Zoetis beats Q3 earnings forecasts with strong growth in companion-animal sales

Itchy dog
Apoquel, a drug to treat dermatitis in dogs, continues to help drive sales growth at Zoetis.

Two years ago at about this time, Zoetis ($ZTS) was struggling to meet strong demand for Apoquel, its new product to treat allergic dermatitis in dogs, and it was under pressure from activist investor William Ackman of Pershing Square Capital, who was reportedly urging the company to either slash its overhead or put itself up for sale. Now, after two years of implementing an across-the-board efficiency plan, fine-tuning its product portfolio and getting manufacturing up-to-speed on Apoquel, the animal health giant is seeing the fruits of its labors. 

Zoetis reported on Nov. 2 that revenues during the third quarter grew 2% year-over-year to $1.2 billion and adjusted net income came in at $258 million, or 52 cents per share. Revenues matched expectations, but earnings beat the average estimate of 46 cents. Much of the gain came from the companion-animal side of the business, which saw its sales grow 4% operationally on high demand globally for Apoquel and other new entries to the product portfolio, said CEO Juan Ramón Alaix in a press release announcing the results.

Apoquel has brought in $180 million in sales in the first nine months of the year, Alaix said during a conference call with analysts after the earnings release, with $70 million of that coming in the third quarter alone. “We have here an excellent response from veterinarians and pet owners using Apoquel as we increase our penetration in new markets,” he said. He added that the company hopes to boost the product’s growth with a direct-to-consumer advertising campaign, which it is now testing.

Zoetis also boosted its estimates for 2016, nudging its expected adjusted EPS from between $1.86 and $1.93 to $1.91 to $1.96 on revenues of $4.85 billion to $4.9 billion. For 2017, the company is expecting sales of $5.150 billion to $5.275 billion and adjusted EPS between $2.28 and $2.38 per share.

The company continues to improve its margins as it works through an efficiency plan that includes eliminating 5,000 SKUs and exiting 10 manufacturing plants. Alaix said during the call that he expects the moves to save the company more than $300 million by the end of 2017.

Despite the paring-back of some livestock products as part of those efficiency initiatives, and a resulting 2% decline in livestock sales, Zoetis won some key approvals during the third quarter. They included a new formulation of Flusure to prevent flu in swine, and approvals in Brazil and Korea for Fostera porcine reproductive and respiratory (PRRS) vaccine.

During the conference call, some analysts voiced concerns about how Zoetis would respond to pricing pressure in the U.S. livestock market and other negative headwinds. Alaix acknowledged the challenges, confirming that sales growth declined during the quarter in the swine market and grew only at single digits in cattle. Producers are losing money, he said, and warm weather conditions led to fewer disease outbreaks, further dampening demand.

But there are some positive forces at work, too, he said, including more livestock in the field and an increase in animals being placed in feedlots. And outside of the U.S., the swine business grew at double-digit rates during the quarter. The company should be able to continue increasing its prices, he predicted, and keep up with the overall market, which is growing at 5% to 6% per year. “We see Zoetis also growing in 2017 in livestock in line with the market,” he said.

As for activist investor Ackman, he seems to have backed off from his tough stance on Zoetis. His hedge fund has been selling shares, and in July, it cut its stake in the company from a high of 8% to 3.8%.

Special Report – Top 10 Animal Health Companies of 2015 – Zoetis