Zoetis Earnings: Companion Animal Segment Fuels Strong Growth

Wide-moat Zoetis ZTS delivered strong second-quarter performance that puts the firm on track to meet our full-year projections, and we’re leaving our fair value estimate unchanged. Zoetis saw 9% quarterly operational revenue growth year over year, driven principally by 11% growth in the companion animal segment and aided by 4% growth in production animals. Though distributor shipments have contributed to choppiness in companion animal growth through the first half of 2023, we remain confident that the underlying demand remains solid. Management indicated that quarterly animal clinic revenue rose 9% and revenue per visit also rose 9%. Favorably, the labor issues that had dogged U.S. animal hospitals in 2022 seem to be easing, which means the bottleneck with vets is dissipating.

Parasiticide Simparica Trio saw U.S. quarterly growth of 2%, but it faced a truly tough prior-year period characterized by 72% growth. Now that the U.S. Food and Drug Administration has approved rival Boehringer’s NexGard Plus, Simparica Trio is about to face its most direct challenge. We still think that Simparica Trio’s efficacy and familiarity among vets and pet owners should keep the product in a strong position, but we’ll be keeping an eye on this over the next few quarters as Boehringer ramps up its competitive launch.

Importantly, the anticipated U.S. regulatory approval of Librela (for osteoarthritis in dogs) arrived in the second quarter, and Zoetis is preparing for full commercialization in November. Considering Librela reached blockbuster status in its second year when it was only approved in Europe, the U.K., and Canada, we think it’s likely Librela will reach domestic blockbuster status in its first full year in the U.S. Considering the lack of good options for canine arthritis and the widespread condition, we expect plenty of dog owners will want to try this novel treatment and potentially give their dogs a new lease on life.