碩騰 (ZTS) 2018 Q4 法說會逐字稿

Welcome to the Fourth Quarter And Full Year 2018 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis.

The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately 2 hours after the conclusion of this call via dial-in or on the Investor Relations section of zoetis.com.

(Operator Instructions)

It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Good morning, everyone, and welcome to the Zoetis Fourth Quarter and Full Year 2018 Earnings Call. I am joined today by Juan Ramón Alaix, 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, 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 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 U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, February 14, 2019. We also cite operational results, which exclude the impact of foreign exchange.

With that, I will turn the call over to Juan Ramón.

Thank you, Steve. Good morning, everyone. Our 2018 results once again confirmed the strength of our business and our leadership in the animal health industry. We delivered another year of stronger performance and executed on investment plan to continue to strengthen our portfolio across the continuum of care.

Our successful innovations, the high quality of our manufacturing, our best-in-class [field] force and the diversity of our portfolio has been driving our steady revenue growth over the years. Since we became a public company in 2015, we now have consistently grown revenues faster than the market, and this revenue performance has been achieved while significantly improving our profitability.

We saw our adjusted EBITDA margin increasing from 24% in 2013 to 35% in 2018. In 2018, we delivered our sixth consecutive year of operational revenue growth, 10% overall with organic operational growth of 8%, which excludes the revenue related to our Abaxis acquisition.

In terms of organic revenue drivers, we achieved our strongest growth in our dermatology portfolio vaccines and parasiticides. Meanwhile, our anti-infective and medicated feed additives show more modest growth, and this was because of regulatory changes around the use of antibiotics in animal production.

For the second year in a row, our broad-based of about 300 products and product lines generated operational revenue growth across all our core species and major markets. We expect our 2018 organic growth to once again outperform the market and deliver our valuable position of growing in line with or faster than the animal health end market.

We also increased profitability faster than revenue growth for the full year, growing adjusted net income by 31% on our operational bases, consistent with our valuable position. This improvement was driven by higher revenue, improved cost structure and tax reform.

In 2018, we achieved other important milestones that will support our future growth and success. Apoquel, our largest growth by revenue, achieved $464 million in sales in 2018, an increase of 28% from 2017. We added 2 new blockbusters to our portfolio in 2018, bringing our total number of products with more than $100 million in annual sales to 12.

Our oral parasiticide, Simparica, and our monoclonal antibody for dermatology, Cytopoint, each exceeded $100 million in sales for the first time, with $158 million and $129 million in annual sales, respectively.

We also introduced critical new life-cycle innovations that keep our portfolio updated and competitive and support the durability of our major global franchises. For example, Fostera Gold PCV MH, our latest swine vaccine, was introduced in the U.S. and Canada to provide greater options and flexibility in protecting pigs from diseases. We also built on this sarolaner compound in Simparica to develop Revolution Plus, a topical parasiticide for cats that was recently approved in the U.S., Japan and Canada. It combines 2 ingredients, sarolaner and selamectin, and it's already marketed in the European Union as a Stronghold Plus. All these new products and the life-cycle innovations demonstrate the excellent return on our investment track in the R&D

We also took important steps to expand our manufacturing net capacity. In the U.S., we launched our production facility for poultry vaccines in Charles City, Iowa. And our expansion in Kalamazoo, Michigan is progressing ahead of schedule, with the first commercial batches of oral solid dose medicine expected to be delivered to customers by the middle of 2019. Outside the U.S., we expect to complete construction of our vaccine manufacturing facility in Suzhou, China by the end of 2019. And we acquired a facility in Tallaght, Ireland to help increase the supply of our market-leading bovine [sealants] that help protect cows from mastitis infections.

During the year, we made our largest acquisition to date, purchasing Abaxis for $2 billion in the fast-growing point-of-care diagnostic space. We see diagnostics as an important area to broaden our portfolio, and we have a tremendous growth opportunity ahead, especially in international markets.

We also acquired Smartbow, where it's a sensor technology and monitoring systems, which will be essential to our expansion in [proposition] livestock farming and other digital and data analytic solutions that are emerging in animal health.

And we returned excess capital to our shareholders. In December, we announced a $2 billion multiyear share repurchase program and the increase of our quarterly dividend by 30%.

Looking ahead in 2019, we'll continue investing to generate short and long-term growth. We'll support our key dermatology and our parasiticide products with direct-to-consumer advertising and promotional campaigns through advanced penetration and launches in new markets.

In the U.S., we'll be launching 2 new products in our companion animal business. Revolution Plus, the topical parasiticide for cats that I mentioned before, has launched this quarter; and pending FDA approval this year, we will expect to launch a new injectable formulation to protect dogs against heartworms for up to 12 months.

In terms of R&D, our pipeline remains very strong, and we expect to see more progress in 2019. Potential filings for new products and continued market expansions of major products like Cytopoint, Simparica and Apoquel, which is expected to launch in China this year.

In 2019, we'll continue our work on new monoclonal antibodies to manage pain in dogs and cats as well as for dermatology in cats. We are making good progress with our research products, and we feel very positive about the potential, this type of agreements, offer for greater compliance, convenience and efficacy for different species. This remains an area to watch as we invest further internally, and we build on our partnership with Regeneron in this space.

As I have mentioned in previous communications, the application for our new 3-way combination parasiticide composed of Simparica and 2 other active ingredients has been filed in the U.S. and with the European Medicines Agency. And if approved, we still anticipate in coming to market in 2020. Additionally, we'll be investing more in research for diagnostics, devices, digital and data analytics technologies that can be integrated with our core portfolio of medicines and vaccines. Diagnostics for livestock had a promising long-term opportunity and areas such as essential technology, monitoring systems, and all the digital application for animal health will be receiving more investments.

In terms of our deeper commitment to diagnostics, we look forward to a full year of selling a more robust portfolio of point-of-care diagnostic instruments, consumables and test kits. We are seeing a great progress with integration of the legacy of Abaxis that's imposed in the U.S. And outside the U.S., we are building the infrastructure, sales and technical teams needed to support our diagnostic portfolio.

Moving to market variation for 2019. We expect the overall industry to grow approximately 5%, excluding the impact of foreign currency. The swine market, companion animal market and poultry are all expected to be somewhat in line with the market growth. The cattle market growth is expected to be more limited based on the challenging market condition for beef and dairy customers. For Zoetis, we expect to grow faster than the market for companion animal and swine based on our new products and to grow in line with the poultry and the cattle market.

We announced our full year 2019 guidance today, and we are expecting organic operational revenue growth of 4.5% to 6.5%, excluding a 3 percentage point contribution from Abaxis. Operational growth or adjusted net income is expected to be in the range of 8% to 11%.

In 2019, we are committed to investing net profits to generate short and long-term growth while returning excess capital to shareholders.

In conclusion, our strong performance in 2018 is based on our [Aversa] portfolio, our leadership, innovation and customer experience across the entire cycle of care. In 2018, we have invested to support the growth of our core business as well as involving the spaces like diagnostics, devices, digital and data analytics. We expect to build on this strategic approach to our growth in 2019 while delivering on the full year guidance.

With that, let me hand things over to Glenn, who will provide more details on our 2018 fourth quarter results and full year 2019 guidance.

Thank you, Juan Ramón, and good morning, everyone. As Juan Ramón noted, we had another exceptional year in 2018 with strong performance in both revenue and adjusted net income.

Revenue exceeded our guidance, and adjusted net income was in line with the high end of our range. We expect our 2018 organic growth to again outperform the market once industry figures are finalized, delivering on our value proposition of organically growing revenue in line with or faster than the market and growing adjusted net income faster than revenue.

Revenue for the full year 2018 was $5.8 billion, with both reported and operational revenue growth for the year at 10%. Excluding the impact of the Abaxis acquisition, operational growth for 2018 was 8%. Of this 8%, 3% comes from price and 5% from volume. Included in the volume growth are contributions from our key dermatology portfolio of 2%, new products, including Simparica, of 2% and in-line products of 1%.

Adjusted net income for the full year was $1.5 billion, representing recorded growth of 29% and operational growth of 31%, driven by revenue growth, gross margin improvement and a lower effective tax rate.

In 2018, we grew our business operationally across all core species, therapeutic areas and major markets. Our key dermatology portfolio and Simparica, continued to grow and gain additional market share, both in the U.S. and internationally. For the full year, we recognized combined revenue of $593 million for Apoquel and Cytopoint. This portfolio continued to grow rapidly in 2018 and is well positioned for future growth heading into 2019.

For livestock, our diverse portfolio of products drove growth across both developed and emerging market, capitalizing on industry trends of higher protein consumption and improved productivity.

Turning to the fourth quarter. Reported revenue growth was 7%, which includes a negative 4% impact from foreign exchange. Currency depreciation in Brazil continued to be the largest driver of the unfavorable foreign exchange impact in the quarter.

Operational revenue growth in the quarter was 11%. Excluding the impact of the Abaxis acquisition, operational revenue growth was 7%. Of these 7%, 3% comes from price and 4% from volume. Included in the volume growth are contributions from our key dermatology portfolio of 2% and new products, including Simparica, of 2%. Q4 represents the first full quarter of Abaxis-related revenue being included in Zoetis results. We recognize $65 million in legacy Abaxis products contributing 4% growth to overall Zoetis in Q4. These results included destocking of wholesale inventories in U.S. as we normalize wholesale inventory levels to be consistent with the rest of our business.

New products, including Simparica, Stronghold Plus and PCV combo vaccine, were also growth drivers in the quarter. Simparica generated $32 million in global sales this quarter, representing operational growth of 90% over last year.

Equine's Core EQ Innovator, the first and only vaccine to contain all 5 core equine disease antigen also launched in 2018, and it helped to drive operational revenue growth of 12% in equine for the quarter.

Our key dermatology portfolio comprised of Apoquel and Cytopoint also continued strong performance this quarter with sales of $156 million, a 25% increase over the prior year. Adjusted net income for the quarter grew 21% operationally, driven by revenue growth, discrete other income items and a lower effective tax rate.

Now let's discuss Zoetis segment revenues for Q4. Beginning with the U.S., revenue grew 14% in the fourth quarter, including 6% growth due to legacy Abaxis product. Including the impacts of the Abaxis acquisition, companion animal grew 26% while livestock grew 3%. Companion animal sales in the quarter were driven by sales of legacy Abaxis products, our key dermatology portfolio and new products, including Simparica. Certain in-line products declined due to competitive pressure, partially offset these increases. Excluding the impacts of the Abaxis acquisition, companion animal growth was 14%.

Key U.S. dermatology sales were $110 million for the quarter with both Apoquel and Cytopoint exhibiting significant growth over the prior year. Simparica also had another positive quarter with U.S. sales in the quarter nearly doubling over the last year.

Revenue growth continued due to increased clinic penetration and market share resulting from our field force selling efforts. Partially offsetting growth in our companion animal business were declines in RIMADYL and CLAVAMOX due to anticipated competition.

The U.S. livestock business delivered growth across all species in the fourth quarter. As a reminder, this growth comes off a strong fourth quarter in 2017.

In the cattle business, we continue to see challenges in both the beef and dairy segments. However, growth was primarily due to higher sales of premium products as well as competitive supply constraints in the quarter.

In poultry, the Zoetis portfolio of alternatives to antibiotics in medicated feed additives continued to be a solid contributor to growth as we saw additional market expansion of no-antibiotics-ever production. Overall, the U.S. demonstrated another strong quarter with growth across all species.

Turning now to our International segment. Revenue grew 5% operationally in the fourth quarter, including 1% growth due to Abaxis legacy products. Including the impact of the Abaxis acquisition, companion animal operational growth was 14% and operational growth in livestock was 2%. As a reminder, international markets faced a headwind of 4 fewer calendar days this quarter resulting from the change in our accounting calendar implemented this year. Full year operational revenue growth of 9% was not impacted by calendar days and provides more accurate indicator of international performance.

Companion animal product growth was driven by the addition of legacy Abaxis products, new products, such as Simparica and Stronghold Plus, our key dermatology products and increased medicalization rate in key international markets. Livestock growth was driven by poultry, swine and fish. So our cattle was relatively flat in the quarter.

The complete quarter and annual results of our top 11 international markets are provided in the table included in our earnings release, but I would like to highlight a few items for the quarter. In Brazil, sales grew 8% operationally with companion animal growing 22% and livestock growing 4%. Companion animal revenue in Brazil benefited from growth in vaccine due to improved supply and key products, primarily Simparica and Apoquel.

Livestock benefited from damp weather condition, which increased the use of cattle parasiticide as well as expanded usage plan on vaccines, which helped drive premium pricing.

Moving on to China. We had another great quarter, growing revenue 16% operationally, largely due to continued growth of companion animal products, primarily vaccines and parasiticides.

Canada grew 10% operationally with balanced growth between companion animal and livestock. Companion animal growth was driven by the inclusion of Abaxis legacy products as well as growth in Apoquel. Livestock benefited from sales of new products in swine and strong performance of key brands in cattle. Other emerging markets also performed well in the quarter.

Summarizing International performance, the addition of Abaxis legacy products, continued growth of new products and diversity across our portfolio all contributed to another solid quarter for our International segment despite the impacts of fewer calendar days.

Now moving on to the rest of the P&L. Adjusted gross margin of 66.4% decreased approximately 250 basis points in the quarter on a reported basis versus the prior year. The decline this quarter is primarily due to the unfavorable impact of foreign exchange, a full quarter of Abaxis-related revenue included in our results and increased inventory charges. The declines approximately offset a strong revenue growth and continued cost improvements and efficiencies in our manufacturing network. The Q4 margin is not indicative of the gross margin we anticipate going forward.

Total adjusted operating expenses, including the impact of the Abaxis acquisition, grew 15% operationally. The increase is primarily related to the acquisition of Abaxis and additional spend in R&D, including investments in monoclonal antibodies for chronic pain and other pipeline programs.

The adjusted effective tax rate for the quarter was 17.3%. This tax rate is significantly lower than the rate from the comparable 2017 period due to the favorable impact of U.S. tax reform and discrete items recognized during the quarter. Adjusted net income for the quarter grew 21% operationally through a combination of strong revenue growth, favorability and other income and a lower effective tax rate.

Adjusted diluted EPS grew 25% [operation] in the quarter versus the same period in 2017. Our income growth and balance sheet discipline have enabled us to continue increasing operating cash flow. Inventory improvements on one area I am particularly pleased with, having decreased months on hand since 2016 by more than 2 months. The current level of less than 9 months on hand is consistent with industry standard, and we expect we will continue around this level going forward. The significant improvement in inventory has released approximately $300 million of cash from our balance sheet since 2016.

Now moving guidance for 2019. We are committed to our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. Before I get into the specific numbers, please note that you can find our guidance table included in the press release as well as the investor slides. Also note that all foreign exchange impact is based upon exchange rates as of late January.

In 2019, we are projecting revenue between $6.175 billion and $6.3 billion, reflecting operational revenue growth of 7.5% to 9.5% over 2018. Foreign exchange is expected to reduce revenue growth by approximately 1.5%. Our organic operational revenue growth, which excludes the impact of the Abaxis acquisition, is projected to be between 4.5% to 6.5%.

In addition to Abaxis legacy products, our key dermatology portfolio and new products will be strong contributors to growth in 2019. From a species perspective, we expect companion animal to grow at a faster rate than livestock, driven by the Abaxis acquisition, continued growth in our key dermatology and parasiticide portfolio, increased medical visual aids in emerging markets and market dynamics, including growth in per-pet spending. From a geographic perspective, U.S. and international market will contribute balanced growth.

Adjusted cost of sales as a percent of revenue is expected to be in the range of 31% to 32%. The expected improvement over 2018 is driven by price increases and manufacturing cost reductions, partially offset by the impacts of the Abaxis acquisition and currency movements. We expect adjusted SG&A for the year to be between $1.47 billion and $1.52 billion. We anticipate foreign exchange to reduce growth by approximately 1% on a reported basis.

Operational growth in SG&A reflects a full year impact of the Abaxis acquisition as well as investments in our diagnostics, international field force and technical service teams. We will also continue to fund strategic investments that have demonstrated a strong return, including direct-to-consumer advertising for Apoquel and Simparica.

Moving on to R&D. We expect 2019 expenses to be between $445 million and $465 million. Consistent with 2018, we have committed to an increase over 2018 in R&D spending to ensure we are well positioned to capture future short, medium and long-term growth opportunities in critical spaces. These spaces include a new combination parasiticide, monoclonal antibody therapies for canine in cats and dogs and new vaccines for poultry.

We will also continue to invest in the next wave of diagnostic innovation, building on our existing Zoetis and newly acquired diagnostic platforms to ensure we are delivering best-in-class point-of-care diagnostic solutions. The increase in adjusted net interest expense and other income deductions is related to our 2018 debt offering, primarily used to fund the Abaxis acquisition.

Our adjusted effective tax rate for 2019 is expected to be within the range of 20% to 21%. The increase over 2018 is related to the impact of favorable discrete nonrecurring items in 2018 and the impact of the GILTI tax, which is effective for us in 2019. We project adjusted net income in the range of $1.65 billion to $1.7 billion, representing 8% to 11% operational growth.

While we do not provide specific guidance on cash flow, we anticipate that in 2019, operating cash flow will decline compared to 2018. As mentioned previously, we have significantly decreased our inventory month on hand to be in line with industry norms, which has provided a significant cash flow benefit in the last 2 years. In 2019, we expect to continue our current levels of month on hand, and as a result, we will not have the benefit of a working capital relief in our cash flow.

In 2019, we also expect an incremental increase of approximately $100 million in capital expenditures for information technology and manufacturing to support our recent acquisitions, improve cost efficiencies and increase capacity.

In terms of our capital allocation priority, we continue to focus first on internal, commercial, manufacturing and R&D investments, then business development opportunities, and finally, returning excess capital to shareholders. We recently announced an increase to our dividend for Q1 2019 of 30%, in line with our 2018 earnings growth. And we also announced the new $2 billion multiyear share repurchase program resulting from our consistent performance, financial discipline and the strength of our business model.

Finally, we expect adjusted diluted EPS will be in the range of $3.42 to $3.52. Our range for reported diluted EPS of $2.83 to $2.99 includes purchase accounting, Abaxis acquisition-related costs and certain significant items.

I'd also like to remind you that while we take a long-term view of our business and prefer to focus on annual rather than quarterly results, there are some considerations I want to point out for 2019 within the quarters. The full year impact of the Abaxis acquisition will have a disproportionate impact on growth across the P&L in the first half of 2019 and partially in Q3. In addition, foreign exchange will negatively impact growth in the first half of the year by approximately 400 basis points in Q1 and 300 basis points in Q2 in revenue.

Now to summarize before we move to Q&A. 2018 was another strong year delivering top line operational growth of 10% and bottom line growth of 31%, demonstrating once again that Zoetis is committed to delivering on its value proposition. We also remain committed to creating shareholder value, returning more than $900 million to shareholders in 2018 through dividends and share repurchases. We expect to continue delivering on our value proposition in 2019, driven by solid growth in our core business and increased contribution from the legacy Abaxis portfolio of diagnostics products.

Finally, in 2019, we will continue to invest internally and externally to grow profitably in the short, medium and long term.

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

(Operator Instructions) We'll take today's first question from Michael Ryskin with Bank of America Merrill Lynch.

A couple of quick questions. First one, you talked about 5% market growth for the overall industry in 2019. I just want to go into that a little bit deeper because in the past, we've seen something more in the 5% to 6% range. So I'm wondering what you are seeing there. If you could give a little bit more color on the dairy markets, cattle markets in the U.S., some of the swine issues we're hearing about internationally. And where I'm getting at with this is what should be our expectations for the in-line portfolio in 2019? If you exclude Abaxis, if you exclude the dermatology portfolio, Simparica. What's the base portfolio doing in terms of volume and price? And then I've got a quick follow-up questions on the margin expansion for 2019.

Thank you, Mike. I will try to cover some of the questions. Also I will ask Glenn to provide some additional details on how we can see the growth -- inline growth in 2019. So I agree that in previous communications, I mentioned that we are expecting the market growth of 5% to 6%. Since then, we have seen that the cattle market, especially in the U.S., in both beef and dairy, has been showing some weakness. And we expect that rather than 5% to 6%, now we're projecting the total market growth of 5%. We still expect that the cattle business [will rise,] will be showing growth, but definitely a growth that will be below this 5%. The rest of the species, as I mentioned in my comments, companion animal, and also swines and poultry will be growing inline or slightly above the market. And the only species that we see some market growth below the market will be cattle. Then moving into the details of the organic growth. We -- as part of our guidance, it's 4.5% to 6.5%. And then, if Glenn can provide a little bit more details of how much will be price growth and also volume growth and new products.

Sure. So in terms of just the overall breakdown, it's really consistent with our long-term expectation. So price, we expect to generate around 2% price this year with particularly stronger price at 3% to 2018 going into 2019, probably more in line with our long-term proposition of around 2%. New products, again consistent, probably 1% to 2%. And then the remainder comes from the inline portfolio. We do consider derm part of the inline portfolio as it has matured and has been on the market a number of years at this point. Also in terms of your question on margin expansion, when you look at where we closed 2018, cost of goods sold as a percent of revenue was a little over 32%. Our guidance for 2019 is 31% to 32%. And we made significant progress in cost of goods in 2018, improving our cost of goods as a percent of revenue by over 100 basis points. So that leaves about another 100 basis points to deliver our commitment of improving cost of goods sold as a percent of revenue by 200 basis points by 2020. You'll probably see that spread between 2019 and 2020, of that attainment.

And we'll go next to Kevin Ellich with Craig-Hallum.

So I just wanted to start off on the cost structure. It looks like some expenses this quarter came a little bit higher than were expected. And then Glenn, you made comments about where you think things will line up in 2019 with increased investments in R&D. Can you just talk about some of the moving parts, and given how good the year was for you in 2018, did you pull-forward any expenses? Or how should we be thinking about that?

So again, in terms of cost of goods. I will start it again. We had significant improvement this year, of a 100 basis point improvement in cost of goods. For Q4, we did see elevated cost of goods, and that was really related to the impact of FX. Also Abaxis and higher inventory write offs in the quarter. Really the Q4 should not be viewed as a run rate for 2019. We have good visibility into our cost of goods, and we're confident in the guidance of 31% to 32% for 2019. As we look into 2019 from an expense perspective, consistent with what we've said, we are making investments in R&D. And R&D is growing more inline, or closer to revenue, as we do have many projects that we're very excited about in our pipeline that we want to make sure that we fully fund. SG&A, when you look at the operational growth, is growing below revenue, even with the investments that we are making in Abaxis.

We'll go next to Erin Wright with Crédit Suisse.

Can you speak to the underlying performance at Abaxis and how the integration is progressing in the longer term cross selling opportunity with the diagnostic portfolio? And then my second question is on SIMPARICA TRIO. Do you think there's a possibility that you are first-to-market there in that category and should we -- how should we think about your competitive positioning there? And do you still feel confident in the 2020 time line and do you anticipate 1 or 2 review cycles from the FDA?

So thank you very much, Erin. I will probably start with the comments on the Abaxis integration. Glenn will also provide some details of Abaxis performance, and then I will also talk about SIMPARICA TRIO. In terms of Abaxis integration, things are progressing in line or even in some cases faster than initially planned. In the U.S., both the teams, Abaxis, the latest team in the field force and also our teams are already working together. And as we communicated initially, the Zoetis team is identifying the opportunities, and also helping the other team also to identify customers to complete the sales. They will be also engaged in ensuring that increase the use of consumables, and this will be an opportunity for future growth. We are working, definitely in the future we'll be -- not only the teams that are working together, but also the portfolio will be fully integrated. And this also, it's -- depending in some work that we are doing in terms of the SAP implementation for Abaxis operations. So we plan to do it in 2019. In International markets, we also are progressing extremely well. We have almost completed the hiring process of field force and also technical support, with still some positions that will be completed in the next coming months. But this team is already working together with the field force team of Zoetis generating the demand. In most of the markets, the supply to customers will be still done through third-party distributors. And in 2020, we'll be deciding, do we keep the distribution or we go direct in some of the markets. But definitely our integration opportunities, our integration plans are progressing extremely well. We are also working on -- continue -- identifying opportunities in terms of R&D. And it is an area that also we are integrating the teams of -- sitting in Kalamazoo, also in Denmark and Union City. Altogether are defining the future portfolio of Zoetis in both companion animal and livestock. Glenn, do you want to give the details of Abaxis performance?

In terms of performance for the quarter for Abaxis, as we mentioned, we had $65 million in sales for the quarter. I want to remind you that Abaxis was on different accounting calendar. But, however, if you do normalize the accounting calendar, that would translate to approximately 8% growth. Again, within the quarter, we did have some destocking to bring Abaxis more in line with our overall levels of inventory with wholesalers. If you adjust for that destocking, the growth for the quarter is double digits. Also for the year, again, if you try to look at it, on an apples-to-apples basis, the growth is double digits for the year with and without the destocking.

Thank you, Glenn. And then moving to the triple combo. So let me, maybe provide a little bit of context. So when we launched Simparica as a single agent, we were 2 or 3 years behind competitors, NexGard and BRAVECTO. And now with the triple combo, it will be first and second to market. But what we did interestingly, because we reduced this gap of 2 or 3 years, and then we expect that if FDA approval is coming in line with our filings and expectations to introduce this product in 2020. So given we are second to market, we'll be only second with a few months different with the competitor. We see a significant improvement compared to the situation that we have with Simparica. And with Simparica, we have been able to continue growing the patient share. In 2018, we increased patient share from 13.1 at the beginning of the year to 15.6 at the end of the year. So we are confident that with the efficacy and also the safety profiles of Simparica and the future efficacy and safety profile of triple combo, will have the ability to have significant market share. Next question, please?

Yes, will go next to Louise Chen with Cantor Fitzgerald.

So my question here is can you talk more about your pipeline as it pertains to the mAbs, livestock diagnostic and aquaculture? When will some of these new products hit the market? Do they have the potential to be blockbusters or in aggregate to be blockbusters? And then just a quick follow-up on the triple combo, is that expected to be a blockbuster product for you as well?

Starting with the easiest question. Thank you, Louise. It's -- definitely triple combo is expected to be a blockbuster. Definitely, Simparica is already a blockbuster, but we expect also that the triple combo will reach this status. In terms of the rest of the pipeline, definitely, there are programs for livestock. These programs, there are a lot of programs that maybe on aggregate basis will represent a significant growth opportunity. But I will not be surprised these programs, as probably in livestock has a blockbuster potential. But definitely, it will help us, first, to protect the current portfolio; and second, to bring innovation in livestock into the market. In terms of monoclonal antibodies for chronic pain, we expect that this will have the probability of being a blockbuster. And we are convinced that monoclonal antibodies for dogs and cats will represent a significant opportunity for treating dogs and cats in a different way than it is today with NSAID, especially for cats that there is nothing especially developed for these animals in terms of pain. But we also are excited about the opportunity of developing monoclonal antibody for dermatology in cats. Again, it's an opportunity that we expect that will be coming in the next 5 years, and it will be -- strengthen our derm portfolio, also moving to another species with the monoclonal antibody. Next question, please?

John Kreger with William Blair.

This is Jon Kaufman on for John Kreger. So a couple of questions on cattle here. You mentioned premium product sales in the U.S. Is that a trend that you foresee continuing in spite of market weakness? And then internationally, where are we in the cycle in some of the key markets? Looking out beyond 2019, can International growth more than offset U.S. weakness? And what are your expectations for long-term growth in this market?

Definitely, the U.S. market for cattle has been, in many cases driven by our premium products. While some of our products, they faced competition during the year, especially when the situation of the animal was of lower risk profile. But we also have seen that in risk situation, our premium products are the best products that they need to protect or to treat animals. So we are confident that our premium products also will remain generating growth in the future. In the U.S., definitely, we see the cattle business growing below market and maybe also growing below what we expected 7 months ago. Because we also projected dairy recovering in the second half of 2018. Then we think that it will take even longer to see a recovery on the dairy business.

In the case of beef, I think, will be always cycles, animals moving into the big lot sooner or later, but we don't see a significant change on beef. We're still projecting that beef will be -- slightly increasing the number of animals, only by 1%. But we think that beef will be probably in line with what we expected 7 months ago. We expect that the overall cattle business for Zoetis will be growing in 2019, and maybe growing faster in International markets than in the U.S. And as we said many times, the diversity of our portfolio is in species and geographies. It's helping us to manage these cycles. These are cycles that we been facing forever, and that's one of the things that not only our industry, but also for Zoetis has been very consistent. Even in the face of changes, cycles, regulatory situations, very consistently delivering growth, in line with the market or even higher in the last 6 years of Zoetis as a public independent company. Next question, please?

We'll go next to Jon Block with Stifel.

Maybe a couple of questions, and I'll try to rope it into one long one. So, Glenn, the 150 FX basis point headwind, I thought you messaged maybe 200 to 300 basis points recently at J.P. Morgan. So I just want to see if I'm correct and what if anything has changed there. And on that same question, is the midpoint of '19 EPS of $3.47 imply any sort of share repo? I think just trying to flow through your numbers, I get towards the lower end of the EPS, if I use the 4Q share count. And then just to pivot over to Abaxis. When you guys bought Abaxis, Juan Ramón, they had a bunch of the new products in their pipeline, urine sediment, blood gas, rapid assays, so just any more color you can give us on -- in your control now for 4, 5 months. How is the uptick been on some of these new products within your portfolio?

I'll address the FX questions. So you are correct, when we were at J.P. Morgan, we did see a bigger impact of foreign exchange based on the rates that were applicable at that time. In terms of the guidance that we have today, we based the guidance based on FX rates as of the end of January. And as I mentioned, based on that, there is a 150-basis-point impact to revenue. However, if you look at the last few weeks, the dollar has continued to strengthen. And based on the rates that we see actually as of yesterday, our revenues would be negatively impacted by about another $50 million and EPS by a few pennies. So this is currently not reflecting our guidance and something that we'll continue to monitor. The other question you had was in terms of the midpoint and in share repo? When we set our guidance range, we really only assumed that will offset dilution from compensation in terms offsetting our guidance, but nothing additional.

Then on the Abaxis question. So the focus that we have been in the last [small sessions] has been to ensure that all the portfolio -- existing portfolios, were really meeting the needs and the quality that is expected from our customers. And one of the efforts that we have been doing significantly is to make sure that our equipments are connected to the practice management system and that's really helping veterinarians to have a full integration of information from different equipments in the clinics. We have also been working on defining the priorities in terms of R&D focus. And we are progressing very well. In terms of -- you're asking also about new products. Well, definitely, the FLEX4 is working very well. We also are planning to introduce FLEX4 in International markets, including Canada and some other markets. And we will provide a little bit more details on the future launches as we are making progress in terms of defining all the priorities and all the products that will be coming in the next coming years. So next question?

We'll go next to David Risinger with Morgan Stanley.

I have -- well, first of all, congrats on the performance. I have 2 high-level questions. The first is with respect to Abaxis. We spoke with a consultant who suggested that it will be difficult for Abaxis to displace IDEXX at many U.S. customers. Could you speak to that, your ability to knock IDEXX out of U.S. customers and drive placements of Abaxis going forward? And then with respect to the FDA's assessment of heartworm drug efficacy and potential resistance concerns, could you just speak to where the FDA is in that process? And whether the heartworm coverage that you are able to demonstrate to the FDA for TRIO will be at the 100% level or whatever level the FDA will require?

Thank you, Dave. Starting with the question on heartworm. Definitely we have presented to the FDA. All the support of the 100% efficacy in terms of projection -- protection against the heartworm. So what is the process of the FDA, is something that -- that probably we cannot comment. But we are confident that we have submitted all the data to support our efficacy and safety profile. We'll continue working with the FDA. It's a process. It's a process of us submitting different dossiers, information, and also responding to questions. We are confident that the process will be able to introduce the product in 2020. About the question on can we gain share in the U.S.? Well, the answer is yes. And we are convinced now that Zoetis is competing with any competitor in the market on equal or even stronger conditions. In the past, Abaxis was limited in terms of access to customers. And I mentioned that maybe they were meeting or visiting their customers once per quarter compared to the -- our competitors having even more frequency than once a month. Now we have the opportunity to really be in front of customers even more than once a month for customers. And also very important, we have the opportunity also to combine all the diagnostic portfolio with our strong portfolio of vaccines, parasiticides, derm and so on and so forth. And also create a value proposition to the customers that was not available at the time of Abaxis. So I understand that there may be people that need to be convinced, but I hope and we'll be working hard to make them wrong in terms of the assessment that we cannot compete against IDEXX. Next question, please?

We are going next to Chris Schott with JPMorgan.

I guess first one is on Apoquel. I'm just trying to get a sense of where we are in the growth cycle here. So specifically, how much more growth potential do you see for the product in the U.S. market? And when you think about the ex- U.S. opportunity, can you just give us a little bit more color about how uptick has trended relative to the U.S. in the markets that you've launched? And what are the biggest ex-U. S. opportunities that you are watching? My second question was on margin expansion over time, so beyond 2019. I know you highlighted '19 as being an investment year with Abaxis coming on board and the R&D investments. But when we look beyond '19, can we think about OpEx growth returning back down to low single-digit levels? Or should we think about Zoetis in a period of kind of multiyear period of OpEx investment, as you overcome these growth drivers, and again this is beyond '19 as we think about the longer-term model?

Thank you, Chris. Well, on Apoquel and comments for the U.S. and also comments for International. In the U.S., we started the year with patient share of 59% and we ended 63%. We still think that there are opportunities of growing the patient share. Second, we still see opportunities for expanding the market. I will continue expanding the market or helping to expand the market with DTC campaigns. That will be the third year that we are investing to create this market demand. And third, we still see opportunities for pricing. So these 3 elements are probably supporting the growth in the U.S. for Apoquel. Definitely lower growth than what we have seen in previous years. So the product has been in the market now for 4 years, will be 5 years in 2019. So we should expect that there will be some reduction on the growth in the U.S. In International markets, well, the situation is slightly different. And I'm not talking about only Apoquel, I am talking about the full derm portfolio, including Cytopoint. Cytopoint has been introduced in the market recently in some International markets. We expect growth in introduction of Cytopoint. We still expect growth for Apoquel. Definitely in terms of patient share, it's below the patient share that we have achieved in the U.S., and we expect that over time, reaching a similar level of patient share. Although the number of medicalized drugs outside of the U.S. is lower in the U.S. And finally, we expect in 2019 to introduce the product in China. And again, China has been a market that has been surprisingly positive in terms of growth in companion animals. Now if I remember it well, and, Glenn, you can correct me if I am not. So now China, in terms of the companion animals is the second largest after U.S. and maybe some other market, but the second or third, it's in companion animals, growing very fast. And we expect also that Apoquel will be successfully introduced in these markets. Talking about margin expansion, you want to cover this question?

Of course. Chris, there are a number of opportunities for us in terms of margin expansion beyond 2019. Just starting with cost of goods and beyond 2020, and delivering on the proposition of delivering the 200-basis-point improvement from 2017. As we look past that, we should be able to continue to get improvements in our cost of goods as a percent of revenue. Really the cost of goods efficiency coming from a lot of the capital investments that we're making today, which we expect to pay off in the longer-term in terms of improved cost of goods, and we'll continue to also get margin expansion from price. Looking at the OpEx lines, from G&A perspective, we do expect general and administrative expenses to grow more in line with inflation as we already have the infrastructure established in most of our markets. Selling will probably be more between the overall inflation rate and growth in revenue, and depending on the level of revenue growth that we have and new product introductions that we'll need to support. And then from an R&D perspective, that will really depend on the opportunities that we have, but that will probably grow more in line with the revenue than others.

Thank you, Glenn. And maybe adding that to the question on Apoquel or derm, I did mention that one day, we should be also facing competition. It's an area that Zoetis has created. It's not the first time that we are creating the market. We did it for pain and now with derm. But we are convinced that we have developed a significant portfolio in derm, a portfolio, which is showing a high level of efficacy, excellent safety profile. And we'll be also adding in the future monoclonal antibodies for dermatology issues for cats. So we are confident that, we have the opportunity of continue growing. Always we need to consider future competition in this space. Next question, please?

We'll take today's final question from Kathleen Miner with Cowen.

Juan, just a brief follow-up on the dermatology area, and I apologize if I missed it, but did you give an update for your expectations for 2019 for dermatology, particularly as you've met or exceeded the $500 million-plus for 2018? And the second question just on M&A. Does your 2019 guidance assume any small bolt-on acquisitions? And given that Abaxis is now on board, what would be the key areas we should watch for? There might be some interest in adding?

Thank you, Kathy, and -- well, in terms of the sales, big sales for our derm portfolio. So in 2018, we almost reached $600 million, it was $593 million. We are creating growth in 2019. But definitely, we are not now updating in terms of big sales. We know that in the future, we'll have competition in this space. So it's a little bit complicated now what is the full potential? We are convinced that we still have opportunities to continue growing. As I mentioned before, we also expect to add new products to our portfolio, monoclonal antibodies for cats and maybe also working to ensure that we also apply life cycle innovation to Apoquel to protect this franchise. And this can be in terms of formulations, in terms of expansion to all other species, so it's something that we'll continue working on life cycle innovations. And you also asked if we are including any acquisitions for -- in 2019 guidance? And the answer is no. So it's just our current portfolio, including Abaxis portfolio and what we described now as organic growth, including Abaxis -- and that we will continue assessing opportunities in the market. We are convinced that we have the infrastructure, we have the expertise to integrate. And also we have the reach to the customers, and we will continue assessing that opportunities available in the market. And if these opportunities are meeting the criteria of strategic value creation and supported by financials, we think that we have the cash possibility to go and acquire other companies.

And I think with that, we conclude this session. So thank you very much for attending the earnings call. Thank you for your questions. And with that, I -- we close this call. Thank you.

And this will conclude today's program. Thank you for your participation. You may now disconnect. Have a great day.