Welcome to the Third Quarter 2021 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 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 open for your questions following the presentation. [Operator Instructions]. If at any point your question has been answered, you may remove yourself from the queue while pressing the pound key.

In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow-ups. Your line will be muted when you complete your question. [Operator Instructions]. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin..

Thank you, Operator. Good morning, everyone. And welcome to the Zoetis Third Quarter 2021 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 projection.

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 US GAAP.

Reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release, and in the Company's 8-K filing dated today, Thursday, November 4th, 2021. 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. We delivered strong results. Again, this quarter with 10% operational growth in both revenue and adjusted net income driven by our innovative portfolio of petcare parasiticides and dermatology products.

Our US business grew revenue 7% operationally, while international grew revenue 14% operationally. In terms of species, our Companion Animal portfolio generated 19% operational revenue growth in the quarter with great performance in markets around the world.

Our latest innovation in parasiticides, the triple combination Simparica Trio is increasing its global adoption. Our groundbreaking dermatology products, Apoquel and Cytopoint, continue to redefine and expand the category.

And we completed the first full quarter of sales for both of our new monoclonal antibody therapies for osteoarthritis pain in dogs and cats, Librela and Solensia. These new products are exceeding expectations and receiving very positive feedback from veterinarians and pet owners in European markets, where they've been launched.

When you add all of this to our growth in diagnostics for Companion Animals, I see our business continuing to capitalize on the positive demographics for pets. Increased spending on pet wellness and treatment will be sustainable well beyond the pandemic.

And our portfolio and pipeline habits well-positioned to continue leading and innovating in this market. Livestock product sales continue to present a more complex picture for the industry and Zoletis with market dynamics vary widely by species and geographies.

As we expected, our livestock portfolio declined 2% operationally in the third quarter, largely due to generic competition across, cattle, poultry, and swine and most significantly in the US We have taken proactive strategies to protect these product lines, including the introduction of a lifecycle innovation like drafting KP.

But pricing pressure remains due to the increasing effects of generic competition. On the positive side, we saw 7% operational growth for livestock and international as markets like Brazil, Chile, and other emerging markets performed well.

Our long-term advantage in livestock continues to be our diverse portfolio and strength across geographies and product categories like medicines, vaccines, and medicated feed additives.

We also continue to invest in R&D programs that align with our customers long-term needs for more efficient and sustainable production methods, which can be built anew therapies, analytics and digital solutions.

We remain on track for a record setting year with updated guidance for operational revenue growth in the range of 14% to 14.5% and adjusted net income growth in the range of 16.5% to 18% for 2021. Our major catalyst for growth has performed well this year and have more runway ahead for 2022 and beyond.

And when do we make the right investments and continue successfully executing our growth strategies. Our strength in petcare has an incredibly strong foundation across parasiticide, dermatology and vaccine. To the first 9 months of 2021, our Companion Animal portfolio has grown 29% operationally.

We also remain very excited about the long-term blockbuster potential of our new monoclonal antibody franchises in pain, Librela and Solensia, as they grow in Europe and we make progress on approvals in the US We currently expect approval of Solensia in the US in the first half of 2022, with Librela remaining more likely in the second half.

Our revenue growth in international markets has been 20% operationally to the first 9 months, driven by China, Brazil, and other emerging markets. We continue to expect growth to come across both our Companion Animal and livestock portfolios in these markets.

Finally, our diagnostics portfolio remains a key catalyst for growth with 28% operational growth through the first 9 months.

We are gaining significant traction with our expansion of the point-of-care portfolio in markets outside the US We always believed international expansion was one of the biggest value drivers for the Abaxis acquisition once we combine that portfolio with the global Zoetis footprint.

The acceleration of international growth for diagnostics is a very positive sign and continues gaining momentum. We also recently added digital cytology testing to our VetScan images platform in the US, UK, Canada, Australia, and New Zealand.

This means we can now offer a network of expert remote pathologists, in addition to artificial intelligence technology for fecal testing. We're seeing our strongest early adoption of VetScan images in Germany, Australia, Spain, and the UK. And we will continue developing additional applications for the platform over time.

In addition to our ongoing investments in R&D programs and direct-to-consumer campaigns, we are investing in manufacturing capacity to meet increasing demands for our new parasiticide products and monoclonal antibody therapies. Expansions are underway at our sites in Kalamazoo, Michigan, Lincoln, Nebraska, and Tullamore, Ireland.

All of these are significant multiyear projects to ensure we have ongoing reliable supply, while maintaining a diverse global network of third-party contract manufacturers that give us the greatest flexibility and redundancy.

Our supply chain team has done an excellent job over the last two years to optimize inventory levels of key products, while minimizing the impact of a challenging global supply landscape. We continue to carefully monitor and manage our supply chain and inventories.

And finally, before I hand things off to Wetteny, I wanted to note our recent news about changes in our R&D leadership team. Long-time R&D leader, Cathy Knupp will be retiring at the end of the year and ensuring a smooth transition through February.

I am very grateful to Cathy for building the most innovative and productive R&D organization in the animal health industry. And for leaving us with a rich pipeline of future innovations and R&D talent, which includes her successor, Rob Polzer. Robin has been with Zoletis since 2015.

Working on many of the innovations that have come to market recently in parasiticides and monoclonal antibodies. He has experienced running our global therapeutics and biologic R&D organization and is the right leader for the future of innovation at Zoetis.

In closing, I want to thank our colleagues for delivering another great quarter and bringing the value of Zoetis to our customers every day. We are confident in the updated guidance we have provided and see the fundamental growth drivers of our business continuing into 2022 and beyond. Now, let me hand things over to Wetteny..

Thank you, Kristin and good morning, everyone. The focus of my comments today will be on our third quarter financial results, the contributing factors that drove our performance and an update of our improved full-year 2021 guidance. In the third quarter, we generated revenue of $2 billion, growing 11% on a reported basis, and 10% operationally.

Adjusted net income of $597 million was an increase of 14% on a reported basis and 10% operationally. Operationally revenue grew 10% with 2% from price and 8% from volume. Run growth is comprised of 5% from new products, including Simparica Trio, and 3% from our online portfolio, primarily our key dermatology franchise.

Now let's dive further into the details of the quarter. Companion Animal products again led the way in terms of species growth, growing 19% operationally, with livestock declining 2% operationally in the quarter.

Our parasiticide portfolio made the largest contribution to Companion Animal growth driven by sales of Simparica Trio and continues strength across our broader portfolio including the Proheart franchise, Simparica, and Revolution Stronghold Plus. We also saw robust growth in our key dermatology products, Apoquel and Cytopoint.

Simparica Trio had another exceptional quarter posting revenue of $122 million, representing operational growth of 140% versus the comparable 2020 period, with year-to-date sales of $350 million.

We believe the global fleet second hardware market will continue to expand and that our broad and innovative portfolio, which were 32% operationally in the quarter has us well-positioned to capture share and outpace our competitors. Global sales of our key dermatology products were $321 million in the quarter, growing 26% operationally.

Total sales exceeded $300 million for the first time in Company history. And we remain ahead of schedule to surpass $1 billion in dermatology sales for the year.

Our diagnostics portfolio had operational sales growth of 7% in Q3 against a very challenging comparative period as the third quarter of 2020 had a sharp increase in wellness visits following wide fill clinic closures in the second quarter.

Our International Diagnostics portfolio performed very well, which as Kristin mentioned, was a key component for the strategic rationale of the Abaxis acquisition.

Diagnostics remains the key growth driver for Zoetis, and we will continue to make significant investments in new technology, expand our reference [Indiscernible] footprint, as well as provide flexible solutions to our customers.

Our equine products delivered strong results with operational sales growth of 20% in the quarter as horse shows and racing return to pre-pandemic levels and field growth in vaccines, as well as nutritional and pain products.

The expected decline in livestock in the quarter was primarily driven by our US cattle and US poultry businesses as our international segment delivered operational growth across all species.

Globally, our cattle business declined 5% operationally in the quarter driven by the impact of generic competition for DRAXXIN and a difficult comparative quarter resulting from COVID-19 dynamics and earlier fall cattle run in the US in the third quarter of 2020.

Poultry also declined in the quarter as producers in the US rotated to lower-cost alternatives to our premium products as a result of current market dynamics. Sales were also negatively impacted by generic competition of Zoamix and BMD, our alternatives to antibiotics in medicated feed additives.

The decline in cattle and poultry offset the growth in fish. Swine was essentially flat in the quarter as decline in the US, primarily from pricing pressure on our anti-infective and vaccine portfolio as a result of generic competition, offset the growth internationally from further key account expansion.

Overall, we delivered another strong quarter, bench marked against a very difficult prior-year comparative period on both the Companion Animal and livestock sides of our business. Now, let's discuss the revenue growth by segment for the quarter. US quarterly revenue exceeded $1 billion for the second consecutive quarter, with revenue growth of 7%.

Sales of Companion Animal products grew 17%, and lifestyle product sales declined by 13%. For Companion Animal, Petcare trends continued to be robust. Vet clinic revenue and patient visits grew again this quarter against growth rates from the third quarter of last year, which were well above historical levels.

Our view remains unchanged that certain trends will moderate, but we remain above pre-pandemic levels. Growth in US Companion Animal was led by our parasiticides portfolio and our key dermatology products. Simparica Trio continues to perform well, with US sales of $110 million and year-to-date sales north of $300 million.

This quarter is also an excellent representation of our commitment to invest in the broader parasiticide portfolio as we launched the targeted DTC campaign for Proheart and prevalent heartworm geographies. Key dermatology sales were $270 million in the US for the quarter, growing 20% with significant growth for Apoquel and Cytopoint.

US diagnostic sales grew 2% in the quarter, which as I mentioned earlier had a very difficult comparative period. However, year-to-date performance has been strong at 23% growth. US livestock sales declined 13% in the quarter.

Our US cattle business faced the comparative period that's a robust growth at third quarter performance of 2020 benefited from an early for cattle run and pent-up demand work its way through the system. In addition, generic competition had not entered the market in the third quarter of 2020.

Our generic defense strategy has been successful as we have been able to maintain a greater volume share of the [Indiscernible] market than originally expected. Although additional generics will likely enter the market in the coming quarters.

From an end market perspective, producer profitability remains challenged by input costs, primarily feed and labor. US poultry sales declined in the quarter as smaller flocks resulted in lower disease pressure, allowing producers to expand usage of lower-cost alternatives through our highly efficacious premium products.

In addition, generic competition is creating pricing pressure on our Zoamix NBNT franchises. To summarize, our US operations delivered another strong quarter driven by our innovative and robust Companion Animal products along with petcare and markets, displaying very strong fundamentals.

The near-term weakness in our US livestock business has been expected and has been more than offset by the strengthened Companion Animal, which demonstrate the importance of diversification across species. Now, turning to our international segment.

Revenue of our International segment grew 14% operational in the quarter with Companion Animal revenue growing 24%, and livestock revenue growing 7% operationally. In the second half of 2020, we saw a material uptick in medicalization rates and standard of care by pet owners, a trend which has continued through the third quarter of this year.

We entered and made significant investments in advertising promotion to capitalize on favorable market conditions and drive growth. Companion Animal achieved broad-based growth internationally in the quarter, led by strong performance of our key dermatology products.

Through 3 quarters of 2021, year-to-date sales are in excess of total sales on the entire prior year. In addition, we are in the early stages of a DTC campaign for key dermatology, which we expect will create additional demand for our products.

Paracitisides had a strong quarter internationally, led by significant growth in the Simparica franchise, which benefited from DTC campaigns and drove growth in Brazil, Eastern Europe, and Latin America.

Librela our monoclonal antibody for alleviation of [Indiscernible] pain in dogs, has done extremely well, generating $15 million in quarterly sales in a select number of markets. Feedback from veterinarians and pet owners on the quality-of-life improvement for the patients has been extremely encouraging.

Our feline monoclonal antibody for alleviation of [Indiscernible] pain Solensia, had positive feedback from the early experience programs in Q2 and launched in the EU this quarter.

[Indiscernible] in cats is a significant unmet need in animal health and our view is that Solensia will become a blockbuster product, with the pain market for cats becoming approximately a $200 million global category overtime.

Our international diagnostics portfolio grew 20% operationally in the quarter, with significant growth in consumable and instrument revenue. And strong growth across a number of geographies such as the UK, Australia, China, and various other markets.

Moving onto livestock, our international business again delivered growth across all species, led by strong operational growth in cattle and fish. Cattle growth in the quarter was driven by further key account penetration and favorable export market conditions in Brazil, in several other emerging markets.

Our fish portfolio continues to perform very well, growing 21% operationally. Growth in our fish portfolio was primarily the result of increased sales of our Alpha Flux Sea lice treatment product, as well as strong growth in vaccines.

Performance in swine and poultry were also fueled by growth in key accounts, as well as overall market growth, primarily emerging markets. At a market level view for international segment, all major markets grew operational in the third quarter with the exception of France, which was essentially flat in Q3.

Emerging markets was again a key contributor to our international performance, led by Brazil, which was 22% on an operational basis. As we expected, growth in China slowed in the third quarter as lower pork prices challenged with this or profitability.

However, the Companion Animal business in China, which grew double-digits once again, offset the weakness in swine. Overall, total emerging markets has grown significantly in both the quarter and on a year-to-date basis.

Our international segment again delivered strong results of robust growth in Companion Animal and growth across all species in livestock. On a year-to-date basis, our international segment has grown 20% operationally with our Companion Animal and livestock businesses, each growing double-digits.

While following pork prices in China are creating a headwind that is moderating growth in swine, it is more than offset by the growth across other species and markets for the demonstrating the importance of our diversity across species and geography. Now moving on to the rest of the P&L.

Adjusted gross margin of 70.7% increased 110 basis points on a reported basis compared to the prior year as favorable product mix for an exchange, low inventory charges and price were partially offset by higher manufacturing costs, freight and distribution costs.

Adjusted operating expenses increased 19% operationally, with SG&A expenses growing 20% operationally resulting from increased compensation-related costs, as well as increased advertising and promotion expense, freight, and T&E. Our [Indiscernible] expenses were 17% operationally driven by higher project spend.

The adjusted effective tax rate for the quarter was 16.7%, a decrease of 330 basis points due to favorable changes to the jurisdictional mix of earnings including increased favorability related to foreign derived and tangible income, and an increase in favorable discrete items compared to the prior year's comparable third quarter.

Adjusted net income and adjusted diluted EPS grew 10% operationally for the quarter, primarily driven by revenue growth, gross margin expansion, and a lower effective tax rate. Our liquidity position remains very healthy.

And in the third quarter were $3.3 billion in cash and cash equivalents following a $600 million repayment of long-term debt in August.

Our financial flexibilities in a very strong position, which allows us to make meaningful investments in our business while returning excess cash to shareholders, as demonstrated by our repurchase of Zoetis shares of approximately $200 million in the quarter.

Now, moving on to our updated guidance for 2021 through a raising and narrowing as a result of our performance in the third quarter and confidence in our ability to deliver sustainable future growth. Please note that our guidance reflects foreign exchange rates as of mid-October.

For revenue, we are raising and narrowing our guidance range with projected revenue now between $7.7 billion and.$7.75 billion and operational revenue growth between 14% and 14.5% for the full-year versus the 12.5% to 13.5% in our August guidance.

Adjusted SG&A expense for the year are expected to be between $1.91 billion and $1.94 billion versus $1.87 billion and $1.91 billion in our prior guidance. The guidance rate largely represents additional compensation-related costs, as well as increased advertising and promotion spend to support growth of new products and key franchises.

Adjusted net income is now expected to be in the range of $2.2 billion and $2.225 billion, representing operational growth of 16.5% to 18% compared to our prior guidance of 13% to 15%. Adjusted diluted EPS is now expected to be in the range of $4.62 to $4.67, and reported diluted EPS to be in the range of $4.23 to $4.29.

Now, to summarize, before we move to Q&A. Three quarters, we've delivered strong operational top and bottom-line growth with revenue growing 17% operationally. And again, raised and narrowed our full-year 2021 guidance.

We have achieved significant growth across our key franchises and are extremely excited about our new product launches, and product pipeline. Now, I hand things over to our operator to open the line for your questions. Operator..

And at this time, [Operator Instructions]. Again, in the interest of time, we ask that you limit yourself to one question and re-queue again with any follow-ups, your line will be muted when you complete your question. Today's first question comes from Michael Ryskin with Bank of America. Please go ahead. Your line is open..

Great. Thanks for taking the question, guys and congrats on a strong quarter and raised the guide. I want to start on DRAXXIN real quick. You touched on generic impact in US livestock a number of times in your remarks, we assume that's predominantly from DRAXXIN.

Can you give us an update if you're seeing any stabilization there or are you expecting for the headwinds in 4Q '22 or 4Q or 2022 or given those trends improve and stabilize from here?.

Yes. Thank you. We were very pleased to deliver another strong quarter and position to raise a guidance once again for the year. With respect to DRAXXIN, as expected, we continue to see the effect of the LOE and DRAXXIN was down about $15 million in the quarter.

Now, our defense strategy here is working well and we are largely maintaining our market share although that does have the effect on price. So, we're very pleased with how the product is performing as well as DRAXXIN KP in terms of maintaining largely the market share from a volume perspective here.

As we look forward, we are expecting further generic competitors to come into this space from a DRAXXIN perspective, and that we believe will continue into next year as well..

And the only thing I would add there, as we said, this is completely in line with our expectations, not just that we gave this year, but that we've been talking about when the generic enters. We generally said it takes somewhere between 20% to 40% over a number of years.

We said in the beginning of this year that that would likely be a little faster and we're on track to be doing that. We expect probably somewhere around a 20% head-on price for us on this product in the year. So, in line with the expectations, Mike..

Thank you. We'll take our next question from Louise Chen with Cantor. Please go ahead..

Hi. Thanks for taking my question here. So, as we start to think about 2022, what are some of the pushes and pulls hereperce for example, will recovery from food services and restaurants be a tailwind in 2022 for livestock? And what else should we be thinking about? Thank you..

Thanks, Louise. We are really excited for a number of the growth drivers that we saw this year, which we really think will continue into next year. I think our strength in parasiticide, our strength in derm, I mean, that will be a billion dollars this year growing at 26% in the quarter.

Diagnostics, again, year-to-date, 28%, we think continues into next year, really strong performance in our emerging markets. China, Brazil, and other emerging, which I think will continue into next year, not to mention our pain monoclonal antibodies. So, I think we have a lot of the growth drivers this year that we think will continue into next year.

I mean, obviously things we're going to watch for next year, there could be headwinds for us. Could be the timing of competition for potential product against Apoquel or Simparica Trio, as Wetteny mentioned in his remarks, we're not really expecting that until the second half of 2022. Again, we don't have great visibility into that.

Obviously, we think [Indiscernible], once we lap some of this draft and impact that will lessen as a real headwind for us. But overall, we really think that durable growth drivers you saw this year really continue into next year and we're pretty confident about that..

We will take our next question from Nathan Rich with Goldman Sachs. Please go ahead..

Thanks so much. If I can maybe follow up on the revenue outlook, Wetteny, for 4Q. I think historically 4Q has been a bit of a stronger quarter. You mentioned the competition on DRAXXIN.

Is there any other dynamic that we should have in mind in terms of the revenue cadence for the fourth quarter? And I guess, with the focus on inflation and cost pressures in the market, do you feel like you've seen any pre-buying of products or stocking up from customers in either the livestock or companion business. Thank you..

Yes. Sure. Look, we continue to see really strong underlying market dynamics overall. And our portfolio is really well-positioned and continues to perform very well against those dynamics.

As we discussed on the prior earnings call, what we're seeing in terms of growth rates in the second half of this year is more reflection of how the phasing occurred last year versus this year, given our position in the market. Again, the strong market dynamics that we continue to face here.

If you look at last year, the second half had almost 17% more revenue in the back half in the first half of last year. And so that's really what's driving the comp here. Those are the phasing of last year where this year is a little bit more normalized.

As Kristin just referenced, we see a number of growth drivers for us, not only from the overall market, but also our portfolio across [Indiscernible], as we look at pain, diagnostics as well, with the one area -- the area that we're watching, including DRAXXIN.

To your point around inflation, is you know given our portfolio and innovative products that we have and demand we see for those products, they position us well to take price. And you saw a 2% price in the quarter included in 10% operational growth.

And we'll continue to look at opportunities to continue to do that as we go into next year, you saw in the quarter our gross margins actually expanded by 110 basis points versus last year Q3, and so that despite some headwinds in the areas of freight, etc.

So, we'll continue to monitor those and take price where we can give the innovative products that we bring to the market [Indiscernible].

And our next question is from Jon Block with Stifel. Please go ahead..

Great. Thanks, guys. Good morning. See if I can [Indiscernible] a couple. The first on livestock and quite honestly was pleasantly surprised by the international livestock up 7% operationally. There's just a lot of noise out there with other companies and swine chatter.

So, I guess the first question is, was that a clean number? No pull forwards and maybe just talk to this market overall, do you still view it as a low single-digit grower for you this year with eventual improvement to mid-single-digit in call it '22/'23? And then just a pivot, Kristin or Wetteny.

I know we're not going to get a 2022 guide, but maybe conceptually at a high level, how do we think of '22 in terms of a year where the delta -- how do we think about the delta between revenue and EPS growth? And I guess where I'm going with this is a lot of innovation for you where you're still dominating the market.

So conceptually, do we just think about it as another year of spending, supporting the portfolio of DTC where the delta between those 2 revenues -- revs and EPS might be a little bit tighter than prior years? And sorry for the long-winded questions. Thanks..

Sure. I'll take the first part of the question then I will let Wetteny take the second half, Jon. Livestock is a complex picture. So, I think your insight is quite well-founded. In the sense of not just the difference between US and international, but the difference between the specie.

So, as you rightly mentioned, the US was down significantly in livestock and that's pretty much generic competition against DRAXXIN, Zoamix and some other products that we mentioned before.

But to your point, international was up 7% and that was still with a really rough time in China as you saw in the quarter with China livestock down about 10%, but more than made up for by China's Companion Animal.

And really it has to do with the mix between species that are growing quite quickly for us like fish, cattle, and poultry, maybe struggling but you look at strong growth in emerging markets, which is what's really booing livestock. And as we've said in previous quarters, how US livestock goes does not mean how overall lifestyle goes.

So, I think we really, the diversity of our portfolio across species, across geographies continues to really be one of the strengths for us at least.

And we do think overall you'll see a flat to low single-digit growth overall across the Company for us in livestock, that maybe a little bit slower than the market, as we said, because of DRAXXIN and some of the key LOEs that we have.

And ultimately, once we lap some of those LOEs, we think you do go back in '23, '24 to a mid-single-digit exactly where we've always been. So, the historic growth of livestock is around 4%. And as we said, we think it absolutely returns there.

And what's the reason to believe? Well, if we're growing international in the quarter at 7%, and really the US is mostly getting hit by the generic. Once we lap those, we do believe you can get back to a livestock growth in the sort of mid-single digits, the way it historically has been. But I'll Wetteny take your second question..

Yes. As we've discussed just before here, we're well-positioned, going out of this year into next year, to continue to sustain growth beyond this year. In terms of how you might see things flow through the P&L, our long-term value proposition is to grow adjusted net income faster than revenue. We don't see any reason to depart from that.

However, given the opposition across a number of really key brands and demand that we see, we'll take the opportunity to invest behind those brands to drive DTC by other awareness campaigns, etc. We're also are investing in R&D, as well as Diagnostics and other areas that we believe will help us accelerate and enhance growth going forward.

So that may, at times, cause that difference to be a little bit tighter as you said, from time to time, but it's to drive that growth -- that enhanced level of growth that we see, given the opportunity that we see in the market..

Thank you. We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead..

Okay. Thanks. Can you provide us any metrics on the contributions from Librela and Solensia in the quarter or any metrics around reorder rates of the products in certain markets and how the launch is progressing relative to your expectations at this point in the expected timeline again for the US launch.

And then second, just more broadly on Companion Animal trends. Any monthly metrics you can give us over the course of the quarter and kind of what's expected for the fourth quarter and beyond in terms of the underlying demand trends across that market? Thanks..

We continue to be very pleased with the performance of Librela and Solensia in the European markets where we've launched the product. The feedback has been very, very strong from vet and pet owners as well. We saw $50 million of revenue from Librela in the quarter and about $2 million from Solensia.

Again, really the first full quarter of those products being in those select markets for us. In terms of where we're expecting approval for next year and we continue to expect approval for Librela as Kristin mentioned, in the first half of the year..

Solensia..

I'm sorry. Solensia in the first half. Sorry about that..

No worries..

Solensia in the first half. With Librela, more likely in the second half of the year in the US..

And I'll take the second half of your question, Erin, with regards to US Companion Animal trends. We don't have the monthly data, but just putting some of this in context, we believe that we look at the data overall right now. We're seeing overall vet clinic revenue growing 7%, which is higher than the historical rate.

It's been a little bumpy over the year. I mean, weather, lots of different dynamics have been driving it. You saw 8% in Q1, 14% in Q2., we are seeing 7%. The way we sort of see this is, we think it overall will be higher than historical norms.

Is it -- is the double-digit that you saw consistently in 2020? No, but I don't think -- we saw very weak as you saw in Q1 and there's a huge bounce back in the second half as we saw last year, we do think that revenue at that clinic will continue to grow above historical rates.

We're not really sure, as I said last quarter that we think that's going to be double-digit, but historically it grew 5 to 6. Is it going to be 7 to 8? I think our view is it will still be stronger than normal, but maybe not in the double-digits overall.

But I mean, its still seeing strength, if you -- anyone of you who have been trying to get an appointment for your dog or your cat at the vet, it's pretty challenging to get one. So mostly because the demand really does remain high there..

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

Great. Thanks so much for the questions. I just -- my question on the derm portfolio, you've built a billion-dollar franchise here, but it's really about competition coming in 2022 or beyond.

What are you anticipating in terms of the impact that a competitor launch could have? I think historically you've talked about a second entry, more building the market than maybe directly cannibalizing your existing business.

But I guess as you've had a longer window of time to develop this, do we reach a point where that competitive launch, I guess, more impacts your growth versus -- I guess the heart of the question is, how much more room is there for market expansion as a new player comes in? Thanks so much..

Sure, thanks Chris. Yes, I mean, our derm portfolio has continued to grow and I think what we've really discovered is there still a large number of untreated animals out there. So, if you look at, we still believe there are 7,000,000 dogs that are diagnosed with some form of itchiness that are still not being treated.

We do believe there's significant market growth. There's still geographic expansion. We've really invested heavily in direct-to-consumer advertising to grow this market. People are home more with their pets. They're spending more time. So, I think people are really starting to notices itch and bothering them more maybe than it did historically.

So, they are seeking help. We've also really invested in programs such as in the US are Petcare rewards program, which it making customers loyal to our product. So, we have been expecting competition to be frank. We probably thought it would've happened before now, but we think there's lots of rooms to continue to grow this market.

And so, will it remain at 26% of you saw in the quarter? Our growth might go down a little bit, but I still think this will be a growing market for us, just given the large number of untreated dogs in the US and around the globe..

And our next question comes from Balaji Prasad with Barclays. Please go ahead..

Hi. Good morning. Thanks for questions. Main focus on China, but the [Indiscernible] and it's because you often spoken about China as a major market, understandably.

Can you help us understand the expectation that are in the market and any comparative range of prizes that you think this market would support? And also, far behind would applicable to be in terms of getting introduced are launched in China. Thank you..

Yeah, I'll start and see what Kristin what's to add here with respect to China. As expected, we saw growth decelerate in China this quarter with about 1% growth in the quarter but keep in mind, China has actually grown 35% on a year-to-date basis. We're up against a very solid comparative on last year where we saw 63% growth in the quarter.

And swine was actually up 159% in the same quarter last year. Again, the pricing dynamics [Indiscernible] which we discussed on the last call started about mid-June. And so, we expected to see sort of decline in the pork area. Now, the other part of your question is long-term.

What do we expect in the market? We do see continued opportunity to grow substantially in China over time as we bring more and more robotics to the market.

But also, if you look at what's happened since African swine fever, you see a concentration more on larger producers versus backyard forms, and we think that [Indiscernible] well in terms of whole medicalization over time, as well for our premium products with respect to swine.

And then on the Companion Animal side, we continue to see really robust growth in China. In Companion Animal, we saw double-digit growth this quarter. And Companion Animal which obviously was partly offset by the swine.

So long term, we continue to expect really solid growth in China, which is our second largest market, driven by the market dynamics that we discussed. Although there may be cycles that we'll see in swine as we're going through right now from a pricing standpoint..

The only thing that I could add to that, is we obviously have launched Apoquel there. It is doing well, it is growing. This is a specialty product in a market that's traditionally been mostly a primary care generalist market. So, we're really excited to grow that.

And I think we have a very strong pipeline of products coming into China and new innovation that we're going to be bringing in just like we brought in Apoquel, the approval right now for Cytopoint, which has not yet launched there. And honestly lots of products behind that we're really excited to be launching in China.

So, we -- it is our second largest market. We do think it's going to continue to have very strong growth. As Wetteny said, with our year-to-date at 35%, we're really bullish on our ability to continue to grow in China..

Our next question comes from Steve Scala with Cowen. Please go ahead..

Thank you. I have a question on Librela and Solensia in Europe. There are several parts of the question. Are owners are returning monthly for the next injection or is the time between injections longer than that? What is the average patient cost of each injection? And just to clarify, I think you said Solensia in cash is $200 million opportunity.

Why is that? Why is that only $200 million? Why isn't it multiples of that? Thank you..

Sure. Again, I can start there. We are really pleased with Librela and yes, we are seeing animals return. I don't have the specific number of days that they're coming back. We can certainly look into that and see if we can get that data for you.

It is priced at a premium to both Rimadyl, as well as to Gala plans on the market, so given it has a phenomenal, both safety and efficacy profile, it has been priced at a premium. The price obviously varies from market-to-market, so I don't think we have that overall information.

With regards to the second part of your answer on Solensia, half is it quite different markets. So, although today the market in dogs is 400 and we believe we can double it. The market is actually pretty higher to size in cats. There are very few approved products out there today to treat cats, so I hardly even say what it is.

It's not zero, maybe tens of millions, it's certainly not hundreds of millions of dollars. And cats are less medicalized than dogs. So, you really have to first medicalize those cats. You have to be able to -- cats like to hide their pain.

So, you also have to find a way that pet owners can notice pain in cats better and identify it and bring them to the vet. So, the reason we've said it's a smaller market is, the number of cats that are medicalized are just smaller, and then the number that are actually treated is really small.

So, the first thing is you need to be able to identify [Indiscernible] with pet owners, convince them to take their cats to the vet and build a market from scratch. Cat owners, when they used to call the vet when their cat was severing from pain, from osteoarthritis. We're told it really wasn't anything.

There's no product in the US, for example, whatsoever. So, it's really about retraining pet owners that there is a product that can meet their cat sneeze, and helping vets really bring the cat into the vet. A lot of pet owners don't like putting their cats in crates to bring them to the vet as you probably know.

But we're very confident that we have a strong pipeline for cats that will increasingly medicalized cats’ overtime and helped build this market. But as we said, just given the number of medicalized cats will be a smaller market than the dog space. And it will likely take a little longer to build it..

And our next question comes from Christine Rains with William Blair. Please go ahead..

Hi. Congrats on a great quarter and good morning. My question is that we noticed that Trio declined sequentially for the first time, so I was just hoping to have some color on this and how it's performing versus your expectations. Thanks..

Sure. Look, we saw another strong quarter across our parasiticide franchise. Small animal parasiticide grew about 32% in the quarter with $391 billion. We've had Trio sales of $122 million, $350 million so far through this year on a year-to-date basis.

The part that continues to do extremely well, particularly in our large corporate accounts, where the penetration rates about 90% and we're seeing about 80% of the order rates as well. So, we continue to gain share in this very large market. If you recall, last year we launched the product, and so we've now -- without lapping it.

And in terms of parasiticides, a sort of seasonality starts to play into [Indiscernible] in terms of what you might see as well. So, this is really in line with our expectations and we couldn't be more pleased with how the product is doing in the market.

And now that we've really penetrated well with the large corporate accounts, we're now going into some of the mid-size accounts as well. So, we continue to see the product gain momentum and again, in line with our expectations..

Your next question comes from Navaan Ty with Citi. Please go ahead..

Good morning. Can you share your stats of pet ownership going forward and average revenue per Companion Animal visit? And apologies if I missed them. And can I quickly ask are you able to comment on the EU Commission investigation to the Belgian office? I understand it was related to anti-trust allegation. Thank you..

Sure. I'll start with your question with regards to the investigation and then Wetteny can take the second half of your question on Companion Animal. On the [Indiscernible] inspection pertains to the [Indiscernible] decision to discontinue the clinical development of a single experimental drug candidate.

We're working with the EC to ensure it has all the necessary information that it needs. And we are confident that we can align the concerns which are prompted the investigation. So, I think your second part of the question was on Companion Animal trends.

The 7% which was broken up between 3% on traffic and 4% on spend per visit, but I don't know Wetteny if you've got any comments on that?.

Yeah, sure. As Kristin mentioned, we saw 7% revenue growth for vet with about -- with visits up 3% and a revenue per visit up about 4%. And that's up against a prior year where we saw real increase in the third quarter in terms of vet visits, etc., given the effects of the pandemic.

We continue to expect that these statistics will continue to be above pre-pandemic levels, or they would moderate from their peaks.

Other -- two other important points to recall here is that if you look at pet ownership or more, we're seeing millennials and Gen-Z bring pets into their homes, and they are doing a lot more research and looking at petcare and wellness, and they are willing to spend more on their pets.

So, the increase in pet ownership, we expect that to continue to provide really strong tailwind in the industry for spending on pets as we look forward and as those pets continue to age as well..

And our next question comes from Dave Westenberg with Jefferies. Please go ahead..

Thanks. Good morning. I have a question on potential competition for Simparica Trio. I know it's been a bit of a moving target. I think initially you thought it could even happen this year and I think it's been pushed out to the rate three times, perhaps to second half of '22. Just curious. I know competitor tight-lipped about what they're doing.

But any thoughts from year-end and why there continues to be a delay here, do you think it's regulatory? Or it -- could it be technical? And if it's technical, is this something that could delay competition for many years to come? And then just -- hypothetically, if competition comes into derm segment around the same time as competition comes for Simparica Trio, do you think you have the flexibility to show above segment growth during this period? Thanks..

Sure. I wish we knew exactly. I mean, we had the same theories that you do that there could be certain technical reasons for some competitors. And let me be clear. Everyone's working in this space. This is the parasiticides. It's the largest single market in Animal Health at $5 billion.

So, I think if you're pretty much any of the large companies we compete with, they're all trying to come up with their own triple combination. So, I don't know that it's the same thing that's holding each of the companies back. I mean, we're not really clear. It definitely could be regulatory, it could be technical, it could be manufacturing CMC.

We're not exactly clear. And to your point, there's really very few public companies who actually disclose much about their pipeline. So, our ability to know where people are is quite limited. We just -- and we always -- I know it's a little [Indiscernible] keep pushing it out.

Sort of like 6 to 12 months from whenever you ask the question because we haven't seen it and we haven't heard it in corporate accounts and they're negotiating with us, we think it's definitely another 3 -- every quarterly with another 3 plus months out. And that's really where some of our back comes from.

And yes, we are confident that even if you'll see, we are planning on competition in these key products, but I think that it's the strength and diversity of our pipeline globally that makes us confident we can continue to grow above market. We've got diagnostics, we've got pain mAb.

We still think you're going to be growing in [Indiscernible] to be honest with you, it's still a lot of unmet medical needs, so yes, we remain confident that we can grow above the market even if we do start to face competition in some of these key franchises..

And we'll take a follow-up from Balaji Prasad with Barclays. Please go ahead..

Hi, thank you for the follow-up. And just a question on DRAXXIN, I mean, [Indiscernible] in detail, but I know that you've got approval for DRAXXIN KP in July, probably launches some time in Q3.

So, a lot of expectations from the KPs [Indiscernible] ensure that the market stays flat or is this go for this to [Indiscernible] growth? And secondly, on the same, it seemed that 'til now [Indiscernible] launched January versions. You call out a couple of more generates. Any more are you expecting next year? Thank you..

Sure. DRAXXIN KP was part of our defense strategy. I don't think it's going to restart growth for us necessarily to market as we're seeing generic competition, but it is as Wetteny outlined in his remarks at the beginning of this call. It's helped us retain our share.

It provides incremental innovation and incremental benefit to our customers and a reason, obviously, to stay with that. Yes, we have had in the US two competitor s so far. We've heard up to three more are potentially coming.

I don't know why they haven't -- we would've expected them this year, so their approval -- whether or not they actually entered the market, we're not really --we not sure when and if on that, but we would've said we probably have a few more entering..

It appears we have no further questions. I'll return the floor to Kristin Peck for closing remarks..

Great. Look, thank you everyone for your questions today and for your continued interest in Zoetis. Just to summarize, I think we delivered another strong quarter of results driven by our diverse global portfolio and strength in Petcare parasiticides and dermatology products.

We are raising our guidance for the full-year 2021 and we remain on track for a record-setting year for us. And we're continuing to invest in the areas to support our long-term growth. And we remain confident in the fundamental growth drivers for animal health and for Zoetis into 2022 and beyond. So, thanks so much for joining us today.

Have a great day..

This will conclude today's program. Thanks for your participation. You may now disconnect..