Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be introducing Zoetis today at the 40th Annual JPMorgan Healthcare Conference. From the company, we have Kristin Peck, CEO; as well as Wetteny Joseph, CFO. And before I turn it over to Chris, and I do want to remind people that if you have a question to use the Ask A Question feature on the website, and I'll work those into the Q&A after the presentation. So with that, Kristin, happy new year, thanks for joining us and look forward to the presentation.

Thank you, Chris. It's a pleasure to be speaking with you and the JPMorgan health care audience again this year. I know we're all a little disappointed not to be in San Francisco, but I want to thank the organizers for being cautious and early and continuing to put people's health first during the pandemic. So before I talk about how Zoetis is advancing animal care, let me mention a few legal housekeeping items, which can be found on Slide 2. As usual, our comments today will include forward-looking statements and non-GAAP measures. And you can find more details on these risks as well as reconciliation of the non-GAAP financials in the slide deck we published this morning and in the SEC filings on our corporate website. So let's get started, moving to Slide 3. Our purpose, to nurture our world and human kind by advancing animal care, drives everything we do. We've been pursuing this purpose for 70 years and has helped us to remain the world's leading animal health company. Its meaning resonates with Zoetis colleagues, who are proud to work for a company that values, understands and serves the human-animal bond. And during the COVID-19 pandemic, we've become more mindful of the essential role our medicines, vaccines and diagnostics play in society. We help preserve the health and well-being of pets and farm animals. We serve veterinarians and livestock producers, whose livelihoods rely on our products and services. And we keep the world healthier with vigilance and research to fight emerging infectious diseases and create a more sustainable world. And for those of you who may not be as familiar with Zoetis, let me summarize some of our key facts and figures here on Slide 4. We help predict, prevent, detect and treat animal disease and illness. We compete in a total addressable market of approximately $45 billion for animal health medicines, vaccines, diagnostics and related technologies and services. And we offer the industry's most innovative, diverse and durable portfolio to address the entire continuum of animal care. We also have a track record of healthy growth. Just 5 years ago, we generated $4.9 billion in annual sales. And in the guidance we gave in November, we anticipated full year 2021 sales in the range of $7.7 billion to $7.75 billion, with year-over-year operational growth expected in the range of 14% to 14.5%, our best year ever. This growth and our value creation has led to a strong total shareholder return, outpacing our S&P 500 care companies over the last 5 years. The breadth and strength of our business is evident in our market leadership positions shown on Slide 5 and have us well positioned for continued above-market growth. Zoetis features a portfolio of products across 8 major species, 7 product categories and being sold in over 100 countries. Our revenues are split about 50%, 50% between our U.S. and International Segments and about 60% to 40% between our companion animal and livestock portfolios. Based on market reports in the third quarter of 2021, we are #1 in 4 out of 5 species, including companion animals. We are pioneering research in dermatology, and the latest drumbeat of new parasiticides and monoclonal antibodies have us separating Zoetis from the pack. We continue to show strength across all major product categories, moving from #5 to #3 in parasiticides in 2021 based on our Simparica, Simparica Trio products. We're also #1 in all major geographies, except for Europe. This market leadership is built around the innovation, diversity and durability of more than 300 product lines. The numbers tell the story on Slide 6. We spend approximately $500 million annually in R&D to advance our pipeline, which has generated approximately 1,000 new products and life cycle innovations over the last 5 years. Our approach to innovation is a combination of breakthrough new products that can raise the bar for animal health as well as a steady set of enhancements to our existing product lines. Our product lines have an average market life of 30 years, providing solid and reliable revenue streams to support future growth. When you look at the span of our revenue drivers, our top 10 products are significant, but they accounted for only 44% of our revenues in 2020. Our R&D investments have also redefined standard of care for veterinarians, expanded entire product categories for future growth and become blockbusters for the animal health industries. And blockbusters are products with more than $100 million in annual revenue. As of 2020, Zoetis had 13 or more than 1/3 of the industry's blockbusters. And in fact, 6 of those products were greater than $200 million in annual revenue. This type of performance gives us great confidence in our ability to continue to innovate. For example, our dermatology portfolio has revolutionized the care of dogs, growing from $34 million in 2014, the first year of sales of Apoquel, to $941 million in 2020 based on Apoquel and Cytopoint. And it is a category we continue to expand through new geographies by increasing pet owner awareness and developing life cycle innovations like the recently approved Apoquel chewable tablet in the EU. We expect competition to come to this space, but we remain confident in our science, experience and talented R&D team to differentiate us. In 2021, we launched new monoclonal antibody products for osteoarthritis pain, Librela and Solensia, which are the latest breakthrough innovations from Zoetis. We view OA pain as another place where we can radically improve the standard of care, differentiate Zoetis based on our science and increase the pain treatment market for dogs and cats. We are already seeing great acceptance of these products in Europe and will be increasing awareness of this medical need in the EU and other markets over time. All of this innovation is supported by a top sales and service organization, a reliable, high-quality supply chain and disciplined investment strategy and to focus on execution. As you see on Slide 7 and 8, Zoetis has delivered a consistent track record of financial performance despite the pandemic and market and business challenges like African Swine Fever and generic competition. We have grown our operational revenue faster than the market every year since we became a public company in 2013. On Slide 8, you'll see we also continue to expand our margins and grow our adjusted net income faster than revenue, which enables us to make crucial investments for future growth. These are 2 of my favorite charts, because I'm incredibly proud of Zoeti's colleagues who have shown the resiliency, agility and customer focus to maintain this type of performance year after year in a dynamic marketplace. Now that I've spoken about the capabilities that gives Zoetis its competitive advantage, let's turn to the industry trends and future growth opportunities that excite us. The companion animal pet care space has been booming based on a few major trends that should be lasting for the market. In the U.S., for example, 65% of adults owned a cat or a dog in 2020, and we've seen more people acquiring more pets during the pandemic. Pet owners are also spending more time with their cats and dogs as they work remotely or stay closer to home during the pandemic. They've become more keenly aware of every scratch, limp and whimper from their pets. And we are seeing a new generation of pet owners emerging. Millennials and Gen Z comprise about 50% of all new pet owners in the U.S., and their connections tend to be more intense. They place a premium on their pet's health, and their belief in health and wellness translates to their canine and feline companions. In developed markets, we're seeing veterinarian and pet owners using more innovative treatments for all sorts of conditions, including dermatology and osteoarthritis pain. And the shift to online commerce and auto renewals, which accelerated during the pandemic, is increasing compliance for medicines like parasiticides. And this trend is not just in the U.S., increasing medicalization rates and spending trends for pets are global and driving growth in emerging markets as well. The livestock market is a different story, having been more impacted by the pandemic and economic challenges related to labor and input costs. These issues, however, are cyclical, and we believe the livestock market should be at a path back to more historical growth rates in the coming years based on several trends. Demand for animal protein continues to increase as the world population grows. Healthy animals remain essential to a safe and affordable food supply. Emerging markets, including China, are driving a lot of that increased consumption with either local production or through imports from other markets like Brazil. Given the economic challenges, producers continue to seek ways to increase their productivity and efficiency of their animals and operations, and this represents a growth opportunity for Zoetis' diverse portfolio and our increasing investments in digital and data analytics. We're also seeing an increasing focus on more sustainable food production with generics -- genetics, vaccines, technology and data analytics, all playing important roles in how we raise healthier animals, prevent disease, detect illness, identify production improvements and provide more individualized care to sick animals. Moving to Slide 11. You may recognize our 5 strategic priorities, which we established 2 years ago after analyzing many of these industry trends. We've made significant progress on many fronts since then, and we are confident they remain the right approaches to our long-term strategy. Let me take a minute to share how these priorities are evolving and directing our future plans. In terms of driving innovative growth, we continue to see tremendous potential in our existing portfolio of medicines, vaccines and dermatology products as well as recently launched parasiticides like Simparica Trio, ProHeart 12, Revolution Plus our latest monoclonal antibodies for OA pain, Librela and Solensia. As I described earlier, our abilities to develop life cycle innovations, pursue geographic expansions and increased market awareness for existing products have been key elements of our success. In terms of future products, we will continue to expand our vaccine portfolio for livestock and pursue monoclonal antibodies for new indications and conditions. We're also advancing our research on immunotherapies through our collaborations with Colorado State University. We continue to increase our understanding of the potential use of immunomodulators in livestock and advance our understanding of the biology of key diseases affecting companion animals. We see great promise for the role these insights can play over the long term, not only for reducing the use of antibiotics and livestock but also for new therapies that can treat chronic conditions in companion animals. In terms of enhancing customer experience, I think of this in a few ways. First, in using our own digital and data tools to know our customers better and make it easier for them to do business with us. We're using new platforms to share insights across our teams with the goal of anticipating more customer needs, sharing best practices with them and identifying future areas of innovation. We also want to demonstrate how we care for our customers, their animals and their practices in new and meaningful ways. For example, we established a Chief Medical Officer organization under Veterinarian, Mike McFarland, that is reaching out to the veterinary community through podcast and other programs to spotlight issues that impact their profession. We're also listening to customers in areas like sustainability to improve our packaging and support policy issues that matter to them. And ultimately, we're investing in our supply chain to ensure a reliable global supply and capacity for future demand. We are progressing on-site expansions in China, Ireland and the U.S. I am more convinced than ever that leading in digital and data analytics will help us address many of the most pressing customer needs for greater efficiency, speed and more individualized care. We've been doing a great deal of hiring and forming partnerships that are bringing new thinking to animal health problems. These technology-driven solutions are built around precision animal health, genetic predictions and artificial intelligence and diagnostic platforms to put data into the hands of our customers, where and when they need it. For example, our VetScan Imagyst, the first cloud-based artificial intelligence diagnostic platform, has been very well received by customers, and we're only scratching the surface as we continue to develop new applications. But delivering for and delighting customers can only happen when we have an aligned and high-performing organization. In the dynamic and challenging talent landscape we operate in today, more than ever, colleagues want to work for a company that is a market leader and innovator and whose purpose and values align with their own. Zoetis continues to be recognized for our culture and work environment around the globe and have maintained a high engagement score of 88% throughout the pandemic, based on the leadership and commitment of our people. As we enter 2022, we'll be doing significant hiring across our business to support growth opportunities we see in pet care, diagnostics and our international markets. And finally, we continue to champion a healthier, more sustainable future. We are still early in this journey, but in 2021, we announced our Driven to Care strategy and goals, published our first sustainability report. And just last week, we announced new climate goals committing to achieve carbon neutrality in our operations and 100% renewable energy usage by 2030. We have more work to do, but our efforts in sustainability have already led to recognition as one of Newsweek's Most Responsible Companies for 2022 and is one of Investor Business Daily's 100 Best ESG Companies. I'm excited to see where we'll go in the space. With these as long-term strategic priorities, let me spend a few minutes on Slide 12, discussing the near-term growth drivers we see for 2022. Pet Care will remain the major growth driver for Zoetis globally based on our diverse and innovative portfolio. We see continued growth opportunities for dermatology, which should top $1 billion in sales for the first time when we report 2021 results. Parasiticides, driven by our triple combination, oral parasiticides, Simparica Trio as well as Simparica, Revolution Plus, Stronghold Plus and ProHeart 12, will continue to achieve growth as we gain market share in major markets. And our monoclonal antibodies for OA pain in dogs and cats, Librela and Solensia, got off to strong starts in several markets in 2021. We also anticipate receiving the U.S. approval for Solensia in early 2022 and approval for Librela in the second half of the year, assuming FDA inspections are completed at facilities outside of the U.S. Diagnostics is our next major growth driver in 2022, with fully integrated point-of-care business that is primed for strong growth internationally, along with expansion plans for our relatively new reference lab operations. We're making significant progress in one of the fastest-growing markets for animal health. We are supporting this growth with more dedicated field force and customer service resources while developing more offerings that will leverage our portfolio across the continuum of care. Finally, we see significant growth opportunities in emerging markets, including China and Brazil. These remain solid growth markets for livestock as they are feeling less of an impact from generic competition than in the U.S. And companion animal products are also very strong based on increased medicalization, positive pet care trends and many of our newer products being well received and adopted. Our financial performance has remained very strong over the years, and it has allowed us to continue making meaningful investments in our business while returning capital to our shareholders. As illustrated on Slide 12, our long-term value proposition for shareholders continues to be: growing our revenue in line or faster than the market; growing our adjusted net income faster than revenue; driving growth through investments in innovation, R&D and business development; and returning excess capital to shareholders as we continue to invest in our business. In December, we announced the approval of a new $3.5 billion multiyear share repurchase program and a 30% increase in our quarterly dividend. These actions demonstrate our ongoing commitment to shareholders as part of our capital allocation priorities. And finally, on Slide 14, let me leave you with these conclusions. Zoetis is well positioned in a large and growing $45 billion animal health market that is resilient and essential even in the most challenging economic times. We have delivered a track record of strong and steady financial performance based on innovative science and market leadership positions; we were committed to sustaining. We are making investments across our diverse portfolio of operations to scale ourselves for future growth and execution against our strategic priorities. And finally, in the coming year, our major catalyst for growth remain continued strength in pet care based in parasiticides, dermatology and pain; ongoing expansion in markets outside the U.S., most notably China; and acceleration of our diagnostic performance as we build on momentum with more reference labs, new products and increased sales and technical services. We are looking forward to the year ahead and keeping you updated on our progress. With that, thank you. And now, Chris, would you like to open it up for Q&A for me and our CFO, Wetteny Joseph?

Great. Thanks so much, Kristin, and I appreciate all those comments. Maybe one, just to kick off on my end, starting on the product side. Obviously, you had a great year with Simparica Trio in '21. So maybe just as we exit the year, can you just remind us where you stand from a market share perspective? And when you look at some of the share that Trio was able to gain, is launched over the last 18 months or so, how much of that is coming from, I guess, newer and more competitive agents versus how much of this is coming from older prescription products or OTC? So just a little bit of flavor of where these -- where your share gains are accruing from?

Sure. Wetteny, do you want to start, then I can build off it?

Yes, sure. Look, we're very pleased with the progress we're making, not only with Trio and its penetration. I think you saw, with respect to Q3, we delivered $122 million of sales with Simparica Trio, but our entire Simparica franchise is actually growing quite well. In the third quarter, our Simparica franchise grew 69%. And if you look across flea, tick and heartworm in the U.S., our small animal parasiticides grew 37%. In Simparica outside the U.S., not Trio, Simparica grew 37% as well in the quarter. So the entire portfolio of parasiticides is growing quite nicely for us. And this is the largest sort of market within Animal Health, which is roughly $5 billion, and we continue to see opportunity to grow in this market and gain share. We -- our Simparica brand is now the #2 flea, tick heartworm brand in the U.S. And we, again, continue to put advertising and promotion and investments behind the brand to continue to drive growth here, particularly as in the U.S., we are the only triple combination product with flea-tick as well as heartworm. Kristin, if you want to add anything.

No, that was great.

Great. And just on that competitive landscape, I think your latest commentary maybe suggested competition in second half of '22. Is that still a fair assumption to work with? Or any updates on that time line?

Sure. I mean we still are expecting second half 2022, Chris. But I feel like, if you've been paying attention in the last years, we say that every year. We only have, again, in our space for those that are new to animal health, there's no public disclosure. So our knowledge is based on 2 things normally. The first is when I'm negotiating with my major customers, are they thinking there's the competition, and they're going to try to push us on price, et cetera? Or ahead of major conferences, our biggest conferences are VMX and Western Vet in Q1, and we see buying of advertising stuff. Obviously, we're not expecting that right now. Both Wetteny and I will be heading to VMX this weekend to meet with some of our major customers, and it's too early in the year to be negotiating 2023 contracts. So I mean, I will say, we'll give you an update as soon as we have one, but as you know, we don't have great access to information here.

Absolutely. I guess just in general, if I think about this franchise, though, I think relative to a few years ago, it does seem like you had maybe a longer window here than what we might have anticipated. I guess has that changed how you think about either peak share or peak sales or just more broadly, how you think about investing behind Trio given this kind of long runway you had to kind of be [indiscernible] in the U.S. market?

Well, Chris, you remember, we had this conversation about 2 years ago when we were launching, and I didn't know and we didn't know as an industry when competition would come in. So I said, we'd be as aggressive as possible and only the paranoid will win. And we invested aggressively behind Simparica Trio and Simparica because we didn't know how much time we have. And I think you've seen us do that in a number of ways, certainly with direct-to-consumer advertising, but also investing in our field force in the U.S. and in Technical Services, and you're going to see that continue into 2022. We're really excited. We'll leverage every additional day that we have to build our brand awareness, to build loyalty with both vets and pet owners. So we're investing aggressively behind this as well as really building some retail capabilities to partner with some of those alternative channels to make sure that we can be most effective in a space that is heavily influenced, obviously, by some of those alternative channels.

Okay. Great. The other kind of big launch we're going to be watching here on the pain side. Maybe we can just talk a little bit about the rollout of Librela and Solensia in Europe. Just how those launches trended versus your expectation?

We're really pleased with how they've been trending. We had a very disciplined and thoughtful approach to launching those based on what we learned, honestly, with Cytopoint which is we started both of those with early experience programs for a number of months, really spending time with [ KOLs ]. Just as a reminder, monoclonal antibodies in the space are a new mechanism of action. And so we really wanted to make sure that some of the key opinion leaders had experience with the products and therefore, could then advocate to general practitioners for these injectable products. It's really played well for us when we did it with Cytopoint. And as you look at the progress quarter-over-quarter for both Librela and Solensia outside the U.S. where we've launched, it's worked incredibly well. And we really feel like we've got tremendous momentum as we go into 2022 to continue to grow those products in the markets where we've launched as well as to experience some of the markets we're planning to launch them in outside of the U.S. So I think this is really giving us the playbook for how we'll do it as we think of the U.S. And I want to put a particular emphasis here on Solensia. Because we're talking about cats, where they're not terribly medicalized to start, there's really never been a product for this. So we've got to spend a lot of time preparing the market for what that looks like, how to help identify what arthritis looks like in cats to get those vets to get those cats into the clinic, et cetera. So we'll be quite thoughtful, and you can expect a similar process for us as we launch in the U.S. or get -- hopefully get approval and we'd hope to launch in the U.S. But Wetteny, is there anything you want to add to that?

No, you covered it well, Kristin.

Okay.

Can I just ask, just as we think about maybe comparing and contrasting as we watch the European rollout, what are the similarities in terms of the U.S. market? And are there notable differences we need to keep in mind as we think about hopefully some approvals this year and getting those to the market in the U.S.?

Well, a few things I'll note. Outside of the U.S., it ranges by market, but in Europe, where we've launched Librela and Solensia, we can't do branded advertising. So we often find that the uptake of new technologies in Europe is slower than it tends to be in the U.S., where we have more tools in our tool belt to try to build awareness, get pet owners to ask for products as they come in. So we've looked at across the board any new technology, whether that be even diagnostics or pharmaceuticals treatments, et cetera, it tends to be a little slower outside the U.S. than we tend to see in the U.S. However, we're kind of trying this time to change our thinking a little bit and to consider even unbranded advertising in spaces like dermatology in Europe. But we would expect that the U.S. could be a little faster because of our ability to do branded advertising. But Wetteny, is there anything else that I didn't think of there that you'd add?

No. I think we've certainly put advertising promotion behind a number of our brands. And where we can, particularly where we have a market position where most likely the benefit will accrue to us. We're doing unbranded advertising where the pet owners going to the vet will likely be looking at one of our products. So we'll continue to do that to capitalize on our position across various markets.

Okay. And any update on the U.S. regulatory front in terms of the applications of note?

Yes. I mean as I mentioned in my prepared remarks, we are expecting Solensia to be earlier in the year. So hopefully, sometime in Q1. -- And for Librela, it's still projected to be in the second half of the year, but that is dependent, as I mentioned in my remarks, on getting an inspection of the next U.S. site. So I mean I guess the only thing is probably a little earlier in the year on Solensia is the only thing I would say is a little bit of a change there.

Yes. Okay. Perfect. Excellent. Continuing through the companion portfolio. I guess on the derm side, as we think about the kind of addressable market here, I think you've talked about the millions of dollars not getting access to these products that may be need access. What do you think needs to be done to fully drive penetration of this market? Because it's one that I thought it was just going to be one we'd see kind of peaking and kind of plateauing a lot sooner than it has, and it's been obviously a very durable growth asset for you. So just help a little bit in terms of like in terms of where we are at this stage in the launch. And what you're most focused on and to driving growth here?

Yes. Let me compare and contrast sort of the U.S. and ex U.S. In the U.S., we've been doing branded and unbranded. And the reality is there are still 7 million untreated dogs in the U.S. So it's still really getting pet owners to realize that itchy dog, there could really be an underlying health condition there, and you should talk to your vet about potential treatments. And that's been incredibly effective, also getting more people more compliant. So I think [indiscernible], there's lots of things we can do in the U.S. to continue to build that. Outside of the U.S., where we've been more limited in our ability to do branded advertising, it's really investing for the first time now in unbranded advertising outside the U.S. to get the pet owner to realize, if they have an itchy dog to speak to the vet about it. Since we are the only products approved right now outside the U.S., all that advertising only really helps us. So it's the ROI and it is much stronger than if there's lots of competition. So we are really focused on doing that. As I said, pick up of new technologies tends to be slower outside the U.S. We also are still launching in new markets outside the U.S. in these products. So we also have like new addition of new markets. But I think there still remains a significant opportunity to grow this market. The last thing I'll say is we're also looking at new life cycle enhancements and new products. So we recently got the approval of Apoquel chewable in the EU, which is for people who have difficulty getting their dogs to take pills, it's a great new addition as well. So as I mentioned in my remarks, we're going to continue to invest aggressively behind the franchises we build, both from sales, A&P, technical as well as really looking at new innovations in the space.

Excellent. And I think about the pipeline front, I mean, I think you mentioned in the presentation kind of other roles for monoclonal antibodies in the pet market. Are there markets that you're most interested in there or focused on as we think about kind of after paying, what's the next kind of big opportunity for the company?

There's a number of spaces when you think about that platform. We're talking about immunotherapies and monoclonal antibodies. There's just a number of diseases we think our platform and immuno and that space can really make a big difference. And certainly, we've talked much in the pet care space, chronic kidney disease, many other diseases where this platform is highly relevant. But we really also think immunotherapies are going to be a key trend as well in the livestock space. And our partnership with Colorado State is really focused on figuring out products that we can bring to market there, where I think people want more preventative products, things can help really versus just full treatments and antibiotics alternatives there. So we think we're really quite excited what that platform can do.

Great. One more for me on the companion side. Kind of a bigger picture, I guess. If I think about going through the second half of 2020 and 2021, it seems like the companion market had some tailwinds in terms of pet adoption, et cetera. I guess if we look out to 2022, when we start to annualize some of these, are you seeing any notable trends at the vet level? One seems to have either like pet adoption rates changing or the way the medical utilization of -- medicalization of pets is changing. Anything of note that, as we've now had a little bit of a distance, maybe from that bolus of new animals that came on board?

Yes. I think some of the trends you saw in 2021 will be sustainable as you look into 2022 and beyond. For starters, more people home more often, noticing more, as I mentioned. As much as we all thought, we'd like that to all [indiscernible] to happen. So I think that is more sustainable. And by the way, not just in 2022. I think the days of everyone being gone 5 days a week. So people are going to be spending more time at home. Those animals become more and more part of your family. But I think some of the most fundamental shifts is actually who's adopting the animals and how they look at animal health, and that's millennials and Gen Z who spend a lot more time focusing on the health and wellness of their pets, investing a lot more in that. And as these pets age, their wellness needs will increase as well. So we see many of these trends really being sustainable over a longer trajectory. But Wetteny, is there anything you'd add there?

The one thing I would say is it's remarkable how these trends are not only in sort of mature markets, but we see them across our emerging markets as well, as you've been doing more and more virtual meetings with our teams across the world in different markets, which are seeing companion animal trends similar to what we see in the U.S. and Western Europe. And we think, again, those are very lasting trends that will continue to drive increase in standard of care for pets no matter where they are around the world, which we think will continue to drive growth for us.

Great. One question I get pretty frequently is just thinking about margins for '22. It seems like another -- you're investing pretty heavily. You've got these really nice growth drivers. Should we be thinking about more modest margin expansion as you're investing in these launches? If we look out to '22, and your formal guidance somewhat in the future, but maybe just help us a little bit in terms of the level of investment for this year as you get all these new launches off the ground.

Yes, as Kristin mentioned in the prepared commentary just a little while ago, our long-term value proposition is to not only grow top line above the market, which we're well positioned to do with our innovation, but also to grow adjusted net income faster than revenues. And we don't -- we see that continuing even as we make investments across our brands and investments in R&D as well as CapEx, et cetera. So while we'll do those investments, and they might tighten the range between what the top line growth is versus what the adjusted net income growth is, we do see the opportunity to do that. One other point that I'll make is, if you look at the animal -- companion animal growth that we've seen and the innovation, that's driving improved mix for us is favorable from a pricing perspective and from a margin standpoint. So that allows us -- and we have the ability to drive price, particularly to offset inflation and other things as we look ahead. And those will allow us to continue to drive growth margin expansion for gross margin, but even as we make investments across the business, to still be in a position to grow the bottom line faster than the top line.

Great. And you did mention inflation. In terms of the -- is inflation something we have to think about in terms of your business? I know you've got maybe a different mix than some of your peers who are seeing a little bit more margin pressure here. But just how do we think about inflation affecting the business in '22?

Yes, we've seen some effects in 2021 as it is with some of our input costs, freight costs, landed costs, but those have been more than offset by the favorable mix that I just described as well as being able to take price. And so as you look at our results from Q3, for example, we were able to report 2 points of growth coming from price. And so as we look ahead, particularly on the companion animal side, we see an opportunity to do that, that will offset inflationary pressure that we can see as well as what we see on the livestock side, where we continue to see competition intensifying around the loss of exclusivity for Draxxin, et cetera. We see the opportunity to take price on the companion animal side as well as mix improvements that will more than offset those.

Great. Maybe in the last few minutes here, just pivoting over to livestock. Just as we enter in '22, can you just talk about the overall environment you're seeing here? So I guess where are we seeing kind of the healthiest signs of recovery? What markets are lagging? What are the segments you [indiscernible] to us?

Sure. I will start...

Maybe I'll start and then...

And you can certainly build on it. As we look into -- as we talked a little about livestock over the last few years, it tends to be cyclical. There's been a number of challenges. Some of that are going to continue that I'll talk about that we face. So as you look at that, certainly, we had ASF in 2019. And really, COVID had a very different impact given labor and input costs for livestock and supply chain disruptions. I think some of that stuff is working its way through. You're still seeing a lot of differences across species. We ultimately believe livestock goes back to a mid-single digits, 4%, 5% growth rate. Zoetis has been lagging certainly in 2021 and will continue in 2022, given the loss of exclusivity of key products such as Draxxin and Zoamix that we have. But ultimately, the demand for protein is not changing. Ultimately, China will stabilize with swine. I know there's been a lot of turbulence over the last few months sort of in the pricing of swine there, but that will eventually work its way out. And the underlying dynamics of livestock will bring it back to that. I think the other major trend that we're excited about is really getting back to some more innovative products. We're excited at the launch of some of our vector vaccines, certainly in poultry, a little bit being [ worse ] by the LOE of Zoamix at the moment, but really exciting progress there, certainly launches the vaccines and swine and then really looking as we look toward '23 -- 2023 and 2024 getting back to more historical trends for growth rates in livestock. But as Wetteny mentioned, by species, by market, these trends look very different. So when you double-click any given species, it can be growing actually quite well like cattle in Brazil, whereas the U.S., where we have more of an impact of Draxxin, it's obviously more challenging.

Yes. And just on that generic, can you just remind us as we think about how much headwind you experienced in '21 and just maybe the -- how much more is to come in '22? So how far through this LOE cycle -- or I guess, ROE for the livestock business?

The LOE is playing out exactly as we thought it would. We expected to see about 20% headwind for Draxxin in the first year, and we're seeing about that. It was a little bit delayed, if you recall, in the first quarter, we didn't see the competition. But is it -- as you've come through to Q3 and then expecting more for Q4, we see that come through. And then we said the second year, we expect another 20%. Now what you see is we have an innovation like Draxxin KP as well as it's really been mostly on price where we've maintained most of our volume. So when the dust settles on all this, we expect to maintain leadership in this very important premium anti-infective market. And we're seeing an expanded use of macrolides for areas where perhaps producers would have seen less risk. With prices having come down, they're using more of them, and we see that expansion also contributing to volume. So overall, it's playing out exactly as we thought, but we do continue to see competition intensifying around the LOE.

Okay. Excellent. And then just in the last minute here. Just when I think about capital allocation, you announced the multiyear share repo, you've got a pretty sizable cash balance at this point. How do I think about business development and kind of your biggest areas of the focus given you've obviously got an industry-leading position in a lot of the markets you compete in? So what are you most focused on as you think about where Zoetis could -- what capital deployment could enable for Zoetis going forward?

Look, we're really well positioned to be able to continue to really invest internally in R&D and CapEx, as we've talked about already, behind our key brands, parasiticides, derm and as we launch our OA pain franchise with monoclonal antibodies. And at the same time, we also have the opportunity to really invest in [ BD ] as we look across our strategic areas of focus. And you saw the most recent acquisition, which is Jurox, which we plan to close here in this year. And then previously, you saw the deals that we did across the reference labs with respect to diagnostics. So we continue to see [ BD ] playing a key role for us. Do we anticipate large transformative-type transactions? Probably not. But we do think across our core, in areas that are key for us from a strategic perspective, we see opportunities to continue to pull on that lever and still have cash that we'll look to return to shareholders via the multiyear sort of share buyback program that we announced and continuing to increase our dividends, as you saw a 30% increase in dividends quarterly dividends that we announced as well.

Great. I think we're just out of time. Chris and Wetteny, I really appreciate the comments and congrats on all the progress you're making with the business. Thanks for joining us.

Thank you, Chris. Thank you.

Great. Thanks. Thank you.

Thanks.