Key Takeaways:
Share price: $168 Target Price: $182
Position size: 2.08% TTM return: +15%
Overall Zoetis released another remarkable quarter with companion sales +25%. The management team provided an initial 2021 outlook that is mostly positive, with sales expected in the 9-11% range. Margins should not expand as much as we’ve been used to as the management team wants to invest in its diagnostics business as well as marketing. This most likely explains the lack of reaction in the shares on earnings day. Even with today’s valuation, we remain impressed with the growth story and continue to see upside as new drugs come to market.
Revenue growth of 9% (ex-FX): 2% from price, 7% from volume (4% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 1% from other in-line products)
o For 2020, revenue grew 9%, and similar to 4Q, price added 2% and volume 7% (3% from new products, 3% from key dermatology products, 1% from acquisitions)
o Companion animal grew 25% in 4Q
o Simparica Trio launch was slow initially in clinics with covid restrictions, but finished the year with goals achieved
o Covid created a difficult environment for livestock down 5% – but the company believes consumption patterns will return to normal in 2021, bringing this segment back to growth in the low single digits, while long term it will return to 4-6% growth y/y
o Diagnostics portfolio grew thanks to a recovery in vet visits
Margin expansion was lower than prior years (+20bps for the year vs. +200bps)
CEO quotes:
o “Positive pet care trends during the pandemic based on increased adoption and people spending more time with their pets should continue driving market growth in the near-term. Date in the US shows visits to veterinary clinics have rebounded and the average revenue per visit has continued to increase”
o “We’re also hopeful that you will see an increase in dine out which will send signal to the industry to expand herds”
Guidance for 2021:
Revenue growth of +9% to +11%, driven by continued launch of Simparica Trio and other parasiticides, dermatology portfolio growth, and diagnostics
- Livestock growth in the low-single-digits, growing in line with the market. Their leading anti-infective product DRAXXIN is facing generic competition. Recovery continues form the African Swine Flu in China
- Companion animal: growth in the mid-single-digits, growing faster than the market
- Launch of the first monoclonal antibody for osteoarthritis pain in dogs (Librela) and cats (Solensia) in Europe in 1H21, followed by the US in 2022 – approval by the FDA seems unlikely in 2H 2021 due to delays and challenges affecting the FDA, related to Covid.
Flat gross margins as the company is investing behind reference labs and generic competition on Draxxin (and price impact on it). It is possible that near term ZTS does not see high margin expansion as it has in the past but we don’t expect a contraction
Zoetis investment thesis:
· · Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented
· · ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs
· · ZTS is growing above the industry rate and has proven resilient throughout economic cycle
· · Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013
· · Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability