The operator welcomes participants to the Third Quarter 2023 Financial Results Conference Call and Webcast for Zoetis. Steve Frank, the Vice President of Investor Relations, will be hosting the call and is joined by the CEO, Kristin Peck, and CFO, Wetteny Joseph. The presentation materials and additional financial tables are available on the Investor Relations section of zoetis.com. A replay of the call will be made available after its conclusion. The remarks may include forward-looking statements and references to non-GAAP financial measures.

Kristin Peck, the speaker for the third quarter earnings call for 2023, discusses the strong performance of the company in the third quarter, driven by their diverse portfolio of companion animal products. Despite challenges in the Chinese market, the company saw 8% operational growth in revenue and 13% growth in adjusted net income. They have also grown their revenue by 7% operationally in the first nine months of the year. Peck emphasizes the resilience of the animal health industry and the company's ability to compete and grow in uncertain economic times. They are on track to achieve their full year operational guidance and have narrowed it around the midpoint of the range. The company's diverse portfolio and strong commercial execution are expected to continue driving long-term growth, with their companion animal franchises being the main catalysts.

The company is expecting strong growth in their dermatology portfolio due to direct to consumer campaigns and new product launches. They have seen success in the parasiticides market and have recently launched a canine monoclonal antibody for osteoarthritis pain, with plans to launch a similar product for cats. Their diagnostic portfolio has also shown strong growth, and they are focusing on simplifying their reference lab service and utilizing AI technology to improve their diagnostic solutions.

The company is narrowing its full year guidance for operational growth in revenue and adjusted net income, while still seeing strong underlying customer demand for animal health. They expect double digit growth in their companion animal portfolio and low single digit growth in their livestock portfolio. The company is confident in sustaining their market leading franchises and investing in their portfolio and DTC programs to support growth. They believe they will continue to grow faster than the market in the coming years, despite uncertainties in China and elsewhere.

The company is confident in its diverse portfolio and strong franchises, such as Librela. They had a successful third quarter with growth in both the U.S. and international markets, driven by companion animal and lifestyle products. Revenue and adjusted net income also grew in the quarter. The main driver of revenue growth was the companion animal portfolio, with double-digit growth in key products such as dermatology and monoclonal antibodies. The company also saw growth in livestock products. The key dermatology products and monoclonal antibodies for OA pain were the main drivers of global growth, with significant growth in both the U.S. and international markets.

In the U.S., Librela has been launched and is now available in most major markets. Simparica Trio had a global revenue of $206 million in the quarter, with a 20% operational growth. This was due to increased advertising and promotional focus. The companion animal diagnostics portfolio had a revenue of $90 million and grew 14% operationally. The life sci portfolio grew 3% operationally, with international growth offsetting a slight decline in the U.S. In the U.S., revenue was $1.2 billion, with companion animal products growing 11% and livestock sales declining 2%. The key drivers of companion animal growth were the dermatology portfolio, Simparica Trio, and Solensia.

Sales for Simparica, Apoquel, and other products continued to drive growth in the quarter. The launch of Apoquel Chewable was successful in Europe, and Simparica Trio saw increased patient share despite competition. Pain products and diagnostics also saw growth in the U.S. market.

In the third quarter, livestock sales decreased by 2% due to timing of supply and restocking in the previous year, but this was partially offset by growth in cattle productivity and poultry sales. The International segment saw an 8% increase in revenue, with companion animal sales growing by 12% and livestock sales growing by 5%. This growth was driven by increased sales of monoclonal antibodies for OA pain, dermatology products, and small animal parasiticides. Sales of Librela and Solensia also saw growth. The international key dermatology portfolio contributed $133 million in revenue and saw double-digit growth in most major markets, driven by strong uptake of Apoquel Chewable and Cytopoint.

In the international small animal parasiticides portfolio, the Simparica franchise saw strong growth of 29% driven by demand in emerging markets, while the Revolution franchise declined by 16% due to economic challenges in China. The international livestock segment also saw growth of 5%, driven by price increases and improvements in the cattle and poultry industries. The adjusted gross margin improved by 70 basis points due to price increases and lower freight charges.

In the third quarter, Zoetis saw an increase in operating expenses and a decrease in effective tax rate, resulting in a 13% increase in adjusted net income and a 15% increase in adjusted diluted EPS. Capital expenditures for the quarter were $145 million and the company repurchased $250 million of its own shares. For the full year 2023, Zoetis has revised its reported revenue range due to unfavorable foreign exchange rates, but maintains its operational revenue growth guidance of 6.5% to 7.5%. The company expects to benefit from the approval and launch of Librela in the U.S. and the performance of its Lifestyle business.

The ongoing uncertainty in China has affected potential growth for the company, resulting in slightly lower adjusted net income and narrowed growth expectations. Despite this, the company has shown resilience in its portfolio and the animal health industry, with broad-based growth across species and geographies. The company remains committed to growing above the industry, driven by its innovative portfolio and commercial execution. In the companion animal segment, the company saw strong performance from its top five products, despite a difficult consumer environment. Legacy products may have seen a modest decline. The company is expected to continue growing faster than the market in the future.

Kristin Peck responds to a question about the growth of Zoetis in the years 2023 and 2024. She mentions strong growth in all of their franchises, particularly in the pain portfolio. She also mentions the success of their new products, Librela and Solensia, and their strong compliance among pet owners. Peck remains optimistic about the strength of their companion animal portfolio and hands the question over to Wetteny to provide more detail on specific areas.

The company has seen strong growth in the companion animal and overall categories, slightly above their expectations for the quarter. Consumers continue to prioritize pet health, leading to growth in therapeutics and clinic revenue. The company's broad range of products and innovation have contributed to this growth, with both new and legacy products performing well. The company is optimistic about future growth, including the launch of a new product in the U.S. in 2024.

Librela and Solensia are experiencing continued growth in international markets. The company plans to use price as a lever to drive growth, and expects to see growth in the livestock, derm, paris, and diagnostics franchises. The initial feedback for Librela in the US has been positive, with strong uptake from both vets and pet owners. The company has ample supply to support the expected strong ramp in sales. As for margin expansion, there may be some impact from Librela not yet reaching critical mass, but there is still potential for operating leverage across the business.

The company is seeing strong demand for their OA pain product in the U.S. and Europe. They expect the product to be a game-changer and to expand the market. They also believe that the product, along with another one, can generate $1 billion in revenue. The launch into the U.S. market may cause a temporary decrease in gross margins due to investments in marketing and field force, but they still expect a lift in contribution margin.

The speaker will provide more specific guidance for 2024 in the next call, but they are optimistic about the growth potential due to various factors. They expect to see mid- to high single digit growth and continue to focus on margin expansion. The next question is about Librela and how vets are diagnosing OA pain and starting dogs on therapy. The speaker mentions that dog OA pain is easier to diagnose compared to cat pain, and many dogs are already being treated with existing products. The speaker also briefly discusses international performance of Librela.

The paragraph discusses the growth of Librela, a product for dogs with osteoarthritis, in international markets. The company has seen significant growth in these markets, with a 65% increase in revenue in the third quarter. This growth is driven by both pre-existing markets and new markets that have been launched this year. The company expects continued growth in the coming years, particularly by providing the product to dogs earlier in their disease. The paragraph also mentions that the diagnosis process for dogs is not a concern for veterinarians, as there are established protocols for this. The paragraph ends with a request for Wetteny Joseph to provide more specific information about the international growth.

The company expects competition in dermatology in the second half of next year, but they are well-positioned with their current products and a pipeline of future innovations. They also mention a tougher comp for Q3 due to supply constraints, but still had a 33% growth in the EU. They also address a question about R&D spending, stating that it has decreased but they are still investing in new products.

The company saw a 14% growth in the quarter and plans to heavily invest in their portfolio and the market. They are focusing on chewable products as a defense strategy against upcoming competition. The growth in international markets was led by the conversion to Apoquel Chewable, while retail drove growth in the U.S. R&D spend was up 13% year-over-year, but this is mostly due to timing of investments. The company remains on track with their regulatory milestones and is driving innovation across their portfolio. The focus then shifts to Trio, which had a solid result in the U.S. but is still in the process of ramping up.

Peck discusses the strong growth of Trio in the market, with a 20% increase in Q3 and a 3% increase in market share. She also mentions the new competitor, but expects continued growth for the franchise. She also mentions the challenging comp in Q4 and the impact of destocking and pre-price buying. Peck highlights the strength of auto-ship and retail, and notes that the category has low switching once a product is chosen.

The company is pleased with the growth in its Trio portfolio and has reduced its CapEx expectations due to timing of project spend. They remain committed to their investments and expect elevated CapEx for the next few years before it aligns with revenue growth. On the companion animal side, the company expects double-digit organic growth in 2023 and is confident in this based on a strong quarter and expected high growth in the fourth quarter despite a difficult year-over-year comparison.

The company expects strong growth in the companion animal sector due to the humanization of pets and the increased spending by millennial and Gen-Z pet owners. The launch of new products such as Librela and Solensia are expected to further drive growth, along with the continued success of Cytopoint. The company also notes that there may be some challenges in the livestock sector, but overall, they are confident in their guidance for the year.

The company is looking at the global drivers of pet care and revenue per clinic, which is expected to continue growing until 2024. The livestock market is also expected to grow due to the increasing consumption of protein by the growing middle class. The company is confident in its supply plans for Librela and is investing in internal capacity, such as the Lincoln facility, to meet demand beyond 2024.

The speaker is confident in their company's ability to meet demand expectations, even with the recent pressure on veterinary visits. They mention that their business has been flat year-to-date and down 1.5% in the quarter, but they are not as reliant on vet visits as their products can also be purchased through other methods. They note that vet clinic visits are still ahead of pre-pandemic levels and they do not pay much attention to them.

The company's revenue in the vet clinics business has been growing faster than the industry average due to their focus on innovation. They are not as dependent on the number of vet visits, as their therapeutics and retail sales also contribute to their revenue growth. In the livestock sector, there has been a strong start to the year, but there may be a decrease in the fourth quarter due to variability in supply and timing of price adjustments. This has been factored into the company's guidance for the year.

The speaker discusses the capital dynamics and guidance for the parasiticide market, estimating that nearly half of the market is still dominated by collars and topicals. They also mention the risk of pricing pressure from competing products in the future. The speaker confirms that U.S. sales for Librela were minimal in Q3 due to a limited early experience program.

The company is confident in achieving its full year guidance, thanks to its diverse and innovative portfolio. They are committed to investing in their portfolio and managing costs to create value for shareholders. They continue to grow faster than the market by focusing on their people and operational excellence. They look forward to updating investors on their progress and attending the JPMorgan Healthcare Conference.

This summary was generated with AI and may contain some inaccuracies.