For the second quarter in a row, Zoetis ($ZTS) reported better-than-expected earnings, efficiency gains and expectations for 2016. On Aug. 3, the company said its revenues in the second quarter grew 3% year-over-year to $1.2 billion. Zoetis’ adjusted net income jumped 14% to $246 million, or 49 cents per share, as it continued to make headway achieving efficiency goals that it established in late 2014.
Sales were in line with expectations, but earnings handily beat the average analyst estimate of 44 cents. And as a result of the strong quarter, Zoetis boosted its sales and earnings forecast for 2016, telling analysts to expect revenues between $4.8 and $4.9 billion and adjusted EPS of $1.86 to $1.93. The company had previously forecast revenues of $4.775 billion to $4.875 billion and EPS of $1.83 to $1.90. The company’s shares were up nearly 4% in morning trading to $51.69.
On an operational basis, Zoetis’s adjusted net income rose 22%, CEO Juan Ramón Alaix reported in a press release announcing the results. He credited the growth to efficiency improvements, many of which were instituted at the company in response to pressure from activist hedge fund investor William Ackman of Pershing Square Capital. Zoetis has been working to eliminate 5,000 underperforming SKUs and exit 10 manufacturing plans, in addition to boosting R&D efforts aimed at producing high-margin products. The company originally expected those moves to save $300 million a year by 2017, but now Alaix is predicting the company will outperform that target.
Ackman, who had reportedly been pressuring Zoetis to put itself on the block, has been backing off of late, cutting his ownership stake in the company from 8% to under 4%.
In the U.S., Zoetis saw its revenues in the second quarter jump 10% to $594 million, driven largely by the success of new products it has introduced for companion animals. The company saw strong demand for Apoquel (oclacitinib), its drug to relieve itching in dogs with dermatitis, as well as Simparica (sarolaner), its new chewable flea-and-tick fighter for dogs. Most recently, Zoetis sparked a social-media sensation with its pre-July-4-fireworks introduction of Sileo (dexmedetomidine), a drug to treat anxiety in dogs who are afraid of loud noises.
During a conference call after the earnings release, analysts pressed Alaix for details about how Zoetis would continue its strong momentum going forward. The CEO cited several opportunities for growth, including developing markets such as China.
“We describe China as the largest producer of pork in the world. They have 800 million pigs,” he said. “A lot of this production is not consolidated or highly sophisticated. We expect this will present a big opportunity for companies like Zoetis that can offer products that will increase the productivity and the quality and safety of the products in China.” The company plans to expand its presence in China by launching existing products there, including vaccines for production animals, as well as by investing in R&D efforts taking place in the country, Alaix said.
Zoetis has also been expanding via M&A, most notably entering the booming market for fish vaccines by buying Pharmaq for $765 million. When asked during the earnings call what the plan would be for future acquisitions, Alaix said Zoetis is always looking--but carefully.
“We find that the first priority in terms of capital allocation is investing internally,” he said. “Second would be M&A. We … will continue assessing any opportunity in the market and bringing to our company things that will enhance our core business or that will complement our portfolio.” Diagnostics and genetics are among the priorities there, as well as opportunities to expand in foreign markets, he added.
- here’s the earnings release
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