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Must-know: Why Maverick Capital disposes position in Zoetis

Smita Nair

Overview: Maverick Capital's 1Q14 positions (Part 7 of 7)

(Continued from Part 6)

Maverick Capital disposes position in Zoetis

Lee Ainslie’s Maverick Capital started new positions in Ashland Inc. (ASH), 21st Century Fox (FOXA), Cubist Pharmaceuticals Inc. (CBST), and Ctrip.com International (CTRP). Top positions sold were eBay Inc. (EBAY) and Zoetis Inc. (ZTS).

Maverick Capital exited a position in Zoetis Inc. (ZTS), which accounted for a 3.22% position in the fund’s 4Q13 portfolio. According to the fund’s filings, the position was initiated in 3Q13.

Zoetis  is the animal health business which was spun off by Pfizer in February, 2013. It is one of the leading companies in the discovery, development, manufacture, and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. It organizes and manages its business across four regional operating segments: the United States (U.S.); Europe, Africa, Middle East (EuAfME); Canada, Latin America (CLAR); and Asia, Pacific (APAC). Zoetis said the United States was its largest operating segment with revenue of $1.902 billion, or 42% of total revenue for 2013. Livestock products represented approximately 64% of the revenue for the year ending December 31, 2013.

FDA restriction on use of antibiotics

Madison, New Jersey-based Zoetis is one the leading manufacturers of animal antibiotics. Its total revenue for antibacterials for livestock was approximately $1.2 billion for the year ending December 31, 2013.  There’s been a global debate on the overuse of antibiotics in animals that has led to an increasing number of antibiotic-resistant infections in humans and animals. According to data from U.S. Centers for Disease Control and Prevention, cited by Bloomberg, around two million Americans are infected by drug-resistant bacteria annually, leading to at least 23,000 deaths.

Zoetis said in its annual filing that, “In December, 2013, the FDA announced final guidance establishing procedures for the voluntary phase out in the United States over a three year period of the use of medically important antibacterials in animal feed for growth promotion in food production animals. The guidance provides for continued use of antibacterials in food producing animals for treatment, control and under certain circumstances for prevention of disease, all under the supervision of a veterinarian.” Zoetis said it supports the FDA’s efforts to voluntarily phase-out growth promotion indications, and will comply with procedures outlined in the December guidance.

On its latest earnings call, the management said, “definitely the pressure to reduce the use of antibiotics in regions like Europe and more specifically in Western Europe continue affecting industry revenues. In 2013, the use of anti-infective in
Europe declined by 7%.” They added that despite the pressure it expects antibiotics to “continue growing at the global basis although at a lower pace than the global growth of animal health.”

1Q revenue miss estimates

For 1Q14, Zoetis missed revenue estimates, but beat on earnings. It posted a 1% increase in revenue to $1.1 billion. Net income for 1Q14 was $155 million, or $0.31 per diluted share—an increase of 11%, compared to 1Q13. The management said, “Our performance in the U.S. and across emerging markets helped offset an operational decline in certain developed markets in Europe and Asia-Pacific.”

Zoetis saw a 3% operational growth in companion animal and 4% operational growth in livestock. The 3% growth in companion animal was driven by a strong performance in Latin American countries due to the continuing increase in the medicalization rate and the positive impact of its new canine product Apoquel in the U.S., U.K., and Germany. Companion animal sales in the quarter were affected by the cold weather in the U.S., which reduced the number of pet owner visits to veterinarian clinics.

Revenue in the U.S. was $479 million—an increase of 6% compared to 1Q13. In livestock, sales of the swine portfolio grew by 6%, tempered by the continuous spread of porcine epidemic diarrhea virus (or PEDv), especially in the U.S. Zoetis said livestock in the U.S. was positively impacted by the performance of its cattle business, which was due in part to a higher number of feedlot placements, the higher price of calves, and the cold weather that increased the demand of respiratory vaccines and antibiotics. The management said, “We are encouraged by signs of the U.S. cattle being rebuilt as the drought conditions have eased.” Poultry product sales grew across the therapeutic areas and benefited from new vaccines.

Revenue in EuAfME was $270 million—a decrease of 4% operationally compared to 1Q13. Sales of livestock products decreased 6% operationally. This was primarily driven by a decline in the U.K. associated with one-time impacts in the quarter. Zoetis saw a decline in poultry products related to regulatory issues that have been resolved; and a decline in swine products linked to reductions in the use of anti-infectives.

Revenue for Asia-Pacific’s emerging markets grew by 14%, offsetting a decline in the more developed markets. Sales of livestock products grew 7% operationally, driven primarily by sales of swine products in China and Japan, poultry products in India, and cattle products in China. Despite positive performance in Japan, New Zealand, and China, sales of companion animal products declined by 2%.

Zoetis expects revenue of between $4.65–$4.75 billion for full-year 2014. It said it continues to support the launch of new products in new markets and to expand the geographic reach and lifecycle of its portfolio.

Zoetis’ competitors include Elanco, Eli Lilly’s animal health division, and the animal health divisions of Merck & Co. and France’s Sanofi.

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