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Text: I am joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer.
Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP.
We also cite operational results, which exclude the impact of foreign exchange.
I hope you and your loved ones are all staying healthy and able to get vaccinated for COVID-19, if not already, then soon.
We've been very fortunate in the U.S. as vaccination rates are up and infection rates are trending down overall.
But that is not the situation everywhere.
In many countries, improving access to vaccines and controlling infection rates are critical hurdles for a more comprehensive global recovery.
Yet with the extraordinary measures being taken by so many, I remain optimistic about the steady progress we're making to beat this pandemic.
I'm also very proud of what we've been able to do at Zoetis in our own small way to support the global effort.
We've been able to keep our colleagues safe, encourage and assist them with vaccinations where possible, and continue serving our customers in the care of their animals.
And we're off to a very strong start in 2021, executing on strategies for building on our innovative pet care portfolio, expanding in key markets outside the U.S. and accelerating our growth in diagnostics.
In the first quarter, we grew our top line revenue at 21% operationally, our best quarter ever, with 25% operational growth internationally and 19% growth in the U.S. China and Brazil led our international performance with 75% and 48% operational growth respectively, exhibiting their strength in both companion animal and livestock product sales.
In total, our containment animal portfolio grew 34% operationally based on the strength of our parasiticides and dermatology products, while our livestock portfolio grew 8% operationally with solid growth in cattle, swine and fish products.
Digging deeper on pet care, it has been one year since the launch of our triple combination parasiticide, Simparica Trio.
It is exceeding expectations and has been well received by customers, with a 90% plus penetration rate in our largest U.S. corporate accounts.
Simparica Trio is the latest growth catalyst for a portfolio of small animal parasiticides.
After several successful innovations in the last few years, these products made up 16% of our total sales in the first quarter and includes such brands as Simparica, Simparica Trio, Revolution, Stronghold and ProHeart.
We believe the ongoing market shift to e-commerce is another boost for this category, helping to increase compliance and months on therapy.
And our direct-to-consumer campaigns for Simparica and Simparica Trio continued showing a solid return on investment in markets around the world.
Meanwhile, our key dermatology portfolio led by Apoquel and Cytopoint, demonstrated continued double-digit growth.
We are seeing excellent traction and significant growth across the range of international market.
Our dermatology portfolio has further growth potential as we continue expanding our international customer base and seek to become a more common first-line treatment for pruritus in dogs.
Veterinarians and pet owners alike appreciate the exceptional standard of care that our products can provide.
In the containment animal space, we've also continued to be pleased with our diagnostics portfolio, which grew 47% operationally in the first quarter.
We have grown our point-of-care diagnostic sales, made excellent progress on improving our connectivity solutions in veterinary practices, and have seen our cloud-based VetScan images platform receiving very positive customer feedback, with placements exceeding expectations in the early launch.
We're also making progress on our Reference Labs integrations and look forward to future expansion in this space, both in the U.S. and internationally.
Our growth in livestock was driven by the performance of cattle, swine and fish in the first quarter.
Cattle product sales in the U.S. were strong as the food service sector has started to recover and generic competition projection was later than expected.
Meanwhile, swine benefited from the continued recovery from African swine fever in China.
Looking ahead, we are raising guidance for operational growth and full year revenue to the range of 10.5% to 12%.
And while we had an unusually strong first quarter, we expect more normalized revenue growth in the second half of the year due to tougher comparative quarters and increasing generic competition for DRAXXIN.
Glenn will provide more details on other guidance updates in his remarks.
Since the beginning of the year, Zoetis has continued to advance our key priorities, including key milestones for new products and life cycle innovations and geographic expansions for major brands.
Since our last earnings announcement, we received approval in the European Union for Solensia the first injectable monoclonal antibody for the alleviation of pain associated with osteoarthritis in cats and will be launching this year.
Osteoarthritis is vastly underdiagnosed and undertreated today due to limited options for therapy and difficulty recognizing pain in cats.
Meanwhile, Librela, our monoclonal antibody for the alleviation of OA pain in dogs, has launched in the EU.
And we're seeing a great customer response from vets and dog owners who referenced increased activity, social ability and quality of life for their pets.
In the U.S., we continued discussions with the FDA regarding our regulatory submissions and manufacturing inspection for Librela and Solensia, and we now anticipate approvals for both products in 2022, with Librela likely later in the year.
We will provide updates on U.S. revenue expectations for these products in 2022 as we get further clarity on approval timing and rollout plans.
It is also worth noting that in China, which is our second largest market in terms of revenue, Zoetis recently received approvals for several leading products, Fostera PCV MH a one-shot vaccine for pigs, Excenel RTU EZ, a key anti-infective for cattle and swine, and Revolution Plus, our latest parasiticide for cats.
We continue to strengthen our portfolio in China, one of our key catalysts for growth.
We're also maximizing our key brands with more geographic expansion.
In poultry, we expanded our line of recombinant vector vaccines with approval of Poulvac Procerta HVT-ND in Canada, Brazil and several other smaller markets.
And in parasiticides, we received additional approvals for Simparica Trio in Japan, Mexico and several other smaller markets.
In terms of sustainability, we published our long-term goals in March with specific commitments to communities, animals and the planet.
We've built a comprehensive and rigorous approach through our Driven to Care program, and our goals include support for 10 of the 17 United Nations Sustainable Development Goals.
We'll be releasing more detail on these goals and our initial progress in our sustainability report this June.
In closing, the fundamental growth drivers for our industry continue to show strong and sustainable momentum.
Pet adoption trends and higher spending per visit in the U.S. along with increased medicalization rates in markets outside the U.S. all continue to bode well for significant growth in our companion animal and diagnostic portfolios globally.
We feel very confident about where our companion animal business has come over the last few years, launching innovative new products, defining new standards of treatment and expanding our global reach.
In 2014, our companion animal business was 34% of our total revenue.
Last year, it had grown to 55% based on the strength of our innovation and investment in growth, and we see that continuing to expand.
In livestock, the industry is in a more limited innovation cycle, and we expect modest growth for the year.
Livestock growth is tied closely to the pandemic and how quickly the foodservice industry recovers.
For Zoetis, we also anticipate increasing headwinds of generic competition to DRAXXIN, but we expect our life cycle innovations and competitive strategies to help us mitigate the impact.
While U.S. livestock may present challenges for us in the near term, I feel very positive about our catalysts for growth in pet care, diagnostics, and international markets like China and Brazil.
We continue to be led by our companion animal parasiticide and dermatology portfolio with more growth to come, and we see a bright future ahead for our monoclonal antibodies for pain.
Diagnostics is accelerating its growth as we increase our global footprint, expand our reference labs and demonstrates the potential for VetScan images to veterinary clinics.
And internationally, China continues to be a market with significant growth potential, not only in swine products, but with a sizable opportunity for increased medicalization of pets.
And we expect major growth to continue in Brazil across the companion animal and livestock portfolios.
As always, we remain confident that Zoetis' diverse portfolio across species and geographies, our continued pipeline of innovative new products and life cycle innovations, and the agility and commitment of our colleagues will continue driving our success in 2021 and beyond.
Now let me hand off to Glenn, who will speak more about our first quarter results and updated guidance for the full year 2021.
As Kristin mentioned, we had a very strong start to the year, delivering substantial growth on a global basis and across species and therapeutic areas.
Today, I'll focus my comments on our first quarter financial results, the key drivers contributing to our performance, and an update on our improved full year 2021 guidance.
In the first quarter, we generated revenue of $1.9 billion, growing 22% on a reported basis and 21% operationally.
Adjusted net income of $603 million with an increase of 33% on a reported basis and 34% operationally.
Operational revenue grew 21%, resulting entirely from volume increases with price flat for the quarter.
Volume growth of 21% includes 13% from other in line products, 5% from new products, and 3% from key dermatology products.
Companion animal products led the way in terms of species growth, growing 34% operationally, with livestock growing 8% operationally in the quarter.
Performance in companion animal was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., certain European markets, Canada, Australia and Mexico.
We also saw growth in our key dermatology products, Apoquel and Cytopoint, as well as in small animal vaccines and diagnostics.
Following blockbuster sales in year one, Simparica Trio began 2021 with strong first quarter performance, posting revenue of $90 million, growing sequentially each quarter since launch.
The underlying dynamics that drove first quarter sales are very favorable for significant future growth, such as increasing clinic penetration and robust reordering rates within penetrated clinics.
I'd again like to mention how pleased we are with the performance of our broader parasiticide portfolio, which, in addition to the Simparica franchise, had significant growth in the Revolution, Stronghold and ProHeart franchises as well.
U.S. market share within the flea, tick and heartworm segment is now at an all-time high of 31%, representing an increase of more than 9% for the first quarter versus the same period in the prior year.
Global sales of our key dermatology portfolio were $245 million in the quarter, growing 24% operationally.
We remain confident that key dermatology sales will exceed $1 billion this year.
Our diagnostics portfolio grew 47% in Q1, led by increases in consumable and instrument revenue.
2020 presented challenging conditions for our diagnostics business, as social distancing restrictions limited our ability to enter vet clinics and increase our market share.
However, our vast product portfolio, commitment to innovation, and ability to leverage the breadth of our medicines and vaccines portfolio has us well positioned to grow faster than the overall diagnostics market.
Livestock growth in the quarter was primarily driven by our cattle and swine businesses.
Improving market conditions from the COVID-19 recovery as well as successful promotional activities led to increased sales across the cattle portfolio.
In addition, later-than-expected timing of generic entrants led to strong first quarter sales for DRAXXIN.
Our swine portfolio grew 19% operationally as large producers continued rebuilding herds as they recover from African swine fever and created significant demand for our products.
Poultry sales declined in the first quarter as producers expanded their use of lower-cost alternatives to our premium products.
The decline in poultry partially tempered the growth in cattle, swine and fish.
Now let's discuss the revenue growth by segment for the quarter.
U.S. revenue grew 19%, with companion animal products growing 32% and livestock sales declining by 4%.
For companion animal, pet ownership and pet spending trends remain promising.
While severe weather caused a slight decline in vet clinic traffic for the quarter, revenue per visit was up more than 10%.
In addition, pet ownership has increased and is trending toward a younger demographic, and younger pet owners typically spend more on pet care.
This is a key driver for increased revenue per visit and creates robust demand for our diverse portfolio.
Our small animal parasiticide portfolio was the largest contributor to companion animal growth, growing 74% in the quarter.
Diagnostics, key dermatology products and small animal vaccines also contributed to growth.
Simparica Trio continues to perform well in the U.S. with sales of $83 million.
The Simparica franchise generated sales of $112 million in the quarter and is now the number 2 brand in the U.S. flea, tick and heartworm segment.
Companion animal diagnostic sales increased 62% in the quarter as the continued recovery at the vet clinic and a favorable prior year comparative period led to significant growth in point-of-care consumable revenue.
Key dermatology sales were $157 million for the quarter, growing 16% with significant growth for Apoquel and Cytopoint.
U.S. livestock declined 4% in the quarter, driven primarily by poultry as producers switching to lower-cost alternatives unfavorably impacted our business.
Swine also declined in the quarter, which is attributed almost entirely to a favorable nonrecurring government purchase, which occurred in Q1 2020.
Cattle grew 6% in the quarter as promotional programs and the timing of generic entrants drove growth across the product portfolio.
Growth in cattle partially offset the declines in poultry and swine.
To summarize, U.S. performance was once again strong in what remains a very favorable companion animal market environment, in which we offer the broadest and most innovative product portfolio.
Although livestock declined in the quarter with expectations of further declines for the year, we are encouraged by a series of foodservice trends such as increased dining out and school and business reopenings.
Revenue in our international segment grew 25% operationally in the quarter, with companion animal revenue growing 37% operationally and livestock revenue growing 17% operationally.
The strength in companion animal was fueled by the continuing trends of pet adoptions, increasing standard of care by pet owners, and our investments in advertising, all of which drove growth across our parasiticide and dermatology portfolios.
Companion animal diagnostics grew 18% in the quarter, led by a 24% increase in point-of-care consumable revenue and a second consecutive quarter of double-digit increase in instrument placement revenue.
We began early experience programs for Librela, a monoclonal antibody for alleviation of OA pain in dogs.
The feedback from the programs has been extremely positive, and further solidifies our view of the long-term potential of the product with an EU launch currently under way.
Our feline monoclonal antibody, Solensia, will begin early experience programs in Q2 with an EU launch to follow in the third quarter.
Solensia will provide cat owners an innovative therapy to address one of the largest unmet needs in animal health.
Our international livestock business saw double-digit growth across all species with the exception of poultry, which grew low single digits in the quarter.
Swine revenue grew 29% operationally led by growth in China of 128%, marking the third consecutive quarter with swine growth in excess of 100%.
While additional outbreaks and strains of African swine fever have occurred, we believe it is contained to a specific region and a limited number of customers.
Cattle grew 11% operationally in the quarter as a result of marketing campaigns, key account penetration, and favorable export market conditions in Brazil and several other emerging markets.
Our fish portfolio delivered another strong quarter, growing 39% operationally driven by strong performance in Chile, the timing of seasonal vaccination protocols, and the 2020 acquisition of Fish Vet Group.
All major markets grew in the first quarter, many in double digits.
China total sales grew 75% operationally, which in addition to the significant growth in swine, delivered 59% operational growth in companion animal.
Brazil grew 48% operationally in the quarter as sales of Simparica, the leading oral parasiticide in the Brazilian market, drove a 73% operational increase in companion animal.
Overall, our international segment delivered strong results, again, demonstrating the value of substantial geographic and species diversification.
Our companion animal business benefited from favorable trends such as rising medicalization rates outside the U.S. And while swine was the largest growth driver for our international livestock business, the contributions were broad-based with growth across all species.
Now moving on to the rest of the P&L.
Adjusted gross margin of 71% increased 70 basis points on a reported basis compared to the prior year as a result of favorable product mix, partially offset by foreign exchange and other costs, including freight.
Adjusted operating expenses increased 8% operationally, resulting from increased compensation-related costs and advertising and promotion expense for Simparica Trio.
This was partially offset by reductions to T&E costs as a result of COVID-19.
The adjusted effective tax rate for the quarter was 19%, an increase of 230 basis points driven by a reduction in favorable discrete items compared to the prior year's comparable quarter, partially offset by the favorable impact of the jurisdictional mix of earnings.
Adjusted net income and adjusted diluted earnings per share grew 34% operationally for the quarter, primarily driven by revenue growth.
We resumed our share repurchase program in the first quarter, repurchasing approximately $180 million worth of shares.
Along with our dividend, share repurchase is a critical component of our shareholder distribution strategy.
We remain in a strong liquidity position and are highly cash generative.
And as a result, we expect to be able to execute on all investment priorities including direct-to-consumer advertising, internal R&D and external business development, while still returning excess cash to shareholders.
Now moving on to our updated guidance for 2021, which we are raising as a result of our first quarter performance.
Please note that our guidance reflects foreign exchange rates as of late April.
For revenue, we are raising and narrowing our guidance range, with projected revenue now between $7.5 billion and $7.625 billion and operational revenue growth between 10.5% and 12% for the full year versus the 9% to 11% in our February guidance.
Adjusted net income is now expected to be in the range of $2.12 billion to $2.16 billion, representing operational growth of 12% to 14% compared to our prior guidance of 9% to 12%.
Adjusted diluted earnings per share is now expected to be in the range of $4.42 to $4.51, and reported diluted earnings per share to be in the range of $4.08 to $4.19.
Our key assumptions for 2021 have not changed materially since the guidance we provided on our Q4 2020 call.
However, our current view is that we will not face competition in the U.S. for Simparica Trio or our key dermatology products until the second half of 2022.
On our fourth quarter call, I mentioned that we anticipated growth to be heavily weighted toward the first half of the year, and I'd like to take this time to expand upon that further.
We are expecting first half 2021 growth to materially outpace growth in the second half of the year, primarily resulting from Simparica Trio sales and the favorable Q2 2020 comparative period related to COVID-19.
Subsequently, we expect growth to moderate in the second half of the year as a result of increased generic competition for DRAXXIN as well as challenging comparative periods when pent-up demand in the first half of 2020 worked its way through the system in the second half.
Now to summarize before we move to Q&A, we've delivered strong operational top and bottom line growth in the first quarter with significant gains in both companion animal and livestock and across nearly every therapeutic area and geography.
In addition, we raised and narrowed our full year 2021 guidance.
And while growth will moderate in the back half of the year for the reasons I outlined, we again expect to grow faster than the market and feel very positive about our position for sustained growth beyond this year.

user
sees fy earnings per share $4.08 to $4.19.
sees fy revenue $7.5 billion to $7.625 billion.
q1 revenue rose 22 percent to $1.9 billion.
sees fy adjusted earnings per share $4.42 to $4.51.

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