Zoetis Inc - Class A (ZTS) — Q3 2023 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to the Zoetis third quarter 2023 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 and that 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 report 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, November 2, 2023. 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 third quarter earnings call for 2023. We generated strong performance in the third quarter, driven by our diverse companion animal portfolio of key dermatology products, pet parasiticides, monoclonal antibodies for osteoarthritis pain and diagnostics. We delivered 8% operational growth in revenue and 13% operational growth in adjusted net income, despite continued market challenges in China. We showed balanced segment growth this quarter with 8% operational growth internationally, and 8% growth in the U.S. Our companion animal portfolio grew 11% and our livestock portfolio grew 3% operationally in 3Q, in line with our overall expectations. Through the first nine months of the year, we have grown our revenue 7% operationally, as customers place a premium on the animal health benefits that our products deliver, even in times of economic and geopolitical uncertainty. As the market leader in animal health, we compete in an essential global industry that has been resilient during various economic cycles. And we continue to grow above the market based on a steady pipeline of new products, lifecycle innovations, and commercial execution. We are on track to achieve our full year operational guidance and have narrowed it around the midpoint of the range, as we continue to balance headwinds and tailwinds in the marketplace. We are executing well on the drivers where we have more control, like the successful launch of Librela in the U.S., while also mitigating the downside of macroeconomic declines in China, both of which were not considered in our original guidance this year. Once again, our diverse portfolio across product categories and geographies generates durable, reliable long-term growth. We continue to expect our key companion animal franchises to be our core catalysts for growth. We anticipate strong growth in our market-leading dermatology portfolio for the year, building on the ongoing direct-to-consumer, or DTC, digital campaigns that support disease and product awareness, as well as the continued introduction of lifecycle innovations like Apoquel Chewable. Our compare-to franchise and broader portfolio of parasiticides continue to perform well in this increasingly competitive product category, based on our innovative and highly effective products and promotional support from DTC. In terms of new products, we're very pleased with the U.S. launch of Librela, our canine monoclonal antibody for osteoarthritis or OA pain. This product has been very well received by veterinarians and pet owners in the U.S., as well as other major markets globally. And we have built ample supply for continued growth in the U.S. and elsewhere. Solensia, our monoclonal antibody for OA pain in cats, has also been well received by veterinarians in markets around the world as we look to help increase medicalization of cats. We're building awareness of this condition among cat owners and introducing our monoclonal antibody treatment through DTC campaigns, as well as AI tools like cat pain IQ, which helps veterinarians and pet owners use videos to identify this condition. Our diagnostic portfolio has been showing stronger year-over-year performance in 2023, with 14% operational growth in the third quarter, and we continue to refine this business to better serve customer needs across our comprehensive portfolio. For example, we're simplifying our reference lab service and operating model in the U.S. and focusing on expanding our larger regional hubs, which can deliver one-day turnaround and have more modernized operations. We also continue to emphasize the benefits of AI technology and our virtual lab services to enhance the speed and quality of our diagnostic solutions. With all this in mind, we are narrowing our full year guidance for operational growth to a range of 6.5% to 7.5% in revenue and a range of 7.5% to 8.5% in adjusted net income, keeping the same midpoint as our prior guidance. Wetteny will provide more details on guidance in his remarks. We continue to see strong underlying customer demand this year and into 2024, even while recovery in China is still a notable uncertainty. The majority of practices in the U.S. continue to see high customer demand for veterinary services. However, labor constraints and more limited hours continue to hamper their ability to meet this demand. Year-to-date, clinic visits are flat as we expected. We did see a modest decline in clinic visits this quarter in the U.S., while clinic visit revenues and average revenue per visit were up. Looking ahead, we remain confident in the sustainable underlying demand for animal health, based on the strength of the human-animal bond, people's willingness to spend on pet health, and the essential need for a safe and secure food supply. We expect to achieve double-digit operational growth for our companion animal portfolio this year and low single-digit operational growth in our livestock portfolio. Before I wrap up, I want to reiterate a theme I discussed earlier this year at Investor Day. It's the confidence we have in sustaining our key market-leading franchises across dermatology, pet parasiticides, and osteoarthritis pain based on life cycle innovations in these categories, as well as the pipeline we are exploring in other areas of unmet need. We are firmly committed to investing in our portfolio as well as the DTC programs and capabilities we need to support our growth while managing costs and creating value for our shareholders. Despite economic and geopolitical uncertainties in China and elsewhere, we believe we will continue to grow faster than the market for the remainder of 2023 and into 2024. This confidence stems from our diverse portfolio across markets and species. Our industry-leading franchises, the ongoing launch of Librela, and the operational excellence and agility that our people deliver every day for our business and for our customers. So thank you, and let me hand this over to Wetteny. Wetteny?

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a strong third quarter, with broad-based growth across both our U.S. and international segments, across both companion animal and livestock portfolios and across both price and volume. For the quarter, we were able to deliver results in line with our expectations, even in light of continued headwinds in China. In the third quarter, we generated revenue of $2.2 billion, growing 7% on a reported basis and 8% on an operational basis. Adjusted net income of $629 million grew 11% on a reported basis and 13% on an operational basis. Of the 8% operational revenue growth, 5% is from price and 3% is from volume. Volume growth consisted of 2% from new products, including our monoclonal antibodies for pain, Librela and Solensia, and 1% from our key dermatology portfolio. Our companion animal portfolio was the main driver of revenue growth, growing 11% operationally. Livestock also contributed, with operational growth of 3% in the quarter. Companion animal growth was again driven by our innovative products with double-digit operational growth in our key dermatology portfolio, our monoclonal antibodies for OA pain, Librela and Solensia, and Simparica Trio. Our key dermatology products generated $393 million in sales globally, posting growth of 14% on an operational basis with double-digit growth in both the U.S. and international. Globally, our monoclonal antibodies for OA pain posted $77 million in combined revenue in the quarter. Growth came primarily from our European markets as well as from the impact of new launch markets internationally. With the October full launch of Librela in the U.S., our pain products are now available in most major markets. Simparica Trio posted global revenue of $206 million in the quarter, representing growth of 20% operationally versus the comparable 2022 period. Growth was driven by expanded DTC advertising support globally as well as from increased field force and promotional focus. Our companion animal diagnostics portfolio reported revenue of $90 million and grew 14% operationally, with growth contributions from both the U.S. and international. Our life science portfolio grew 3% operationally, with international growth partially offset by a slight decline in the U.S. Growth in livestock was driven primarily by price, especially in high inflationary markets. We also saw volume growth in our poultry portfolio, driven by increased usage of vaccines as well as our antioxidant product, Zoamix in the U.S. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter, growing 8%, with companion animal products growing 11%, and livestock sales declining 2%. On the companion animal side, while vet clinic visits declined 1.5% in the quarter, we continue to see robust revenue growth, up 6% versus a year ago. Average revenue per visit is up over 7%. On a year-to-date basis, clinic visits are flat, while clinic revenue is growing 8%. These trends highlight the continued durability of pet owner willingness to spend as well as the continued impact of vet clinic staffing challenges. Our companion animal revenue growth continues to outpace veterinary clinic revenue growth, due in part to our continued expanded growth in the retail channel. Turning to product performance. Companion animal growth in the U.S. was driven by our key dermatology portfolio, Simparica Trio, and Solensia. Key dermatology product sales in the U.S. were $260 million in the quarter, growing 13%. Simparica Trio sales continued to drive growth in the quarter, with vets showing a preference for injectables due to higher compliance and pet owners appreciating the longer duration of treatment. Apoquel sales were driven by growth in the retail channel as pet owners continue to rely more heavily on retail for ongoing pharmacy needs, as well as retail auto-ship programs that drive higher compliance. Our latest dermatology life cycle innovation at Apoquel Chewable was launched in the U.S. in October. Apoquel Chewable has been well received in Europe as pet owners favor the ease of chewable administration over film-coated tablets. Simparica Trio posted U.S. sales of $184 million in the quarter, growing 17%, driven by increased focus in our parasiticide promotional programs. We continue to see patient share growth in Simparica Trio, even with the recent competitive launch in the triple combination space. We remain confident in our ability to compete through our superior label, strong retail channel presence, and the strength of our corporate and specialty relationships. In the U.S., our pain products posted sales of $15 million in the quarter. We continue to see solid patient penetration growth for Solensia, as well as an uptick in feline clinic visits, and expect to continue to drive awareness of feline OA through our DTC advertising campaigns. Librela has been well received by early experience program participants and their patients during the third quarter. We moved to a full launch in mid-October. We have been very pleased with post-launch performance thus far and are confident that we have ample supply to meet our demand expectations. Our U.S. companion animal diagnostics portfolio posted growth of 18% in the quarter, as we continue to see positive results from the new field force we introduced last year. We saw strong placement growth in the quarter, especially on our imaging devices. U.S. livestock sales declined 2% in the quarter, primarily resulting from the timing of supply on certain cattle products in the prior year when we had an improved supply position and restocking in the channel, which drove a strong comparable quarter. The Q3 decline was partially offset by growth in our cattle productivity implant, Synovex, due to extended label claims. The cattle decline was partially offset by growth in poultry due to vaccines and the extended use of Zoamix, an alternative to antibiotic medicated feed additives. Moving on to our International segment, where revenue grew 8% on both a reported and operational basis in the quarter. International companion animal revenue grew 12% operationally and livestock grew 5% operationally. Increased sales of companion animal products resulted from growth in our monoclonal antibodies for OA pain, our key dermatology products, and our small animal parasiticides portfolio. Growth in our OA pain products was bolstered by field force focus and DTC awareness campaigns in early launch European markets, specifically the U.K. and Germany, as well as the continued uptake in markets launched earlier this year. Librela sales were $50 million internationally, or a 55% operational growth in the quarter, despite a slightly more difficult comparator in Q3 of 2022 due to the removal of supply constraints in our international markets. We remain confident in our ability to supply our forecasted demand for Librela. Solensia sales were $12 million in the quarter. Our international key dermatology portfolio contributed $133 million of revenue and grew 17% operationally. We saw double-digit growth across most of our major markets and strong uptake of Apoquel Chewable. Apoquel growth was driven primarily by the delayed itch season in Europe and Canada. Cytopoint growth was driven by continued patient expansion and higher compliance in existing patients. Our international small animal parasiticides portfolio growth of 9% operationally was driven by our Simparica franchise, with Simparica posting $40 million in revenue, growing 29% operationally, driven primarily by demand generation in emerging markets. Simparica Trio posted $23 million, growing 47% on an operational basis, driven by growth in corporate account contracts. The Simparica franchise performance was partially offset by a 16% operational decline in the Revolution franchise, driven by a difficult comparable period in China due to the return of supply in the prior year, as well as the ongoing impact of the current economic conditions. As Kristin mentioned, we have seen declines in China due to the ongoing economic challenges, particularly on the companion animal side, which were not fully reflected in our initial guidance. We continue to monitor economic conditions. However, we do not expect an improvement this year or into the first half of next year. Our international livestock segment grew 5% operationally in the quarter, driven primarily by price increases, especially in high inflationary markets. Growth was driven primarily by our cattle portfolio, which grew 8% operationally. Brazil was the largest contributor, where we have seen price growth, supply recovery on certain products, as well as continued improvement in cattle industry dynamics. Additionally, the prior year was a weak comparative period due to the impact of supply disruptions and a more uncertain industry dynamic that led to a lowering of channel inventories in the quarter. Our poultry business also contributed to growth in the quarter, growing 9% operationally due to increased key account penetration in emerging markets. Now moving on to the rest of the P&L for the quarter. Adjusted gross margin of 70.5% improved 70 basis points on a reported basis compared to the prior year, primarily driven by the impact of price increases and lower freight charges. This was partially offset by higher manufacturing costs, inventory charges, and product mix. Adjusted operating expenses increased 7% operationally, driven primarily by higher SG&A expenses, which were 5% operationally due to higher competition-related expenses. R&D expenses grew 13% on an operational basis in the quarter, driven by higher compensation-related expenses as well as increased project spend for our pipeline projects. The adjusted effective tax rate for the quarter was 19.6%, a decrease of 130 basis points due to favorable jurisdictional mix of earnings and a higher benefit in the U.S. related to foreign-derived intangible income, partially offset by lower net discrete tax benefits. Finally, adjusted net income was 13% operationally and adjusted diluted EPS grew 15% operationally for the quarter. Capital expenditures in the third quarter were $145 million. We now expect full year capital expenditures to be in the range of $725 million to $750 million. In the quarter, we repurchased $250 million of Zoetis shares. Now moving to guidance for the full year 2023. Please note that guidance reflects foreign exchange rates as of late October, which reflect the continued strengthening of the U.S. dollar. Beginning with revenue for the full year. Due to unfavorable foreign exchange rates, we are revising our reported revenue range while narrowing our guidance on operational revenue growth. We expect revenue between $8.475 billion and $8.55 billion, with a range of 6.5% to 7.5% operational growth. Our previous guidance was 6% to 8%. We have been pleased with our operational performance thus far. While foreign exchange headwinds have been larger than expected, our year-to-date operational revenue growth of 7% is in line with our expectations. We expect to benefit from the approval and launch of Librela in the U.S., which is included in our revised guidance last quarter, as well as the performance of our Lifestyle business. However, ongoing uncertainty in China has continued to offset upside potential. We are expecting adjusted net income to be in the range of $2.49 billion to $2.51 billion, also slightly lower, driven by unfavorable foreign exchange. Operationally, we are narrowing our growth expectations to a range of 7.5% to 8.5%, previously 7% to 9%. Expected reported diluted EPS narrows to a range of $5.14 to $5.21. And adjusted diluted EPS narrows to $5.38 to $5.43. Finally, to summarize before we go to Q&A. Our broad-based growth across species and geographies, despite the challenging economic environment in China, continue to highlight the resilience of our portfolio and of the animal health industry. We remain committed to growing above the industry, driven by our innovative portfolio, commercial execution, and multiple sources of in-line growth. Now I'll hand things over to the operator to open the line for your questions.

Great, thanks guys. Good morning. I promise one long question. So in companion animal, the overall revenue was a bit shy of what we had expected, but you really had great performance in what we call sort of the big 5 products. So atopic derm, Trio map, the big 5 were all ahead of our estimate. So maybe if you guys can talk a little bit about the ongoing uptake of some of those key big 5 products, even with a more difficult consumer, right? Because people view some of those as discretionary. Again, the results were really strong and even despite the more difficult consumer. And then the flip side would just be anything to cite regarding the legacy products, right? So if you back into legacy that might have been modestly down year-over-year. And a quick part B on the follow-up, Kristin, you mentioned faster growth for Zoetis than market in '24. I don't think we're really surprised by that. You've done that year in and year out. But can I push you a little bit on how we should think about Zoetis in '24 versus Zoetis in '23? In other words, if we take into account the OA pain uptake, if you would, could we see accelerated growth for the company in '24 versus '23 when we think about all the moving parts?

Wow. That’s a great question, Jon. There are many aspects to consider here. Let me start, and then Wetteny can elaborate. We saw strong growth across our franchises, with dermatology growing 14% this quarter, Paris at 10%, diagnostics also at 14%, and our overall pain portfolio at 91%. Pain is certainly leading that growth. Looking ahead to 2024, we are optimistic about continuing that trend. We are pleased with the launch of both Librela and Solensia, which are still early in their life cycles but showing significant growth. If you look at the international market where these products have been available longer, the growth is impressive. Importantly, we are seeing strong compliance rates across Europe for these products. As a pet owner seeing the benefits of the second dose of Librela, I can’t imagine any pet owner would take their dogs off these top-tier medications. Wetteny, would you like to address the detailed questions regarding dermatology, Paris, and Solensia? We remain optimistic about our companion animal portfolio as we enter 2024, and the 11% growth aligns with our expectations. Wetteny, do you want to provide more details on that?

Yes, absolutely. The 11% operational growth in companion animals aligns with our expectations for the quarter. Overall, the operational growth of 8% is slightly above what we anticipated. As mentioned in the last call, we expected Q3 to fall at the mid to high end of our growth rate, which is around 7% to 8%, so we achieved the higher end. Regarding consumer behavior, as we've repeatedly stated, the therapeutics category in pet health, particularly for chronic conditions, has not been treated as discretionary by consumers. Even with some softness in pet spending, it doesn't extend to healthcare and therapeutics. This has been evident, even with a slight decline in clinic visits this quarter, while clinic revenue is up nearly 7%, and we're growing faster than that. Retail contributes to this growth, and we'll discuss it more in detail shortly. Looking at our key products, as described by Jon, derm and Triomabs are both up double digits across the U.S. and international markets. Our growth this quarter was broad-based, covering companion animals and livestock with a 5% price increase and 3% volume growth, indicating a wide-ranging success. This reflects our extensive product offerings, innovation, and the value placed on them by consumers and pet owners. When examining our legacy products, we notice that pricing tends to increase even as volume remains stable. In-line products were flat year-on-year this quarter with some price uplift. I share the optimism Kristin expressed about 2024, as we have multiple growth sources. The U.S. launch of Librela, along with continued growth in international markets for both Librela and Solensia, contributes to this. We will also leverage pricing in addition to the in-line products previously mentioned. Livestock is back to growth, and we will reassess this when we provide guidance next year. We anticipate growth across our key franchises, including derm, paris, and diagnostics. I'll stop here as a lengthy response to a comprehensive question, and we can move on to the next.

Thanks. On Librela, can you talk a little bit about the initial feedback for U.S. practices? Will there be any initial clinic-level stocking? I think you said your expectations are intact there. But any lumpiness quarter-to-quarter that we should be thinking about? Has anything changed in terms of your expectations there? And then as we think about margin expansion next year, given Librela won't be at critical mass so that we may weigh on the gross margin. But is there still some underlying operating leverage that we should think about across the business?

Sure. Thanks, Erin. I'll take the first half of the question, and Wetteny can take the second half of the question. We launched in the U.S., the early experience trial in September with 400 clinics. As I mentioned, my dog was actually one of those dogs. We went to a full launch in mid-October once we got a full dose in, and that's really the uptake was really strong. Very pleased with the results. We're obviously still in the early stages, but we're seeing it very similar to what we saw in Europe. Both vets and pet owners are super excited. We made sure that we've got ample supply as both Wetteny and I mentioned, because we do see this as a strong ramp, as you saw what happened in international. International had a supply constraint for a while. And as soon as we open that, we saw where that really went. So we continue to see really strong demand. Penetration is going really well in the clinics in the U.S. and the experience is broadening. There will be some small initial stocking for sure in some of those clinics, but I don't know if I would call that lumpiness going into next year. There definitely was obviously, they stock it. And our hope is we continue to just continue to drive that growth going forward. It is the number 1 selling OA pain product in Europe. We expect it to obviously be the same in the U.S. If you look at the U.S. in particular, there are 26 million medicalized dogs with OA. So this is a big market that we're going after, and this is a game-changing product. So we really see a very strong potential with this. We think Librela will expand the market. And as we've mentioned before, we really do think Librela and Solensia alone can be a $1 billion portfolio for us, and that's in a market today that was only $400 million. So I think that sort of underscores where we see growth there. But do you want to talk about the margin expansion issue, Wetteny?

Sure. I will. You're right, Erin. When considering ABS at its peak, once they scale up, they will enhance and improve our gross margins. We also believe they contribute positively to our contribution margin, even as they are still subscale in reaching their peak. As we enter the U.S. market, which is significant, we'll experience some gross margin challenges. However, many necessary investments to build our field force are already accounted for. There will be additional marketing and direct-to-consumer expenditures, and as we achieve the right level of product penetration in clinics, there will still be opportunities for contribution margin increases. This will impact our gross margins, but we'll provide more exact guidance for 2024 during the next call. Based on what we are sharing today, we're very optimistic about 2024, given the factors I just outlined. As we mentioned during Investor Day, we expect growth in the mid- to high single digits. You will continue to see us focusing on margin enhancement as we balance the mix between companion animals and larger animals, but I won’t provide more specific details than that.

Great. Thank you so much for the question. I wanted to stick with Librela. And Kristin, specifically ask about how vets are diagnosing OA pain and starting dogs on therapy? You obviously talked about the large number of pets that could benefit from this, but relatively few dogs on treatment. I guess, anything you can share in terms of diagnosis rates for practices that were in the early experience program and where those diagnoses are coming from? Are these dogs currently on a pain product and maybe switching to Librela or these new dogs being diagnosed? Anything there would be great. And then a quick follow-up on the international performance of Librela. It looks like it was roughly flat sequentially on a constant currency basis. Any learnings on seasonality or anything like that on the international side, now that that's been on the market for a little bit?

Sure. A few things I'd say there. Unlike cat pain, which we can certainly talk about if someone has a question on it. Dog OA pain and osteoarthritis has been diagnosed quite well by that. This is not hard to diagnose dogs; unlike cats, they do not hide it. You can sense they're less active. They limp. They don't want to go upstairs. It is not hard to diagnose. And a lot of these dogs are already being treated. They're being treated with our product, Rimadyl, and other OA products. There's diets for this; this is not a space where there's not a developed market, a developed protocol for diagnosis. That is not the case in cats, where we do have to really develop protocols for diagnosis. What we saw initially is the first dogs they put on are the most symptomatic dogs, where they know that like they really are really struggling. I think if you look at what we've seen internationally, as vets get more comfortable with it, they then start providing it for dogs earlier in the OA pain, which actually is even better. They have greater quality of life over time. So our experience of diagnosis is really coming out of international, which is normally initially the dogs they first put it on are the ones suffering the most where their pet owners are begging for it. And then over time, you move into earlier stages of OA. But again, this is not one that is hard to diagnose for vets. They have protocols to do that today. So we're not really as concerned here in the diagnosis part. I think what we really need to do and we see growth in '24 and beyond in '25 and '26 is having that really provide a product like Librela to dogs earlier in their disease, which I think will be a good growth driver. And in international, that is definitely not the case. We're seeing phenomenal growth right now. It is definitely not flat. But Wetteny, do you want to get into some of the specifics of the international growth situation there?

Yes, absolutely. Look, if you look at Librela, we delivered $53 million in revenues in Q3. That's a 65% growth operationally. Now if you look at the preexisting markets, they were up about 33%. So that's an incremental $10 million or $11 million in the quarter year-on-year growth in the preexisting markets. And then new markets that have been launched this year is about $10 million that includes a little bit from the U.S. from the early experience program. So year-on-year growth and then sequentially, I think was your question, and we're still up a few million sequentially. Just keep in mind, Q3 last year, as we said, we had a bit of a tougher comp for Q3 because that's when we released sort of the allocations that we're on and the supply constraints. So that is factoring a little bit, but we still had 33% in the EU sort of locations in markets where we had previously launched. So that's still a very robust growth despite the comp.

Hi, thank you for the question. Regarding 2024 in dermatology, do you anticipate any competitive launches beyond those we already know from Elanco? How confident are you in your decision to price Apoquel Chewables at the same level as your existing products? Are there any examples where chewables have served as a competitive advantage ahead of a competitive launch? Additionally, as a brief follow-up on R&D, there was a slight decrease, and I believe you're projecting further declines. Should we read too much into this as an indication that there might not be a significant new product in 2024 or 2025?

Sure. As we look for competition in dermatology to your question, we are expecting competition in the second half of next year. Our knowledge is that really there's only one that we're aware of at this point that we're expecting in 2024. We obviously don't know when in the second half that it would be coming. But we're well positioned for competition. As we've been preparing for competition for a while. We both have Cytopoint, we have monoclonal antibodies. We've got Apoquel. We've got Chew. We've got a pipeline behind that of continued life cycle innovations with longer-duration monoclonal antibodies for other species. So dermatology is a critical portfolio for us. We're continuing to grow. We did 14% in the quarter. So we're going to invest heavily behind this to make sure that we can continue to grow both our portfolio and the market overall. And if you look at chewable pricing, our strategy was let's move everybody to a product that's even easier that their dog likes even more that they see as a treat before you have competition, which we're expecting to be in a film-coated tablet similar to the original Apoquel. So we do see this as a really strong defense strategy for us. We've been seeing great, as you look at the growth in international in the quarter. It was led by the conversion to Apoquel Chewable. And in the U.S., a lot of the growth in derm for us was also led by retail, which has done really, really well. To your point on R&D, I'll let Wetteny take it, but there's absolutely nothing going on there in the sense of any weakness in our portfolio. But Wetteny, do you want to talk about sort of what drove some of that?

Yes, absolutely. Look, as Kristin just said, we remain on target with our regulatory milestones with respect to R&D spend, which was up about 13% year-over-year on the quarter. So clearly, well above our revenue growth rate. So what you're seeing in terms of our overall expectations for the year versus where we're landing is just a matter of timing on the span of projects, but nothing significant or notable there. Again, we continue to drive innovation, both across new innovation as well as lifecycle innovation across our portfolio, and we're very excited about the progress we're making in R&D.

Yes. It's mostly just timing of investments. I mean, it varies quarter to quarter.

Right. Thanks for taking the question. Mostly, I want to focus on Trio. You had a really solid result in the U.S., but it's sort of in that ramping up phase. Can you talk a little bit about what you're seeing in the market between yourself and the key competitors, BI, Merck, Elanco and specifically, BI just flashed NexGard PLUS, we saw a relatively surprising decline in Bravecto revenues from Merck? So I'm just curious, any change to competitive dynamics, anything you're seeing in terms of pricing or stocking or destocking and how that impacts Trio? And then just a follow-up on the very last question. CapEx as well, you slashed the guide this year pretty significantly. I think I heard you say Wetteny, the $725 million to $750 million, and previously it was I think, $900 million to $1 billion. So just curious, did that get pushed out into '24 as well? Or is there any other change there?

Sure. I'll take the first half of the question, see if Wetteny wants to build on it and then Wetteny, if you want to handle the CapEx question. We did see strong growth in Trio in the quarter, 20% in Q3 for Trio. It remains the number one flea tick heartworm in the U.S. by revenue. And really importantly, it's continuing to grow share. It's up 3% in the quarter. It's also growing patient share, which was up 2% in the quarter. So we're expecting solid growth this year. Obviously, there's a new competitor. But in Q4, I would also say to watch; we got a challenging comp as you look at us in Q4. If you remember, we got back into stock and ran a number of promotions in Q4 of last year. But we continue to expect strong growth for the year there. Even with the destocking that we saw in the U.S. in Q1 and the pre-price buying, as we talked about before that you had in Q4 of 2022. So we see this as a franchise that will continue to grow. A lot of our growth is really being driven by our auto-ship, by retail, which remains very strong for us with our corporate accounts. This is also a category where you do see low switching once you get on a product. So we do believe the broadest portfolio but continue to see strength in Trio. So we're happy with the growth we've seen there. But Wetteny, anything you add that I miss there, and you want to talk about CapEx?

Yes, sure. Look, on Trio, I think you covered it well; $206 million of revenue in the quarter. That's up 20% operationally. We're very pleased with that, including the patient share gains that Kristin already described. On CapEx, yes, we did reduce our CapEx expectations for the year from about $950 million to $1 billion down to $725 million to $750 million. This is really on the timing of project spend. We remain committed to the investments that we're making. And this is still representing about a 25% increase in CapEx year-over-year. So as we said at Investor Day, we expect CapEx to remain elevated for the next couple of years, and then we'll start to bring that down sort of in the range of a growth rate that approximates our revenue growth range as you go beyond '24, '25-time frame. So again, really just don't matter of timing is what you're seeing from a CapEx standpoint.

Hi. Good morning, thank you for taking my question. On the companion animal side of things, it's a nice strong quarter. I think you had said, if I heard you correctly, that in 2023, you expect full year organic growth, double digits. The question being, I think you're at 7% year-to-date. I'm kind of being a little dangerous here and playing with my model live, but I think it implies kind of like a high teens organic growth in companion animals in the fourth quarter. One, am I thinking about that correctly? And then two, what's kind of giving you the confidence that the business can do that, especially, I think Q4 is a little bit more difficult year-over-year comp?

Yes, I'll be happy to take that. Look, we continue to see, as you saw this quarter, 11% operational growth in companion animal. And though we have some tough comps, as Kristin just referenced with the Trio answer on the previous question, we are expecting very, very strong growth across companion animal. And keep in mind, we have some comp challenges with respect to livestock, which will decelerate from what it is on a year-to-date basis, about 6% to a low single-digit growth. So as you look at what's factored into the guidance that we just gave in narrowing the range, but still maintaining our midpoint, if you will, you can factor that into your equation in terms of what the livestock versus companion animal mix is as we exit the year.

Good morning. I have a couple of questions. First, without discussing any guidance for 2024, could you highlight some macro factors and how you expect them to evolve? Specifically, in the diagnostic space regarding consumer trends, do you see an increase in option volume? Secondly, could you elaborate on your supply plans for Librela? I understand you recently opened a new facility in Lincoln; how does that affect supply costs and margins?

Sure. I'll start with the beginning and then Wetteny maybe you can build on it. We continue to see very strong macro drivers in animal health. It's really led by the humanization of pets, which is a global trend. It's also led by the continued growth of households, who are predominantly millennial and Gen-Z and importantly, more income households, who are really raising the standard of care that they want to spend on their pets. We see this as important drivers as we bring real innovation to the market with Librela, with Solensia certainly continuing with Cytopoint, which is growing very strongly. So we look at the drivers of pet care globally, which is really who's adopting the pets, how they want to spend on their pets, and looking at revenue per clinic, which continues to grow very strongly, which is what we're really correlated against. It's something that continues into 2024. These are strong macro drivers for us. As we've spoken about on the livestock side, we really believe that market historically, and we believe in the future will continue to grow. 2% to 4%, low single digits. And as we said, we were going to return to that growth rate as we start to fully lap the challenges with DRAXXIN. So as you look at livestock, what's driving that is a growing middle class and more consumption of protein, with the whole Ozempic thing aside, which really hasn't impacted livestock or the consumption of protein globally, really because of who is really driving a lot of that growth, which is middle classes across the globe, and more and more people entering that and seeing and upgrading their protein. So we look at those macro drivers, and we really don't see any changes if we look into not just 2024, but 2025 and 2026. And when we bring innovation to those markets, we believe we can continue to grow ahead of that. So Wetteny, I'm not sure if I missed anything there, and if you want to take the second half of the question?

No, I think you covered the macro dynamics well, Kristin. On the supply question with respect to Librela, we are very confident in our supply plans to meet the demand expectations for Librela that we have certainly for '24 and beyond. Mentioning the Lincoln facility, certainly in addition to both our internal capacity and third party that we are using, we continue to invest internally. And I think if you look at Lincoln, that will be a factor, particularly as you go beyond 2024, with respect to supply planning fully well and other maps as well. So again, very confident in our ability to meet those demand expectations, and we've already factored the ramp that we saw in Europe in our thinking around demand there as well.

This is Ekaterina on for Chris. Thank you so much for taking a question. So first, very quickly, just on veterinary visits and the pressure we've been seeing there recently. Can you just remind us how sensitive Zoetis is to that dynamic and maybe your latest thinking around how visits are going to trend maybe into 4Q and potentially into 2024, if you want to comment on that. And then the second question is just on U.S. cattle. Can you just elaborate a little bit more on the dynamics you saw in the quarter? Because I think one of your competitors mentioned the timing of the cattle kind of was shifted earlier this year. Is this something that you saw as well? And does that potentially create a headwind for you as you think about the fourth quarter?

Thanks, Ekaterina. I'll take your first question and Wetteny can build on me and then take the second. That business was flat year-to-date, which is what we've expected and what we talked about previously. In the quarter, they were down around 1.5%, and as you discussed, we're really not as reliant on vet visits. The better proxy for us is revenue because again, remember that a lot of our products don't need to be purchased in the clinic. If you look at both auto ship, as you look at retail, you look at chronic medications, all of this continues to have us a higher correlation with overall revenue growth in the clinic. Historically, as we talked about before, vet clinic visits are flat to maybe 1%, and if you look at where they stand today, they're still ahead of where they were pre-pandemic. So we don't pay as much attention to that vet clinic visit. If you look at revenue in the clinic, our growth in companion animal was higher than even that number, and that's because we're driving so much innovation there overall. So if you look at vet clinics business, we're not as tied to that number as we continue to say. So I don't know if there's anything I missed there, Wetteny, what you want to build on, and then you want to take the second question?

Yes, sure. The only thing I would add on the vet clinic visits is you see our growth continues to outpace that of the clinic growth. And the vet visits were not as they're are important, right? But we're not as sensitive to visit because therapeutics and chronic indications tend to power through that. And you can still see volume growth even as visits are down. And then the retail piece, which is continuing to grow. We've seen an additional 24% points as a percentage of our pet care revenues in the U.S. each year. So we've gone from 11% from about 5% just a few years ago. So we continue to see that in the quarter, it was up about 35%, if you look at our retail sales. So those are the factors I would add. With respect to the cattle dynamics and livestock in general, I would say clearly, we've had a very strong start to the year through the first 9 months. Livestock is up about 6%. Clearly, we're signaling that will come down in the fourth quarter. And that's really more a factor of variability across quarters, given the timing of supply that we've had in the prior year versus the current year. The timing of when we've taken price adjustments for Draxxin, for example, which impacted Q2 versus Q3 as well as Q4 this year as we're anticipating a step in that at the end of the year. So that will put some more pressure on Q4. We factored all that into our guidance that we've just issued today, which we are still in line with our expectations that we started the year with, which is right around our midpoint; we just narrowed it. So all those are in. With respect to capital dynamics around we haven't seen anything that would say there's a pronounced shift with respect to the cattle run here. But again, we factored all these items into our thinking and what we've just iterated today from a guidance standpoint.

Hi. This is Chris on for Steve. Thanks for taking a question. We had 2. First, on the U.S. on the parasiticide market, can you provide an update on the estimated volume share of topical today? And then looking ahead to 2024, what is the risk of significant pricing pressure on Trio from the month of Credelio Quattro? Assuming a non-inferior product label type seems like the main level they could both to grow their market share. And then a clarifying question on U.S. Librela, can you confirm that U.S. sales were 0 in Q3? And then looking ahead to Q4, do you still expect sales to be immaterial for the full year?

Yes. Look, I'm not sure if I got the second question, but I'm going to give it a shot and then ask you to clarify after I give you an answer on parasiticide markets. So we still estimate in terms of volume, nearly half is still in the collars and topicals, but from a value perspective dollars, we're significantly leaning on the collars and prescription. I think you're asking a specific question about share for specific products within the topicals and collars, and I don't have that to hand. But if it was a different question, I'll ask you to clarify after I give you an answer on Librela. So Librela, in the third quarter was minimal. As you know, in September, we had an early experience program. That was only about 400 clinics very limited with KOLs to get them using the product and being able to talk about it, etc., and helping with refining protocols and so on. And so the number was like $3 million in the quarter, not meaningful at all. And given the timing of the full launch in October and with the holidays coming, it is not going to have a meaningful impact on the full year growth again on that point. But I'll ask you to clarify if I didn't get the question right on Paris.

Next question?

Great. Thank you, everybody. Great questions today. Once again, we want to reiterate that we remain confident in our ability to achieve our full year guidance based on the diverse and innovative portfolio that continues to drive our success. We are firmly committed to continuing to invest in that portfolio as we look at the opportunities ahead of us, through DTC and building our capabilities to support our growth, but we'll also continue to manage our costs and ensure we're creating value for our shareholders. We continue to grow faster than the market by focusing on our people and our colleagues and on operational excellence and agility. They deliver every day for our business and for our customers. So we look forward to updating you on the full year and our long-term value proposition and hopefully seeing many of you in San Francisco at the JPMorgan Healthcare Conference to kick off 2024. Thanks, everybody.