Pfizer spinoff Zoetis ups 2017 guidance, eyes more M&A for future growth

Dog at vet
Strong sales of veterinary products for dogs and cats continue to drive growth at Zoetis.

What does Pfizer animal health spinoff Zoetis share with its former parent, aside from its lineage? The answer: They’re both under pressure from investors to drive growth through acquisitions.

Indeed, M&A was a major theme of Pfizer’s second-quarter earnings call last week, and it came up today for Zoetis after the maker of pet meds announced strong sales and earnings and brightened expectations for the rest of the year. The company’s performance was driven largely by its companion-animal portfolio, which grew sales 7% in the U.S. and 12% overseas. Hit products included Apoquel and Cytopoint to treat dogs with allergic dermatitis.

Zoetis has already made a mark in M&A, picking up aquatic vaccine maker Pharmaq last year for $765 million. And last week, Zoetis closed an $85 million acquisition of Nexvet, a company developing species-specific monoclonal antibodies to treat osteoarthritis pain and other disorders in companion animals.

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But Zoetis has the strength to do more deals—and CEO Juan Ramón Alaix is vowing to make additions that boost both its manufacturing technology and its ability to introduce innovative products. The company’s revenue rose 5% during the quarter to $1.3 billion and its net income was up 10% to $247 million (50 cents per share). Both results were in line with expectations. Zoetis boosted its guidance for the year and is now expecting revenues to come in between $5.15 and $5.25 billion, with earnings per share of $2.12 to $2.21. The company had previously expected sales between $5.1 billion and $5.23 billion and EPS of $2.08 to $2.20.

“With our increasing cash flow, we continue to look at all the investments we can make to support our future growth,” Alaix said at the start of a conference call with analysts and investors. That could include expanding the company’s vaccine manufacturing capacity, he said.

During the call, an investor expressed concern about Zoetis’s swine vaccines, which are facing competitive pressure. “We can see good growth in international markets. But in the U.S., in spite of our portfolio now being much more competitive, we have not yet gained share as we expected,” Alaix admitted. Pipeline products expected to hit the market in 2018 should help boost sales, he said.

RELATED: Ackman's demands may have irked Zoetis, but they bore earnings fruit in Q4

When asked about when the company will see meaningful accretion to earnings of acquisitions like Pharmaq and Nexvet, Alaix didn’t make any firm predictions beyond this year. But he did point out that the company has engineered buyouts in another key growth area: diagnostics. Last year, Zoetis bought Scandinavian Micro Biodevices (SMB) for $80 million—an addition that will make the company more competitive in the rapidly growing market for rapid tests that veterinarians can run on cats and dogs, Alaix said.

Zoetis will continue to prioritize identifying M&A “opportunities that will complement our internal efforts and will support…revenue growth,” he said.

Zoetis has come a long way since 2015, when activist investor William Ackman of Pershing Square bought up $1.5 million worth of the company’s shares and put pressure on Alaix to get costs under control or sell the company. Zoetis tightened up its management structure, cast off underperforming products and made other changes that boosted margins 1,000 points since 2012. The company is promising to improve its gross margin by another 200 basis points by 2020.

Betting on cats, canines, cows and other critters has proven smart for investors who bought into the Pfizer spinoff on day one, in February 2013, and held onto their shares. Zoetis shares have skyrocketed more than 130% in that time, while Pfizer’s stock has risen a more modest 20%.