Zoetis (ZTS) Q2 2024 earnings call transcript

Steven Frank Thank you, operator. Good morning, everyone, and welcome to the Zoetis second quarter 2024 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer and Wetteny Joseph, 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 Page 2 of 17 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 US GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing, dated today, Tuesday, August 6, 2024. We also cite operational results which exclude the impact of foreign exchange.

With that, I will turn the call over to Kristin.

Kristin C. Peck Thank you, Steve, and good morning, everyone. Thank you for joining our second quarter earnings call for 2024. We had another outstanding quarter growing revenue 11% operationally, and 18% operational growth in adjusted net income. Success was fueled by strong demand for innovative products, our ability to capture and expand markets, and the dedication of our purpose-driven colleagues. Segment growth was well-balanced with 12% growth in the US, and 10% operational revenue growth internationally, even against a strong comparative quarter. Our innovative companion animal portfolio grew 12% operationally while our livestock portfolio saw 9% operational growth across species and geographies. It's been an excellent first half of 2024, growing revenue 12% operationally, highlighting that our leadership stems from both industry-leading innovation and differentiated execution.

We remain focused on our core strategy delivering consistent results for our customers, the animals in their care, and our shareholders, and our unwavering commitment to excellence has resulted in the most diverse and comprehensive animal health portfolio. We lead the industry in R&D investment bringing over 300 science-driven innovations to market including three of the top five best selling products in animal health, Apoquel, Simparica Trio and Cytopoint. With our global footprint and world class manufacturing facilities, we ensure consistent quality and on-time delivery. Our early investments in digital transformation power an exceptional customer experience while positioning us for future growth. We continuously refine our commercial strategies for effective launches and market penetration, and our powerful brand recognition, targeted direct-to-consumer campaign, experienced sales reps and medical experts help us capture new market share and win loyalty.

Our customers are at the center of everything we do, from understanding their challenges to exceeding their expectations. Scientific innovation enables us to meet their demands while creating new markets, our commercial execution allows us to defend and grow that market leadership. The animal health industry has proven essential and resilient in all types of climates, but it's also dynamic and growing, and we are well-positioned to seize the opportunity. Look no further than our revolutionary osteoarthritis pain franchise, Librela for dogs, and Solensia for cats. We are developing a market with breakthrough products that are safer and more effective while offering convenience for veterinarians and pet owners. The results speak for themselves. Globally, Librela grew 142% operationally this quarter fueled by the successful and ongoing US launch, but again, it's innovation coupled with execution.

Take Solensia for example. Despite launching in Europe three- years ago, we reported 60% operational growth this quarter. Our breakthroughs are driving increased feline clinic visits which in turn expands the total market. Page 3 of 17 We, along with veterinarians and pet owners, are excited about how these safe and efficacious products are revolutionizing first-line treatment for chronic pain in dogs and cats of all ages. Given our proven track record of building and scaling billion dollar franchises, we remain confident about the OA pain trajectory, but we don't just launch products, we cultivate them for long-term success. Our key dermatology franchise exemplifies this commitment delivering strong 18% operational growth driven by Apoquel and Apoquel Chewable along with Cytopoint.

We have transformed the management of atopic dermatitis in dogs, providing safe, effective, and convenient solutions. With over 23 million dogs treated globally and a decade of proven results, Apoquel is the world's number one prescribed oral medication for allergic itch and it is overwhelmingly endorsed by veterinarians worldwide, with approximately 90% satisfaction, reflecting the trust and confidence they place in our market-leading brands and we are still unlocking the opportunity. Today, there are approximately 20 million dogs globally with under treated or untreated pruritic itch presenting a vast untapped market. Take the US for example. We estimate that 10 million dogs are currently receiving veterinary treatment for itch while a majority or roughly 70% receive Apoquel or Cytopoint, there are 3 million dogs prescribed alternative options like steroids.

Moreover, an estimated 8 million dogs are treated with over-the-counter product or not treated at all. This highlights the potential addressable market of 11 million dogs in the US, alone, that could benefit from our safe and effective therapies. Internationally, the trend is similar with room for even more growth as dogs become increasingly medicalized, underscoring a significant global market opportunity that will fuel our ongoing growth. To solidify our leadership and win new patients we are focused on DTC marketing to raise awareness, enhance medical education to improve compliance and expanding retail partnerships. Our ability to execute extends from (08:11) Simparica franchise, which grew 22% operationally for the quarter. We have not only navigated the changing competitive landscape, but embraced new opportunities with confidence and agility.

Several key trends are fueling our growth. First, pet owner demographics are shifting. They are younger, more affluent and connected by the powerful human-animal bond. They're highly engaged and willing to invest in their pet's health and well being. Second. And Wetteny will say more on this, there's a significant channel shift aimed at meeting the evolving needs of these younger pet owners. We are making our products more accessible ensuring they are available where and when they need them. This combination is a crucial part of our growth strategy and the results are reflected in our performance. In this dynamic environment, our execution across all phases from launch to expansion to defense, sets us apart, showcasing we can introduce, sustain and grow products in a competitive market.

Our focus on innovation and execution cuts across every part of the business, to create shareholder value. In our livestock portfolio, the sale of our medicated feed additive and certain water-soluble product portfolios remains on track to close in the second half of the year. Meanwhile, we are focusing on innovative solutions for producers, including preventative, antibiotic alternatives and genetics. As the demand for healthy and sustainable animal protein continues to rise, we remain committed to supporting our livestock customers. Our dedication to meeting their needs and adapting to the evolving market conditions ensures that we are well-positioned to contribute to their success. Building on our outstanding performance this quarter, we remain confident in our ability to grow faster than the market and through competition, as reflected in our raised guidance.

While macroeconomic headwinds persist, animal health remains resilient and Zoetis' strong, operational execution and innovative diverse and durable portfolio enable us to navigate all kinds of market conditions effectively. Page 4 of 17 We further demonstrated our commitment to shareholders, and confidence in our growth trajectory with the recent announcement of a board approved $6 billion share repurchase program which Wetteny will elaborate on. The animal health landscape is evolving, and our innovations are at the forefront. And while breakthrough innovation is a cornerstone of our strategy, our success is rooted in multiple drivers of growth. We're not just launching new products, we are transforming existing ones, to unlock their full potential and better serve customer needs through lifecycle innovations.

That means taking proven therapies and developing new formulations, uses, and delivery methods maximizing their impact and reach. This translates to value created for customers and shareholders alike, by allowing us to bring critical new solutions to market faster, minimizing development risk and cost by leveraging existing safety profiles of proven products and expanding the reach of established products. Our commitment to lifecycle innovation is just one reason we are the leader in animal health. When combined with our market leadership, deep customer insights, strategic investments, and our purpose- driven colleagues, we are uniquely positioned to deliver against the four tenets of our value proposition. To grow revenues faster than the market, to invest in innovation and growth capabilities, to grow adjusted net income faster than revenue, and to return excess capital to shareholders.

Our differentiated execution and innovative diverse and durable portfolio ensures we are not just keeping pace, we are setting the pace, and redefining what's possible in animal health. With that, let me hand it off to Wetteny. Wetteny?

Wetteny Joseph Thank you, Kristin, and good morning, everyone. As you heard Kristin mention, our ability to execute on our commercial and strategic plans drove another outstanding quarter. We simultaneously executed across product launches, market expansion, and market defense to propel us to a strong first half. In the second quarter, we posted $2.4 billion in revenue, growing 8% on a reported basis and 11% operationally. Adjusted net income of $711 million grew 9% on a reported basis and 18% operationally. Quarterly growth (12:41) was driven by our innovative companion animal portfolio. Globally, OA pain mAbs posted $149 million, while Simparica franchise posted revenue of $384 million which includes $299 million from Simparica Trio, and our key dermatology franchise contributed $414 million.

Our livestock portfolio also saw strong growth with $694 million in revenue. Looking closer at our success and execution. I'd like to focus first on OA pain. As we continue to execute our US launch strategy, we remain confident in our OA pain trajectory. Based on our experience launching other billion dollar franchises, we know that first-in-class therapies require significantly more market development than lagging look-alikes. In the US, we have reached over 9,000 vets and veterinary technicians through interactive reaffirmation (13:39) sessions with our Chief Medical Officer, and industry KOLs. This is on top of the thousands of interactions our sales reps and medical teams have had on individual vet visits. These interactions ensure our customers have the tools and resources to reinforce the safety and efficacy of Librela and Solensia with pet owners.

Additionally, we are deploying capital to expand our DTC strategy. Pet owners know their pets better than anyone, and we want to help them detect the science of OA and the available treatment options. We know these therapies are improving lives based on the positive testimonials from pet owners. The positive impact and reception of Librela are reflected in the market adoption. In the US, we see record Page 5 of 17 penetration with over 80% of clinics now purchasing the product. No products in our history has penetrated this quickly. Reorder rates are approaching 90% which is a leading indicator of customer satisfaction. In Europe, treatment is expanding to moderate and mild OA cases that were largely untreated, now making up more than 65% of total cases.

This is just a glimpse into what we expect in the US over time, as Librela continues to expand the addressable market and gain market share. Despite our early success, we still have significant room for continued expansion. Our focus on execution doesn't stop after we launch a product. After more than a decade of exceptional safety and efficacy, our key dermatology franchise is still a critical performance driver growing 18% operationally in the quarter. In the US, derm clinic visits are increasing driving volume growth across both Apoquel and Cytopoint. The franchise, including Apoquel, Apoquel Chewable and Cytopoint, is designed to cover multiple needs across different dermatological indications and their different methods of administration suit any vet or pet owner preference.

Our derm products also address the full spectrum of pruritic cases providing relief from acute and seasonal conditions as well as treatment for dogs with life-long chronic conditions which make up the majority of total derm revenue. And vets and pet owners are extremely happy with the results. In global studies, veterinarians report approximately 90% satisfaction with Apoquel safety and efficacy. Our comprehensive portfolio meets vets needs and the needs of their patients and we are confident in our ability to grow revenue even in the face of competition. That confidence is fueled by the significant opportunities for market expansion that Kristin mentioned earlier.

First, we are targeting the 8 million dogs in the US with atopic dermatitis that are either untreated or not treated by a vet through direct-to-consumer advertising helping to educate pet owners on the signs of an itchy dog and our prescription treatment options. Additionally, in the US, there are 3 million dogs who are prescribed alternative products like steroids. We are confident in our ability to win these new customers through our proven safety and efficacy. We are also drawing more doses from the same patient base due to trends within pet healthcare, including preference for injectable therapies, chewable formulations and alternative channel growth increasing compliance.

Lastly, there are many markets where our key dermatology franchise is in the early stages of maturity. These markets should provide long-term growth trajectory and our outstanding international growth highlights this momentum. Our excellence in execution on our OA pain launches and key dermatology expansion have contributed to a great first half of the year.

Now let's move on to our segment results. US revenue grew 12% in the quarter with companion animal growing 13% and livestock posting 11% growth. For the first time, sales across our US companion animal portfolio surpassed $1 billion in the quarter. Performance was driven by our OA pain mAbs, Simparica Trio, and our key dermatology franchise. Portfolio growth was largely driven by trends in retail and home delivery reflecting the evolution of pet owner preference for convenience and increased compliance on dispensing OA medications. In the clinic, usage of injectable therapeutic treatment is growing to offset the alternative channel shift. Page 6 of 17 Our OA pain mAbs, Librela, and Solensia, posted a combined $71 million in US sales in Q2.

Librela generated $53 million primarily on increased clinic utilization (18:25) As I mentioned to date, market adoption is higher than any product in our history, thus, we are confident in our trajectory. Solensia posted $18 million in revenue. We continue to be pleased with what we are seeing in the feline OA space. As Kristin mentioned we see positive trends in feline OA visits which have nearly doubled since our launch almost two years ago. Simparica Trio posted US growth of 19% in the quarter on $254 million in revenue. We are entering our second year with competition in the triple-combination parasiticide market, and we continue to execute on not just defending our leadership position with Trio but growing it.

Again, we do not take a launch and done mentality. We posted 26% moving average total growth over the past 12 months. The majority of which was in a competitive market highlighting not only our first mover advantage but also the stickiness of our customer base.

Lastly, in the vet channel, Simparica Trio is winning with puppies, a leading indicator of future performance. In the absence of meaningful differentiation, vets and pet owners are reluctant to switch from a safe, efficacious product. Key dermatology product sales in the US were $283 million for the quarter, growing 17%. Apoquel was the largest growth driver with Apoquel Chewable benefiting from increased conversion. Cytopoint growth continues to be driven by vet and pet owner preference for injectable solutions, especially for chronic cases. Earlier, Kristin alluded to shifting pet owner demographics in the evolving landscape. Much of our success with Simparica Trio and Apoquel has been bolstered by our ability to win in the growing retail and home delivery space.

The convenience of these channels for self-administered products are increasingly popular with pet owners and we are committed to making our products available where our customers need them. Currently, Simparica Trio is the best-selling prescription product in the retail channel and Apoquel is second. We estimate that over 20% of Trio sales and one-third of Apoquel sales now come via the retail channel. Additionally, the alternative channel growth rate for both Trio and Apoquel exceeded overall growth rate for these products this quarter. Growing pet owner preference for alternative channel convenience has led to a decline in product-only clinic visits. This is why visits are not the best indicator of our performance, given we have consistently grown volume in an evolving landscape.

Our US companion animal diagnostics portfolio grew 5% in the quarter, returning to growth after Q1 distributor inventory work downs (21:23) following our channel strategy change. US livestock had a strong quarter growing 11% driven primarily from the timing of supply on Ceftiofur which had a soft comparable period last year.

Moving on to our international segment, revenue grew 4% on a reported basis and 10% excluding the impact of foreign exchange. Companion animal grew 12% operationally and livestock grew 8% operationally. Our international companion animal portfolio growth was driven by Simparica, key dermatology and OA pain franchises partially offset by impacts in China. Our international Simparica franchise grew 35% operationally. Growth was driven by Simparica growing 38% operationally, to $59 million in sales in the quarter. We continue to see increased use in Latin America and Eastern Europe as well as price benefits in high inflationary markets. Simparica Trio grew 31% operationally on $45 million in sales, benefiting from key account growth in Europe, continuing focus on DTC and the positive impact of our recent launch in China.

Page 7 of 17 Our key dermatology franchise grew 19% operationally in the quarter, posting $131 million in sales. We saw double-digit growth across most of our major markets driven by higher compliance, and new patients. Growth was partially offset by headwinds in Japan, due to pre-price buy-ins in Q1. As we highlighted earlier, we continue to see significant opportunity for growth. Many international markets are in the early stages of market development with significant runway for growth. Internationally, our OA pain mAbs grew 35% operationally posting $79 million in combined revenue. International Librela sales were $63 million growing 32% operationally. As we highlighted last quarter, we have lapped the launches in our significant international markets, which occurred in Q2 of 2023.

Solensia sales were $16 million growing 49% operationally. Our international companion animal diagnostics portfolio grew 15% operationally with strong performance across much of Asia and Europe. International companion animal growth was partially offset by expected declines in China driven by Revolution franchise. International livestock grew 8% operationally in the quarter driven by price increases primarily in cattle and poultry in high inflationary markets. We saw strong growth in our fish portfolio this quarter, with contributions from price and volume, driven by strong demand for vaccines in Norway. Growth in price and fish was partially offset by volume declines in most of our other livestock species, due to a challenging comparable quarter, as well as the impact of unfavorable rotations. As expected, the economic challenges in China persist, putting pressure on certain companion animal products as well as livestock, especially swine.

Consistent with what we have said for several quarters, the impact on our growth is expected to moderate late in the year, but continued headwinds are expected throughout the year, across companion animal and livestock. Fiscal discipline across the P&L is one of the things that unlocks successful execution. As we move on to some of the highlights, we wanted to reaffirm our continued commitment to reinvesting in our business and our confidence in the returns we see from those investments. Adjusted gross margins of 71.7% declined 70 basis points on a reported basis. Foreign exchange had an unfavorable impact of 130 basis points. Excluding FX, we saw higher margins due to price increases, favorable mix and lower freight costs, partially offset by higher manufacturing costs especially in high inflationary markets.

Adjusted operating expenses increased 9% operationally, contributing to this growth was SG&A increases of 7% operationally and 17% operational growth in R&D. Improvements in operational gross margin and prudent expense growth contributed to adjusted net income which grew 18% operationally. Adjusted diluted EPS grew 20% operationally for the quarter.

Lastly, I want to highlight our share repurchase program. In the quarter, we repurchased a record high $533 million in shares. Additionally, on August 1, we announced that we received board approval for a new $6 billion share repurchase program, our largest program to date. The shares are expected to be repurchased over a multiyear period of up to four years and the program can be canceled at any time. The company's previous $3.5 billion share repurchase program which was approved in December 2021 is expected to be completed this year. This commitment reflects continued confidence in our ability to return value to shareholders. Before moving to guidance, an update on the planned divestiture of our medicated feed additive portfolio.

As Kristin mentioned, we are expecting this divestiture to close sometime in the second half. Our current guidance is not reflective of this sale and may be adjusted subsequent to the close of the deal. As we stated in our April announcement, this portfolio generated approximately $400 million in revenue in 2023 with roughly linear seasonality. Page 8 of 17 Now moving on to guidance for full year 2024. Our outstanding first half performance, particularly in our Simparica and key dermatology franchises demonstrated our ability to drive growth through execution across our business and gives us confidence going forward. Thus, we are raising our 2024 guidance provided during May's earnings call. Please note that guidance reflects foreign exchange rates of late July.

For the year, we expect revenue between $9.1 billion and $9.25 billion, a range of 9% to 11% operational growth. As we stated earlier, our OA pain trajectory remains on track. Our expectations for Librela for the year remain unchanged. We now expect adjusted net income to be in the range of $2.64 billion to $2.69 billion, representing operational growth of 13.5% to 15.5%. We are maintaining our commitment to grow adjusted net income faster than revenue over the long term while increasing our investment in demand generating activities such as direct-to-consumer advertising. While we saw exceptional leverage this quarter, subsequent quarters may not have the same level of operating leverage due to the optimal timing of investments.

Finally, we expect adjusted diluted EPS to be in the range of $5.78 to $5.88 and reported diluted EPS to be in the range of $5.35 to $5.45. In closing before we go to Q&A, the strength and diversity of our portfolio and our relationships as well as our ability to execute on our strategic vision continually allows us to outperform our peers. We have the utmost confidence in our best-in-class portfolio and colleagues to continue to set the benchmark moving forward.

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

Answer – Wetteny Joseph: Sure, Jon. I'll take the first part of the question and then Kristin will address the second one. Look, if you look at the start we've had for the year it's really been an outstanding start. We've seen demand across our innovative products and clearly a balanced growth picture when you look at the quarter with the US growing 12%, international growing 10%. We saw companion animal growth at 12% and livestock 9%. To get to your point around price and volume, I will cover the quarter but then I'll remind you of what the first half of the year looks like and what we're anticipating for the balance of the year. The quarter had about 8% Page 9 of 17 price and 3% volume.

Now if you look at the price contributions, you have about 2 points coming in from Argentina similar to the first quarter and as we anticipated in the second quarter and that leaves you with roughly 6 points of price and 3 points of volume. Now I will tell you on a year-to-date basis given where the comps were, versus the prior year, you actually have a very balanced picture between price and volume. On a year-to-date basis we've grown 12% operationally at the top line. Separating out Argentina, you have 5% price and 5% volume, and that's roughly the balance we expect for the full year. Just a little bit of nuance on a year-over-year basis based on the comps that's driving much-higher volume in Q1 and much-higher pricing in Q2.

The last point I'll make is Trio had another outstanding quarter, and we're getting better price realization from more targeted promotions. In fact, we did not run promotions in the second quarter compared to the last year where we did run the promotion, so that has a little bit of dynamic also playing out on the price picture if you follow that. Again, very pleased with the performance overall. Stronger price contribution coming from that. We expect roughly balanced price volume picture for the year.

Answer – Kristin C. Peck: And, Jon, I'll take your second question. Look, if you saw the quarter where we drew derm by 18%, the Simparica franchise at 22%, and pain at 142%, clearly, the DTC is having a very positive effect on ROI on each of these. We actually think about it in a much more detailed way than what you were mentioning. We don't just look at it by brand. We look at it by channel, so what is connected TV, TV, digital and there's different ROIs for different. I mean some of these are building markets as you said. Some of these are just more consumer oriented. If you look at parasiticides, consumers really do drive a lot of that spend themselves versus derm and pain where you have both the consumer and the veterinary involved, so we look at it both by product, we look at it seasonality.

And I would say, we're investing significantly across all three where we really believe both there's an opportunity to drive compliance and as well as an opportunity to grow these markets. So we're aggressively investing across each, but we look at it in a very detailed level to make sure that ROI in any given channel we're investing at any given time of the year makes the most sense.

Answer – Kristin C. Peck: Thanks. I'll take the first question, I'll let Wetteny take the second question on competition across all three. Obviously, very, very pleased with Librela's growth in quarter at 142%. What Page 10 of 17 we're really seeing is it is fundamentally improving the quality of life for dogs with OA pain. We've seen a really positive reception. They find it safe and efficacious and it's really making a real difference. To date we have about 18 million doses. We're very pleased with the penetration to date in the US which is 80%, with the reorder rate at 86%, so to your point on quarter-over-quarter growth, continuing to see and expect the rest of the year to see significant quarter-over-quarter growth in this product.

As we mentioned on last call, we're always in ongoing discussions with the FDA. Certainly in the first year after launch, as they're doing their post-marketing reviews we have been in those. We have had dialogue with them about possible changes to the Librela label as we've had in many of the other markets we've operated in. In those markets, as you look at it, we continue to see positive trends quarter over quarter in Europe, after label changes we had in both the EU and the UK in both 2022 and 2023. So these are label changes, as you know, are not uncommon as we talked about last quarter. So we're really excited to see the growth we continue to see in Librela and really the excitement and positive stories from pet owners.

So Wetteny do you want to take the second question?

Answer – Wetteny Joseph: Sure. Look, when we look at the performance so far, it's been phenomenal across derm and Trio for the first half of the year as well as strong contributions obviously coming from our OA pain franchise. You heard the numbers coming in from Librela and Solensia both in the US with the launch as well as internationally. When we think about the competitive landscape, look, clearly, given what we're seeing and what we anticipate continuing just momentum in the business, we're raising guidance based on the core business. I would say derm in particular, when you look at the competitive landscape, we've raised our expectations on derm to double-digits. We're seeing high single-digits previously. When we look at Trio, the update isn't really meaningful.

We were anticipating through the late in the year competitive launch. Anyway it's a third to come to market, et cetera so not any meaningful impact here in terms of how we think about the guidance.

Answer – Kristin C. Peck: Thanks, Mike. I'll take the second question on the long-term opportunity and then I'll let Wetteny cover anything that I missed as well as cover all the dynamics you're asking for specifically Page 11 of 17 around chewable. To your point, our derm portfolio has been on the market for 11 years and we posted 18% growth in the quarter, so I would say that there's a significant opportunity to continue to expand the market. I appreciate your comment on the slides, we did try to add slides this quarter to try to bring to life some of the stories that we're talking about, again just some of those numbers out there for you. And specifically what we were trying to address in that is the significant opportunity where we see two drivers really of the future growth.

One is around compliance and we're seeing really strong growth here around compliance. We can increase compliance through retail and auto ship. I even think chewable which Wetteny will talk about will help drive compliance, so we think there's a significant opportunity for more weeks and more months on therapy. And I also think there's a big opportunity to continue to expand the market. And building on what Wetteny said in his prepared remarks, there's 3 million dog owners right now that are prescribed other products such as steroids that could be moved to our product, and then there's 8 million dogs with OA who might be using shampoos or things like that, over-the-counter treatment or might not be using anything at all.

We see those as significant opportunities to continue to grow the market. That's 11 million dogs in the US alone. And as I mentioned in my remarks, internationally we see the same key drivers and same opportunities, but with an additional one which is that there's still many dogs yet to be medicalized in international, and as those dogs become more medicalized across many countries in China, Brazil, et cetera, we see a significant opportunity there. But I knew you asked a number of questions on Chewable which I'll let Wetteny build on as well as anything else he saw in derm he wanted to mention.

Answer – Wetteny Joseph: Look, when I look at the derm picture, Mike, I'm very excited about how we're thoughtfully targeting these sub-parts of the business beyond continuing to educate pet owners, and so on, which is already benefiting us in terms of the growth we're continuing to see in this product 11 years later. So clearly we are penetrating those areas, and we think there is some real ways we can smartly and thoughtfully target here, above the about 7 million that we are already treating with our products, there's 11 million that we can go after here in the US alone, and Kristin just touched on that. And so won't go into more detail on that, but very excited about how we're doing that there.

In terms of chew, look this is largely conversion from Apoquel, so I wouldn't say that it is necessarily contributing to overall growth but important part of our strategy as we look ahead. We've seen the conversion rates outside the US, for example, in those markets in Europe, we've been in for, I think, about two and a half or so years now. Those are now about 50% penetration. In the US, as we ended the quarter we're approaching about a 25% (40:44) conversion. I think we've crossed that since, so we're in that ballpark, so clearly meaningfully converting from Apoquel, which again, is an important part of our business. And we think could long-term contribute to overall growth given the ease-of-use and preference to pet owners et cetera.

Answer – Wetteny Joseph: Sure. Look, first of all, let me just cover one last piece that I didn't cover on the last call, which was the contributions into the stocking around chew and then I will get Brandon to your question around the guidance, and what went into it, in terms of puts and takes and top versus bottom. First of all, there's very little contribution in terms of net inventory into distribution on chew. It's about $4 million, I'll call it 1 percentage point out of the 18% we talked about on key derm globally, so not meaningful at all. Now to your point around the guidance. Look we raised the midpoint of our guidance about 50 basis points, the same on the bottom.

We are still very much committed and confident in driving operational sort of growth and expansion through the P&L. You've seen about a 450 basis points separation between top line and bottom line, so clearly, continuing to demonstrate our core value proposition to grow the bottom line faster than the top line. I think what you're seeing here in terms of the guide while it's the same raise at top and bottom in terms of basis points is because we see an opportunity to invest in the business in areas that will drive growth as we exit the year and enter into next year, and as you said, continuously, we will make those investments as we see those opportunities, but still, again, sticking to our commitment to driving top and bottom.

Now I think as you look at the back half of the year, I will note a couple of things. If you remember last year, in the fourth quarter, we have basically an easier comp particularly in terms of bottom line in the fourth quarter but these investments will impact the operational leverage you'll see in the third quarter, so expect that to be not at the levels that you're seeing in Q2 here as you math from the guidance and the implications in the back half. So clearly back half looks like about a 9% topline growth there at the top, leverage on the back half but more heavily weighted towards Q4 versus Q3 in terms of that leverage.

Answer – Wetteny Joseph: Sure. I'll cover both here. Look, really when you look at the conversion strategy, we have with Apoquel Chewable versus Apoquel, we talk about the key derm franchise here versus breaking them out here, so we have 18% growth in key derm. If you look at both Apoquel, the Apoquel franchise, as well as Cytopoint with double-digit growth in the quarter, again, we continue to emphasize the combination of Apoquel and Apoquel Chewable versus breaking them out, which is the reason that you heard the commentary from us as you did. In terms of patent protection, look, there are various patents that cover the product both across the active ingredient as well as the formulation and dosing regimen, so they do vary, but overall if you look at the franchise we're looking at patents that extend out to 2031.

More details are available in the 10-K, if you want to pull that up from last year and of course this year's 10-K as well will cover that.

Answer – Wetteny Joseph: So maybe I'll take a stab at the first one, Balaji. Look, I think you've seen that spend in animal health, (46:05) pet owners is a doable spend and they see their pet health as essential. We've seen that time and time again, and every survey we've done given the human-animal bond, et cetera, shows that. I think when you look at pet health spend, 86% of pet owners are saying that they would spend whatever it takes if their pet needed extensive veterinary care. We've done market studies as well that demonstrate if pet owners had a 20% reduction in their budget they would still spend the same on their pet health. So clearly underscoring this importance in terms of the importance of the pet health as a member of the family of pet owners and we see that show up in terms of our numbers.

I don't know if I have a view in terms of how that differentiates between therapeutics versus diagnostics. Clearly as we look at the picture today, you continue to see (46:55) strong volume growth in our business even as you see very robust price as well, so clearly, we see that opportunity to continue to drive the business. That way we are seeing some price realization, so it's not priced to the (46:55) pet owners, price into our channels in terms of vet clinics et cetera, but you see our ability to continue to take price and still drive volume in the business, given the innovative solutions we're bringing that are addressing chronic conditions for pet owners that they really, really care about.

So we think that there's continued room to continue to do that. In terms of the fish vaccine, I can't speak to the specific vaccine you talked about. Clearly we saw 20% growth in our fish portfolio this quarter. This is largely driven by demand for vaccines in Norway. Very important market for us, so we've seen both price and volume there, perhaps we'll take offline on that specific one that you referenced.

Page 14 of 17 Answer – Kristin C. Peck: Sure. I'll take your MFA question and then I'll let Wetteny take the volumes and things like that across wellness and vaccines. If you think about our medicated feed additive business as you saw, it was integrated into some of our portfolio contracts but the majority of those contracts and the majority of the value as Wetteny outlined globally, our MFA sales last year in 2023 were only $400 million, so it's not inconsequential but it is not a material way of the way we negotiate. Most of our negotiations across portfolio are in more innovative products that are essential to our customers. So no, we are not concerned in livestock as we sell that business and our ability to continue to leverage our portfolio to provide the best value for our customers, so we're committed to continuing to do that.

And I'll let Wetteny take the second question sort of on the wellness.

Answer – Wetteny Joseph: Look, David, I think your question on wellness in terms of what's happening across the core portfolio brands versus the rest, I think at the heart of that question is really what's happening around visits which we have continuously talked about that overall visits are not a good indicator for our business and you see volume growth across our pet care business each quarter even when overall visits are down. Now, to get to your point, if you look at Apoquel, Cytopoint, the key derm franchise, if you look at Trio and Simparica franchise, and OA pain, those are all seeing increased volume across the business. I think if you then say what's happened to the rest of the portfolio, it contributed about 2 percentage points to our growth.

And that's largely the price in this quarter but that's (50:15) just the dynamic versus the prior-year in terms of both timing of when we had some vaccine availability in the prior-year that added to supply last year and therefore it's a comp item, if you will, and then China has its impact in terms of (50:30) the rest of the portfolio, so it's a little bit more price versus volume in the quarter, but overall typically we see about one to two point contribution to growth from the rest of the portfolio, and that's what we're seeing this year. Again, I would underscore that we are seeing increased volumes across pet care regardless of the overall visit picture, and I think that's really what's important for us (50:49) business.

Answer – Kristin C. Peck: Thanks. I'll start and let's see if Wetteny wants to build anything here. I think what you're seeing is you might see an impact in lower spending in pet discretionary but we're continuing to see consumer see pet medical care as very essential and they are willing to spend. So as you look in the quarter we saw about a 4% growth of revenue in the clinic, about 6.2 (52:09) revenue per visit growth. I mean, obviously you're referencing the decline in overall clinic visits. Page 15 of 17 But if you look at our US pet care numbers, we outpaced significantly, overall in the US, with 13% growth in our companion animal business, so we're seeing very strong demand for our products.

These pet owners are young, they're affluent. They see the pets as essential member of their family and they are continuing to spend to keep their pets healthy and happy. So we are very optimistic if we look to the rest of this year and confident in the guidance that Wetteny provided and confident honestly if we look into 2025 that the consumer when it comes to essential veterinary care still is willing to spend. We've done multiple studies that we've referenced before. 86% of pet owners would spend "whatever it takes" to take care of their pet and even when faced with a 20% reduction in their income, they would not change what they spend to take care of their pets.

Answer – Wetteny Joseph: Sure, Chris. Thanks for the question. Look, if you look at the growth, I mentioned earlier on the call, given the competitive dynamics, and quite frankly just the strength of our growth as we continue to expand the market, 18% growth in the second quarter, we are raising our expectations for key derm franchise. We said last quarter it would be high single-digits. We're now seeing double-digit growth for 2025. Look on your question, I'll start on the black box warning and turn it over to Kristin to add any additional points. Clearly, a black box warning is the most serious warning that the FDA will have on a product, and when faced against a product that does not have one, also it's been in the market for 11 years, over 23 million dogs have been treated with our Apoquel product, the satisfaction level is being above 90% or around 90%, both on safety and efficacy, that becomes a tall order.

So clearly, we've talked about our excitements, quite frankly around still unmet need out there in terms of undertreated and untreated that we are targeting, regardless of competition because we believe on offense here in terms of growing, expanding use of our products is the best move regardless of the competition, but clearly, will position us well versus a product that has a black box label.

Answer – Kristin C. Peck: The only thing I'd add there is I think what's really exciting about Apoquel is that you don't have to trade-off safety and efficacy there. It can be used across all durations of therapy both acute, seasonal and chronic. I think the chewable really provides differentiation especially at the consumer level. You don't have to worry about vaccine status and it works very, very quickly, so I think that's what also gives us optimism in our potential to continue to grow this franchise.

Answer – Kristin C. Peck: Sure. First, on your question on the EU Commission investigation, it actually has to do with an experimental compound that was part of the Nexvet acquisition which was about seven years ago. We continue to believe our decision to stop the experimental compound was sound, rigorous and lawful. And we're confident the concerns will be unfounded when they finish their investigation with regards to that. You were asking me how we're doing in international with regards to Librela. Right now, about 65% of the cases are now mild-to-moderate, which we think is significant progress. This has been a big focus of ours as we mentioned on the previous calls. And with regard to your last point, I think on vet visits, we don't really have really good detailed information internationally on vet visits, so there's not great information.

It ranges by market to market and there's not great sources, so I don't have any specifics I can share there.

Answer – Wetteny Joseph: (57:50) where we saw 9% growth in our livestock portfolio. As you've said, continuously, livestock tends to grow the market somewhere between 2% and 4% typically. This year we are seeing increased price, particularly in those hyperinflationary markets like Argentina for example. And so we would expect livestock as a market to grow towards the higher end of that range and we believe we will follow that range as well if you look at what we would expect in our results. I think when you see high single-digit growth rates like this, sometimes it's the comp, for example, in the US, Ceftiofur had an easier comp versus prior-year, so you'll see an uptick in that but overall we expect livestock to be in that 2% to 4% range, perhaps a touch above that in this current environment given the pricing environment on those hyperinflationary markets.

Thanks, everybody, for joining the call today and for your questions. Our ability to seamlessly integrate innovation and execution resulted in what I believe is an outstanding second quarter and first half of 2024. It led us to raise our guidance and we are very excited about the continued momentum for the rest of the year. I think we've clearly demonstrated our ability to generate groundbreaking ideas and translate those into tangible results. We are laser-focused on our strategy to ensure we remain at the forefront of the industry. I believe our diverse and durable portfolio of trusted and best-in-class products positions us well to Page 17 of 17 capitalize on the emerging opportunities and to really redefine how animals are cared for, for the long-term, and finally, I want to express my heart-felt gratitude to all of our dedicated colleagues across the globe.

We recently celebrated Purpose Month across our teams and geographies highlighting how we bring our purpose to life everyday with our customers, our communities and each other and their passion for nurturing the world and humankind by advancing care for animals is truly inspiring. Your hard work and commitment are the driving force behind our success, and I want to thank you for everything that you do and I want to thank all of you for joining us today. Have a great day.