Q4 2020 Zoetis Inc Earnings Call
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Welcome to the fourth quarter and full year 2020 financial results conference call and webcast for here with us.
Leading the call today, you'd see Frank Vice President of Investor Relations for go with Us.
Presentation materials and additional financial tables are currently posted on the Investor Relations section of the let us they'll come from the presentation slides can be made us by us for New York and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours. After the conclusion of this call.
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Thank you good morning, everyone and welcome to the day, whether its fourth quarter and full year 2020 earnings call I'm joined today by Kristin Peck, 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.
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 statement 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.
Remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles for U S. GAAP a reconciliation of these non-GAAP financial measures for the most directly comparable us GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K.
Filing David Today February 16th 2021, we also cite operational results, which exclude the impact of foreign exchange and with that I will turn the call over to Kristin.
Thank you Steve Good morning, everyone I Hope you and your loved ones are all staying healthy.
As we all know we're still experiencing hard times in many regions as Covid cases continue and new variance of the virus emerged.
I hope you share my optimism that with product for vaccinations and continue to hear us the safety protocols better days are ahead.
The year 2020 will be remembered for COVID-19, I presume it Paul.
Also reaffirm the resilience of our business the essential nature of animal health and the agility and dedication of our colleagues in the face of industry and personal challenges.
Throughout the year, we successfully ensured colleagues safety and maintain reliable supply for our customer we kept driving innovation and strengthening our diverse portfolio of 13, blockbusters and more than 300 product lines across eight species and seven major product categories. We successfully launched our triple combination parasiticide.
I would compare for trio, we also achieved approvals for the first ever long acting monoclonal antibodies for osteoarthritis pain in dogs, and cats with Rob relative authorization for dogs from the European Union and several other markets and Celesio first authorization for cash and Switzerland. We also continued to build on our vaccine portfolio.
In livestock with the approval of our circle, Max <unk> swine vaccine and the European Union and in poultry, we continued advancing our recombinant factor a vaccine with the approval of Paul back from <unk> to HPT IBD in the U S.
Meanwhile, in diagnostics, we successfully launched <unk> a breakthrough platform using cloud based artificial intelligence for veterinary clinics, we were able to do all of this while staying anchor to our purpose and advancing the five long term priorities that I set out at the beginning of the year, including sustainability will remain important.
[noise] progress and our ESG programs and metric reporting we look forward to share our long term ESG goals in the coming weeks and finally, we delivered financial results for 2020 that were in line with the guidance. We provided last February before the impact of the global pandemic with known.
For the full year, we generated 9% operational growth in revenue primarily based on new products in our companion animal business. The continued strength of our key dermatology portfolio and growth in China.
As part of our long term value proposition, we once again grew revenues faster than the anticipated growth for 2020.
And faster than historical industry rates of 4% to 6%.
As part of our value proposition. We also delivered on growing our adjusted net income faster than revenue for the full year, we delivered operational growth of 10% and adjusted net income or adapting our operations for the pandemic and continuing investments in our pipeline and new product launches.
We generated strong fourth quarter results, which Glenn will discuss in a minute and these performance trends give us confidence in our growth drivers and strong momentum for 2021.
We expect to continue growing revenue faster than the market in 2021, driven by ongoing strength in pet care continued expansion in markets outside the us most notably China and acceleration of our diagnostics portfolio penetration, we're guiding to operational growth of 9% to 11% in revenue for full year 2021.
Growth expectations for the companion animal market are in the mid single digits, and we expect us to grow significantly faster than that based on the continued uptake of <unk> trio the strength of our key dermatology portfolio and the launch of monoclonal antibodies in markets outside the us Paul.
<unk> pet care trends during the pandemic based on increased adoption and people spending more time, Inc.
And with their pets should continue driving market growth in the near term data in the US shows visits to veterinary clinics have rebounded and the average revenue per visit has continued to increase.
Over the long term, we see these trends moderating as adoption rates normalize and people eventually return to the workplace the specialty care regimens and chronic care treatments that began in the pandemic should continue and our innovative portfolio across dermatology parasiticide pain vaccines and diagnostics had us well.
<unk> positioned for continued growth and capturing share as these shifts occur.
In terms of livestock market, we expect low single digit market growth in 2021 as the impact from COVID-19 will still be felt in a number of products experienced loss of exclusivity. We expect the weighted to grow in line with the market even as we faced increased headwinds from generic competition for <unk>, our leading anti.
<unk> product.
We are confident we can leverage our lifecycle innovation strategies together with the overall diversity of our livestock portfolio, including swine product sales in China to help us address the loss of exclusivity for Jackson and maintained livestock growth that will support our 2021 guidance longer term, we will continue to invest in livestock innovations and.
Data driven animal agricultural solutions.
As we continue through 2021, we will be building on the progress against our five priorities.
Driving innovative growth enhancing customer experience, leading in digital and data analytics cultivating a high performing organization and championing a healthier more sustainable future.
Our investment plans and focus on growth for 2021 include continuing this except for longer compared for trio in the us and other markets as well as the ongoing adoption of other new Parasiticide Revolution, plus and for heart 12.
Driving growth in dermatology for the increased use of direct to consumer advertising and disease awareness campaigns in the U S and globally. Our focus remains on growing this market and increasing customer loyalty to our innovative treatments, which we expect to help us top $1 billion in annual sales for the first time.
As noted earlier, we will be investing in the launch of the first monoclonal antibodies for osteoarthritis pain in dogs and cats in Europe in the first half of 2021 and advancing the regulatory process in the U S and other markets.
We remain confident in the eventual U S approval of these products based on the safety and efficacy data. We submitted at this point. We believe it is unlikely we will receive approvals for Celesio orla relative in the US in 2021, we continue to work through regulatory reviews and manufacturing inspections with the FDA and we will continue to keep you up.
<unk> on this process on future calls.
And finally, we're continuing our development of digital and data solutions that will support more individualized animal care and more efficient and sustainable operations for producers.
In conclusion, I'm incredibly proud of what our people accomplished in the face of such uncertainty during 2020 and it gives me great confidence in our continued success and full year guidance for 2021.
As we navigate through recovery from the global pandemic and capitalize on the growth opportunities. We see ahead by optimism comes from what drove us over the last year.
The resilience and essential nature of the animal health industry, the diversity innovation and market leadership of our portfolio and the agility and passion of our colleagues for face any challenge now let me hand, it off for Glenn who will speak more about our fourth quarter results and guidance for the full year 2021.
Thank you Kristen and good morning, everyone. We had another exceptional year with revenue of $6 7 billion in.
And adjusted net income of $1 8 billion.
Both exceeding the high end of November full year guidance range.
Full year revenue grew 9% operationally and 7% on a reported basis with adjusted net income increasing 10% operationally and 5% on a reported basis.
Going deeper into the numbers price contributed 2% to full year operational revenue growth with volume contributing 7%.
Volume growth consisted of 3% from new products, 3% from key dermatology products and 1% from acquisitions with other in line products plus for the year.
We again saw broad based revenue growth with the us growing 11% and international growing 7% operations.
The innovation, we brought to the market and the diversity of our portfolio was key to our strong performance as companion animal grew 17%, while livestock was flat on a year over year basis.
Performance in companion animal was led by our parasiticide portfolio bolstered by the launches from <unk> trio, which generated revenue of $170 million.
This added approximately $150 million of incremental revenue and exceeded our expectations set prior to the pandemic.
Sales of <unk> also grew double digits for the year with operational revenue growth of 16%.
Our key dermatology portfolio demonstrated continued strength in 2020, growing 23% operationally generating revenue of $925 million and increasing more than $170 million versus prior year.
The COVID-19 pandemic created a difficult market environment for livestock. However, we are encouraged by the resiliency displayed in 2020.
We remain optimistic that global livestock will return to modest growth in 2021 as the recovery from African swine fever in China continues and consumption patterns normalize.
Operational growth in adjusted net income of 10% was driven mainly by strong revenue growth and operating margin expansion.
Now moving on to our Q4 financial results, where we posted another strong quarter with revenue of $1 8 billion.
Representing an increase of 9% operationally and 8% reported.
Adjusted net income of $438 million is an increase of 3% operationally and flat on a reported basis.
Operational revenue grew 9% with 2% from price and 7% from volume.
Volume growth of 7% consisted of 4% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 1% from other in line products.
Companion animal products led the way in terms of species growth growing 25% operationally, while livestock declined 5% operationally in the quarter.
Companion animal Parasiticide grew 52% in the quarter gaining market share in the us of more than 7% when the flea tick and heartworm segment.
Versus the same period in the prior year.
This includes the continued adoption of <unk>, which generated sales of $60 million in Q4.
Our key dermatology products <unk> cider point again had significant global growth in the quarter with $257 million of revenue, representing 27% operational growth versus an extremely difficult comparative period in which <unk> grew 29% for the fourth quarter of last year.
Our diagnostics portfolio again made positive contributions to revenue with reference lab expansion and double digit growth in consumable and instrument revenue.
The recovery in wellness visits continued to be a catalyst for growth following the slowdown from social distancing restrictions earlier in the year.
As we noted on our previous earnings call. The early for cattle run for the portion of fourth quarter sales into the third quarter, leading to weaker quarter in cattle than we would typically expect.
This was the primary driver of the 5% operational decline in livestock for the fourth quarter.
For the remainder of the livestock portfolio slowing posted the second consecutive quarter of growth with the herd rebuild continuing key accounts as the market recovers from African swine fever in China.
Our agriculture business grew high single digits in the quarter and along with swine, partially offset the decline in cattle and poultry.
Now moving on to revenue growth by segment for the quarter.
U S revenue grew 11% with companion animal products growing 30% and livestock sales declining by 15%.
For companion animal the positive trends at the vet clinic continued in Q4 with patient visits up 2% and revenue per visit increased by 13%.
Companion animal growth in the quarter was driven by sales of our Sunpower for franchise as well as key dermatology products.
We maintained an increased investment in direct to consumer advertising in both therapeutic areas and continue to see a good return on that investment.
<unk> performed well again in the quarter with sales of $56 million, we remain extremely encouraged for the future growth of our product and the growth of the overall market segment as a material portion of trio sales came from new patients to the category.
Key dermatology sales were $176 million for the quarter growing 32% with significant growth for apical inside a point.
Our investments to support the franchise have been instrumental in driving more patients into the clinics.
Companion animal diagnostic sales increased 22% in the quarter as a result of reference lab expansion and growth in point of care instruments and consumables.
U S livestock declined 15% in the quarter, driven primarily by Tuttle, which had a portion of Q4 sales pulled into the third quarter as a result of the earlier movement from pass through to Piedmont.
The remaining species declined as well with COVID-19, and pricing pressure negatively impacting us wine business.
Poultry declines are largely attributed to product rotation and less producer profitability, leading to reduced usage of our premium products.
To summarize U S performance innovation and return on investment once again drove exceptionally strong growth in companion animal while livestock was down in the quarter. The results were in line with our expectations.
Revenue in our international segment grew 7% operationally in the quarter companion animal revenue grew 17% operationally and livestock revenue grew 2% operationally.
Increased sales of companion animal products resulted from growth in our parasiticide portfolio vaccines and key dermatology products.
Parasiticide growth in the quarter was again driven by the Sunpower for franchise with further adoption of <unk>.
In Q4, we observed a series of favorable market trends, such as increased pet ownership and medicalization rates in Asia.
Overall companion animal grew in every major market, except Italy, and the UK, which has arguably the strictest lockdown protocols.
Companion animal diagnostics grew 16% for the quarter led by an increase in point of care consumable usage.
Swine revenue grew 14% operationally posting a third consecutive quarter of double digit growth.
Swine sales in China grew in excess of 100% for the second straight quarter.
Key accounts expanded their use of vaccines and other products as they continue to rebuild herds from smaller farms to large scale operations.
China total products grew 45% operations in the quarter and 34% operationally for 2020.
Brazil was also a significant contributor to international growth in the quarter growing 18% operationally.
For the fourth quarter and full year 2020, Brazil delivered double digit growth in all species, except poultry, which modestly declined.
Overall, our international segment delivered strong results. Despite the challenges presented by COVID-19, our diversity across products and geographies enables our international segment to again be a significant driver of growth.
Now moving on to the rest of the P&L for the quarter.
Adjusted gross margin of 67, 7% fell 80 basis points on a reported basis compared to the prior year, resulting from other manufacturing costs inventory charges recent acquisitions and elevated freight expense.
This was partially offset by favorable product mix and price increases.
Adjusted operating expenses increased 10% operationally, resulting from increased advertising and promotion expense for some power for trio and <unk>, partially offset by <unk> savings.
Return on investment from our DTC campaigns has been very favorable and we remain and will remain an important investment to support future growth of the business.
The adjusted effective tax rate for the quarter was 13, 5% a decrease of 70 basis points driven by the impact of net discrete tax benefits, partially offset by the jurisdictional mix of earnings.
And finally, adjusted net income and adjusted diluted EPS for the quarter grew 3% operation.
In December we announced a 25% annual dividend increase continuing our commitment to grow our dividend at or faster than the growth in adjusted net income.
In addition, we resumed our share repurchase program in January with $1 4 billion of remaining capacity under the current authorization.
Now moving onto guidance for 2021 please.
Please note that guidance reflects foreign exchange rates as of late January.
For 2021, we.
We are projecting revenue between seven for 755 billion.
Representing 9% to 11% operational growth.
We are expecting foreign exchange favorability in 2021 of approximately 200 basis points.
We expect companion animal to be the primary driver of growth in 2021 with the continued strength of our diverse parasiticide portfolio, which includes full year <unk> trio sales.
We believe market dynamics for companion animal will remain strong in 2021, allowing for further expansion of our key dermatology products as well as our diagnostics offerings, which we anticipate will grow faster than the overall animal health market.
While we expect the pace of certain trends that accelerated in 2020 to moderate such as increased spend per visit our view is that 2020 has established a higher base for future growth.
We anticipate livestock will return to global growth in 2021, primarily driven by more normalized food consumption patterns.
Geographically, we expect total company sales growth to be relatively balanced between our U S and international segments.
However, we do expect continued and meaningful growth in China and other emerging markets.
I'd like to touch upon the key assumptions that underpin our expectations for revenue growth.
Beginning with dermatology, our guidance does not assume a meaningful competitive entrants in 2021 and with continued investments behind the franchise, we believe revenue will exceed $1 billion.
For the full year.
We also do not assume a triple combination product will launch in the us in 2021 to compete against <unk> trio.
We're extremely excited about our monoclonal antibodies for pain with both labella influenza, having long term blockbuster potential.
However, as Chris mentioned, while both products will launch in the first half of 2021 in the EU and other international markets. We do not currently expect either product to receive approval in the us this year.
For the.
Vendor of the P&L adjusted cost of sales as a percentage of revenue is expected to be approximately 30%, which is relatively consistent with our cost of sales in 2020.
Adjusted SG&A expenses for the year are expected to be between $1 775, and $1 85 billion.
With the increase from 2020 focused on supporting primary drivers of revenue growth, including recent and future product launches key brands and recent acquisitions and reference lab expansion in diagnostics.
Adjusted R&D expense for 2021 is expected to be between 500 and $520 million as we remain committed to investing in pipeline opportunities for new therapies and lifecycle innovation.
Adjusted interest and other income deductions is expected to be approximately $260 million with the increase over 2020, driven by increased interest expense as well as lower interest income.
Our adjusted effective tax rate for 2021 is expected to be approximately 20%.
The increase in 2021 is primarily related to the impact of favorable nonrecurring discrete items that occurred in 2020.
Adjusted net income is expected to be in the range of $2 <unk> to $2, one 3 billion representing.
Representing operational growth of 9% to 12%.
Our guidance reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue during the year, when we will be making meaningful investments to support future growth.
Consistent with 2020, we are anticipating elevated capital expenditures in 2021 to support investments in manufacturing focused on internal sourcing of API capacity increases and facilities to support pipeline opportunities.
We're also investing in information technology to support our recent acquisitions as well as digital capabilities and data analytics.
Finally, we expect adjusted diluted EPS to be in the range of $4 36 to $4 46.
And reported diluted EPS to be in the range of $4 two to $4 14.
While our guidance represents full year expectations, we do anticipate growth will be more heavily weighted towards the first half of the year.
This is largely due to full year some power for trio sales and a favorable comparison versus Q2 2020 as a result of COVID-19.
To summarize.
<unk> 2020 was another exceptional year in which we delivered 9% operational revenue growth and 10% operational growth in adjusted net income in.
From a year that presented a unique set of challenges.
Our guidance for 2021 highlights our ability to grow revenue organically above the market and grow adjusted net income faster than revenue even during times of elevated investment.
Before turning it over to Q&A I'd like to express how proud I am of our colleagues and all we've accomplished amidst an unprecedented set of circumstances.
While there is no assurance that the new year will be without similar challenges faced in 2020, we cannot be more excited about the opportunity to again deliver on our long term shareholder value proposition.
Now I'll hand things over to the operator to open the line for your questions operator.
And at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may recall yourself from the queue at any time by pressing the pound key.
Once again that is star and Juan.
We'll take our first question from John Block with Stifel. Please go ahead.
Thanks, guys. Good morning, Congrats on just a great 2020.
Hospitals upfront for the quarter for <unk> 'twenty gross margins were a bit below despite being companion animal growth in next year.
Seems like you're guiding to flattish call. It gross margins again, despite what seems like a positive mix shifts from Glenn can you talk about that a bit why are we not seeing a bit more on gross margin considering the companion animal performance and us expand gross margin still a part of the long term story, and then I'll stick with sort of guidance.
Really big numbers on 2021 guidance out of the game you talk for large Dod versus companion can you talk through the components of companion animal a little bit more I don't know if I, specifically hernan trio number moving to.
Safe to assume trio of 400 million plus any other components you'd call out thanks guys.
Sure John So first when you look at the gross margin expectation for 2021. It is relatively flat versus 2020 as you mentioned the mixed with companion animal will be beneficial as we move into 2021 some of the offsets for that there was some of the investments that we're making in other areas such as reference labs, which come at a lower margin.
Particularly in the early stage of their lifecycle as we're building those rabbits.
Labs, the margins will be a little lower until they reach their full operating scale. So that's some of the offset so there are some positives in terms of the companion animal mix.
Some offsets, though with some of the longer terms, we're investing and looking at other areas.
In terms of the drivers of companion animal growth. So obviously, we do expect trio to be a significant driver of growth for 2021, we're not putting a specific number on trio, but we would expect a contribution from growth in 2021 to be at least as big as what we achieved in 2020, so that will obviously be one of the drivers also.
Continued growth in our dermatology portfolio, we saw a very strong performance in 2020 with 23% growth in that portfolio operationally for the year, we do expect that portfolio will exceed $1 billion as we move into 2021 also in companion animal diagnostics, we expect very rapid growth in diagnostics as well.
In the fourth quarter, we saw a 20% growth and we expect that will help carry us forward with the strong momentum that we had in the quarter into 2021 as well as strong performance that we're seeing in many of our emerging markets such as China and Brazil. So those are some of the factors that are driving the strong companion animal growth.
Yeah.
Our next.
<unk> comes from Michael <unk> with Bank of America. Please go ahead.
Thanks, guys.
Matt a quick two parter first of all is going to be on the livestock markets and just specifically on <unk> are you starting to see some competition I know the pads just rolled off but.
Any early comments you can tell us in terms of pricing from.
Companion launches and sort of expecting updated expectations for market share, but also what steps you are taking and how meaningful of a headwind do you expect in 2021, and then broader on livestock, we've read a lot about input costs going higher on corn and things of that potentially pressuring producing into markets such as poultry and swine.
How does that factor into your outlook for low single digit growth.
And then second question would be just a little bit more on the.
On the companion animal expectations for for.
For 2021, and obviously youre growing well above the market.
But.
Any thoughts on sort of inline portfolio can you comment on for you on commented on the on strong term strength from what you've seen <unk> from <unk>.
Can you sort of comment on <unk>.
<unk> plus.
And.
On the rest of the non portfolio there.
Thanks, Mike So starting on track then we.
We are expecting a number of competitors.
Enter in the us market again, the low this month, so it hasn't happened yet.
I'd say more probably entrance and we expected a few months ago, but we don't think that will lapse, obviously I think the market will shake out obviously.
As we said previously typically we expect about to lose about 20% to 40% share over several years indicates a drag from given the large number of competitors. We do expect that to be factor, but we don't really expect it to be overall different.
And really partly what drive that I think is we do believe that a lower price on draft and will expand the market for Macrolide overall.
Therefore, the market itself will grow we also think we're positioned well from a broad portfolio strong technical I, we do expect that price to come down in that 20% to 40% that is an expectation, but as I said this is all baked in right now.
Our guidance that would be expectations around where traffic is going to be us there and if you look at broader livestock you referenced some of the input costs.
You heard in some of our opening remarks, we are expecting low single digit growth. So a return to growth in livestock overall.
Again, some of that will be led in the us and surcharges species that a lot of that will be led outside the us as a reminder, about 60% of our livestock business is outside the us and we're seeing incredible growth right now in China, and some other markets, Brazil et cetera.
Overall, we do think some of the input cost for us will.
There will be a pressure, but we have given the diversity of our portfolio.
Looking at some large markets our second largest market is China.
This market is Brazil, we do see strength in livestock. There. So we overall do you believe livestock will return to low single digit growth.
In 2021, and we continue to believe it will return to normal growth in the mid single digit range you can afford us over the medium term so Glenn I'm not sure. If you wanted to take the incremental question on the Brian and animal time from 'twenty. One yes. So the transfer companion animal remained very strong and it's really driven by the breadth of our portfolio. So we talked a lot about the growth that we <unk>.
Spect to see from trio from our derm portfolio from our diagnostics portfolio also in 2021 will have the launch of our monoclonal antibodies for pain in Europe as well as some other markets will also be a key contributor to growth. But then there are other products that round out the portfolio of products such as Pearl Hartwell products, such as Revolution, plus also the growth that we're seeing.
In markets like China, where a companion animal is growing very rapidly markets like Brazil. So there are really many areas of growth that we see and thats driven by the fact that we do have the broadest portfolio in companion animal we are able to leverage that with our customers.
And our next question comes from Louise Chen with Cantor Fitzgerald. Please go ahead.
Hi, Thanks for taking my question. So what are the macro factors that you see for US allowed us in 2021 as it pertains to livestock feed prices, whether any other headwind or tailwind that you see out there. Thank you.
Sure Louise.
From you as you look at livestock overall.
We're seeing some of the macro changes sort of a recovery in China around ASF is driving significant portion of the growth from a supply perspective.
China is still going to be importing a decent amount probably less than in 2020.
From other markets around the world sort of maintaining that we're also hopeful that youll see an increase in dine out which will signal for the industry to expand herd. So in 2020 with obviously with many different factors, but we do see both an increase in demand.
And in markets, where our technology is it really leverage some of the emerging markets, where we're seeing significant uptick there they will remain challenges in summer day.
U S producers, obviously for some of the input cost et cetera, but we do believe you'll see more of a return to normalcy as we move into 2021 and Thats why we are guiding answered at the low single digits, but we do believe in the medium term will be back to sort of index single digit from Roth.
And our next question comes from Erin Wright with Credit Suisse. Please go ahead.
Great. Thanks, Thank you.
P formulation approach.
Right.
Your call.
Thank you.
Cash flow.
Alright.
Okay.
Cannibalization of legacy product, they're cleaning out in line with your expectation.
Mike.
Thanks, Steve.
How should we think about the contributions from <unk>, Inc.
For us our country.
Meaningful at all and how should we think about the dynamics are impacting approval and you ask do you still anticipate are you so confident.
Steve will be Barker from product blockbuster product for you.
With the launch of menu items from <unk>.
Thanks.
The second question on Matt If I can answer you were breaking up in digitizing on the first question I think we've more or less avid for let us give a shot and you can comment if we miss some of it some of it we heard so starting on your second question on the Matt We were very excited to now have labella approved.
And launching in the first half of this year and the EU, Brazil, Canada, and Switzerland for Atlantica, we continue to expect approval in the EU.
And our first half for Directv launching sort of midyear, we already do have approval on for Alexia in Switzerland and.
And we remain confident in the eventual approval based on the safety and efficacy data we submitted in the us but as you saw in our remarks and our release with the approval timeline has moved out a bit.
We believe this is has to do with the fact that this is the first monoclonal antibody approved by the FDA in animal health our previous one final point was actually USDA it making it a little harder for us honestly to predict some of the regulatory process there.
We're continuing to work through the regulatory process and manufacturing inspections.
And we will continue to keep you updated we don't think that changes the overall.
Peak sales of this product at all but it.
It is a slightly different process I guess, Glenn might have understood a little bit better, but we'll try your first question.
And I think your question was around how we're performing with the breadth of our portfolio from parasiticide with our customers and I think thats going very well and the veterinary clinics, we're really able to offer our customers a variety of options based on how they want to best treat the animals and I think that shows in the performance that we saw with some powerful franchise in two.
<unk> thousand 20, not only did we exceed our goals for trio with $170 million in sales in the year, but we also saw significant growth in <unk>, which really exceeded our expectations. So we grew operationally, 16% with sunpower because what we saw was that the advertising and driving patients into the clinic for Sunpower Katrina.
Actually benefited the overall portfolio and we also saw a very positive growth in pro heart 12, as well. So we think the breadth of the portfolio in the parasiticide, who is really a benefit in fuel.
<unk> colleagues really able to execute very well with that portfolio was that your question, where do we get it all.
Alright, you can come back in the queue.
There was a little bit there.
Okay, we'll take our next question from John Kreger with William Blair. Please go ahead.
Hi, Thanks, very much just maybe a quick follow up on the labella us launch timeline in the us give us a sense for how far pushed back the approval timing might be and do you think you need to collect additional clinical data.
Yes, we don't have a great status right now we're still working through the regulatory and manufacturing process. We also the FDA can require inspections at facilities that are outside the us, though the exact timing of when theyre going to be able to do that is a little bit uncertain. So I don't have a great sense of snap.
If we did we would obviously given more specific guidance, we do not expect it to be in 2021, which is what we're being fair on now and as soon as we know more we will be happy to update you on future calls going forward, but unfortunately don't have greater again, we remain very confident that we will eventually be approved.
We need to go through a new process with the regulator hasn't in animal health under CGM approved monoclonal antibodies previously so it's a little bit different for us. Though this is the best we know at this point.
Thank you and then second question can you, maybe just sort of frame the diagnostics plan for 'twenty one it is.
It seems like our results are starting to accelerate there.
Are any of the investments being focused in the livestock should we really think about your efforts right now being concentrated with companion animal.
Sure for 2021, our focus remains on companion animal.
We're very pleased with our progress on placements, which isn't really good leading indicator.
Usage as you saw we had double digit consumer.
Consumable growth as well, which we're quite pleased with.
When we look at new products, you've added the imaging platform. We're excited with its first indication, obviously and FICO, that's the AI powered online.
We're looking for additional indications there so yes for the last piece there would also be reference lab. So we're continuing to expand our U S reference laboratory, probably adding about three to five more labs for this year. So we believe diagnostics is a core part of our portfolio. It's a market that growth at 10% plus we're really pleased that we're starting to see some strong momentum.
Okay.
The different parts of that Paul referenced lab as well as placements as well as consumables. So we remain very committed to the space and are pleased with our progress over there.
And our next question comes from David Westenburg with Guggenheim Securities. Please go ahead.
Hi, Thank you for taking the questions and congrats on a great year.
Can you give us a little bit of flavor on where trio is taking share from I think you mentioned there is some new to the category, but I am just trying to get into trying to add a flavor is that legacy just regular C suite intake.
What component is heartworm and basically what I'm trying to do is.
Get a good sense of how big this from grow in terms of both.
Both the hardware market in our flea and tick market and then just a second unrelated question on trio is there any synergies, particularly on a sales synergy from the direct to consumer marketing campaign, it might be able to benefit maybe derm.
Maybe even there is a cost synergy so thank you very much.
Sure.
Victoria, We did see an increase in share in Q4.
7%. So we are taking share in a number of places us coming from.
If you think about it the first is at new properties, where I think we're doing quite well with new I think puppies offer new people to the category overall I would say people, who maybe previously gotten product over the counter or moving in and we are taking share from some of the other established competitors.
In the space. So I think we're seeing strong growth overall I would say there and pleased that our share if you look at the potential for the product.
The two competitors, both net guard and <unk> are each $600 million products. A day. So we continue to believe there is significant growth. We are we remain under index to be honest with you and cash set aside for we continue to see this.
As a significant part of our overall growth growth from a sense of is are there synergies with term not really is what I would say except for on the cost side. Obviously, we can get better buying power. When you replace DTC ads by leveraging the spend across both but beyond that we don't see strong synergies honestly between the DTC online.
Affecting the other unlike when he has to carry bolt and things like that but we think may be the only synergy Erica and our buying power by leveraging the combined DTC spend.
And we can go to our next question from Nathan Rich with Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for the questions.
Chris maybe just start.
Moving to launch curve looks like for products like <unk>.
A new way for debt.
Thats, the treat osteoarthritis and chronic pain.
Kind of what are your initial impressions on sort of the level of demand thats out there for from beds for this type of treatment and how liberal it'd be price relative to existing treatments on the market I know it can be kind of up to $100 a month here in the us Im sure. It varies a lot by market, but just any any comment on pricing would be helpful.
Sure.
I think.
Lifecycle for Libra, and Valencia, and the curve will be a slightly different labella is entering a market that's $400 million today.
It's an established market. So I think the ability for people are already bringing their dogs and for OA.
OA pain. So I think we have the opportunity with relative to expand the number of patients given the safety and efficacy profile and the compliance benefits of the product.
I think we can also increased days on therapy with <unk>.
Also helps us grow the market and then obviously price to your point, though it is price at a premium to many of the products on the market today. It is not obviously, we don't have a price in the license.
Is that have an approval yet in the US I think for Lindsay is going to be a little bit different I think it's a Caribbean I'd take a little longer.
I have to do the fact that there really isn't a market today in most parts of the world.
There really was no treatment. So cat owners are kind of in the condition to non operating there has been we started focusing on about a year ago to try to build that market may pet owners are aware of.
Pain looks like and cash.
And get encourage them to start bringing their cash for that and then getting back to treat that we think is a significant market, but you have to first medical is some of these conditions and treat it is significant.
$60 million cash from the us today.
Really only expect 40% of them have OE, but only 18% of them are really identified by that so we think both are significant markets that we can grow the market for Lindsay it's more about creator Marc creating a market and I think you can look at our success in doing that with dermatology with App opponents data point. So we're investing early.
Glenn has been talking about some of the guidance over the last year and for 2021 and building those markets, but I would assume the curve for la <unk> will be much faster than the purpose lithia as we're building a market.
And our next question comes from <unk> Prasad with Barclays. Please go ahead.
Hi, good morning.
In isolation from the results.
Questions from me firstly.
The lifestyle category the sales seems to be so contingent on China and there are news of unregulated or illegal license being used and Derek Pennsylvania, Sam. So I wanted to understand what are you seeing on the ground and how should we wrap our heads around the rehiring cycling 2021 second.
Second on operating margins considering that you will not have the diluted impact of diagnoses that he saw in 2020.
Should we be looking for better operating margins considering the revenue makes us better livestock should be in a recovery and.
And if so what are the offsets to this thanks.
Sure. So when you look at overall livestock and particularly in China. So we've seen very positive performance in livestock in China. This year. So from a livestock perspective, we grew 45% in China. This year and we expect continued strong performance in China in 2021, as we continue to see the herd rebuild recovery from Africa.
In swine fever, and where we're seeing that recovery is particularly in our larger accounts and larger accounts to use more of the multinational products and of our premium products. So we've seen a really rapid acceleration of our growth for example in the second half for the year in swine and particularly in 2020, we grow over 100% in swine in China and we.
Very positive momentum moving into 2021 very significant growth from China in 2021 in terms of the operating margins. There are a couple of things to look at as we move into 2021 day.
A number of areas of investments that we have in our SG&A really continuing to support the growth of trio as well as the monoclonal antibodies for pain as well as dermatology, we've increased our DTC investment in 2020, particularly around trio and <unk> and we plan on continuing that in 2021 as we saw a very positive return on.
There, obviously, we will continue to invest in R&D.
And that'll be an area of continued investment as we've seen a very positive return on that investment as well the other thing to consider when you look at the overall guidance, which with revenue growing 9% to 11% and income growing 9% to 12%.
One of the reasons that income isn't growing more rapidly is the change in assumption in tax rate between 2020, and 2021 and 2020 our rate was 18, 3% our guidance for 2021 as approximately 20% if you neutralize for the impact of the tax rate our adjusted net income would actually be growing.
2% faster some more 11% to 14%. So we are seeing margin expansion, but the impact from tax rate is diluting that to some degree.
We'll go next to Chris Schott with Jpmorgan. Please go ahead.
Great. Thanks, So much can you talk a first maybe a bit about innovation on the livestock side.
Seems like the market between Covid and some other dynamics has been kind of a bit lackluster in terms of growth for the last few years. So what does it take to get back to mid single digit growth on the livestock side and what are some of the bigger innovation trends, we should be watching there and my second question was just following up on the topic of margins.
Looking out to 2022 and beyond.
Just thinking about sustained window of higher expense growth as you get many of these new launches off the ground for us lot of that groundwork already been I guess invested as we go into 'twenty and 'twenty, one I'm trying to get a sense of how we should think about longer term margin expansion expansion dynamics, assuming we continue this very healthy topline set us for seems to be playing out. Thanks. So much.
Thanks, Chris.
We have been talking about the fact that you really get to the mid single digits.
In a sustainable way, we youre going to need innovation I think theres a few spaces that were you're already starting to see that income that will be coming the first is around the vector vaccine space, which we've been talking about in 2020, we launched our first one in the us for Newcastle in 2021, we launched one for IBD, we're looking for more at launch.
There is a significant market is about $300 million market growing double digit. So we do see vector technology in poultry, which is one of the faster growing EPS being an area of innovation and growth for US. We also think more broadly that immunotherapy theyre going to be really important for two reasons. One there are alternatives to antibiotics.
Alex.
And secondly, healthier animals are more productive. So it also increases productivity for US producers. So I think immunotherapies, which we've been working on for a while and have a partnership with Colorado state to develop will be important. The other factor that I think is really important to focus on precision livestock farming.
We also think has great potential for leaders right now and the genetic space there and genetic testing. We also purchased GLA as you know we're looking at really match for that individual animal care and heard monitoring and I think thats, probably the next big wave, that's probably more of a medium term growth driver, but I think theres a number of spaces, where you are.
You're going to see innovation at the livestock spot seller price vectors, immunotherapies and precision livestock farming I'll, let Glenn take the second question on long term margin expansion. So in terms of the long term margin expansion I think there are a couple of factors to consider for 2021, we mentioned that the gross margin is relatively flat and talked about some of the driver.
<unk> of that with some of the investments we're making in reference labs also the impact of the drag from low this.
This year on gross margin so as we move into 2022 and beyond some of those impacts will be a little less than we would expect to see continued expansion in gross margin in terms of the overall operating expenses beyond 2021, obviously, there will be one year, where Jamie normalizes when things get back to normal from Covid, but beyond there.
Net impact we would expect that we would continue to be able to grow our expenses at a pace below that of revenue. So we'll probably continue to grow R&D in line with revenue.
That may vary in any given year based on the opportunities, but SG&A based on the infrastructure that we have globally established we should be able to grow that somewhere between inflation and revenue. So we would expect to continue to see expansion there on an overall operating margin perspective.
Our next question will come from David Risinger with Morgan Stanley. Please go ahead.
Yes, thanks, very much and let me add my congrats.
Another phenomenal year as well.
So I have two questions first with respect to the monoclonal antibody approval delays. So it is for both cats and dogs, but it wasn't quite clear to me, whether the FDA wants more clinical data or whether there are manufacturing issues because of manufacturing questions. Because I think Chris then you had mentioned.
And.
Manufacturing. So if you could just clarify on both of them.
What the FDA issues are whether they are clinical or manufacturing and.
And then <unk>.
The wettest us R&D has obviously been.
Amazingly differentiated from competitors.
Competitors struggled to bring blockbuster companion animal products to market, even including follow ons to the whether it's us top growth drivers over several years.
So considering that can you just help us understand the unique aspects of the let us as R&D and its ability to maintain separation from the competition. Thank you.
Sure. Thanks, Steve.
With regards to the monoclonal antibodies with Rolla and Celesio.
It really is just working through the regulatory process and the questions that they're asking and.
Alrighty inspected the site. So at this point, we have not been asked for any clinical data, but we're still in the regulatory process is what I would say.
It is our first time doing this with the FDA. So it's just us.
New profit for Bolton Understandably, it's the first center looking at some of these types of products that they have a number of questions. So it really is just going through the regulatory review process and trying to manage new manufacturing inspections, which I do know that probably the COVID-19 is definitely impacting that a little bit.
We're just working through that so at this point, we have not been asked for any additional clinical data and we don't think theres any manufacturing issues. At this point, we're just still working through the review process and what their expectations are.
With regard to the weighted R&D.
What I would say us I think it's the partnership between R&D manufacturing and our commercial organization is taking those insights for commercial has of customer needs and.
And part of it early on with R&D to develop product I think the other thing we've done really allowed us partner with manufacturing to be able to scale those products and be able to bring them to market. We manufacture our own monoclonal antibodies as you know we've got very strong manufacturing capabilities, which is I think important for launching many of the products and scaling up at that level.
We certainly learned the hard way early on in our journey about investing in that partnership when we saw some of the challenges we had us supplying our profile. So I think from an R&D perspective, obviously I think we have great science, but I think the rigorous arc profit and partnership they have with our commercial and our manufacturing colleagues at.
And our willingness to invest in disruptive technologies and take those risks that we've been doing we've been managing over the last eight years anything you'd add that one no I think it's exactly what you said, Chris when we talked about the interconnected capabilities between commercial manufacturing and R&D and I think that works extremely well is your electricity said identifying.
What the key needs are in the marketplace early on coming up with solutions and making sure that the products that we are able to manufacturing we've been very successful in doing that.
Our next question will come from Kathy Miner with Cowen and company. Please go ahead.
Good morning. Thank you first question I have us relates again to the monoclonal can you just clarify when you talked about plant site inspections being needed is it correct then both either one or both of the monoclonal or manufacturing outside of the U S. SEC.
Second question also on the product is the intention to launch both the cat and dog ones at the same time is there an advantage to do in one or the other and we can speak just about the EU markets, where you have approval and a second question on the derm products, you've targeted $1 billion in sales for this year can you talk about some of the drivers behind that is it outside of the US is it more.
Pets et cetera. Thank you.
Sure. So first of all cash would be great to hear from you and secondly on the math.
They are both.
The manufacturing facilities are different for them, but they are outside the us and prior approval inspections regulators.
Regulators handle them differently.
You are going to be required probably for both of these products and they are both different but they are both.
Outside of the US I think.
Your second question was around the derm sales growth U S or ex U S.
It's both.
We still believe we're underpenetrated outside the us at the same number of dogs in the us and outside the us get two thirds of our sales in Durham remain in the US. So we do think there is a significant opportunity. It has been harder to get scale outside the us historically, mostly because we've not been able to do direct to consumer advertising that is brand specific.
One of the investments we are going to make for the first time is doing just overall disease awareness direct to consumer advertising in 2021, So we cannot be specific with brands, but in general we really are the only products. So hopefully if you raise awareness around the disease and that there are treatments.
Encourage people to speak to their debt.
And get the best care. So that I think is one of the reasons why international we are hoping we will start to grow faster, but I have to give our U S team tremendous credit they continue to grow the market the investment in direct to consumer advertising raising awareness that there are products are bringing more person and getting more pets treated in the US there are still 6 million.
Who.
Who need our products are needed solution, who arent getting Juan so we do believe there is still growth in the us. Although we would expect although I'm sure I know last year as you've seen very strong growth out of the US we would expect over time for the us growth.
Dart to decline with the overall growth and more for growth to come from international but we still believe there is significant potential in both.
And our next question will come from Elliot Wilbur with Raymond James. Please go ahead.
Okay.
Thanks, Good morning, and congratulations on the strong performance of trio and challenging year.
Christian just made.
Maybe wanted to dive in a little bit more on the launch day.
Tails around the product it seems like obviously one of the reasons for its relative success. This year versus earlier expectations was just far less cannibalization of <unk> than originally expected, but wondering if you could just share with us additional metrics in terms of where you are with respect to <unk>.
Clinic penetration rates, how many targeted clinics of you being able to actually reach.
Just Jim additional metrics around the uptake and launch would be helpful. And then just thinking about the product longer term, obviously very strong.
First year, well, if I think about launch analogs on the human health side, I mean generally five years out you're looking at something on the order of six to 10 X first year sales not sure. If that's applicable in the companion animal market, but just some thoughts in terms of.
Maybe longer term launch analogs with respect to the product. Thanks.
Sure.
With regard for the launch of trio I would say, there's a lot of unique characteristics of that trio launch a relaunch at the height of the pandemic in the us.
Not sure how to compare that to other people's launches.
We were slower to penetrate clinics I would say in Q2 and Q3, but we're quite pleased that by the end of the year. We reached all of our penetration goals. So I think our penetration has been quite strong.
Given the delay really the outperformance was our share once we were penetrated within the clinic and the ability to get more of the patients on our product has been really strong and that gives us good confidence as we move into 2021.
Glenn mentioned a few minutes earlier, we are expecting a similar contribution for startup will have a Q1, where we didn't have sales last year, but with the penetration that we are able to achieve by the end of the year, which is reaching the goals. We had wanted we think if we can just get the same poultry that we had like those clinics in 2021, we will continue to see great growth across.
There were also seeing it also Paul our broader characters.
Portfolio, So I'm not sure I would say I will give us the human health analog, but I continue to remind everybody. We remain underpenetrated in this space imperative is the single biggest category in the animal health space at $4 billion globally with $2 5 billion in the us.
Continuing to see about 15% growth instant Paragon beyond trio globally it share.
There is significant opportunity here for us from to continue to grow and we were quite pleased if you looked at overall accounts, we had an increase in share of 7% in Q4. So we think we can continue to take share in net and drove an overall so I'm not sure it looks like human health.
With our biggest competitors are even $600 million product I think we've got strong ability to continue to grow into.
At least our fair share of this day.
Yes, John I'd answer that in terms of the question on peak sales for becomes challenging with peak sales of the timing of competition and that remains unknown. Obviously for 2021, our current guidance does not expect another triple combo within the us.
And the timing of that will obviously impact what our overall peak sales could be for the product.
And our next question will come from Navin Jacob with UBS. Please go ahead.
Hi, everyone. Thanks for taking my question. This isn't a streaker 90 for months and maybe and Jacob just from a couple of specific questions.
Can you quantify the revenue impact in 2020 on the earlier volatile channel wrong, and you expect us to.
To recur.
Adverse revenue.
Revenue impact you expected to recur in 2021.
And then can you quantify the difference in gross margin and day diagnostics from your therapeutics portfolio or your corporate average thanks very much.
Yes, so in terms of the impact of the early fall catalog on for 2020 that did not have an impact for the year that was just the seasonal impact between Q3 and Q4, because you saw the very strong performance. In Q3, you saw the opposite occurred in Q4 of this year and then predicting the seasonality of that in 2021, obviously is difficult, but we focus more.
On the full year, obviously in terms of the overall impact in terms of gross margin for the diagnostic business. We don't specifically provide gross margins by therapeutic area or by species, but overall, we always say our companion animal business. Obviously it has the higher margin diagnostics in general is lower than some of our key therapeutic areas.
And our next question will come from David Steinberg with Jefferies. Please go ahead.
Thanks.
John.
Obviously, one of the tailwind from the pandemic.
Dachshund.
Around the country.
Previous comments I think you'd said there are about $3 2 million EBITDA.
Since Andrew I was just curious now that 2020 is in the books do you have any data.
Many more of them.
Sure.
Last year.
The tailwind you've called out is just the increase in dollars for vet visits.
And as most pet owners because vaccinated as they go back to work.
Durable do you think both the increased dollars per visit and increase adoptions are and is there any chance that could reverse.
Most people back to the present to us.
Follow up question on trio.
Comp has the potential to your competition I think Glenn you said no expectation score.
This year you previously had said no competition in the first half for this year when do you actually know it's murky, but when do you actually think there might be your first competitor and also what gives you such great confidence that there would not be any competition.
2020, when I simply ask that because with such a successful launch it's obviously a target for credit competitors. Thanks.
Sure.
The pet adoption.
There are 135 million pets in the us in a typical year.
Youll see about $3 2 million adoption, so EBITDA, a 10% increase net isn't going to dramatically change things, but we are seeing an increase in debt visits.
We think it's a positive trend and we do expect that to continue in 2021, So as Glenn mentioned earlier, we did see a 2% increase in debt visits. Thank you for we are expecting that to continue. So I think you are seeing maybe a proportional to what was the incremental tests that were adopted we don't have very specific numbers, but I would say I assume its somewhere.
Between like 2% and 10% there it'll be helpful and I do think we're going to continue to see an increase in visits you asked as well about spend per visit which was incredibly strong.
In 2020, we don't believe it's going to remain that strong to be honest with you. We still think it will grow when you look generally speaking at our space.
We've seen overall revenues of clinics growing in the mid to high single digits on a normal year.
Im not sure what 2021 is going to look like but assuming it's somewhere close to a normal year, we do think youre going to see strong growth overall, there in Spain overall revenue the vet clinic, both with growth in total number of visits as well as our spend per visit with regards to the trio question on cash.
Competition, we don't have the visibility that human health hazard to when we'll get competitors to be very Frank we would've expected a competitor by now.
We would have expected one in Durham as well so we're not exactly sure what the challenges but.
We don't have a great way of knowing other than rumor mill in the market and strategic accounts, who often try to renegotiate with us when they think of competitors entering the market, which we haven't seen yet that does not mean that someone credit surprised us, though there could be but we wanted to be clear what our guidance was based on so at this point given we don't have any specific knowledge.
We will assume we do not have competition in 2021. After one day would come honestly, we don't really know but to your point. These are large markets. Both your question, Ontario, but as well as term and we are expecting competition. We just at this point do not have any specific knowledge. So our guidance did not include an assumption for competition in either space.
And we'll take our next question from Greg Gilbert with Truth Securities. Please go ahead.
Hi, going back to the diagnostics.
Glenn you mentioned the growth rate there I think 20% can you talk about to what degree that rate is influenced by M&A, if at all and maybe more broadly about your strategy. There clearly there is an element of sort of building in catching up but I'm also curious on sort of how youre trying to differentiate our leapfrog competition broadly from.
Diagnosis diagnostic standpoint, and then Glenn are you seeing any signs of upward pressure on key input costs as the world thinks about commodity price inflation or at least for potential for it. Thanks.
So in terms of the diagnostics growth for the quarter like you said, we did see 20% growth in diagnostics are part of that was driven by the reference lab acquisitions debt that we have so net of that organic growth was around 12%, 13% and diagnostics for the quarter. So still very positive growth in the quarter and we saw a nice momentum.
As we move throughout the year, and we think that will carry us well into 2021 also we established a much better infrastructure for diagnostics in 2020 in two ways.
We fully integrated into our core S&P system. The diagnostics business. So we now are able to provide one face to our customer in terms of billing as well as product offerings. The other thing that we did was we made significant improvements in our bi directional connectivity.
Improving significantly throughout the year at the beginning of the year, we have that connectivity to about 30% we increased debt at the end of the year to over 70%. So we think that establishes very well as we move into 2021 as well as some of the new innovation, we're bringing with the images platform as well. So we think those are some of the key drivers as we move into two.
'twenty, one as well as the continued reference lab expansion that we're embarking on so we're very excited about the growth that we expect to see in diagnostics in 2021.
In terms of key input costs and inflation for us from manufacturing perspective, there's nothing in particular that we see particularly challenging obviously for 2020, we had some elevated freight costs because of the impact of COVID-19 that will probably continue as we move into 2021 that is embedded in the guidance, but nothing else.
Have a significant impact.
And there appears to be no further questions. At this time I will turn the call back over to the speakers for any additional or closing remarks.
Thank you thanks, everybody for your questions and your continued interest in the rest of the day, we look forward to keeping you updated on our business throughout the year and continuing to deliver the results and innovations that you and our customers expect thanks, so much for joining us.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at anytime.