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Edited Transcript of ZTS earnings conference call or presentation 2-May-19 12:30pm GMT

Q1 2019 Zoetis Inc Earnings Call

MADISON May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Zoetis Inc earnings conference call or presentation Thursday, May 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn C. David

Zoetis Inc. - Executive VP & CFO

* Gregory Daniel Fraser

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Juan Ramón Alaix

Zoetis Inc. - CEO & Director

* Steven Frank

Zoetis Inc. - VP of IR

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Conference Call Participants

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* Christopher Thomas Schott

JP Morgan Chase & Co, Research Division - Senior Analyst

* Courtney Patrice Owens

William Blair & Company L.L.C., Research Division - Associate

* David Reed Risinger

Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Jonathan David Block

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Kathleen Marie Miner

Cowen and Company, LLC, Research Division - VP

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Louise Alesandra Chen

Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD

* Michael Leonidovich Ryskin

BofA Merrill Lynch, Research Division - Associate

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Presentation

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Operator [1]

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Welcome to the First Quarter 2019 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis.

The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately 2 hours after the conclusion of this call via dial-in or on the Investor Relations section of zoetis.com. (Operator Instructions)

It is now my pleasure to turn the call over to Steve Frank. Steve, you may begin.

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Steven Frank, Zoetis Inc. - VP of IR [2]

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Thank you. Good morning, everyone, and welcome to Zoetis First Quarter 2019 Earnings Call. I am joined today by Juan Ramón Alaix, our Chief Executive Officer; and Glenn David, our Chief Financial Officer.

Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements, and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q.

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. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, May 2, 2019. We also cite operational results, which exclude the impact of foreign exchange.

With that, I will turn the call over to Juan Ramón.

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [3]

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Thank you, Steve, and good morning, everyone. I will start today by describing some of the dynamics in the animal health industry that are on investors' minds. First is the positive trend for spending on innovation in companion animal medicines and treatment. Pet owners' spend in the U.S. continue to rise in terms of revenue per visit and number of patient visits. And we also see positive trends for pet care in the rest of the world. Pet owners are willing to spend their income on medicines, vaccines and other treatment to ensure a longer and better quality of life for their pets. We believe Zoetis is well positioned to continue its success in the companion animal space as our portfolio of dermatology products, parasiticides and vaccines continue to drive our growth.

Second, we see economic pressures and other challenges continuing to impact dairy and cattle producers in the U.S. We still, however, expect to see the U.S. cattle and dairy market growing for the full year, driven by a strong domestic demand for beef, an increasingly optimistic outlook for beef and dairy exports and a modest improvement in milk prices.

Finally, African Swine Fever has made headlines about significant concerns for the pork market. It is impacting producers in China, with some reports saying that as many as 150 million to 200 million pigs or up to 30% of their annual pork supply could be lost into the outbreak. For context, that is more than the U.S. annual pork production.

This situation has far-reaching implications for the global pork supply chains. The reduction in supply in China is making the pigs more valuable, creating opportunities for greater export from other countries and increasing consumption of other proteins. The situation will evolve through the year, and we are monitoring any effects on the overall market and our business, which saw an impact in the first quarter.

These type of outbreaks, unfortunately, are part of doing business in animal health. This year, we are facing issues with African Swine Fever. A few years ago, we dealt with PEDV with avian flu and before, with bluetongue disease. These challenges are why Zoetis has built a diverse portfolio of best in class products across all relevant species and geographies, to both address opportunities and to manage through economic cycle, disease outbreaks and unfavorable weather conditions.

We communicated in February that we expected the overall industry to grow approximately 5% for the year, excluding the impact of foreign currency. Now because of African Swine Fever, we expect the animal health industry to have a lower growth rate in 2019, and we'll continue to assess the broader impacts of African Swine Fever as the year progresses.

Despite some of these temporary challenges, we are maintaining our guidance for operational revenue growth. Excluding Abaxis, 4.5% to 6.5% for the full year, which we expect to be faster than the growth of the animal health market.

Turning now to our first quarter results. We are off to a solid start for the year, with 11% operational revenue growth being driven by our companion animal business. Revenue from the Abaxis acquisition accounted for 5 percentage points of the overall 11% growth. Our sales in companion animal products are once again leading the way, with a 27% operational growth, based on the addition of sales from Abaxis, as well as our parasiticides and key dermatology portfolio. Our livestock product sales declined 3% operationally due to challenge in certain cattle and swine markets.

For the first quarter, we grew our adjusted net income by 18% operationally and adjusted diluted EPS by 19%, as we benefited from a strong revenue growth and a significant increase in gross margin due to pricing, a favorable product mix and cost improvements. Glenn will provide more details on our first quarter performance in his remarks.

Our results once again confirm the importance and value of a growth and innovative portfolio in the animal health industry, and we remain confident in our performance and outlook for the full year.

Looking ahead, we continue to invest in advancing our pipeline, ensuring successful market launches of new products and furthering the integration of Abaxis this year. Since our last quarterly earnings announcement, we have seen key companion animal products, including the Cytopoint and Simparica for dogs, and the Revolution Plus for cats continue to gain approvals in markets outside the U.S. Our Core EQ Innovator, the first-and-only combination vaccine to offer protection against 5 core equine diseases, was also approved in Canada. And last week, Zoetis received approval for Apoquel in China, one of Zoetis' largest companion animal markets, and we expect to launch the product there within the next 2 months.

On the livestock side, we launched Clarifide Plus for Jersey cattle in the U.S. This is first genomic test for this breed that provides a direct indication about the genetic risk factor for 7 of the most common and costly adult cow diseases.

In terms of our R&D pipeline, we still anticipate launching this year a new injectable parasiticide formulation to protect dogs against heartworm for up to 12 months, pending FDA approval.

Our new 3-way combination parasiticide, composed of Simparica and 2 other active ingredients, still in regulatory review in the U.S. and with the European Medicines Agency. Reviews are also underway in Canada and Brazil, with further submission expected in Japan, China and Australia this year. If approved, we anticipate this product coming to market in 2020.

We also continue working on new monoclonal antibodies to manage pain in dogs and cats and dermatology for cats. Those programs are progressing, and we'll keep investors informed of future filings in this area. We feel very positive about the benefits these treatments can provide to greater compliance, convenience and efficacy for different species.

In the case of other research for livestock, I would point to our programs in vector vaccine technology for our poultry research into promising new classes of antibiotics, and our ongoing investment in diagnostics, genetics, devices, digital and data analytics and technologies that can be used in application precision livestock farming. Additionally, we have vaccine products to address current and future emerging diseases, which has been a growth driver for our industry in the past.

We also maintain a comprehensive portfolio of approximately 300 product lines for Zoetis. And we invest significantly each year on life cycle innovation that keep those products competitive and growing.

Finally, we are making good progress on the integration of Abaxis. We remain positive on the point-of-care diagnostic end market. Given its strong global growth prospects, as well as the critical role these diagnostics play in the vet clinic. We are excited about the strength of the Abaxis portfolio and the way our field force is already presenting it to customers around the world. Our U.S. field force has been working to drive greater growth through new lead generation for diagnostics.

International markets have nearly completed staffing and training of our expanding diagnostic team, implemented a new customer service model across this market, and view this as a greenfield opportunity for future growth.

We are pleased with our progress to date and we continue to view 2019 as an important year for the integration and platform setting, enhancing certain products and customer experiences, and developing more comprehensive customer solutions that leverage our new diagnostic assets.

In closing, our first quarter results once again demonstrate the stability and the diverse strength of our portfolio in a dynamic animal health industry. We are executing on our strategies for growth across the continuum of care, with new products and solutions that help our customers predict, prevent, detect and treat diseases in animals, while navigating the evolving trends in animal health. And we are investing and making important progress in key areas, such as dermatology, parasiticides, diagnostic, digital and data analytics, where we see both near- and long-term growth opportunities.

Thank you for joining us today. And I will now hand the call over to Glenn. Glenn?

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [4]

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Thank you, Juan Ramón, and good morning. As Juan Ramón noted, 2019 is off to a solid start. Operational revenue growth was 11% and operational adjusted net income growth was 18%. Reported revenue growth for the first quarter was 7%, with a 4% unfavorable impact from foreign exchange, driven primarily by currency depreciation of the euro and Brazilian real. Excluding the impact of the Abaxis acquisition, operational growth for the quarter was 6%. Included in the 6% growth is 4% price and 2% volume. Volume growth includes contributions from key dermatology of 2% and new products of 1%, which are partially offset by declines in other in-line products of 1%.

Companion animal demonstrated continued strength this quarter, with legacy Abaxis products, parasiticides and key dermatology products leading the growth, with positive contributions from all key markets. Meanwhile, livestock declined in the quarter, based upon declines in sales of medicated feed additives and challenges, like the African Swine Fever outbreak in China.

Our overall results in the first quarter continue to demonstrate the value of our diversified portfolio, with double-digit operational growth, despite the declines in swine and cattle. Legacy Abaxis products contributed 5% to total Zoetis operational revenue growth in the quarter, with sales of $61 million. As a reminder, the acquisition of Abaxis was completed in the third quarter of 2018, so sales from legacy Abaxis products are incremental in the first half of 2019.

The revenue this quarter represents a decline over the pro forma revenue from the prior year. This decline is primarily driven by new product launches and initial distributor stocking in the first quarter last year. We continue to expect full year growth in diagnostics products as we focus on improving customer experience, connectivity to practice management software and international expansion.

Our key dermatology portfolio, comprised of Apoquel and Cytopoint, also continue to contribute to growth this quarter, with sales of $155 million, a 30% operational increase over the prior year. New products, including Revolution Plus and Stronghold Plus as it's called internationally, PCV combo vaccines in swine and Core EQ Innovator in equine, were also growth drivers in the quarter. Revolution Plus, a topical parasiticide for cats, builds upon the sarolaner compound that is found in Simparica. The product launched in the U.S. this quarter and in 2017 internationally, and is off to a great start, supporting strong growth in the Revolution/Stronghold line in the first quarter.

The decline in other in-line product volume was related to the timing of cattle product purchases in the U.S.; African Swine Fever in China; the divestiture of certain agribusiness products in Japan, which occurred in the fourth quarter of 2018; and the implementation of stricter commercial and pricing policies in Brazil. The agribusiness is historically seasonal, with a disproportion of sales in the first quarter. These declines are partially offset by the continued strength of Simparica, now captured in the in-line product category, which generated $48 million in global sales this quarter, representing operational growth of 61% over last year.

Now let's discuss the revenue growth by segment for Q1. U.S. revenue grew 13% in the first quarter. Companion animal grew 30% and was partially offset by a 7% decline in livestock. Excluding the impact of the Abaxis acquisition, U.S. revenue grew 8%. Companion animal sales in the quarter were driven by sales of legacy Abaxis products, in-line products, including our key dermatology portfolio and Simparica, and new products, including Revolution Plus. Excluding the impact of the Abaxis acquisition, companion animal growth was 20%.

U.S. dermatology sales were $104 million for the quarter, growing 26%, driven by market share gains, price and investments in direct-to-consumer advertising, which continue to expand the market. Simparica sales in the quarter were $25 million, growing 40% over the prior year. U.S. livestock declined 7%, driven by cattle and swine. Cattle was impacted by the timing of medicated feed additive purchases, and dairy continued to face headwinds, while producer profitability remained low.

Swine was impacted by the discontinuation of a promotional program for our premium products and the timing of medicated feed additives purchases. The declines in cattle and swine were partially offset by another strong quarter for poultry, driven by growth of alternatives to antibiotics in medicated feed additives. Despite the decline this quarter, we continue to anticipate U.S. livestock will grow for the full year.

Turning now to our International segment. Revenue grew 7% operationally in the first quarter. Companion animal operational growth was 23%, while livestock declined 1% operationally. Excluding the impact of the Abaxis acquisition, International revenue grew 5%. Companion animal product growth was driven by continued expansion and uptake of key dermatology products, the addition of legacy Abaxis products, strong Simparica sales and growth in China. Excluding the impact of the Abaxis acquisition, companion animal growth was 18%. Livestock declines were driven by the impact of African Swine Fever in China and the divestiture of certain agribusiness products in Japan, which were partially offset by growth in poultry, fish and sheep.

The complete quarterly results of our top 11 international markets are provided in the table included in our earnings release, but I would like to highlight a few items for the quarter. The U.K. had operational revenue growth of 16% in the quarter, with companion animal growing 21% and livestock growing 11%. Companion animal growth was primarily related to legacy Abaxis products and increased sales of key dermatology products and Simparica. Livestock benefited from increased market share in aquaculture vaccines in the quarter.

In Australia, sales grew 10% operationally, driven by companion animal growth of 15% and livestock growth of 6%. This market benefited from key dermatology, legacy Abaxis products and Simparica in companion animal, while livestock growth was related to key brand performance in cattle. In Brazil, sales grew 1% operationally, driven by companion animal growth of 43%, partially offset by livestock declines of 13%. Companion animal revenue growth in Brazil was driven by parasiticides, primarily Simparic, and continued strength of Apoquel. Livestock declines in cattle for Brazil related to the strengthening of our commercial and pricing policies, which impacted short-term results. We anticipate these policy updates will strengthen our long-term opportunity in this market. Overall market dynamics remain positive, as does our full year outlook.

Moving on to China. We had a challenging quarter, with revenue declining 2% operationally. Livestock declined 28%, driven by challenges in swine. African Swine Fever is having a greater-than-expected impact, as the outbreak has worsened in China, reducing the size of the swine herd. We continue to expect other regions, primarily the EU, Brazil and the U.S., to increase exports of pork to China to meet domestic consumer demand. We also anticipate growth in other proteins, although to a lesser degree.

Companion animal remained strong, partially offsetting the livestock decline with operational growth of 38% driven by continued growth of vaccines, parasiticides and an expansion of the field force in China, allowing us to capitalize on this fast-growing market. As Juan Ramón mentioned, we're also very excited about the launch of Apoquel into this important market.

Other emerging and developed markets also continue to perform well this quarter, particularly in companion animal. Summarizing International performance, continued growth of key dermatology products, the addition of legacy Abaxis products, and diversity across our portfolio, all contributed to a solid quarter, despite challenges in livestock.

Now moving on to the rest of the P&L. Adjusted gross margin of 70.2% increased approximately 270 basis points in the quarter on a reported basis compared to the prior year. The improvement this quarter is primarily related to price, favorable product mix, foreign exchange and unit cost improvements, partially offset by the inclusion of the lower-margin legacy Abaxis portfolio. We do anticipate a more normalized gross margin in the second quarter, as both price and mix impact will moderate.

Total adjusted operating expenses, including the impact of the Abaxis acquisition, grew 8% operationally. The increase is primarily related to the acquisition of Abaxis and an increase in certain compensation-related expenses. We are anticipating higher expenses in the second quarter, primarily related to the timing of promotional investments for our key products, the timing of R&D project spend and the Abaxis integration.

We are continuing with direct-to-consumer advertising and promotional campaigns in the U.S. that support our key dermatology and parasiticide products, with our highest expenses occurring in Q2 and Q3. The adjusted effective tax rate for the quarter was 18.8%. The increase from the comparable 2018 period is predominantly related to the impact of the global intangible low tax income or GILTI tax, which is a provision of the U.S. tax reform that is effective for Zoetis in 2019.

Our expectation for the full year adjusted effective tax rate is consistent with initial guidance, which is between 20% to 21%. The favorability in the first quarter is primarily driven by the tax benefits from stock-based compensation. Adjusted net income for the quarter grew 18% operationally through a combination of strong revenue growth, favorability in gross margin, and moderated growth in operating expenses. Adjusted diluted EPS grew 19% operationally in the quarter versus the same period in 2018.

Now moving on to guidance for the full year. Beginning with revenue, we are decreasing both the low end and high end of the range by $75 million to reflect the impact of foreign exchange. As I noted on the fourth quarter call, U.S. dollar strengthening was something we would be monitoring, and additional USD strengthening has occurred since we set guidance. We are now projecting revenue between $6.1 billion and $6.225 billion, while maintaining operational revenue growth of 7.5% to 9.5% over 2018. Our organic operational revenue growth, which excludes the impact of the Abaxis acquisition, is projected to be between 4.5% and 6.5%, consistent with the guidance provided in February.

Adjusted cost of sales as a percent of revenue is still expected to be in a range of 31% to 32%. As I noted earlier, there were some favorable drivers in the first quarter that we expect to moderate through the remainder of the year. We are decreasing the low and high end of the range for adjusted SG&A for the year to be between $1.45 billion and $1.5 billion, due to the impact of foreign exchange.

Moving on to R&D. We expect 2019 expenses to be between $445 million and $465 million, consistent with the guidance provided in February. Full year adjusted interest and other income deductions is now expected to be approximately $200 million, compared to the previous estimate of $220 million. The favorability is largely driven by a reduction in interest expense. Our adjusted effective tax rate for 2019 is expected to be within the range of 20% to 21%, consistent with previous guidance, and we are still projecting adjusted net income in the range of $1.65 billion to $1.7 billion, maintaining 8% to 11% operational growth.

With a more limited foreign exchange impact on the bottom line as well as the benefits of the actions we have taken to reduce interest expense, we continue to expect adjusted diluted EPS to be in the range of $3.42 to $3.52, consistent with previous guidance. Our range for reported diluted EPS of $2.79, $2.93, however, is a reduction of both the low and high end of the range, based upon increased certain significant items, primarily due to a change in estimate related to inventory costing impacting the first quarter.

Finally, I'd like to remind you that our quarterly results may fluctuate and that our focus continues to be on the full year. As I've already noted, we anticipate lower gross margin and the higher operating expense in the second quarter, which will impact adjusted EPS. The full year impact of the Abaxis acquisition will also continue to have a disproportionate impact on the P&L until we pass the acquisition date in the middle of the third quarter. Finally, foreign exchange will continue to negatively impact the P&L in the second quarter, with an impact of approximately 300 basis points to revenue growth.

Now to summarize before we move to Q&A. Our first quarter results continue to demonstrate the value of our geographic and product diversity, with operational revenue growth of 11% and operational adjusted net income growth of 18%. We continue to see strength in our companion animal portfolio driving these results and expect growth in livestock for the full year. And we remain committed to delivering on our full year operational growth rate for revenue and adjusted net income, demonstrating the durability and consistency of our business.

Now I'll hand things over to the operator to open the line for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Erin Wright from Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [2]

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Can you discuss a little bit how the Abaxis integration is progressing here relative to your internal expectations? It was a little bit lighter than what we thought in our Abaxis model. And is that just the distributor dynamics? And I noticed that the GAAP acquisition-related costs ticked a little bit higher. Is that all attributable to Abaxis and where we stand with the SAP implementation? And then the second question is on international livestock. Just given some of the dynamics around African Swine Fever and what you called out in Brazil, can you speak to how we should think about that quarterly progression over the course of the year?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [3]

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Erin, to answer the question on Abaxis, and let me start saying that we are pleased with the progress that we are making with the integration of Abaxis. The team in the U.S. is already working together, maybe not fully integrating the 2 portfolios, because we mentioned that for this full integration, we need also to work with the integration of SAP. And related to the implementation of SAP for Abaxis, we have decided to move the implementation from August, September to February, because we want our IT team to focus on working on the connectivity of all the equipment of diagnostics. We think that this connectivity that we expect to finalize by the year -- by the end of the year will help us really to have a much more support to diagnostics and offer full integration or full connectivity of the diagnostic equipment to the practice management system. We're also pleased with the progress that we are making in international markets. We have now almost completed all the hiring process for reps and also for technical support. We have also set the customer service that would help in the area to provide the support to diagnostic customers. So in general, we are progressing very well. We continue -- very excited about the quality of the portfolio of Abaxis, and we are very confident that Abaxis will represent a significant growth opportunity, especially from 2020. Now we see 2020 -- 2019 as a year in where we are integrating, we are fixing some of the things that we have identified from the previous Abaxis model and we are very confident that the projections that we have for this portfolio will be very positive.

In terms of the international livestock. Let me provide a comment on Brazil, and then I will ask Glenn to go into more details on what we expect for the rest of the year in the total livestock performance. And in Brazil, we see that the market continue growing very fast. It's a very strong growth and for Zoetis. So the growth in companion animal is above market growth. So we are growing very fast. In cattle, we decided to change some of our commercial policies, including prices. And we saw, as expected, some negative reaction from distribution. This has an impact in the first quarter for Brazil, especially in cattle, but we are convinced that these changes will help us to generate better future growth and improve the profitability of our cattle operations in Brazil. So we remain very convinced that Brazil will be a growth driver for Zoetis, and we are investing to support this growth. And Glenn, do you mind to provide more details on international livestock?

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [4]

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Absolutely. Erin, just also to your question on Abaxis and the Q1 performance, you referenced distributor stocking. So part of the -- when we talk about the pro forma performance in Q1 2019 to Q1 2018. In Q1 2018, there was stocking, with the introduction of the new products in terms of the urine sediment analyzer and the FLEX4 Rapid Test. That did pose a challenging comp as we look between Q1 2019 and Q1 2018. In terms of the international livestock performance, as Juan Ramón said, for livestock internationally, we declined about 1% this quarter, driven by the factors that we discussed in terms of African Swine Fever, as well as the impact in Brazil. We would expect to return to growth in Q2 and that growth to accelerate in Q3 and Q4.

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Operator [5]

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We'll go next to Louise Chen with Cantor Fitzgerald.

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Louise Alesandra Chen, Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD [6]

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So I wanted to ask you about your temporary weakness in livestock and when do you expect that to subside this year and then return to growth? And how much of that is macro versus company-specific? And then maybe just if you could talk a little bit more about this MFA buyer pattern.

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [7]

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Well, as we said that in the first quarter, we faced 2 impacts in terms of the temporary weakness in the livestock. One was the cattle business in the U.S. was affected by different factors. I'm talking about the market. The market declined. We saw that the movement of animals to feedlots was below expectations, in many cases, driven by weather conditions, but we are optimistic about the cattle business in the U.S. moving forward. The demand for beef is positive, and also the exports are increasing. Additionally, we expect also in the second half of the year a small increase on the price of the milk. Also, that will help the total cattle business in the U.S. As many times we mentioned, I think it's difficult to analyze our business in a quarterly basis. There are fluctuations based on buying patterns and promotional activities, weather conditions, that maybe it's important to understand the business on a yearly basis. We remain confident that the livestock market will be growing at the end of the year. What we are expecting is that the poultry will be growing in line or slightly ahead of the market. In terms of swine, we expect growing lower than the market and mainly because of the African Swine Fever, that we expect that having a temporary impact, but maybe from a third, fourth quarter and definitely in 2020, we expect a significant recovery, because many markets outside of China will expand their production. That will generate significant growth. And finally, the cattle, we also expect for the year overall growing. We expect growing in the U.S. We also expect growing in International markets, but growing below expected market growth.

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [8]

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And Louise, in terms of the timing of the MFA purchases in the U.S., that's really related to the timing of our annual price increases. So in 2019, we aligned the timing of our MFA price increases to be in sync with the rest of our portfolio, which is in January. That led to some additional sales in Q4 of 2018 that then destocked in Q1 of 2019. So that is not an impact that we would expect to see as we move forward through the rest of the year.

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Operator [9]

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We'll go next to Kevin Ellich with Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Juan Ramón, just have a couple of questions here. Companion animal continues to be really strong. We've seen really good growth out of, obviously, the dermatology portfolio, but also Revolution Plus for cats and Simparica for dogs. Could you talk about what areas you're focused on, the product development, maybe more on the feline side, and areas that are under-medicalized? Also, timing for the monoclonal antibody products. And then Glenn, on the SG&A and operating expenses, clearly, there were some favorability this quarter. And you talked about increased spending, DTC campaign in Q2. Could you give us a little bit more color on that?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [11]

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Kevin, we see the product portfolio is still showing opportunities for growth. We see opportunities for growing the parasiticides now with Revolution Plus. We still see that Simparica continues gaining momentum in the U.S. and also international markets. Apoquel, Cytopoint are growing and we expect to continue growing. We expect to continue growing in the U.S. and also expect to continue growing in international markets. And now we have the addition of Apoquel in China, that also will support this growth. We're also very confident that this growth is steady and for the long term because, as we said, the current portfolio continue growing. But we expect also to introduce Simparica or a combination of products, that 3-way product in 2020. But also we expect to continue generating growth. In the future, we are not, at this point, providing any details of when we expect monoclonal antibodies to be in the market. But definitely, we see opportunities in feline with pain. We see opportunities also in feline with dermatology, again, with monoclonal antibodies and also with the monoclonal antibodies in dogs for pain. And we are very confident that the R&D machine will continue bringing innovation into the market in companion animals, but also in livestock. We have programs for both companion animals and livestock that will support the growth in 2020, 2021, also 2022. So we are very confident that we have a pipeline that will maintain growth that will be in line or faster than the market. And Glenn will respond to the question on G&A.

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [12]

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Yes. Kevin, in terms of the operating expenses, so just for the quarter, our operating expenses grew about 8%. If you back out Abaxis, operating expenses grew around 3%, compared to our revenue growth of 6%. So it's pretty much in line with our overall expectations over an extended period of time. That being said, we did have some favorability in R&D expenses in terms of the timing as well, though as we move through into Q2 and Q3, a, we expect elevated expenses in Q2 and Q3, as that is the time frame in which our DTC promotions, particularly in the U.S. around our dermatology portfolio and Simparica, will kick in at a higher level; and we also expect some elevated expenses in terms of our R&D as well.

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Operator [13]

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We'll go next to Michael Ryskin with Bank of America.

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Michael Leonidovich Ryskin, BofA Merrill Lynch, Research Division - Associate [14]

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A couple, I want to dig deeper on some of the moving pieces in the quarter, both on the livestock markets in the U.S. and internationally. If I circle through some of the items you called out, African Swine Fever, the spend, divestment, looking at your revenues by geography, I think I can estimate that ASF may have had a $5 million to $10 million hit in the quarter. The Japan divestment is similar, in the ballpark as well. First, I want to get a sense if that's the right way to think about it and then, if that's a similar run rate you would expect for ASF going forward?

And then the other one will be in the U.S. livestock business. You talked a little bit about the distributor relationship and the stocking in 4Q. But just trying to get a sense of the magnitude of that impact in the first quarter versus the rest of the feedlot pressures as well, so we could plan the phasing through the course of the year.

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [15]

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Mike, I will maybe make a general comment on the African Swine Fever. Then Glenn will go to the details of your questions. So first, the African Swine Fever definitely is having a significant impact in China, and we also have an impact in our results. We mentioned that probably up to 30% of pigs will be lost, 150 million to 200 million. And as a reference, in the U.S., the production is 120 million per year. But it's also true that in China, the market share of multinational companies is only 10%. 90% is products that are sold by local companies. We definitely see a significant issue in China, mainly for the producers in China. But also we see that the other countries, the U.S., Brazil, European markets will increase significantly the production of pork to meet all the demands of the Chinese consumers, that definitely for a significant period of time, there will be seen a shortfall of producing in China. And since outside of China, we have a significant market share in the swine, in the medium and long term, we see that as an opportunity to generate growth in swine and also maybe an impact in poultry, and to a minor extent, also to beef. Because in the end, the consumption of animal proteins in China will remain, and export markets will supply a product to meet the demand in the markets. And then Glenn will go to the details of the impact on African Swine Fever in the quarter and also the Japan agribusiness and also the U.S. impact of the buying patterns.

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [16]

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So Mike, specific to your questions, for ASF and Japan, you mentioned a range of $5 million to $10 million. So what I'd say, ASF is probably at the high end of the range for the quarter, and Japan is probably at the low end of that range for the quarter. In terms of U.S. livestock, obviously, we did have the impact in Q1. It's a little above that $5 million to $10 million range that you referenced, with the bigger portion of that being cattle.

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Operator [17]

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The next question from Jon Block with Stifel.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [18]

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I've got 2 long ones, so maybe I'll try to break it up, if it's okay with you. The first one the triple or SIMPARICA TRIO. Juan Ramón, any updates on how the filing or interaction with the agency is proceeding? And I'm just curious in your ability to fulfill demand in the early days. Obviously, with Apoquel, there were challenges post launch, although I know some of that was sort of reliance on the third-party manufacturer. So any color would be helpful. And I'll ask a quicker follow-up.

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [19]

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John, and we are progressing well with discussions with the FDA. We have completed out all the sections of the filing, and it's just now the normal process of question and answers. We are confident that the dossier, it's strong and it will be approved by the FDA. But it's always something that is not depending on us, but on the regulators. But one of the challenges that we discussed in the past is that we needed to demonstrate 100% efficacy on heartworm. We have provided this data, and we are confident that the product will be approved and ready to be launched in 2020. And well, definitely, we try to learn from previous challenge or issues or mistakes. And definitely, in the case of the 3-way problem, we secure enough active ingredients to be ready to launch the product as soon as the product is approved. So we are not expecting any challenge in terms of supplying the market or the demand.

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Operator [20]

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We'll go next to David Risinger with Morgan Stanley.

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [21]

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So I have 3 questions, please. First, with respect to U.S. companion growth this quarter, could you just give us the figure, the percentage ex Abaxis? .

Second, how should we model livestock sequentially in the second quarter? I just don't have a good feel for how we should think -- be thinking about the livestock business sequentially in 2Q in the U.S. and ex U.S.

And then one little tidbit, with respect to the revenue guidance reduction of 1%, was that solely related to FX? Or was there also some modest impact elsewhere?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [22]

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David, Glenn will cover these 3 questions.

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [23]

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Sure. So just in those questions, so in terms of our revenue growth, excluding Abaxis, focused on companion animals. So globally, our companion animal business grew 27%. Without Abaxis, we still grew extremely strong at 19% globally. In the U.S., the number was with Abaxis we grew 30%, excluding Abaxis, we grew 20%. And internationally, companion animal grew 23%. Without Abaxis, we grew 18%. So really strong organic growth within our U.S. companion business. As we mentioned earlier, in terms of livestock growth sequentially, when you look at it globally, we did decline 3% this quarter in terms of the livestock business on an operational basis. We do expect to return to growth in Q2, and we expect that growth to accelerate throughout the year. In terms of the guidance, we reduced the guidance at both the low and high end of the range by $75 million. That was purely due to FX. There were significant movements at the time from when we set guidance. When we set guidance back in February, we were using rates as of late January. And when we set guidance now, we're using rates as of the end of the -- towards the end of April, and that had a significant movement. So the movement was purely due to FX.

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Operator [24]

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We'll take the next question from John Kreger from William Blair.

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Courtney Patrice Owens, William Blair & Company L.L.C., Research Division - Associate [25]

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This is Courtney Owens on for John Kreger. So just a quick question surrounding the dermatology portfolio. When you just think about like the penetration rates, specifically in the U.S. right now, where do you guys think that is? And then when you think about the international growth in the dermatology portfolio for the rest of 2019 and beyond, where do you guys foresee that going? And then just when you think about them individually, so Apoquel and Cytopoint, have they trended well compared to your expectations? And are you seeing vets having like a strong preference for one or the other product?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [26]

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In terms of penetration for dermatology portfolio, I think it's about in terms of patient about 59%. And it's something that probably -- or 63%, sorry, it's the total patient share, which is very strong. And we still see opportunity there, first, to continue expanding the market. And we will be starting now in the second quarter campaign, and direct to consumer campaign with 2 objectives. One, it's expanding the market; and also second, it's set to continue building brand equity for Apoquel. We see also that these investments are also having a positive impact on Cytopoint. We expect dermatology portfolio to continue growing. We expect also to grow faster in international markets than in the U.S. But in the U.S., we still see positive momentum. And how much is the preference for Cytopoint or Apoquel? In that respect, I think we leave veterinarians to decide what is the best for their patient, the pets. And we are not trying to promote Apoquel in favor of Cytopoint and Cytopoint in favor of Apoquel. They are covering all the spectrum of needs in terms of treating dermatology issues, itching in dogs. And that we see that there is some cannibalization, but also Cytopoint has been growing the market and helping us to increase this franchise.

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Operator [27]

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We'll go next to Kathy Miner with Cowen and Company.

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Kathleen Marie Miner, Cowen and Company, LLC, Research Division - VP [28]

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I have 2 questions. First, could you provide more clarification on your comments about the impacts of the African Swine Fever on Zoetis? And then I appreciate that over time, there's either going to be a greater demand for other the proteins, or you will see other regions pick up some of the supply. Can you just help us understand why that's medium to long term and why shouldn't we see some of those dynamics sooner, particularly as supply needs to pick up in some other countries? And my second question is on Apoquel. First, could you give us the breakdown between Cytopoint and Apoquel sales of the $155 million you gave us before? And also in Apoquel in China, could you give us a sense of the market size? Is it similar to the EU5 or U.S.? And is Cytopoint also under review in China?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [29]

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Kathy, so let's go back to the African Swine Fever and the potential impact. We mentioned that we expect that up to 30% of pigs can be lost because of the African Swine Fever in China. So if we translate this 30% to our revenues in, so we can also estimate that it will be about 30% of our revenues, although we expect a little bit lower impact because of maybe sophisticated farms are less affected by the African Swine Fever than the production of small farms. We expect that it will be an immediate impact in terms of the value of the pigs. As a reference, in the last quarter or in the fourth quarter of 2018, producers in the U.S. they were losing $20 per pig. Now they are making $30 profit per pig. So the value of the pigs has increased significantly. And then the willingness to spend to keep these pigs healthy and productive also will increase. So we expect that this will be a positive impact -- an immediate positive impact. Then we expect also that the farmers or the producers in U.S., Brazil, European Union, will increase production. The cycle of the production is 6 months. But probably, we'll need to wait 6 months to see some impact, because there will still -- it will increase the production. And even if it takes 6 months from birth to slaughter, I think we can start using products at an earlier stage of the animal. So we expect the third and fourth quarter of this year having a positive impact in the swine business in Brazil, U.S. and U.S. market. And moving into the details of Apoquel break out. Glenn, do you mind answering that and also probably those for the projections in China and providing some context?

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [30]

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Sure. So in terms of the total derm revenue, we had $155 million in total sales in the quarter, with growth of 30%. To the earlier question in terms of penetration, U.S. had $104 million in sales and International had around $52 million. So as there are similar amounts of medicalized dogs in the U.S. is international, we would expect more rapid growth from International and greater penetration over time internationally. The breakout of the $155 million between Apoquel and Cytopoint, we had $119 million of sales of Apoquel, with 22% operational growth, and we have $36 million of sales in Cytopoint, with 65% operational growth. In terms of Apoquel in China, very excited about the launch of Apoquel in China. China is one of our largest and fastest-growing companion animal markets. Just to put in context, though, the overall potential in market size, so in 2018, Apoquel globally in all of our international markets, excluding the U.S., had less than $160 million of sales, with our top market internationally generating sales of just below $30 million. So that should give some overall context in terms of the potential of Apoquel in any given international large companion animal market.

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Operator [31]

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We'll go next to Chris Schott with JPMorgan.

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Christopher Thomas Schott, JP Morgan Chase & Co, Research Division - Senior Analyst [32]

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Just 2 questions. Maybe first on SIMPARICA TRIO. Just a little bit more color about how you're thinking about the launch of these new triples, how quickly they'll be adopted? Should we be thinking of these as products that could have significant year 1 uptake? Or is this a more a gradual kind of 3- to 5-year process as these roll out?

The second question, I know, has been touched on a little bit, but your companion business, and particularly the U.S. companion business, were particularly strong in the quarter, above recent trend. Can you just elaborate a little bit more on what you're seeing here and if there's anything that's either one-time related or if either your year-over-year time related in terms of the strength we saw this quarter? Just trying to get a sense of how much of this is just really healthy organic kind of underlying growth versus timing issues?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [33]

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First, starting with the combination product for parasiticides. Well, the adoption, I think we expect that the adoption would be fast and also will depend if we are #3, #2 or #1 in the market. But definitely, we see a need for the market to combine internal and parasiticides mainly in dogs. And we are confident that will be a significant opportunity to generate growth in 2020, 2021 and also 2022, because we think that, that this product will have a long run and definitely, the opportunity to generate our growth in companion animals. And Glenn will talk about the U.S. companion animal growth in the quarter and the trends for the future.

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [34]

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Yes, so what I'd say Chris is, a, that the overall global companion animal growth was very strong. When you take out the impact of Abaxis, we grew 19%, 20% in the U.S., 18% internationally. So both segments growing very rapidly in companion animal, and those are driven just by strong underlying dynamics in trends, particularly around the derm portfolio, around Simparica and also really strong performance of Revolution Plus. Q1 of '19 was the launch of Revolution Plus in the U.S. It's off to a very successful start. There is some stocking in Q1 of 2019, particularly in the U.S., but still the start that we're seeing in Revolution Plus is very, very encouraging.

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Operator [35]

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We'll go next to Gregory Fraser with SunTrust.

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Gregory Daniel Fraser, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [36]

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This is Greg Fraser on for Gregg Gilbert. On its call, Merck noted that its livestock business was impacted by destocking related to consolidation in the distributor space. Is that something that you've observed? I wasn't sure if your comments on distributor purchasing patterns was related to what they described.

And then just a quick follow-up on the livestock commentary. Are you anticipating growth for International for the full year?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [37]

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Probably we saw some challenge with the distribution in Brazil, but not in the U.S. In Brazil, I mentioned that we have these changes in commercial policies that reduced sales to the distribution during the quarter. But as I mentioned, we expect that this will support more quality growth in the future. But no changes in the distribution in the U.S. So Glenn do you want to add comments here?

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [38]

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No, just to your question on livestock growth for the full year, we still are expecting livestock to grow globally, in the U.S., and internationally.

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Operator [39]

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We will the take today's final question from Navin Jacob with UBS.

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Unidentified Analyst, [40]

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This is [Prad Agarwal] on behalf of on behalf of Navin Jacob. Two questions, please. First on poultry. Your growth in poultry products was quite strong. So could you give more color on what is driving that in terms of the near-term trends and anything specific from your product portfolio?

And secondly, one of your competitors recently made an acquisition that included some oncology products. So is Zoetis making an R&D investment in oncology? And do you think this market is commercially attractive?

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [41]

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So I will ask Glenn to answer your question on poultry, and then I will cover the oncology part of the question.

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Glenn C. David, Zoetis Inc. - Executive VP & CFO [42]

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So from a poultry perspective, we continue to perform very well in poultry. Overall, very solid growth, higher than the rest of our portfolio in livestock. And really that's driven by our portfolio of alternatives to antibiotics in poultry that we continue to perform very well in within the MSA sector. So that's something that's been consistent for us over the last number of quarters and a trend that we expect to continue.

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Juan Ramón Alaix, Zoetis Inc. - CEO & Director [43]

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And on oncology, we have already a product in oncology which is working well, which is Palladia. We launched this product some years ago. We continue assessing the oncology market. And definitely, we have some programs -- internal programs related to monoclonal antibody and some other programs, but still oncology is a very limited market, although maybe in the future will be potential attractive market. But today it's a quite limited opportunity.

And I think with that conclude the questions, and thank you very much for joining us today. And as we said, we remain very confident about the outlook for 2019. And we are maintaining our operational growth, and we are also maintaining our target in terms of adjusted net income. Thank you very much for your attendance.

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Operator [44]

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This will conclude today's program. Thanks for your participation. You may now disconnect.