Zoetis CEO Alaix on the Q1 surprise and brighter 2016 forecast

Itchy dog

The year got off to a rough start for animal health giant Zoetis ($ZTS), with a combination of volatile foreign currency rates and an unexpected $35 million charge the company had to swallow after the European Commission ruled that a tax scheme it used in Belgium is illegal. But after having dampened its revenue expectations for 2016 in February, Zoetis reported a better-than-expected first quarter and upped its full-year forecast on May 4.

In the first quarter, Zoetis’ sales grew 5% year-over-year to $1.2 billion, according to a press release. Excluding the impact of foreign currency, sales were up 12%, the company said. Adjusted net income rose 15% to $239 million, or 48 cents per share. That bested analysts’ estimates of $1.1 billion in revenues and 41 cents per share.

The company said it now expects 2016 revenues to come in between $4.775 billion and $4.875 billion, vs. the $4.650 billion to $4.775 billion it had previously forecast. Zoetis expects adjusted EPS to come in between $1.83 and $1.90 for the year.

“We are seeing more favorable exchange rates now compared to February, but we are also seeing better momentum in the international market,” said Zoetis CEO Juan Ramón Alaix in an interview with FierceAnimalHealth.

One of the standouts during the first quarter was Zoetis’ companion animal product line, which posted revenue growth of 32% in the U.S. and 23% overseas, the company said. The increase was driven largely by Apoquel, the company’s drug to treat atopic dermatitis in dogs. The product was so popular when it was launched in 2014 that the company couldn’t keep up with demand. Manufacturing improvements alleviated the resulting shortfall, which Zoetis expects will help sales of the product reach a peak of $300 million a year, Alaix told investors during a conference call after the earnings release. And during the first quarter of this year, Apoquel chalked up its latest approval when it was cleared for marketing in Japan.

Zoetis’ products for food animals turned in a mixed performance during the quarter. Overseas, sales were up 9%, driven largely by the company’s acquisition of Pharmaq, a leading maker of fish vaccines, according to the earnings release. But in the U.S., livestock revenues dropped 4%, pressured by competition in the swine business, the company said.

Alaix says Zoetis’ livestock business is vulnerable to natural swings caused by factors such as a drop in milk prices and fluctuations in the quantity of cows in the market. “Trying to understand the business is complicated,” he said. “It’s all part of a natural cycle that we need to manage. But I’m still confident that we will perform well in 2016.” Alaix is particularly confident about growth opportunities in China, where its recent introduction of two new swine vaccines was well received, he says.

Last year, Zoetis embarked on a cost-cutting plan under the watchful eye of Pershing Square Capital’s William Ackman, who had been pressuring the company to improve its efficiency or put itself up for sale. Zoetis eliminated 5,000 underperforming SKUs, exited 5 manufacturing plants (with 5 more sales or exits planned) and cut 165 jobs from its New Jersey headquarters. Alaix believes the moves paid off--so much so that he’s confident Zoetis may outperform its original goal of saving $300 million a year by 2017. That’s because general and administrative expenses have improved more than originally expected, he said. “We’ve eliminated layers and redundancies without reducing our interactions with customers,” Alaix said.

Alaix is counting on a few key products to drive Zoetis’ growth going forward, including Simparica (sarolaner), a once-monthly pill for dogs that fights fleas and ticks and that was recently approved by the FDA. It’s a hot market--Merck ($MRK) Animal Health and Sanofi’s ($SNY) Merial both have top-performing flea-fighting pills--but Alaix is confident Zoetis can compete in what the company estimates is a $2.5 billion market for oral parasiticides for dogs. Simparica, he says, “is very fast at protecting animals--in 8 hours you get full protection, which is faster than our competitors.”

As for being third to the market, Alaix says he’s confident that the combination of efficacy and a lower price point will help Zoetis compete. “We have an opportunity to capture market share,” he says.

- here’s the earnings release

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