Company Reports

As we’d anticipated, Zoetis saw a strong start to 2024, fueled by its companion animal franchises. While management revised its outlook for the full year, our estimates remain within that range, and we’re holding firm on our fair value estimate. Not surprisingly, Librela for canine osteoarthritis got off to a fast start in the US, racking up $40 million in revenue for the first quarter. Despite a Wall Street Journal article last month that raised issues about Librela and potential adverse effects, we have yet to see diminished appetite by veterinarians for this therapy. Management indicated that US reorder rates have approached 80%, which we interpret as strong interest and potentially positive experiences by vets. At this point, we’re inclined to view reports of adverse effects as uncommon events. The wild success of Librela thus far and the impressive penetration of Solensia for osteoarthritis in cats underscore the strength of Zoetis’ wide economic moat, from our perspective. Zoetis has materially enlarged its footprint in large-molecule therapies for companion animals, leaving its main competitors in the dust.

Wide-moat Zoetis delivered fourth-quarter and full-year results that met our expectations on the top line and slightly exceeded our bottom-line projections. After minor adjustments to our model that were immaterial, we’re holding steady on our fair value estimate. Quarterly operational revenue growth of 8% offered a strong finish to 2023 where operational sales grew 7%. In particular, the companion animal segment grew 10% on an operational basis in the fourth quarter—outpacing the market. Further, quarterly livestock revenue increased 6% off a relatively soft prior-year period, which added some topspin.

Zoetis posted solid third-quarter results that largely put the firm on track to meet our full-year expectations, and we’re reiterating our $170 fair value estimate. With quarterly revenue up 8% operationally, the firm benefited from continued strength in the companion animal segment (up 11%) and stabilization in the livestock category (up 3%). Importantly, last month, Zoetis kicked off U.S. commercialization of Librela for osteoarthritis in dogs, and this launch should gain steam as we head into 2024. The firm’s role in bringing this revolutionary innovation to canine arthritis and pioneering this market for feline arthritis underscores our confidence in Zoetis’s wide economic moat. Since spinning off from Pfizer, Zoetis has consistently reached commercial success with innovative therapies and preventative products and become the dominant force in animal drugs.

Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors. Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety. The firm has also sought to expand its presence into virtually every type of animal-related health market, including aquaculture and pet diagnostics.

Wide-moat Zoetis delivered strong second-quarter performance that puts the firm on track to meet our full-year projections, and we’re leaving our fair value estimate unchanged. Zoetis saw 9% quarterly operational revenue growth year over year, driven principally by 11% growth in the companion animal segment and aided by 4% growth in production animals. Though distributor shipments have contributed to choppiness in companion animal growth through the first half of 2023, we remain confident that the underlying demand remains solid. Management indicated that quarterly animal clinic revenue rose 9% and revenue per visit also rose 9%. Favorably, the labor issues that had dogged U.S. animal hospitals in 2022 seem to be easing, which means the bottleneck with vets is dissipating.

Wide-moat Zoetis delivered unusually muted first-quarter performance thanks to U.S. distributor stocking patterns, but these types of timing differences typically do not shift our long-term valuations much. We’re holding steady on our fair value estimate.

Zoetis capped off 2022 with strong performance in the fourth quarter, and our minor adjustments weren't enough to materially move our fair value estimate. For the full year, Zoetis delivered 8% operational revenue growth along with 11% adjusted earnings growth, which is largely consistent with Zoetis' prepandemic performance. Though shares are now fairly valued in our view, we remain enthusiastic about Zoetis' wide economic moat. From quarter to quarter through 2022, we saw evidence of this wide moat in the ongoing adoption of its companion animal therapies across different disease states. Zoetis has racked up a stellar track record of innovative therapies for dogs and cats that once again saw double-digit growth in the fourth quarter, with the U.S. up 12% and international up even higher at 21% in operational growth. We see little in the competitive landscape to rock Zoetis' intangible assets in the companion animal segment.

Zoetis reported third-quarter results that were characterized by a number of growing pains that we categorize as short-term turbulence, but we’ve moderately trimmed our fair value estimate to $170 per share, down from $186, after adjusting our estimate for 2022-23 to reflect ongoing unfavorable foreign exchange, drag from near-term materials shortages, and the delay in U.S. regulatory approval of Librela. Nonetheless, shares remain undervalued from our perspective. Despite these near-term constraints, we see little to alter our confidence in Zoetis' wide economic moat, including its intangible assets and cost structure. Indeed, Zoetis continues to enjoy gross margin nearly 1,200 basis points higher than that of Elanco, its closest stand-alone animal drug competitor. Considering Zoetis' success in shifting its portfolio toward the more-innovative companion animal products with more pricing power, we expect the firm can maintain this advantage over Elanco.

Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors. Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety. The firm has also sought to expand its presence into virtually every type of animal-related health market, including acquaculture and pet diagnostics.

Zoetis reported solid second-quarter results and it remains on track to meet our full-year expectations, and our fair value estimate is unchanged. Though Zoetis pulled down the upper end of its revenue outlook for 2022, our projection remains bounded by the new estimates. We see little to knock this animal healthcare juggernaut off its game, and remain confident in Zoetis’s wide economic moat. While its enviable cost structure underpins its moat, we think intangible assets, and specifically, this firm’s ability to bring revolutionary innovation to commercialization is perhaps its greatest competitive weapon.

Zoetis reported first-quarter results that were muted by strengthening foreign-currency headwinds, but it remains on track to meet our full-year expectations, and we’re holding steady on our fair value estimate. Coming off last year’s exceptionally strong performance, we anticipate moderation this year that will leave top- and bottom-line growth closer to prepandemic rates. We remain confident in the company’s wide economic moat, which rests on cost advantage and intangible assets. We think the latter is where the action is right now, and we're impressed by the early European commercial uptake of monoclonal antibody Librela for arthritis in dogs. Zoetis’ push into mAbs for companion animals puts the firm significantly ahead of competitors and offers a strong product to address a large and undertreated market.

Zoetis’ solid fourth-quarter results were a testament to the strength of its companion animal franchise, and we’ve raised our fair value estimate to $186 per share, up from $174, after adjusting our estimates for companion animal gains that will more than offset softness in the production animal segment in the near term and lowering the tax rate now that meaningful tax reform is unlikely to occur. We think the strong European adoption of Zoetis’ new monoclonal antibody Librela for canine arthritis underscores our favorable view of this firm’s intangible assets that support its wide economic moat. Zoetis continues to be the dominant leader in developing and commercializing innovative therapies for key small animal health conditions. With an ongoing launch in Europe and expected U.S. launch in 2022, we anticipate Librela (the first innovative arthritis therapy for dogs in decades) could reach animal blockbuster status ($100 million in sales) this year.

Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors. Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety. The firm has also sought to expand its presence into virtually every type of animal-related health market, including acquaculture and pet diagnostics.

Zoetis delivered another strong quarter, which was particularly impressive, as the prior-year period also featured double-digit top-line growth driven by the roll back of shelter-at-home orders. As the firm generally remains on track to reach our full-year projections on the top and bottom lines, we’re leaving our fair value estimate unchanged. Consistent with the long-standing pattern, Zoetis saw the companion animal business lead the way with 19% year-over-year operational growth, which was supported by strength from the U.S. as well as internationally. In contrast, the production animal segment was down 2% in the third quarter operationally, and the main softness came from the U.S. We remain confident in Zoetis’ wide economic moat, especially as the firm has embarked on commercialization of its monoclonal antibody therapies for osteoarthritis in dogs and cats. We think this type of innovation is a good example of Zoetis’ prowess for productive R&D and should add to the firm’s intangible assets through the long term.

Amid much media attention and anecdotal evidence suggesting widespread, significant growth in pet adoptions across the United States during the pandemic, we took a closer look and estimate there was a 13% net increase in dog adoptions in 2020 year over year, based on consolidated shelter data and American Kennel Club records. It is less clear what the rise in cat adoptions was, as there is simply less reliable data for cats. Nonetheless, we think this increase in adoptions, along with the extended period of intense pet bonding for new and existing pet owners during the pandemic, should support the robust increase in pet healthcare spending seen initially in 2020 to extend over the next eight to 10 years, reflecting the general lifespan of newly adopted pets. While we have dialed up our cash flow projections for narrow-moat Idexx Laboratories and wide-moat Zoetis, their share prices remain rich and imply wildly optimistic expectations.

Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors. Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety. The firm has also sought to expand its presence into virtually every type of animal-related health market, such as acquaculture and pet diagnostics.

Zoetis reported strong second-quarter performance, buoyed by stellar results from the companion animal segment, and we’ve raised our fair value estimate to $174 per share from $142. The primary factors behind the increase were more optimistic projections for companion animal growth during the explicit forecast period to reflect Zoetis’ robust product pipeline coming to fruition, as well as a slight boost to our long-term growth assumptions based on our confidence in the firm’s ability to innovate and its ever-increasing footprint across all markets in animal health that contributes to its wide economic moat. These drivers were partially offset by a probability-weighted increase in our assumption for the U.S. corporate tax rate beginning in 2022.

Zoetis posted strong first-quarter results that remain on track with our full-year expectations. After slight adjustments to our companion animal projections and for higher expenses in the second half as normal travel patterns pick up again, we’re leaving our fair value estimate unchanged for now. The firm’s track record for successful commercialization of novel therapies, especially for companion animals, only reinforces our confidence in Zoetis’s wide economic moat. Not only has Zoetis pioneered (and continues to dominate) the dermatology market for small animals, its line up of monoclonal antibody therapies for osteoarthritis is poised to jump start the pain relief market, which has been populated mainly with NSAIDs.

Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors. Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety. The firm has also sought to expand its presence into virtually every type of animal-related health market, such as acquaculture and pet diagnostics.

Zoetis wrapped up 2020 with further strength in is companion animal business during the fourth quarter, and we plan to moderately increase our fair value estimate after incorporating more optimistic estimates for the 2021-2023 time frame. Although 2020 revenue outpaced our projections by roughly 300 basis points, this was generally offset by expenses that also exceeded our estimates. We remain confident in Zoetis’ wide economic moat, which is built on a cost advantage moat source as well as intangible assets. The profitability gap between Zoetis, the leader in animal healthcare, and number 2 Elanco hasn’t much changed over the last year. Gross margin at Zoetis runs approximately 69%, while Elanco has recently been at 50%. Though Elanco management seeks to improve its performance on this measure, and the addition of Bayer’s animal health division with estimated gross margin of 64% should have given profitability a boost, Elanco has yet to make good on this goal. In the meantime, Zoetis continues to eke out incremental efficiencies and press its advantage in the U.S., where gross margin now exceeds 80%.