Zoetis Earnings: U.S. Commercialization of Librela Is Off to a Good Start and Bolsters the Wide Moat

Zoetis ZTS 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.

Aside from pushing the envelope on innovation, Zoetis will face additional competitive pressure next year as more competitive products begin to emerge in the U.S. The firm will likely need to ramp up its defense more than it has in the past, and we’re already seeing signs of this. For instance, rival Elanco is likely to receive regulatory approval on its product for atopic dermatitis in the first half of 2024, which will directly challenge Apoquel. Zoetis began rolling out its more convenient chewable form of Apoquel last month to defend its flank. Similarly, we expect Elanco to launch a direct competitor to Zoetis’s Cytopoint around 2025. Fortunately, we’ve seen Zoetis credibly stay a step ahead of the field before.

We were also pleased to see quarterly diagnostics revenue rise 14% year over year, supported by 18% growth in the U.S. thanks to an enlarged field force. We think expansion into this attractive market makes strategic sense for Zoetis, though it remains far behind Idexx, the market leader.