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Pet health ‘has proven to be recession resistant,’ Zoetis CFO says

Zoetis CFO Wetteny Joseph joins Yahoo Finance Live to discuss earnings and the market for pet health and spending.

Video transcript

- Our furry friends are still taking a big bite from our wallets as pet spending remains strong. Pet pharmacy maker Zoetis out with latest earnings, beating on revenue as US demand for pet treatment holds up.

Joining us now is Zoetis CFO Wetteny Joseph. Wetteny, good to see you again. It's been a while. Take us through this quarter here because you called out strengthening demand for companion animal products. And that comes at a very challenging time for the economy. Break that down for us.

WETTENY JOSEPH: Yeah, Brian. Great to be with you again. Indeed, we delivered another really strong quarter, 8% operational growth in revenue, and 9% in adjusted net income, driven by a companion animal portfolio.

And we don't see any signs of slowing down. Despite the broader uncertainty in the economic environment, pet spending and the prioritization on pet health remains very strong. And the underlying fundamentals of the industry remain strong. And we are a leader in innovation.

And so what we're seeing is continued volume growth. Our companion animal business, globally, grew 14% operationally in the quarter. And we are really continuing to launch innovation steadily across the space to take advantage of those strengths.

- Hi, Wetteny. It's Julie, here. Health, in general, whether it's personal people health, or animal health, it does tend to be relatively resistant in times of macroeconomic troubles. Are there any part of your business that you do consider to be more discretionary, that you're watching closely to see if there are any signs of waning demand?

WETTENY JOSEPH: If you look at animal health historically, it has proven to be recession resistant. And what's happened over the last number of years is that the underlying fundamentals have gotten even stronger.

The demographics of pet ownership have trended towards millennials and Gen Z and they place a higher premium on the health of their pets. And we're seeing more pets, and the adoption has tended to be in higher income households, as well. And so we do see that resiliency getting even better than past economic cycles.

If you look at our livestock business in the quarter, we were down 1%. We expected that given some generic competition for a couple of our products, and the swine market in China where prices have been, although lately they have been recovering. And we see that boding well for us as we look at the second half of our year.

So also, our business and given the chronic type medications that we have on the Rx side of our business, we see that resiliency being very firm and even on stronger ground than it's been historically.

- But aren't visits to vets under pressure here?

WETTENY JOSEPH: Interestingly, Brian, if you look at pet visits in the clinic in the US, for example, visits have actually been very strong. We are up against some very, very strong comp if you look at last year, given about 5% to 10% increase in pets during the pandemic.

Puppies and kittens need to go see the vet. And so that created a really high watermark, if you will, if you go back in the first half of last year. But as we tracked visits to the clinic over a number of years, the visits in the second quarter were the fourth highest of visits that we have on record.

So it's just a matter of the comps. What is really important is if you track the revenue for clinics in the US, revenue has been increasing on a 7% growth over the last three year, so up 20% versus pre-pandemic levels.

And that has been a much higher correlation to how we perform given the innovation that we're bringing to the market that's helping to fuel that as well. And so as we look at it, yes, the visit numbers were down in the quarter about 2.5% compared to a very, very high strong comp last year.

But they're still up versus where they were pre-pandemic levels. And given more pets and higher, again, prioritization on the health of pets, we expect that to continue to remain robust. But spending has trended, even when visits are down, revenue per visit was up about 7% in the quarter. And revenue overall is about 5% for clinics across the US.

- You talked a lot about, on the call yesterday, about a potential new generic competitor launching later this year, potentially impacting the business. What are you exactly looking for there?

WETTENY JOSEPH: Yeah, Brian, actually it's not a generic competitor. In the US, we are the only triple combination for parasiticides. So that's to protect against fleas, ticks, and heartworm. And heartworm is prevalent across the US.

We are a first mover in the US in that market. And we have really seen exceptional growth. In fact, our product grew 72% in the quarter. And it launched in 2020.

And so if you look at that market, we have been expecting competition to come. We expect that competition to come in the first half of next year. But we've been really enjoying growth as that end of the market, which is relatively new standard of care, which is an oral medication for, again, parasiticides.

And we see the expansion of that space continuing. We are seeing about 30% of the dogs that come onto our product are new to the category, meaning they had not been prescribed an oral medication for parasiticides previously.

And while we have really strong penetration across the industry, and across our large corporate accounts, we actually see significant more room to increase utilization across those.

And so even with competition, which is actually going to be driving more awareness, more direct to consumer advertising in the space, that awareness will drive more patients into the clinic, which will partially benefit us as well.

So as we expected, there will be competition. It's not a generic. It will be another brand in this category. We expect to continue to drive growth in our products. And historically, we've seen that in this space, actually.

In terms of parasiticides, historically, you've seen brands that came onto the market first while the second or third competitor has come into the market, the initial brand actually continues to grow, again, because the standard of care has shifted or is shifting patients from using collars and topicals for parasiticide protection into the oral medications, in this case, the triple combination oral medication for parasiticides.

- My dog, Sparky, we have that very medication for him at home, as it happens. Zoetis CFO Wetteny Joseph. Thanks so much for being here. Appreciate it.

WETTENY JOSEPH: Thanks for having me.