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Zoetis beats Q2 consensus ahead of pet launches, livestock's return to normal

Zoetis Inc.'s second-quarter revenue growth of 9% year over year was driven by the accelerating companion animal market and a return to form in livestock, despite the continuing outbreak of African swine fever in China.

The company, which announced upcoming pet products during the Aug. 6 earnings call, was trading up about 6.9% to $120.38 as of 10:42 a.m. ET.

Zoetis' companion animal segment saw a 22% increase in operational revenue, thanks to the Parsippany, N.J.-based animal health giant's "Big 3" products: skin condition drugs Cytopoint and Apoquel, and the flea and tick protectant Simparica.

Meanwhile, livestock revenue was up 3% as the market returned to growth across all species, including pigs. Zoetis CFO Glenn David noted that poultry was the primary driver due to Zoetis' offerings in alternatives to antibiotics and medicated feed additives. Cattle was negatively impacted by challenges in the dairy market and weather but remained a favorable comparison from the prior year, David said during the call.

Swine performance was flat year over year, though African swine fever impacted second-quarter business by a little over $10 million, David noted.

CEO Juan Ramón Alaix said the company expects a return to normal rates in 2020, even if the African swine fever situation in China is not resolved, as other regions like Europe will likely ramp up exports of pork to China.

Alaix did not include the U.S. as a potential pork exporter for China, citing the ongoing trade war. He underscored, however, that the trade discussions' impact has been "manageable" for the company.

Riding second-quarter momentum and in anticipation of new products, Zoetis raised its full-year guidance for 2019 in revenue and adjusted diluted EPS.

Up next in companion animal

According to Alaix, Zoetis will be first to market in the $4 billion global canine parasiticide market with its three-way parasiticide combination, Simparica Trio, which received a positive opinion from the European Medicines Agency in July and is expected to receive approval by October 2019.

Zoetis has also filed for approval of Simparica Trio, which would protect against fleas, ticks and heartworm, in the U.S. and other countries. The product, the first of its kind and highly anticipated by veterinarians, according to Stifel analyst Jonathan Block, will likely launch in the first quarter of 2020, Alaix said.

Yet another area of unmet need articulated by veterinarians is feline pain solutions, which Alaix reported has also been filed for approval in the U.S. and the EU. A monoclonal antibody for controlling pain associated with osteoarthritis in cats should be approved in 2021, Alaix said. He added that a monoclonal antibody for pain in dogs is in the process of filing for approval.

Monoclonal antibodies are engineered to bind specifically to one substance, and are expected to become a blockbuster particularly in the feline market, Alaix noted.

The pending companion animal drugs round out what Block said will be Zoetis' next Big 3: Simparica Trio and monoclonal antibodies for pain in cats and dogs.

Alaix added that Zoetis' acquisition of Platinum Performance Inc. in July will also expand its pet care and horse markets, particularly in the area of health and wellness. The deal is on track to close in the third quarter.

Changes in the market

During the call, analysts noted some shifts in the animal health industry, including the entrance of e-commerce and alternative proteins.

Alaix said the company sees the new e-commerce channels as a positive for the industry and added that they may provide an opportunity to increase compliance.

Some of Zoetis' current products, including Simparica, are already offered through such channels like Chewy Inc.'s online platform.

But Alaix emphasized that the alternative protein market, which offers plant-based products as opposed to meat, should not have an impact on the industry.

"The demand for the consumption of poultry, chicken, beef, eggs, dairy will remain very strong," Alaix said.