Zoetis Inc - Class A (ZTS) — Q1 2022 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to the Zoetis first quarter 2022 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements. Actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings including but not limited to our annual reports on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Thursday, May 5, 2022. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Thank you, Steve, and welcome, everyone, to our first quarter earnings call for 2022. Zoetis delivered a strong quarter to start the year with 9% operational revenue growth and 8% operational growth in adjusted net income driven by the strength of our companion animal portfolio. We generated similar growth for both the U.S. and international segments, with 9% and 8% operational growth, respectively. Our strength across parasiticides, dermatology products, monoclonal antibodies, and diagnostics are all capitalizing on the positive trends in pet care with customer-driven science coming from Zoetis. In the first quarter, we grew 20% operationally in our companion animal portfolio. As we expected, our livestock portfolio continued to face challenges, declining 6% operationally in the quarter largely due to declines in swine product sales in China and generic competition from DRAXXIN. As we look at the rest of the year, we are updating our guidance to reflect the negative impact of recent changes in foreign exchange rates, but this has no impact on our previous operational growth rates and assumptions for the year. Even as we face uncertainties related to the war in Ukraine, COVID-19 lockdowns, inflation, and ongoing supply chain constraints, we remain confident in the underlying strength and performance of our business. Our diverse portfolio, global scale, talented colleagues, and continuous innovations remain the foundation of our long-term success and durability, and we continue to invest in the resources, marketing programs, and manufacturing capacity we need to support our growth. In R&D, we're building new capabilities and pipeline across our companion animal and livestock portfolios to ensure our long-term performance. In the first quarter, we continued to receive approvals for new products and indications, develop life cycle innovations for major brands, and expand our portfolio into new markets. On the livestock side of the business, we expanded our cattle vaccine portfolio with an approval in the U.S. of Protiviti, the first modified live vaccine to offer protection against Mycoplasma bovis. This vaccine provides cattle producers and veterinarians with broader overall protection against bovine respiratory disease. We also gained approval in Brazil for Draxxin KP, which is also a treatment for BRD and combines the antimicrobial properties of DRAXXIN with the nonsteroidal anti-inflammatory ketoprofen to rapidly reduce fever in a single dose. Draxxin KP is also approved in the U.S., Canada, European Union, Australia, and Mexico, and it has been an important part of how we continue to distinguish the DRAXXIN brand in the face of generic competition. In poultry, we received approval in Brazil for Poulvac® Procerta™ HVT-IBD, our recombinant vector vaccine that is also approved in the U.S. and Canada. On the companion animal side of the business, we received another approval for Solensia, the industry's first monoclonal antibody for osteoarthritis pain in cats, adding Australia to the U.S., European Union, U.K., Canada, and Switzerland. Another mAb therapy, Cytopoint, received a claim extension in Canada, so it now covers both the treatment of atopic dermatitis and allergic dermatitis in dogs. Cytopoint and Apoquel continue to grow significantly and expand the dermatology market as disease awareness and treatment options become more known to pet owners. We have a strong leadership position based on our innovative science, and we do not believe competing products will come to market in 2022. We also continue building our multipurpose diagnostics platform, Vetscan images, with the recent addition of blood smear testing. Introduced in September 2020, Vetscan images is a first-of-its-kind technology with a multitude of applications, including AI fecal analysis, digital cytology image transfer, and now AI blood smear, all helping veterinarians broaden their in-clinic diagnostic offerings to provide the best care possible for dogs and cats. For the last two years, I've been speaking to you about our catalyst for growth, and those continue to drive our performance. Our outlook for growth in international markets remains very positive based on a diverse global footprint and continued expansion opportunities for key brands like Simparica Trio, Apoquel, Cytopoint, Librela, and Solensia. In terms of Ukraine, we have condemned the Russian invasion from the outside, and we are deeply saddened by the senseless violence being brought upon the people of Ukraine. Our company, colleagues, and the Zoetis Foundation have worked together to provide veterinary care, medicines, financial support, and evacuation assistance to those in need. With every decision, even the most difficult and complex ones, we're guided by our purpose to nurture the world and humankind by advancing care for animals. While we have suspended all investments and promotional activities in Russia, the continued care of pets and livestock remains an essential responsibility for Zoetis and our colleagues, and we remain focused on maintaining a critical supply of animal medicines and vaccines for veterinarians and producers there. We anticipate a negative impact of about 1% to our original full-year growth expectations due to Ukraine and Russia, but we are maintaining our previous operational growth rates based on the overall strength of our companion animal business and the positive momentum of expanding our U.S. pet care and diagnostic commercial teams. Speaking of diagnostics, another catalyst for growth, we delivered 12% operational growth in the first quarter. We continue to invest significantly in this space to accelerate our growth. For example, we've been shifting our go-to-market model this year and building a dedicated field force for our diagnostics portfolio. This hiring is a significant part of a 40% increase to our total U.S. companion animal field force. We see field force expansion as a key lever to supporting growth opportunities in our diagnostics and pet care businesses. We also continue to see very strong growth in pet care as we expand our major companion animal brands in markets around the world. Simparica Trio is doing very well as it continues to gain market share based on veterinarians' preference for an innovative triple combination parasiticide for dogs. Pet owners have also been demonstrating strong loyalty rates after trying Trio, and we are excited by the ability of our direct-to-consumer campaigns and additional field force colleagues to increase interest in this product. Librela is also doing incredibly well across Europe, and we remain confident in the blockbuster potential for Librela in 2022 and Solensia in the longer term. As we see improvements in supply, we will be launching Solensia in additional markets such as Canada and Australia this year. In terms of the U.S., we are still planning a launch of Solensia in the second half of the year, and we anticipate approval for Librela by the end of the year, assuming FDA inspections are completed at facilities outside of the U.S. Overall, we continue to benefit from pet care trends in terms of increased demand, clinic revenues, pet ownership, and spending habits. Finally, a brief update on supply. As I mentioned last quarter, we are managing certain isolated supply constraints for Librela, Solensia, and some of our other products as we compete for limited manufacturing inputs critical to human health during the pandemic. We were also seeing additional global supply challenges related to Russia's invasion of Ukraine and the recent COVID-19 resurgence in China. While some of these challenges are global, we are working to mitigate any impact to our overall business. Our commercial teams are ensuring controlled launches for new products and coordinating with customers to minimize any impacts on their animal care. In conclusion, we are off to a good start for the year, and we're maintaining our operational growth expectations for the full year. Our diverse and durable portfolio, global scale, and pipeline of innovations have us well positioned to meet customer needs and shareholder expectations for this year and beyond. Thank you. Now let me hand things off to Wetteny.

Thank you, Kristin, and good morning, everyone. As Kristin highlighted, we had a robust start to the year with continued growth across several of our core product lines. Today, I will concentrate on our financial performance for the first quarter, the main factors driving our results, and an update on our full-year guidance for 2022. In the first quarter, we achieved revenue of $2 billion, which is a 6% increase on a reported basis and a 9% gain on an operational basis. Our adjusted net income of $625 million grew by 4% on a reported basis and 8% on an operational basis. Of the 9% operational revenue growth, 3% was attributed to pricing and 6% came from volume. This volume growth of 6% was made up of 5% from new products like Simparica Trio and Librela, and 3% from key dermatology products, while other in-line products experienced a decline of 2%. The decrease in other in-line products was anticipated and largely due to a challenging comparison to the previous year and the impact of our swine business in China. Companion animal products showed the highest growth, increasing by 20% on an operational basis, while livestock products decreased by 6% operationally in the quarter. Our small animal parasiticide portfolio was the largest contributor to growth, with a 25% operational increase driven by our innovative fleas, tick, and heartworm products. Globally, Simparica Trio recorded $164 million in revenue, marking an operational growth of 83% compared to the same period in 2021. In Q1, Simparica Trio became the top-selling canine parasiticide in the U.S. in terms of revenue, and we recently introduced Trio in Japan, which is a significant market for heartworm treatments. Additionally, our key dermatology products, Apoquel and Cytopoint, achieved substantial global growth with revenue of $307 million, reflecting a 28% operational increase against a strong prior year where key dermatology products grew by 24% in the first quarter. In Europe, our newly launched monoclonal antibody Librela, intended for osteoarthritis pain relief in dogs, also significantly contributed with $21 million in sales during the quarter. Our Global Diagnostics portfolio earned $98 million in revenue with an operational growth of 12% in Q1, driven by increased sales in both the U.S. and international markets. Growth was mainly supported by consumable usage and new product introductions. We continue to see an uptick in placing new devices in international markets. Diagnostics remains a crucial growth driver for Zoetis, and we are committed to investing significantly in our field force, new technologies, and reference labs. I expect revenue growth to persist at levels exceeding what we experienced before COVID as veterinary care standards continue to rise through innovation, better demographics, higher compliance, and an increasing number of pets. In the U.S., companion animal growth was primarily driven by sales from our parasiticide line and key dermatology products. Simparica Trio sales were strong once more, achieving $147 million in the U.S. and growing by 77%. We continue to meet our targets for clinic penetration and gain market share within individual clinics, with ample opportunities for future growth. The satisfaction rate among veterinarians is approximately 90%. Key dermatology product sales for the quarter were $194 million, representing a 23% increase, with Apoquel and Cytopoint being significant contributors. Our investments to promote this portfolio have been pivotal in bringing more patients to clinics, and we will keep investing significantly in this area, as a large number of dogs with dermatitis remain untreated, presenting opportunities for market expansion. In April, we initiated our new pet care market strategy, increasing our U.S. companion animal field force by around 40% and establishing dedicated diagnostic and pharmaceutical coverage for our products. For U.S. livestock, there was an 11% decline in the quarter, mainly due to challenges within our cattle business, which was anticipated due to new generic competition for Jackson and ongoing elevated input costs affecting producer profitability. Our swine business is also facing headwinds from increased use of lower-cost alternatives and reduced disease pressure. Swine product sales did grow this quarter due to favorable market conditions for producers. Looking at our International segment, revenue rose by 3% on a reported basis and 8% operationally during the quarter. Companion animal revenue increased by 23% operationally, while livestock revenue decreased by 3% operationally. The growth in companion animal products was driven by key dermatology products, monoclonal antibodies for pain relief, and our parasite line. Our Semak brands continue to thrive thanks to international direct-to-consumer campaigns in Latin America and parts of Europe, and we remain optimistic about the long-term prospects of these initiatives. Librela, our monoclonal antibody for osteoarthritis pain, generated $21 million in sales, with expectations that it will exceed $100 million in revenue this year. Librela quickly became the top pain product in the EU in its first year, with favorable metrics indicating strong potential for future growth. Reordering rates linger around 90%, and compliance has surpassed our expectations, with plenty of opportunities to broaden the pain market considering many dogs on Librela are new to the market. Meanwhile, international livestock saw a 3% operational decline due to our swine portfolio in China, with increased pork supply and subsequent price drops impacting profitability for producers. Despite expecting China to rebound in the latter half of the year, we foresee a challenging second quarter for our swine portfolio. Conversely, we saw growth in our fish, poultry, and cattle segments. Our fish portfolio again grew double digits this quarter, buoyed by products like AlphafluxCLIce and AlphaGeLivVac in Chile. Cattle product sales increased in key markets due to favorable pricing and conditions in Brazil and Australia, along with demand initiatives in emerging markets such as Turkey and China. Now, turning to the rest of the P&L for the quarter, our adjusted gross margin stood at 71.6%, benefiting from a shift towards companion animal products and contributions from diagnostics. While advertising and promotion, as well as direct-to-pet owner campaigns for key brands, increased, R&D expenses rose by 4% operationally due to higher compensation costs. The adjusted effective tax rate for the quarter was 18.9%, down by 20 basis points, influenced by positive discrete tax items and settlements with tax authorities, slightly offset by changes in the earnings’ jurisdictional mix. Adjusted net income grew by 8% operationally, and adjusted diluted EPS increased by 9% operationally for the quarter. Capital expenditures in the first quarter totaled $115 million. We expect a significant rise in capital expenditures for the full year 2022, primarily to bolster manufacturing capacity in Ireland, the U.S., and China to meet long-term growth needs. During the quarter, we returned over $500 million to shareholders through share repurchases and dividends, buying approximately $361 million of Zoetis shares, marking our largest quarterly buyback. Now, regarding our guidance for the full year 2022, updates on foreign exchange rates reflect changes up until late April due to a stronger U.S. dollar. Any revisions to our full-year guidance are exclusively linked to foreign exchange impacts, while our operational growth targets for revenue of 9% to 11% and adjusted income of 10% to 13% remain unchanged from our previous February guidance. We are maintaining these operational growth rates despite the ongoing conflict in Russia and Ukraine, which we estimate will negatively affect our expected full-year operational growth by 1%. We believe we can counterbalance this with the strength of our companion animal portfolio. Consequently, we are adjusting both the lower and upper ends of our revenue range down by $100 million due to foreign exchange effects, now projecting revenue between $8.25 billion and $8.375 billion while keeping our expected operational growth of 9% to 11% unchanged. For adjusted net income this year, we now expect it to be in the range of $2.365 billion to $2.4 billion, while maintaining our anticipated operational growth of 10% to 13%. Lastly, we project adjusted diluted EPS between $4.99 and $5.09 and reported diluted EPS in the range of $4.65 to $4.77. Sales of companion animal products will drive growth in 2022, propelled by our diverse parasite portfolio, further advancement of key dermatology products, adoption of monoclonal antibodies for osteoarthritis pain, and growth in point-of-care diagnostics. The outlook for global companion animals in 2022 is very favorable. For livestock, essential macro trends making animal protein a crucial business remain robust, and we believe that more normalized growth will occur in 2023. While our guidance reflects our expectations for the full year, I would like to provide insight into the anticipated growth trajectory for the remainder of 2022. We expect slight top-line operational growth in Q2 to be a bit lower than in Q1 as we navigate business and some supply chain-related activities. A similar foreign exchange impact in Q2 that we observed in Q1 will further affect reported revenue, estimated to have a negative impact of around 3%. Furthermore, significant early-year investments to support future growth, including field force expansion and increased direct-to-consumer advertising, will lead to accelerated OpEx growth in Q2 compared to revenue, adversely affecting bottom-line profitability more than in the latter half of the year. We predict foreign exchange will negatively impact the bottom line in Q2 by about 5%. Our full-year guidance for 2022 reflects our commitment to growth in line with or exceeding market trends, alongside increasing adjusted net income faster than revenue. Our success stems from our diverse portfolio of established brands, multiple sources of in-line growth, a dynamic and disciplined innovation process, and an infrastructure geared toward global market expansion. We aim to keep executing across various business facets and harness favorable end-market dynamics in the foreseeable future. Now, I will hand the floor to the operator to open the line for your questions.

Great. I have one on companion animal trends that I have to ask here. What are you seeing at the clinic level if you could parse out a little bit more of what you're seeing across the U.S. and international in terms of demand trends, what you're seeing in terms of capacity constraints at the vet clinic level? And what is implied in your guidance at this point in terms of operational growth across the companion animal segment? And then a follow-up on Trio, I guess, where do you stand now in terms of market share in canine parasiticide at this point? And how much do you think Simparica Trio is taking share versus expanding the market with greater compliance?

Okay, Erin, it's Kristin. It's great to hear from you. We fundamentally and structurally believe that the pet care industry is in excellent condition. Over the past few years, we've observed strong trends, including a high standard of care, the demographics of pet adopters shifting toward millennials, an increase in pet ownership, and the aging of pets. Therefore, we don't see a demand issue. During the quarter, there was a challenging comparison to last year, and while there was a 5% increase at vet clinics, traffic was slightly lower, as you mentioned. This may be due to some short-term capacity constraints. However, keep in mind that there are significantly more pets now than in the past, which means the overall base is larger. The Omicron variant created some difficulties for certain vet clinics. Also, the data tends to highlight larger corporations that have found innovative ways to enhance their capacity, which we expect to see more of. There have been short-term labor shortages to consider as well. When looking at Zoetis' business, it's a bit different; our nature and innovation focus on chronic medications that don't require frequent visits. We tend to focus more on the spending per visit. Additionally, we have alternative channels that grew by 34% for us in the quarter. Overall, we remain very optimistic about pet care trends. Wetteny, could you address her second question on Simparica?

Yes. Sure, Erin. Look, very pleased with the performance of Simparica Trio, posting $164 million of revenue in the quarter, up 83%. It became the number one canine parasiticide in the U.S. And as we've shared before, we have 90% penetration across large corporate accounts, et cetera. Within those penetrated clinics, we continue to take share as well. Satisfaction level with our product is about 90% among pet owners, and we also just launched Simparica Trio in Japan, which is a key heartworm market as well, just in the middle of this quarter. So I'm very pleased with the performance of Trio.

I was just wondering if I could have any update on diagnostics contribution to the quarter and overall performance? Is growth tracking with your expectations? And can you comment on system placements versus testing volume growth? And if you would have made any additional reference lab purchases?

I appreciate the question, Christine. I'm very happy with how our Diagnostics business performed this quarter, achieving a 12% growth and generating $98 million in revenue. We experienced strong growth in both the U.S. and international markets, including replacements and consumables. We're quite satisfied with the business's performance. Regarding reference lab acquisitions, we did not have any this quarter, but we have made several acquisitions in the U.S. and are continuing to invest in technology. For instance, we have expanded our offerings to include additional indications such as blood smear, in addition to fecal and digital cytology. Overall, we're very pleased with how the business is doing.

Congratulations on the quarter. Just curious what has been the impact of inflation on your Animal Health business, both companion and livestock and how do you see potential increases in inflation or continued inflation impacting your business going forward?

Thanks, Louise. I'll start and then I'll move it to Wetteny. We've seen historically that pet owner spending has been incredibly durable. Right now, we've got about 63% of our revenue in companion animal. But if you look at the February research, 86% of pet owners would spend whatever it takes. So we do see inflation, and Wetteny can certainly get into how we've taken price, et cetera. But I think we've obviously seen an increase in labor costs and freight and fuel. But Wetteny can really talk about the fact that we've been able to leverage price, especially in our companion animal business. So Wetteny, do you want to go over some of those numbers?

Yes, sure. Given we continue to see very strong underlying demand from pet owners, we have very innovative products across our portfolio. We've been able to demonstrate that we can take price at or above inflation levels in the past, and we don't see any reason why we won't do that now. If you look at this quarter, for example, our total growth included 3% of price. Now if you parse that out and you look at just companion animal globally, we took 6% of price. And so we'll continue to use that lever as we proceed. But given the dynamics, Kristin just mentioned, underlying strength in the market, we'll continue to have that availability to us.

And the only thing I'd add there is, despite inflation, I would just note that in 2021, we increased our margins and our guidance for 2022 does the same. So I think it really shows the durability and resilience of our industry.

Kristin, I'd be curious to get your view following up on the commentary you have on just vet visit trends and vet spending trends. Do you see more variability in sales for your products that need to be administered by the vet? And can you just remind us how big of a percentage of your companion animal business that is? And then a quick follow-up for Wetteny. It looks like the revenue guidance came down by $100 million. It looks like operating profit may be down by $50 million. So it seems like a high decremental margin on the revenue reduction. I guess does that just reflect the composition of the expense base? Just to be curious kind of any color you can shed on that dynamic. Thank you.

Sure. I mean, I'll start off with your first question. Again, if you look at our overall portfolio and the nature of our business, I think the level of innovation means we are not as susceptible to vet visit trends. You basically asked what percentage has to be administered in the vet clinic. I don't know; maybe around 50% that would be vaccines and injectables. But I think if you look at the sales of Librela being now the number one pain product in Europe, clearly, for things that are really important to pet owners, they are getting into the clinic. Regular checks for vaccines, we're not seeing any significantly negative trends there. So I think chronic medications, which is a huge part of our business, if you look at dermatology and parasiticides, which are growing at 25% in the quarter and derm at 28% in the quarter, we're clearly not really suffering from the slight decline in the U.S. in trends. But Wetteny, you can take that second question.

Yes, sure. As we've said, we've revised our guidance solely to reflect FX. We continue to maintain our operational guidance range, both top and bottom for the company that we came in with in February. So from an FX perspective, the top line impact is about 3%. It's about $260 million of an impact. And as you referenced, the change you're reflecting in the change in FX has a wider impact on the bottom, and that's really largely driven by FX losses given our exposure across certain currencies, particularly the euro. If you look at the first quarter, for example, you see a wider impact at the bottom than you do at the top, driven by that.

Congrats on a strong result. I want to start with livestock markets. I mean we've known livestock was going to be weak for a while, and so it's not a huge surprise. But so I just want to get an update on how you're seeing a couple of factors that are going, both DRAXXIN, are you still sort of projecting lapping the tough comps around the summer and sort of what are your expectations for DRAXXIN exiting this year and next year, and then broader conditions such as drought in the Midwest and the United States, rising input costs. Sort of how do you see that playing out for U.S. livestock and internationally? And then a follow-up question for Wetteny, if I might. You guys touched a number of times in the prepared remarks on field force expansions or investing in growth, investing in the opportunities in companion animal. Just wondering if you could go into a little more detail on how that's going to play out? When do you see that shown up in the numbers when you think you'll start seeing the payoff for that? And just sort of talk about labor pressures, wage pressures, how that affects your thought process there?

Great. Mike, I'll take the first part of it, which is the broader livestock trends and then Wetteny can take the DRAXXIN and the field force question that you've got. I mean, look, as you know well, historically, livestock has grown around 4%. I think if you look at 2019 and 2020, you saw some unusual events that affected overall industry livestock growth. Obviously, African Swine Fever in China, as you remember, and then overall COVID. But then as I think you look at 2021 and 2022, Zoetis has been unusually impacted, and that has everything to do with where DRAXXIN is. And Wetteny can get into the numbers, but that has played out exactly how we expected it to. Our long-term outlook, as Wetteny mentioned a few minutes ago in his prepared remarks, remains unchanged. We think you're going to start to go back to more normalized growth in 2023 and beyond, basically because feeding the world is a powerful trend, the desire for protein and higher quality protein. But let me let Wetteny get into some of the specifics on the DRAXXIN numbers and then your second question.

Yes. So as we said from the very beginning with the cycle of DRAXXIN, we expect it to have about a 20% impact to the top line in the first year and another 20% in the second. So what we're seeing across livestock right now is playing out exactly as we thought. In fact, in 2021, we did slightly better than that with respect to DRAXXIN. We continue to have the positive effects of life cycle innovation like Draxxin KP, and we're maintaining most of our volume. The margin for DRAXXIN remains very attractive for us as well. So as we expected, we've seen competitors come in, but the performance has been at or slightly better than we expected. Broadly speaking, I think if you look at swine, for example, in China, there was a pretty significant impact on the quarter with respect to large stock. Again, we expected that coming in. And it's really looking at where swine prices are in China versus a year ago, where they were at all-time highs and have been at all-time lows essentially here, and the lockdowns having an impact on sort of demand consumption in this case. So with respect to the field force, if I can transition to that part of your question, very pleased to be able to expand our field force here. We have the broadest portfolio across the market. And if you look at the innovation that we have coming with respect to the pain franchises for Solensia that we are probably launching across the second half of this year. And as we get approval for Librela and launch that as well in the U.S., we continue to have opportunities to really capitalize on the market dynamics and the strong demand and have additional field force, which we see a strong return on those as well. You're also launching a dedicated sales force for diagnostics, separate and apart from our Rx teams, which we believe will have, again, a very positive return for us as well. Now you can see that with those plans, we still have an operationally levered P&L where we're growing the bottom line above the top line. So top line in 9% to 11% and the bottom at 10% to 13% with approximately a 40% increase in our field force.

Great. Maybe just a couple of quick ones. For U.S. Librela approval, was that a slight push, Kristin, to year-end '22 for mid-'22? If it was, maybe just if you could elaborate on what still needs to get done there for approval? And if it is here in '22, how are you from a supply standpoint? Do you think that product will be ready for an early 2023 U.S. launch? And then maybe just as a quick follow-up. Wetteny, can you talk about the supply chain and cost and how you feel there? Companion animals expect to be a big year-over-year in '22. So you've got this positive mix shift, you've got price running ahead of what it normally does. I think you called out 3% versus 1% last year. And GM is still expected to be flattish. So you'd love some color on how you're feeling in the supply chain.

Sure. Thanks, Jon. I'll start with the first question and let Wetteny take the second. With regard to Librela, no, this is exactly as we expected. We were expecting an approval later this year. We continue to expect that, as we wrote in the market, there's no change there. We still require an ex-U.S. site visit, as we said all along. So I would say there's really no update there. To your second question, when would you expect a launch? We're obviously, as we would in any product, working to build up supply. But as always in our industry and especially with regards to biologics and monoclonal antibodies, the standard in our industry is it takes somewhere between three and nine months to get up to a full launch. So this monoclonal antibody, we'll do an early experience sometime in the first half, again, depending on when the approval is and launch shortly thereafter. We're quite excited about this. Obviously, we're working hard to build up that supply as soon as we get the approvals of the site, et cetera. So everything on Librela is exactly where we were before, really absolutely no change there.

Yes. And I'll take the supply chain part of the question, Jon. Look, our supply chain has proven to be very resilient despite challenging elements over the last couple of years. We delivered 15% operational growth last year with 14% of that in volume. So we put our ability to continue to navigate through those. Currently, we are looking at China, for example, where the lockdowns have had an effect certainly in our first quarter, and we see that in our second quarter as well, which is why we included those in our prepared commentary around Q2 expectations. But in terms of price, we are pulling that lever 3% total for the company. On the companion animal side, which now that's about 53% of our company, if you look at the first quarter, companion animal has grown almost 60% over the last two years, if you look back to 2019 levels. So again, very strong market dynamics and demand. We do see the mix shift being very positive for us with more companion animal and with our innovative products that are launching as well. But we do have some offsets when you look at livestock, particularly DRAXXIN, as we just talked about in line with our expectations, but certainly are giving price and maintaining the volume, and as I said, still at attractive margins for us. But that's really the main offset if you look at it across the year.

Firstly, regarding atopic dermatitis, I estimate that you currently hold about 35% of the U.S. market share with Cytopoint and Apoquel. What percentage of the incremental market is allergic dermatitis, and is this market accessible to you with the label extension? Also, do you have any updates on your oral JAK inhibitors expected later this year, and how might they impact your market share? On the livestock side, can you quantify any opportunities arising from the shift in Chinese consumption towards beef and poultry with swine, or do you see little trend in that direction?

Sure. I'll start on the overall derm. As you saw, it grew about 28% in the quarter, driven by expanding our direct efforts. Certainly, you see we're investing more in our field force pet care rewards. I also think genuinely, it's just more people home with their pets. I don't have the specific share numbers. We can certainly get back to you on that. I think it's over 70% in the U.S., our share of the atopic dermatitis and allergic dermatitis markets overall in the U.S., especially if you want to look at revenue. But we're really pleased with where that's going. With regards to competition, I know our favorite question, we don't absolutely know. We would expect competition on it. At this point in time, as we look at 2022, we are not anticipating competition in 2022; we would expect it in 2023. As our latest intelligence, obviously, we could be wrong there. But expectation is competition for derm on a small molecule basis will come in 2023. With regards to our own pipeline internally, we don't discuss that. So I don't think we have any color there. But I don't know, Wetteny, do you want to take the second question?

Yes, absolutely. I just want to add one point on the first topic. When we consider dermatology, it’s not so much about gaining market share; it’s primarily about expanding the market. There’s a significant opportunity regarding the number of dogs that have atopic dermatitis; approximately 6 million out of the 7.6 million being treated are still not receiving adequate treatment, often only getting antihistamines or steroids. We believe there's a potential to address this under-treatment issue. Now, regarding your question about livestock, specifically in China, we have noticed an uptick in beef consumption, which is advantageous for our operations in Brazil, as it exports beef to China, among other activities in the country. Currently, our presence in the Chinese market remains relatively small compared to our swine segment, but the trends we’re observing are favorable.

First, can you just remind us about your sensitivity to economic growth? I know you're seeing very healthy demand in the companion side right now, and you've been able to take price. But if we enter a mild recession in some parts of the world, particularly Europe, what type of pressures would you anticipate, if any, to your business from that? And my second one was on protein demand. I know you've touched on this in a couple of other questions, but it does seem like we're entering a challenging macro environment with food prices growing very rapidly, especially in the emerging markets. Do you see that as a risk at all in terms of global protein demand consumers trading down on protein that could dampen your livestock recovery as we look out to kind of 2023 and beyond?

Sure. Thanks, Chris. Good to hear from you. As you think about the economic challenges and potential economic risk across the globe, I think one thing you've seen about the animal health industry, I was referencing before, is that 86% will spend what it takes. I think it's also really important to focus on the fact that our companion animal business is growing 50% between 2019 and 2021. As Wetteny mentioned, it was about 63%. And that is just a more durable business as you think about getting through economic challenges. We grew through the beginning of COVID, for example. As you look at it, we've grown during the Great Recession. That was when our companion animal business was only 35%. So I think structurally, if you look at our business, it’s more positive now than it was during the Great Recession, so I do think we're going to be pretty resilient as we go through those times. But I'll let Wetteny add anything wants to and then take your protein demand trend question.

Yes, I think you've addressed it well; companion animals now represent a larger portion of our business and are proving to be very resilient. The demographics show an increase in pet ownership among Gen Z and millennials, which is contributing to a rise in the number of chronic conditions we are treating, demonstrating even greater resilience than in the past. Regarding livestock, there is potential for consumers to switch from beef to chicken or pork, and we believe this could happen globally. We have a robust growth portfolio across various species, but this area appears to be less resilient compared to companion animals. However, overall protein consumption is expected to grow over time, especially in emerging markets with expanding populations and rising incomes, contributing to a growing middle class in different regions. While the pandemic has negatively impacted lifestyles, particularly on the livestock side, we expect a return to growth in that area as we move into 2023 and 2024, alongside our continued focus on products like DRAXXIN.

You mentioned enhanced spending per pet. Our understanding is that this is due to two things: enhanced compliance and catch-up in routine wellness checks. Is that what you've seen? If so, how much does each contribute? So how much does enhanced compliance contribute versus catch-up in routine visits? The concern is that the catch-up in routine visits would seem like a one-time boost. And if that's the case, then what are the long-term implications of no longer getting that boost and just enjoying the trends of enhanced compliance?

Sure. I mean, I guess what we would say is that you're seeing more animals; you're seeing Wetteny's mentioned the demographics of who is adopting these animals; people who spend more time and more money on them, the aging of pets. So I'm not sure we would probably parse the data the way you do, to be perfectly honest. Obviously, we are seeing increased compliance. I think alternative channels such as online and autoship, even from clinics, is really helping driving that increased compliance. But I would say if you look at our portfolio, it's innovation. It's bringing disruptive innovation that people are excited about, looking at a product like Parasite, a single product that does three things. We have products that people are excited about. You look at monoclonal antibodies; you look at dermatology. We have great chronic medications that are not as susceptible to how many visits you make. If you get a prescription for medication, it lasts the year. So I guess we would look at the data slightly differently than how you're looking at it. More importantly, for our business, we think the nature of our business and the level of innovation and the demographics of both the number of animals and who's adopting them remains very positive.

Yes. I would say it’s a combination of just an increased standard of care for animals, particularly for pets, that's aided by the innovation that's come out of Zoetis across derm, parasiticides, and now with pain, and the demographics of the owners that actually put a premium on the health of their pets that’s driving this. And I think people are doing more in those visits as well, which is driving sort of the revenue per visit figures that you see, which is, again, part of the reason that we don’t think the visits themselves are as meaningful as the spend per visit.

One question around the EU launch experience and dynamics to date with respect to Librela and Solensia. Just how some of the early experience is shaping expectations for the U.S. launch, areas of over-underperformance, and where you've been positively surprised. Just thinking about dynamics such as persistence. Do you have any sense of the number of patients starting on therapy that are returning for follow-up injections, Librela share of new patient starts? And I know it's still relatively early, but are you seeing or are you expecting to see an increase in overall patient volumes from the launch of these products? And then just as a quick follow-up here, how important was or is the mAb opportunity in the U.S. in terms of driving your decision behind the sales force expansion?

Thank you, Elliott, for your great questions about Librela. We are very excited about its launch. To share some specific information, Librela is currently the top-selling product for pain in Europe. An exciting aspect is that 40% of the patients are new to this category. This shift shows that many individuals who may have avoided other products for safety reasons are now seeking care at veterinary clinics. Regarding your other question, we have a 90% reorder rate, which indicates that customers who come in for one injection are likely to continue using the product. This gives us confidence that Librela will become a blockbuster product in its first full year in Europe, having generated about $22 million in Q1. The successful performance in Europe shapes our approach to the U.S. launch, leading us to prioritize early experiences, getting key opinion leaders comfortable with the product, and building excitement, a strategy that worked well for us in Europe and which we plan to replicate in the U.S. Our expectations for this product have certainly grown due to its early success. We are also very enthusiastic about Solensia, even though it operates in a different market that previously did not exist. We have seen our ability to create markets before, as proven in dermatology. However, we need to encourage cat owners to recognize pain since there are fewer cats with medical needs compared to dogs. We are highly optimistic about Solensia, and while its ramp-up may differ somewhat from Librela, we believe its potential is significant. Would you like to add anything, Wetteny?

No, just a part of the question on the field force, I wanted to just make a comment on which is look, we have the broadest portfolio, as I mentioned before. We continue to add innovative products to that. And so we carefully analyze sort of the coverage across clinics and across products for our field force and are very confident that this is an investment that's going to yield positive returns for us across our products, existing products, opportunities to expand in the existing products, as well as new products that are coming on.

Great. Thank you all for your questions and for the continued interest in Zoetis. I just want to summarize, I think Zoetis is off to a strong start of the year. We've got continued strength in products for pet care, and I think as you've seen, a diverse and durable global portfolio. We're really happy to be maintaining our operational growth expectations for the full year despite the negative impact of foreign exchange and other headwinds. We're continuing to make ongoing investments in talent and technology, manufacturing expansions, and innovation that have us well positioned to support our future growth plans as well. So I look forward to keeping you updated on future calls and hope you have a great day. Thanks so much, everybody.