Welcome to the Second Quarter 2020 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com.

The presentation slides can be managed by you, the viewer and will not be forwarded automatically. In addition, a replay of this call will be made available approximately two hours after the conclusion of this call via dial-in or on the Investor Relations section of zoetis.com.

At this time all participants have been placed in a listen-only mode and the floor will be opened for questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin..

Good morning, everyone and welcome to the Zoetis’ second quarter 2020 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, 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 statement 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 in the company's 8-K filing dated today, August 6, 2020. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin..

driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high performing organization and championing a healthier, more sustainable future.

We've continued to make important investments in products and innovations across the continuum of care from prediction and prevention to detection and treatment of disease.

Supporting successful launches as well as new life cycle innovations and expansions of major products into new markets continue to be the cornerstones of our durable and steady performance.

In the second quarter, we expanded major vaccine franchises with the approval of our Vanguard B Oral for dogs in Brazil and our Fostera Gold PCV MH and Fostera Gold PCV Metastim for vaccines for pigs in Australia.

We also continue to strengthen our diagnostic and digital capabilities building on recent acquisitions in point-of-care and reference labs along with additional investment. We plan to launch a new diagnostic platform for pet care in the third quarter called VETSCAN IMAGYST.

We are very excited about the potential for this disruptive innovation, which will be the first systems to bring clinical pathology right to the point-of-care. This new multi-purpose platform uses a combination of image recognition technology, algorithms and cloud-based artificial intelligence to deliver rapid testing results to the clinic.

Its first indication will be for testing fecal samples for parasites, making it quick and easy to test and treat pets in the same visit. We will have more to say in the coming weeks as we prepare for a global launch. We also view diagnostics is playing an important role in the continuum of care for fish.

In the second quarter, we acquired Fish Vet Group to add more diagnostic tools to our aquaculture portfolio, including environmental testing, which is critical to fish farming.

Finally, at Zoetis our key priority around high performing teams is tied to creating a culture where all colleagues feel valued and included and is reflected in our commitment to promoting inclusion, diversity and equity across our organization.

Our leadership and board are dedicated to being a force for positive change across the globe to drive greater equity and inclusion. And we have dedicated financial and people resources to do so.

As part of this plan, we have made commitments to publish our diversity statistics and to increase our representation of black colleagues and people of color overall in the U.S. As the world leader in animal health, we are committed to demonstrating our leadership on this important business and social issue.

Now let me hand off to Glenn, who will speak more about our second quarter results and updated guidance for the full year.

Glenn?.

Thank you, Kristin, and good morning. I hope everyone is safe, healthy, and adapting to what is certainly an unprecedented time for all of us. Today, we'll provide additional commentary on our Q2 financial results, provide an update on our liquidity position and review our improved full year 2020 guidance.

Beginning with the second quarter results, we generated revenue of $1.5 billion, which was flat on a reported basis and 4% growth operationally. Adjusted net income of $427 million, decreased 2% on a reported basis and increased 4% operationally. Foreign exchange in the quarter had an unfavorable impact of 4% on revenue.

This was driven primarily by the U.S. dollar strengthening against the Brazilian real, Australian dollar, Mexican peso, and euro. Operational revenue growth at 4% was driven by 2% price and 2% volume. Volume growth. 2% includes 3% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 5% in other inline products.

Companion animal products led the way in terms of species growth, growing 13% operationally, while livestock declined 5% operationally. Companion animal performance was driven by a parasiticide portfolio, which includes sales of Simparica Trio in the U.S., Canada and certain European markets and our key dermatology products, Apoquel and Cytopoint.

Revenue from the acquisition of Platinum Performance, and its nutritional products acquired in the second half of 2019, drove the growth in equine. Livestock declines in the quarter were driven by challenges to our U.S. livestock portfolio.

Supply chain disruptions caused by reduced animal processing capacity and shifting consumer demand from restaurant and food service to grocery stores effected our customers' purchasing decisions. This decline was partially offset by strong performance internationally with growth in swine, fish and poultry.

New products contributed 3% to overall growth in the quarter driven by Simparica Trio, ProHeart 12, Revolution Plus and our Alpha Flux parasiticides for salmon in Chile. We remain excited by the launch of Simparica Trio and are reaffirming the range of a $100 million to $125 million for full year incremental revenue.

While vet clinic penetration is occurring at a more moderate pace as a result of the COVID-19 pandemic, prescriptions in those clinics that have adopted Trio have been more robust and cannibalization of Simparica has been less than we anticipated.

Global sales of our key dermatology portfolio were $224 million in the quarter, growing 24% operationally and contributing 3% overall revenue growth. Recent acquisitions contributed 1% growth this quarter, which includes Platinum Performance and our reference lab expansion strategy. Now, let's discuss the revenue growth by segments for the quarter.

U.S. revenue grew 6% with companion animal products growing 19% and livestock products declining by 18%. Companion animal growth in the quarter were driven by sales of Simparica franchise, our key dermatology products and the impact of recent acquisitions. U.S. key dermatology sales were $160 million for the quarter, growing 26%.

The continued strength of this portfolio was driven by expanded usage of both CytoPoint and Apoquel benefiting from our direct-to-consumer campaign, uptick in e-commerce channels and pet owners spending more time with their pets as a result of COVID-19. Simparica Trio performed well in the U.S.

with sales of $36 million, despite challenging market conditions in Q2. We’re observing several positive trends, included rapid uptake in clinic that have adopted Trio smaller than expected cannibalization of Simparica. Sales coming from new patients for the category and taking share from current oral flea and tick competitors.

Diagnostic sales increased 18% in the quarter, largely driven by our reference lab acquisitions. In addition, previous instrument placements created a solid foundation for consumables growth in the second quarter. U.S. livestock declined 18% in the quarter driven by lower sales across all species.

In the second quarter, we faced challenges with significant declines in feedlot placements, reduced demand from the food service industry and the effects that had throughout the food supply chain and our customers, in addition to increased competition. To summarize, U.S. performance was strong in a difficult market environment.

And the diversity of our portfolio, again, proved beneficial as growth in companion animal offset the challenges faced in the U.S. by our livestock portfolio. Our international segment had operational revenue growth of 3% in the second quarter with more balanced performance across our companion animal and livestock portfolios.

Companion animal operational revenue growth was 2% and livestock operational growth was 4%. Increase sales in companion animal products with a result of growth in our key dermatology portfolio and our Simparica franchise, including the launch of Simparica Trio in Canada.

While European markets were impacted significantly by COVID-19, the decline was offset by significant growth in other markets, including Japan and China. Diagnostics had a difficult quarter as wide-scale clinic closures resulting from COVID-19, limited the ability to place the instruments and negatively impacted consumable usage.

International livestock growth in the quarter was driven by swine, fish and poultry. Swine grew double digits in the quarter, primarily driven by China, which grew 25% as key accounts continue to expand their herds and production shifts from smaller farms to larger scale operations. Our fish portfolio delivered another strong quarter.

We saw favorable conditions in Chile and Norway that resulted in vaccinations being accelerated into Q2. In addition, we continue to see an uptake of the Alpha Flux parasiticide in Chile.

Overall, our international segment was again, a positive contributor to revenue growth with performance in swine, companion animal, fish, and poultry, more than offsetting declining cattle resulting from the COVID-19 pandemic. Now, moving on to the rest of the P&L.

Adjusted gross margin of 71.1%, increased slightly on a reported basis compared to the prior year due to price, favorable manufacturing costs and product mix, which were partially offset by foreign exchange, recent acquisitions and higher inventory charges. Adjusted operating expenses were flat operationally.

The incremental advertising and promotion expense is related to Simparica Trio, recent acquisitions and R&D increases were largely offset by reductions to T&E and compensated related costs as a result of COVID-19. The adjusted effective tax rate for the quarter was 22.3%.

The increase versus prior year is driven by the jurisdictional mix of earnings and the impact of discrete tax benefits recorded in Q2 2019. Adjusted net income for the quarter grew 4% operationally, primarily driven by revenue growth and adjusted diluted EPS grew 6% operationally.

Next, I'd like to cover our liquidity position and our capital allocation priorities. We ended the second quarter with approximately $3.4 billion in cash and cash equivalents, including the proceeds from our $1.25 billion long-term debt issuance in May, of which $500 million is earmarked for repayment of our November 2020 maturity.

We have access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which remain undrawn. Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities for internal investment, M&A and returning excess cash to shareholders.

Consistent with what I mentioned last quarter, we still anticipate elevated capital expenditures this year to support investments in manufacturing, information technology to support our recent acquisitions and capabilities in digital and data analytics.

With regard to returning excess cash to shareholders, we remain committed to our 2020 dividend, which represents a 22% increase over 2019. In Q1, we repurchased $250 million in Zoetis shares before suspending the program in the second quarter in order to conserve cash.

We have approximately $1.4 billion remaining under our multi-year share repurchase program. Now moving on to our updated guidance assumptions for 2020.

Our cash performance has always given us confidence that the essential nature of our business, a diverse portfolio and the innovation we consistently bring to our customers would position us well during difficult market conditions.

After assessing recent trends and our performance in the second quarter, we're further refining and raising our full year 2020 guidance. We expect recent positive companion animal trends in the U.S. will continue. Although vet clinic revenue may moderate somewhat as pent-up demand works its way through the system.

Alternatively, we believe social distancing measures are negatively impacting the food service recovery and will continue to present challenges to our livestock business in the U.S. The more recent resurgence of COVID-19 cases in parts of the U.S.

and expanding rates of infection in international markets continues to create uncertainty around the duration, scope and economic impact of the pandemic.

Please note that our guidance reflects foreign exchange rates as of mid-July and given our global footprint, movement in foreign exchange has had an impact on revenue and adjusted net income since we issued our prior guidance in May.

Our current guidance includes favorable foreign exchange at revenue of approximately $50 million and approximately $10 million at adjusted net income versus May guidance.

For revenue, we're raising and narrowing our guidance range with projected revenue now between $6.3 billion and $6.475 billion and operational revenue growth of between 3% and 6% for the full year versus the negative 2% to positive 3% we had in our May guidance.

Adjusted net income is now expected to be in the range of between $1.685 billion and $1.765 billion, representing operational growth, a positive 1% to positive 5% compared to our prior guidance of negative 9% to negative 3%.

Adjusted diluted EPS is now expected to be in the range of $3.52 to $3.68 and reported diluted EPS to be in the range of $3.14 to $3.32. In closing, while the COVID-19 pandemic has certainly presented a set of challenges we have not seen in the past.

We're extremely proud of our colleagues and the commitment they have shown toward our customers, our company, and animal healthcare.

During this time, we have demonstrated the diversity and durability of our portfolio, the resiliency of our industry, and we have confidence in our ability to continue to execute on our strategy during these uncertain times. Now, I'll hand things over to the operator to open the line for your questions.

Operator?.

Great. Thanks guys. I guess, I'll try to just load everything upfront. Glenn, I think op margins were at an all-time high in the midst of a global pandemic, so congrats. But some of that was likely eaten by mix. Yet, it seems like that mix may remain, as you mentioned, intact or favorable for the next couple of quarters.

So as we think about margins into the back part of the year, is there anything to call out overall? And what about the cadence of 3Q versus 4Q? Kristin, for you, just to shift over there, maybe if you can just talk to what you're seeing for a competitive response on Trio.

And just a clarification, the new platform for diagnostics of the new offering is that in a new VetScan analyzer that displaces the old one? Or is it a different unit specific for pathology? A lot there. But thanks for your time..

So Jon, I'll address the first part of your question with operating margins and mix. So as you say, we have very favorable gross margin in this quarter as well as the first half of the year. As we look into the second half of the year, we do expect there to be some deterioration in gross margin.

And that does come from product mix, right? The separation that we've seen in performance in the quarter, livestock declined 5% operationally. Companion animal growth grew 13%. We expect that to narrow in the second half of the year, the differential in performance between companion animal and livestock. So that will negatively impact mix.

The other component is that we generally have a larger portion of livestock sales in the second half of the year than we do have in the first half of the year. The other component to consider is OpEx.

As we move into the second half of the year and our field returns more and more to visiting clinics, T&E expenses, which has been very favorable, particularly in Q2, will rise as we go into Q3 and Q4. In terms of the dynamics between Q3 and Q4, don't really see any big differential in terms of the dynamics between Q3 and Q4..

Okay. Hey Jon. With regards to your question on competitive response to Trio. It's been the response that we largely expected. Obviously, this is an innovative product. They were very aware it was coming. They're obviously running promotions.

You probably saw some stock-ins as we probably saw as you move from Q1 to Q2, but we're really not seeing anything that we weren't expecting overall. And to address your other question with regards to images, it's a completely separate product. It is actually a scanner and a microscope that then uploads to the cloud for analysis.

So it is completely separate than VetScan. And it's a platform. And the first product, as we mentioned, will be around fecal, but it is not a replacement at all of the VetScan machine. It's a separate one that is both a scanner and a microscope..

And our next question comes from John Kreger with William Blair. Please go ahead..

Hi, good morning. This is Jon Kaufman on for Kreger. I'd like to focus a little bit on livestock here. It'd be great to get a sense of your expectation for what the outlook looks like, not just in the coming quarter or two, but really into 2021 and over the medium term. So I guess a couple of questions within that.

First, how much of a residual impact will the processing capacity issues have? And then second, on the lower foodservice demand, let's just say, hypothetically, the U.S.

consumer really isn't ready to go out to restaurants until spring or summer of 2021, do you expect producers to exit and then you're serving a smaller end market? Or is it more of producers realize this is a period of limited profitability, but they don't adjust herd sizes and they stay in the market? Thank you..

Sure. Thanks, Jon. A few things on that. I think the two big trends you're seeing in U.S. livestock – and I’d say you have to look at livestock. 50% of our livestock business is actually outside the U.S. and it grew at 4%. So again, this speaks to the diversity of our portfolio.

But if you look at the sort of global trends you're talking about with regards to the movement from eating out to eating in, we do expect that to continue. And the guidance we've given for the rest of the year is that, that largely doesn't change too dramatically. It's obviously too early to tell in 2021 how that ultimately adjusts.

The second factor to consider in the livestock overall is the packing plants, which have been an issue in the U.S. Packing plant capacity in the U.S. still looks to be about 95% to 97%. And in some businesses, that may be good, but that does continue to back up animals. But again, this is mostly a U.S.

trend, although we have seen a few isolated issues outside of the U.S. and Europe, Australia and some other markets. But again, I think what producers are doing are doing their best to actually alter where they can the flow of animals. This is much easier for poultry to do, given they only have to make decisions on 45 days.

Pigs can do it over six months. So I think you will see a slight reduction in the U.S. in pork. It is much harder for cattle producers. Most of those animals are already here. So we do see cattle probably continuing to struggle probably through the first half of next year.

But I think the third factor besides the dine in, dine out and packing plants to consider is actually the export market. What has really helped maintain a lot of the lot of the U.S. livestock flows has been the export market, with the largest player there clearly being China. And given ASF, they are still in need of a tremendous amount of pork.

So those are the three factors that we're considering that gives us confidence that, to your question, in the short to medium term. In general, livestock has grown around 5%. Obviously, it's been a little lower in the last few years. And I think, again, International was 4%. We were negative in the U.S.

We do think in the medium term it goes back to normal levels, but we do think livestock will continue to be challenged certainly this year and likely at least to the first half of next year. Thanks, Jon. .

Our next question comes from Michael Ryskin with Bank of America. .

Hi. Thanks for taking the question. Just two sort of quick ones for me. First, on the guide, for revenues and guidance of 3% to 6% core growth. I just want to make sure I'm not missing anything. Because you did 4% in the second quarter, you're over 5% year-to-date.

Over end of the range actually impose pretty meaningful deceleration from the second quarter, and yet most trends are pointing upwards. So I'm just wondering if you could go into that sort of what points you to 3%, what points you to 6%. When you guided in the first quarter you talked about a second wave in the fall and winter.

Is something like that in your assumptions now? Or is there anything underlying going on there? And then the second question, again, on the digital VetScan pathology instrument you talked about. Just a little bit of a follow-up. Is it an instrument-only product? Will there be consumables attached to it.

And are you planning any different rollout in U.S. versus international? Thanks..

So Mike, just in terms of your first question in terms of the guidance in revenue of the 34% to 6% growth. So to your point, in the first half, we grew 5% with a limited impact from COVID-19 in Q1. That would imply a second half of 2% to 7% growth essentially.

I think, a, it's first important to understand that, in the first half, that 5% growth did have a contribution from acquisitions of about 1%, which we won't have that same contribution in the second half of the year because of when the timing of those acquisitions occurred last year.

So that really brings you to organic growth of about 4% in the first half of the year, which is the real comparator for that implied 2% to 7% growth in the second half of the year. So really pretty balanced between first half and second half organically with the first quarter not really having a significant impact from COVID-19.

To your question about what brings you to the low end of the range, that would be a more would be a more severe impact of COVID-19 than we're seeing today across our markets. What takes you to the higher end of that range is things sort of stabilizing as they are for the rest of the year without a more rapid or more significant impact of COVID-19..

Sure. And to take the second half of your question, Mike, on images, we will be launching the U.S. and a few markets outside of the U.S. as we move into the end of Q3 to Q4. And there are consumables, but the consumable – the consumables, obviously, reagents there, but there's also a read.

So obviously, with every test that's done, the read that's done in the cloud is also a fee. So there are both – some products to use to prepare the specimen. But there's also – more importantly, the read of each test in the cloud. So it's a consumable, I suppose, but it's almost like a different way of looking at it, which is a cost per read.

I hope that answers it. Thanks, Mike..

Our next question comes from Chris Schott with JPMorgan. Please go ahead..

[Indiscernible] for Chris. Thank you for taking the questions. The first one is on African Swine Fever. You've touched upon this in your prepared remarks, but talk about where we are in terms of the recovery in China.

How much of the herd has been rebuilt? And would you expect this to represent a tailwind in the second half of the year? And then another one on livestock. It seems a part of the dynamic that COVID is creating is producers switching to lower-cost alternatives.

To what extent is this happening? And how sticky do you think this dynamic is as we think about recovery in 2021 and beyond. Thank you..

Sure. So Sure. So we'll start with your question with regard to African Swine Fever in China. What we've been seeing in China overall is that the larger, more sophisticated integrated producers are starting to rebuild their herd. As you saw, very strong growth in our China business of 24%.

What you're seeing underlying this is the beginning of the rebuild of these herds. This is more isolated to sophisticated producers who can ensure biosecurity. Because to be clear, there's still African Swine Fever present in China.

So I think what you're seeing is some of the smaller backyard producers are not rebuilding there, but we are seeing some of the more sophisticated ones doing so. And that is a positive trend for us because they would be more likely to use our products overall.

But if you look at African Swine Fever, we are still predicting that China will have to continue to import pork a significant amount for the next few years. So this rebuild is slow because, as I said, there is still African Swine Fever in China in a few isolated markets as well outside of China.

So I suppose, if you look at that, for China, it will continue to be a tailwind for us, continuing to drive the China business as that herd rebuild. And with regard to your second question on livestock and whether we're – some people are switching to lower-cost alternatives. Historically, that has been the case. So people will trade down.

What's slightly different is that this is a pandemic with a recession. And I say that because, as long as there's more protein than people need, the price goes down. So hamburger meat right now is actually still pretty cheap. So historically, we would've seen a recession. People trade down from beef to pork to chicken’s egg.

So we think that's still a longer-term trend. But with the disruption right now and the overcapacity, you are still seeing some other proteins still in certain markets on a relative basis not be that expensive.

So I think it's – I would say your overall hypothesis over the medium to long term is true, although in certain markets, given overcapacity, the difference in price is not as dramatic as it normally is..

And we'll take our – next question comes from Louise Chen with Cantor. Please go ahead..

Hi, thanks for taking my question. So I wanted to ask you how COVID-19 has changed the way you do business on both the livestock and companion animal side? What efficiencies have emerged? And what could be here to stay? Thank you..

Sure. Thanks, Louise. I think, similar to all businesses, we are – we've had to adjust the way we operate, and I've been incredibly impressed as the resilience of our colleagues and our customers and their creativity.

So the first trend is we've obviously moved a lot more to doing virtual seminars or webinars to handling orders and things like that by phone. Our customers have adapted to more telemedicine in certain markets around the world. And if you look at more broadly in the U.S. and in certain markets outside the U.S. to e-commerce.

So that is obviously for us, it's supporting our producers, our veterinarians and pet owners to make sure they can access our products wherever they our products wherever they need.

But I think some of the skills that our field force is now learning will be one that will help us in the future, obviously reduces some of the travel that some of them had to do. But our field force across the world, where businesses are allowing, are actually back seeing customers.

Now it's not as many customers as they saw before in a day, and that has to be both a customer and a colleague feeling comfortable in a given market. But it also has to flex, obviously, given some of the flare-ups in the U.S. geographically and across the world, a lot more flexibility there.

So I think it's both our customers getting creative and flexible and our field force and some of our capabilities overall as the company to be able to meet our customers where they are. So I think I'm quite impressed at how our colleagues and our customers have adopted..

Our next question comes from David Westenberg from Guggenheim. Please go ahead..

Hi, thanks for taking the questions and congrats on a great quarter. So for my first question, are you anticipating any kind of competitive launch in the derm in the next year, say, 2021? I know we've heard about potential competitive launches for five – probably five years now, but this time it kind of feels a little bit different.

And then for my second question is on the diagnostic platform. Is there any limitation to the sample type, say blood fecal, urine even maybe physical tissue, et cetera? And is there a component that might have a reagent to it? Thank you..

Sure. Sure, so I'll start David with your first question on the Durham portfolio. We were obviously quite pleased with its performance in the quarter, growing 24%. This is now obviously a blockbuster products as well as category. And to your point, we have expected competition for a while given the attractiveness of the sector.

At this point in time, as you know – we have very intelligence, as you know, in our industry with regards to competitive launches, but based on what we know today, we are not expecting a competitive launch in the rest of 2020 and likely the first half of 2021.

Obviously that's always subject to change since we don't know exactly what our competitors are doing, but we continue to believe that we will have competition in the space, but we, at this point, do not believe it's in the next 6 to 12 months. So our focus right now on our Durham portfolio is building those brands as big as we can.

And if you saw in the quarter, our focus on direct-to-consumer advertising in the U.S. to continue to grow our share and to build the market itself. So your second question with regards to the platform, the images platform, what we're saying is it's the first fecal will be the first. Obviously, it could look at lots of others.

I mean that's still – product that is still in our research and development to look at other types such as obviously blood and other types. But those are not things we are prepared at this point to discuss, but obviously the platform lends itself to be able to do multiple different tissue types. Thanks so much..

Our next question comes from Balaji Prasad from Barclays. Please go ahead..

Hi, good morning and thanks for taking my question. So two parts. Firstly, Kristin, there's a material change in the competitive landscape with a new number two company. So I would like to understand your thoughts on what the Elanco and Bayer merger means for the industry and for Zoetis specifically as the number one company.

Secondly, you've been championing technology adoption of the firm. So I want to explore one of the priority areas, you mentioned, digital and data analytics. And what does that mean in actual terms is the revenue driver is an operational efficiency measure or a mix of both? Thank you..

Sure. Thanks, Balaji. For starters on the combination of Elanco and Bayer, as we said previously, we don't really see this as changing the competitive landscape in any dramatic way. We've competed against both of them many times before.

Obviously, the acquisition of Bayer by Elanco will increase their business in the OTC space, where we honestly don't really operate. We do in the direct-to-consumer side, but not in the over-the-counter. So it's not a space that's important to us, especially with our focus on the veterinarian where that's more of a retail market there.

So we don't foresee that changing it. They're both been well-capitalized competitors historically, so we don't see that as a major change. With regards to digital and data analytics, I think, it's an - and it is both a revenue driver as we announced today with IMAGYST certainly looking at products that drive revenues, such as platforms, such as vet.

We've also spoken about precision livestock farming. So there's a numbers of ways in both companion animal and livestock that this continues to help us drive revenue in, but it's also an area where we can also be much more efficient, better targeting our customers, looking at new ways through e-commerce and other channels.

We've done some quite exciting things. In China, for example, launching our own revolution page there and leveraging different tools in digital and data to just also make us more efficient, so to drive revenue and just increase our efficiency. So I think it is a – it's both. Thanks, Balaji..

Our next question comes from Nathan Rich with Goldman Sachs. Please go ahead..

Good morning. Thanks for the questions. I wanted to start with Simparica Trio. You mentioned the clinic penetration is occurring, I think, at a more moderate pace than what you initially anticipated.

Kristin, it'd just be great to get your view on kind of what you've seen so far and maybe what factors have had the biggest impact on pace of uptake? And do you think that we'll see the typical seasonality that you usually see in the parasiticide business, obviously a lot different about this year than maybe past year? And then the second question, if I could just ask it upfront.

On the vet channel overall, how much of the strength do you think kind of might be backlog or pent-up demand versus what might be, excuse me, more sustainable as we think about trends in that part of your business over the balance of the year?.

Thanks, Nathan. So as we look at Trio, we started shipping the distribution in late March and launched the product in April, right and probably the height of the pandemic at least in the U.S. What we've seen to date is that – that was more difficult for clinics to take on new products.

That's often something that requires an in-person meeting and training of staff, et cetera.

So we saw a slight – versus what we expected fewer penetration of clinics, but what we've been incredibly pleased about and why we've given the guidance of $100 million to 125 million, is that for the – we've been quite successful in corporate accounts ones that we engage quite early on this larger clinics and the ones we penetrated, our share in those clinics has grown faster than we expected.

So I think that's been a positive. So I – again, we're continuing to grow our penetration of clinics, but we're quite pleased with the share. And what we're also pleased about is it's had less of an impact certainly in cannibalizing Simparica, which has been great.

So we've certainly taken share from others, but our data also suggests we're also bringing new people back to the category of oral parasiticides, which we think is pretty exciting there.

So, I think – whether this will be a typical season, if you look at some of the data with regards to vet visits Q2 year-over-year, they're still down, I think, about 3%, but it's a significant improvement from the negative 20 to negative 30 you saw it in the U.S. in the beginning of the quarter.

But what's really interesting and what might affect your second – your question there is that the spend per visit, however, is up dramatically. So, latest data, we'll say it's maybe up about 7%. We do think that's going to moderate over time.

This is probably people buying more of the products so they don't have to return to the vet in case there's something. So we do expect that to moderate some in the coming quarters, but that might mean that people may versus the normal – historical six months, six or so – six or seven months of buying the parasiticides, maybe they bought more.

So we'll see that that goes, but we are expecting that to moderate. So I think, overall, we're looking for continued positive trends in companion animal, but I think it will be dependent on geography by geography..

And our next question comes from Kathy Miner with Cowen and Company. Please go ahead..

Thank you. Good morning. I have two questions. First, just going back to the dermatology business given that you talked about the trends were good and people are staying home with their pets more. Could we anticipate greater near-term sales for both Apoquel and Cytopoint? And would this be true in both the U.S.

and OUS? Second question, just on companion animal vaccines, when you talk about the vet visits and the greater revenue per visit, have you seen a ketchup in vaccines? And is this still working its way through the system? Or do you think we're already there? And just a clarification on the share repurchase, I just want to clarify that is in fact still on hold.

Thank you..

Yes, so – Kathy, I'll take the questions on dermatology on and on share repurchase. So in terms of the derm portfolio, if you look back to last year, we had over $750 million in sales and we grew 29%, right. Obviously, with a bigger base of revenue, we were expecting that growth rate to slow down.

When you look at year-to-date, however, we've grown 25%, and that has exceeded our expectations and there's been a number of drivers in that. We've continued to invest behind the portfolio, it should drive growth and we've seen a very positive return on that.

So we do expect to see better than expected performance in the derm portfolio than we would have when we started out the year, which is really pretty impressive considering the impact of COVID-19 as well. And it's a franchise that we will continue to make sure that we invest behind the growth in.

In terms of share repurchase, we did mention on the last call that we were suspending our share repurchase for Q2, we are also suspending for Q3, and we'll continue to evaluate that throughout the year..

Our next question comes from Gregg Gilbert with Truist Securities. Please go ahead..

Thanks. Kristin, I have a question. I'm sorry if this came up, I don't think it's a bit about insurance, both the company’s involvement and then a broader industry question.

So first question is what have you learned about pet insurance? And what went well? And what did not go so well in your launch in that space? And separate from Zoetis’ involvement in that space, longer-term do you see broader based interest in pet owners buying insurance? It seems like everyone with pet sort of gripes about their out-of-pocket yet utilization of insurance is quite low.

Do you think that's an employer mediate – employer mediated phenomenon that needs to be jump started or what are your thoughts on increasing penetration of insurance in the pet space over time? Thanks..

Sure, thanks, Gregg. When we entered the space, it was really about assisting the pet owner and getting the care and increasing access to care and supporting the vet and providing the best care they can. And oftentimes, one of the challenges there is the sort of unexpected expense.

So our focus really has been in this to get like a product that's more attractive to the consumer or to your point, the U.S. versus the rest of the world is underpenetrated in pet insurance.

But we think the primary reason there is not because of employers or anything other than we think, you know, some of the products have not been as attractive to pet owners. So we really felt that the way we launched this, the focus on the pet owner would be attractive.

We are pleased with our performance to date of our product with regards to Pumpkin, which is our pet insurance. And we look at that what's going to drive that and what feedback, we did get some feedback from veterinarians and they had concerns with regard to the inclusion of parasiticide.

So we did change the – that program a little bit to look – focus more on diagnostics. And this is part of continuing to launch a new product and really iterate with our customers both with pet owners and vets to make it as attractive as we can.

This is still a very, very small business relative to the rest of our business to be perfectly honest with you. It's not terribly material, but we are very pleased with how the company has been doing to date and most specifically in the number of new policies they continue to attract.

And our goal is that we can make insurance grow the overall market, which is not hard to do since in the U.S., I think it’s only 2% to 3% versus the other markets outside the U.S..

We will take our next question from Navin Jacob with UBS. Please go ahead..

Hi, this is Prakhar Agrawal on behalf of Navin Jacob. My first question is on your antibodies.

How do you see these products being differentiated versus some of your competitors, such as Elanco’s Galliprant, and how are you thinking about the market opportunity here? And second question is did you increase in alternative channels have a material impact on your margins this quarter and a longer-term with continued increase in alternative channels, how should we think about the impact on your margin profile? Thank you..

Sure. I'll start with the first question on the monoclonal antibodies and I'll let Glenn take the second question with regards to the alternative channels. Obviously, we don't have an approved product, so it's hard to say exactly how it would stack-up.

But the focus on monoclonal antibodies is really a focus on a product with strong efficacy, with a strong safety profile. And these are large markets for example in the K9 space. We think that have gotten really comfortable with monoclonal antibodies as is evidenced by our performance on Cytopoint.

It really also addresses a strong compliance issue, which is you remember to give the product to your dog every day. But it would say if you think about the feline or the cat monoclonal antibodies, there really aren't any products out there today in the cat space.

So we think this is quite innovative in the cat monoclonal antibody space with really very little existing products that cat owners or vets can use.

So we're quite excited, but until we have a profile it would be hard to say very specifically, but certainly from a compliance and safety perspective and efficacy, we think these will be very strong products that we think both vets and pet owners will be quite excited about.

So, Glenn, do you want to take the second question?.

Sure. So in terms of the impact of alternative channels on our margins, it did not have a material impact, and that's just based on the overall size of our sales in those channels, right. It really is limited to our U.S. companion animal business.

So while the channel has expanded significantly in the quarter, it still represents less than 3% of our sales. So it's still not a big impact on the overall margin, but just to give a sense of the growth that we have seen. In 2019, in our U.S. companion animal business, the alternative channels represented about $100 million of sales for the year.

In this quarter alone in Q2 that number was about $50 million. So that gives you a sense of the rapid increase we're seeing in these channels, but it's still small over an overall portion of our business to really impact our overall margins..

And there does appear to be no further questions at this time. And I'll turn the call back over to your speakers for any additional remarks..

Okay, well, thanks everybody. I want to thank you for your questions and for your continued interest in Zoetis.

While there's still many uncertainties around the impact and the resolution of COVID-19, the fundamental strength of our business and industry, we believe are proven and unchanged, and we remain very confident what Zoetis can achieve this year based on the diversity of our portfolio, the resiliency of our business, and certainly the spirit of our colleagues.

So thanks for joining us today..

Thank you. And this does conclude today’s program. Thank you for your participation. You may disconnect at any time..