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Morningstar | Zoetis Flexes Its Wide Moat Muscles in 4Q; No Change to Our FVE

Zoetis reported fourth-quarter and full-year performance that slightly outpaced our estimates on the top line, but this was offset by modestly higher manufacturing and sales and marketing expense. After making small adjustments to our model, we plan to leave our fair value estimate unchanged. With broad-based strength across multiple species, Zoetis demonstrated evidence of its wide economic moat through a robust pipeline featuring new products that offer novel benefits. While we think this is partially a reflection of Zoetis’ expertise at managing product life cycles, we also think the firm has done a nice job of taking an animal-centered approach to innovation. As we’ve discussed before, most other animal health therapeutics are often considered through potential applications for human use, as these organizations are part of larger human pharmaceutical companies. Zoetis has the freedom to devote development resources to animal-specific issues, and its product portfolio reflects that orientation.

Coming off the fourth quarter that saw 7% operational revenue growth (with 400 and 300 basis points from volume and price, respectively), we think Zoetis remains in a good position to meet our expectations for 2019. In particular, the new Fostera Gold PCV MH vaccine for swine should see healthy adoption. Additionally, combination parasiticide Revolution Plus for cats and a novel injection for heartworm protection are both on deck for launch this year. We find the latter especially intriguing because the most popular heartworm preventatives are oral chewables that must be administered monthly. Now that vets in many parts of the country recommend owners keep dogs on heartworm preventatives all year-round, we think the injection that lasts 12 months could be a convenient option. The longer length of efficacy is a substantial improvement to Zoetis’ existing ProHeart 6 vaccine that only lasts for six months.

The one area of softness that is likely to worsen in 2019 is cattle, both beef and dairy. Herds exited 2018 at an all-time high, reaching peak cow cycle. Fortunately, last year solid consumer demand supported cattle prices. However, demand seems to be softening, and we could see the market weaken through this year. Based on management’s remarks, Zoetis expects headwinds in this market, which should be offset by strength in swine, poultry, and aquaculture.