Zoetis Earnings: Lumpiness With Distributors Damped Companion Animal Segment Growth

Wide-moat Zoetis ZTS 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.

In a reversal of Zoetis’s usual pattern featuring companion animal growth as the rabbit and production animal as the turtle, the latter segment posted robust quarterly operational growth of 12% thanks to the expansion of Protivity (for bovine respiratory infection) in new geographies, renewed availability of popular products caught up in supply chain snafus last year, and the waning impact of generic competition to Draxxin. Though we’d be highly surprised if this segment maintains its double-digit growth over the longer term, we do see a few tailwinds to support relatively strong growth through this year.

In contrast, the U.S. companion animal segment posted a quarterly decline of 7%, which reflects distributors stocking up on products in the previous quarter ahead of price increases in early 2023, and pausing in the first quarter to work down that inventory. We expect this effect to diminish as we head into the seasonally strong second and third quarters. Importantly, demand for these companion animal products appears to remain firm, with sales of Zoetis products from distributors to animal hospitals growing 8% in the quarter, which is very consistent with the long-term average growth in pet healthcare spending. Further, the pet segment racked up 10% quarterly operational growth, which provides one benchmark for how well this unit performed absent any distribution bottlenecks. Finally, we’re cautious about the impending competition to Simparica Trio this year but fully expect a very strong U.S. launch of Librela to be an offsetting factor in 2024. The monoclonal antibodies Librela (for dogs) and Solensia (for cats) for arthritis grew to $50 million just in the quarter, and Librela has yet to launch in the U.S.