Welcome to the First Quarter 2021 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 two hours after the conclusion of this call via dial in or on the Investor Relations section of zoetis.com. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Thank you, Keith. Good morning, everyone, and welcome to the Zoetis first quarter 2021 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website 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 statement in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K in 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, Thursday, May 6, 2021. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Thank you, Steve, and good morning, everyone. I hope you and your loved ones are all staying healthy and able to get vaccinated for COVID-19, if not already, then soon. We've been very fortunate in the U.S. as vaccination rates are up and infection rates are trending down overall. But that is not the situation everywhere. In many countries, improving access to vaccines and controlling infection rates are critical hurdles for a more comprehensive global recovery. Yet with the extraordinary measures being taken by so many, I remain optimistic about the steady progress we're making to beat this pandemic. I'm also very proud of what we've been able to do at Zoetis to support the global effort. We've been able to keep our colleagues safe, encourage and assist them with vaccinations where possible, and continue serving our customers in the care of their animals. And we're off to a very strong start in 2021, executing on strategies for building on our innovative pet care portfolio, expanding in key markets in the U.S. and accelerating our growth in diagnostics. In the first quarter, we grew our top line revenue at 21% operationally, our best quarter ever, with 25% operational growth internationally and 19% growth in the U.S. China and Brazil led our international performance with 75% and 48% operational growth respectively, exhibiting their strength in both companion animal and livestock product sales. In total, our companion animal portfolio grew 34% operationally based on the strength of our parasiticide and dermatology products, while our livestock portfolio grew 8% operationally with solid growth in cattle, swine, and fish products. Digging deeper on pet care, it has been one year since the launch of our triple combination parasiticide, Simparica Trio. It is exceeding expectations and has been well received by customers, with a 90% plus penetration rate in our largest U.S. corporate accounts. Simparica Trio is the latest growth catalyst for a portfolio of small animal parasiticides. After several successful innovations in the last few years, these products made up 16% of our total sales in the first quarter and include such brands as Simparica, Simparica Trio, Revolution, Stronghold, and ProHeart. We believe the ongoing market shift to e-commerce is another boost for this category, helping to increase compliance and months on therapy. And our direct-to-consumer campaigns for Simparica and Simparica Trio continue to show a solid return on investment in markets around the world. Meanwhile, our key dermatology portfolio, led by Apoquel and Cytopoint, demonstrated continued double-digit growth. We are seeing excellent traction and significant growth in off-the-range international markets. Our dermatology portfolio has further growth potential as we continue expanding our international customer base and seek to become a more common first-line treatment for osteoarthritis in dogs. Veterinarians and pet owners alike appreciate the exceptional standard of care that our products can provide. In the companion animal space, we also continue to be pleased with our diagnostics portfolio, which grew 47% operationally in the first quarter. We have grown our point-of-care diagnostic sales, made excellent progress on improving our connectivity solutions in veterinary practices, and have seen our cloud-based VetScan Imagyst platform receiving very positive customer feedback, with placements exceeding expectations in the early launch. We're also making progress on our reference labs integrations and look forward to future expansions in this space, both in the U.S. and internationally. Our growth in livestock was driven by the performance of cattle, swine, and fish in the first quarter. Cattle product sales in the U.S. were strong as the food service sector has started to recover and generic competition for DRAXXIN was later than expected. Meanwhile, swine benefited from the continued recovery from African swine fever in China. Thanks to the unprecedented growth in revenue and our continued financial discipline and adaptability throughout COVID-19, our adjusted net income increased by 34% operationally. Looking ahead, we are raising guidance for operational growth and full year revenue to the range of 10.5% to 12%. And while we had an unusually strong first quarter, we expect more normalized revenue growth in the second half of the year due to tougher comparative quarters and increasing generic competition for DRAXXIN. Glenn will provide more details on other guidance updates in his remarks. Since the beginning of the year, Zoetis has continued to advance our key priorities, including key milestones for new products and life cycle innovations and geographic expansions for major brands. Since our last earnings announcement, we received approval in the European Union for Solensia, the first injectable monoclonal antibody for the alleviation of pain associated with osteoarthritis in cats, and will be launching this year. Osteoarthritis is vastly underdiagnosed and undertreated today due to limited options for therapy and difficulty recognizing pain in cats. Meanwhile, Librela, our monoclonal antibody for the alleviation of OA pain in dogs, has launched in the EU. And we're seeing a great customer response from vets and dog owners who reference increased activity, sociability, and quality of life for their pets. In the U.S., we continued discussions with the FDA regarding our regulatory submissions and manufacturing inspection for Librela and Solensia, and we now anticipate approvals for both products in 2022, with Librela likely later in the year. We will provide updates on U.S. revenue expectations for these products in 2022 as we get further clarity on approval timing and rollout plans. It is also worth noting that in China, which is our second largest market in terms of revenue, Zoetis recently received approvals for several leading products, Fostera PCV MH, a 1-shot vaccine for pigs; Excenel RTU EZ, a key anti-infective for cattle and swine; and Revolution Plus, our latest parasiticide for cats. We continue to strengthen our portfolio in China, one of our key catalysts for growth. We're also maximizing our key brands with more geographic expansion. In poultry, we expanded our line of recombinant vector vaccines with approval of Poulvac Procerta HVT ND in Canada, Brazil, and several other smaller markets. And in parasiticide, we received additional approvals for Simparica Trio in Japan, Mexico, and several other smaller markets. In terms of sustainability, we published our long-term goals in March with specific commitments to communities, animals, and the planet. We've built a comprehensive and rigorous approach through our Driven to Care program, and our goals include support for 10 of the 17 United Nations Sustainable Development Goals. We'll be releasing more detail on these goals and our initial progress in our sustainability report this June. In closing, the fundamental growth drivers for our industry continue to show strong and sustainable momentum. Pet adoption trends and higher spending per visit in the U.S., along with increased medicalization rates in markets outside the U.S., all continue to bode well for significant growth in our companion animal and diagnostic portfolios globally. We feel very confident about where our companion animal business has come over the last few years, launching innovative new products, defining new standards of treatment, and expanding our global reach. In 2014, our companion animal business was 34% of our total revenue. Last year, it had grown to 55% based on the strength of our innovation and investment in growth, and we see that continuing to expand. In livestock, the industry is in a more limited innovation cycle, and we expect modest growth for the year. Livestock growth is tied closely to the pandemic and how quickly the food service industry recovers. For Zoetis, we also anticipate increasing headwinds of generic competition to DRAXXIN, but we expect our life cycle innovation and competitive strategies to help us mitigate the impact. While U.S. livestock may present challenges for us in the near term, I feel very positive about our catalysts for growth in pet care, diagnostics, and international markets like China and Brazil. We continue to be led by our companion animal parasiticide and dermatology portfolio with more growth to come, and we see a bright future ahead for our monoclonal antibodies for pain. Diagnostics is accelerating its growth as we increase our global footprint, expand our reference labs, and demonstrate the potential for VetScan imaging to veterinary clinics. And internationally, China continues to be a market with significant growth potential, not only in swine products but with a sizable opportunity for increased medicalization of pets. We expect major growth to continue in Brazil across the companion animal and livestock portfolios. As always, we remain confident that Zoetis' diverse portfolio across products and geographies, our continued pipeline of innovative new products and life cycle innovations, and the agility and commitment of our colleagues will continue driving our success in 2021 and beyond. Now let me hand off to Glenn, who will speak more about our first quarter results and updated guidance for the full year 2021.

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a very strong start to the year, delivering substantial growth on a global basis and across species and therapeutic areas. Today, I'll focus my comments on our first quarter financial results, the key drivers contributing to our performance, and an update on our improved full year 2021 guidance. In the first quarter, we generated revenue of $1.9 billion, growing 22% on a reported basis and 21% operationally. Adjusted net income of $603 million was an increase of 33% on a reported basis and 34% operationally. Operational revenue grew 21%, resulting entirely from volume increases with price flat for the quarter. Volume growth of 21% includes 13% from other inline products, 5% from new products, and 3% from key dermatology products. Companion animal products led the way in terms of species growth, growing 34% operationally, with livestock growing 8% operationally in the quarter. Performance in companion animal was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., certain European markets, Canada, Australia, and Mexico. We also saw growth in our key dermatology products, Apoquel, and Cytopoint, as well as in small animal vaccines and diagnostics. Following blockbuster sales in year one, Simparica Trio begin 2021 with strong first quarter performance, posting revenue of $90 million, growing sequentially each quarter since launch. The underlying dynamics that drove first quarter sales are very favorable for significant future growth, such as increasing clinic penetration and robust reordering rates within penetrated clinics. I'd again like to mention how pleased we are with the performance of our broader parasiticide portfolio which, in addition to the Simparica franchise, had significant growth in the Revolution, Stronghold, and ProHeart franchises as well. U.S. market share within the flea, tick and heartworm segment is now at an all-time high of 31%, representing an increase of more than 9% for the first quarter versus the same period in the prior year. Global sales of our key dermatology portfolio were $245 million in the quarter, growing 24% operationally. We remain confident that key dermatology sales will exceed $1 billion this year. Our diagnostics portfolio grew 47% in Q1, led by increases in consumable and instrument revenue. 2020 presented challenging conditions for our diagnostics business, as social distancing restrictions limited our ability to enter vet clinics and increase our market share. However, our vast product portfolio, commitment to innovation, and ability to leverage the breadth of our medicines and vaccines portfolio has us well positioned to grow faster than the overall diagnostics market. Livestock growth in the quarter was primarily driven by our cattle and swine businesses. Improving market conditions from the COVID-19 recovery, as well as successful promotional activities, led to increased sales across the cattle portfolio. In addition, later-than-expected timing of generic entrants led to strong first quarter sales for DRAXXIN. Our swine portfolio grew 19% operationally as large producers continued rebuilding herds as they recover from African swine fever and created significant demand for our products. Poultry sales declined in the first quarter as producers expanded their use of lower-cost alternatives to our premium products. The decline in poultry partially tempered the growth in cattle, swine, and fish. Now let's discuss the revenue growth by segment for the quarter. U.S. revenue grew 19%, with companion animal products growing 32% and livestock sales declining by 4%. For companion animal, pet ownership and pet spending trends remain promising. While severe weather caused a slight decline in vet clinic traffic for the quarter, revenue per visit was up more than 10%. In addition, pet ownership has increased and is trending towards a younger demographic, and younger pet owners typically spend more on pet care. This is a key driver for increased revenue per visit and creates robust demand for our diverse portfolio. Our small animal parasiticide portfolio was the largest contributor to companion animal growth, growing 74% in the quarter. Diagnostics, key dermatology products, and small animal vaccines also contributed to growth. Simparica Trio continues to perform well in the U.S. with sales of $83 million. The Simparica franchise generated sales of $112 million in the quarter and is now the number two brand in the U.S. flea, tick, and heartworm segment. Companion animal diagnostic sales increased 62% in the quarter as the continued recovery at the vet clinic and a favorable prior year comparative period led to significant growth in point-of-care consumable revenue. Key dermatology sales were $157 million for the quarter, growing 16% with significant growth for Apoquel and Cytopoint. U.S. livestock declined 4% in the quarter, driven primarily by poultry as producers switching to lower-cost alternatives unfavorably impacted our business. Swine also declined in the quarter, which is attributed almost entirely to a favorable nonrecurring government purchase, which occurred in Q1 2020. Cattle grew 6% in the quarter as promotional programs and the timing of generic entrants drove growth across the product portfolio. Growth in cattle partially offset the declines in poultry and swine. To summarize, U.S. performance was once again strong in what remains a very favorable companion animal market environment, in which we offer the broadest and most innovative product portfolio. Although livestock declined in the quarter with expectations of further declines for the year, we are encouraged by a series of food service trends such as increased dining out and school and business reopenings. Revenue in our international segment grew 25% operationally in the quarter, with companion animal revenue growing 37% operationally and livestock revenue growing 17% operationally. The strength in companion animal was fueled by the continuing trends of pet adoptions, increasing standard of care by pet owners, and our investments in advertising, all of which drove growth across our parasiticide and dermatology portfolios. Companion animal diagnostics grew 18% in the quarter, led by a 24% increase in point-of-care consumable revenue and a second consecutive quarter of double-digit increase in instrument placement revenue. We began early experience programs for Librela, a monoclonal antibody for alleviation of OA pain in dogs. The feedback from the programs has been extremely positive and further solidifies our view of the long-term potential of the product with an EU launch currently underway. Our feline monoclonal antibody, Solensia, will begin early experience programs in Q2. And with an EU launch to follow in the third quarter. Solensia will provide cat owners an innovative therapy to address one of the largest unmet needs in animal health. Our international livestock business saw double-digit growth across all species with the exception of poultry, which grew low single digits in the quarter. Swine revenue grew 29% operationally led by growth in China of 128%, marking the third consecutive quarter with swine growth in excess of 100%. While additional outbreaks and strains of African swine fever have occurred, we believe it is contained to a specific region and a limited number of customers. Cattle grew 11% operationally in the quarter as a result of marketing campaigns, key account penetration, and favorable export market conditions in Brazil and several other emerging markets. Our fish portfolio delivered another strong quarter, growing 39% operationally driven by strong performance in Chile, the timing of seasonal vaccination protocols, and the 2020 acquisition of Fish Vet Group. All major markets grew in the first quarter, many in double digits. China total sales grew 75% operationally, which, in addition to the significant growth in swine, delivered 59% operational growth in companion animal. Brazil grew 48% operationally in the quarter as sales of Simparica, the leading oral parasiticide in the Brazilian market, drove a 73% operational increase in companion animal. Overall, our international segment delivered strong results, again, demonstrating the value of substantial geographic and species diversification. Our companion animal business benefited from favorable trends such as rising medicalization rates outside the U.S. And while swine was the largest growth driver for our international livestock business, the contributions were broad-based with growth across all species. Now moving on to the rest of the P&L. Adjusted gross margin of 71% increased 70 basis points on a reported basis compared to the prior year as a result of favorable product mix, partially offset by foreign exchange and other costs, including freight. Adjusted operating expenses increased 8% operationally, resulting from increased compensation-related costs and advertising and promotion expense for Simparica Trio. This was partially offset by reductions to T&E costs as a result of COVID-19. The adjusted effective tax rate for the quarter was 19%, an increase of 230 basis points driven by a reduction in favorable discrete items compared to the prior year's comparable quarter, partially offset by the favorable impact of the jurisdictional mix of earnings. Adjusted net income and adjusted diluted EPS grew 34% operationally for the quarter, primarily driven by revenue growth. We resumed our share repurchase program in the first quarter, repurchasing approximately $180 million worth of shares. Along with our dividend, share repurchase is a critical component of our shareholder distribution strategy. We remain in a strong liquidity position and are highly cash generative. And as a result, we expect to be able to execute on all investment priorities, including direct-to-consumer advertising, internal R&D, and external business development while still returning excess cash to shareholders. Now moving on to our updated guidance for 2021, which we are raising as a result of our first quarter performance. Please note that our guidance reflects foreign exchange rates as of late April. For revenue, we are raising and narrowing our guidance range, with projected revenue now between $7.5 billion and $7.625 billion and operational revenue growth between 10.5% and 12% for the full year versus the 9% to 11% in our February guidance. Adjusted net income is now expected to be in the range of $2.12 billion to $2.16 billion, representing operational growth of 12% to 14% compared to our prior guidance of 9% to 12%. Adjusted diluted EPS is now expected to be in the range of $4.42 to $4.51, and reported diluted EPS to be in the range of $4.08 to $4.19. Our key assumptions for 2021 have not changed materially since the guidance we provided on our Q4 2020 call. However, our current view is that we will not face competition in the U.S. for Simparica Trio or our key dermatology products until the second half of 2022. On our fourth quarter call, I mentioned that we anticipated growth to be heavily weighted towards the first half of the year, and I'd like to take this time to expand upon that further. We are expecting first half 2021 growth to materially outpace growth in the second half of the year, primarily resulting from Simparica Trio sales and the favorable Q2 2020 comparative period related to COVID-19. Subsequently, we expect growth to moderate in the second half of the year as a result of increased generic competition for DRAXXIN and challenging comparative periods when pent-up demand in the first half of 2020 worked its way through the system in the second half. Now to summarize before we move to Q&A, we've delivered strong operational top and bottom line growth in the first quarter with significant gains in both companion animal and livestock and across nearly every therapeutic area and geography. In addition, we raised and narrowed our full year 2021 guidance. And while growth will moderate in the back half of the year for the reasons I outlined, we again expect to grow faster than the market and feel very positive about our position for sustained growth beyond this year. Now I'll hand things over to the operator to open the line for your questions.

We'll take our first question today from Erin Wright with Crédit Suisse. Please go ahead.

Great. Can you speak a little bit more about the underlying trends you're seeing across the U.S. livestock business? How has that segment performed quarter-to-date? And it seems that DRAXXIN competition has played out a little bit better than your expectations, but has anything changed in terms of how you're thinking about that headwind over the course of 2021? And then my second question is on parasiticides. It does represent a larger portion of your portfolio than it has historically. I guess how should we think about the seasonality of that business, the purchasing patterns both across retailers and vet clinics? And did you see any sort of pull forward outsized stocking dynamics in the quarter that we should be aware of and what your guidance now assumes for Simparica Trio?

Sure. Thanks, Erin. Regarding U.S. livestock, while overall numbers were down 4%, there were various trends at play. U.S. cattle increased by 6% this quarter, primarily due to a delay in the entry of generics into the market. While we anticipated more entrants earlier, we believe that this will not alter the overall outcome by year's end. We expect those entrants to arrive, and when they do, penetration rates for generics, particularly for DRAXXIN, should reach between 20% and 40% in both the U.S. and EU and globally. However, this may occur a bit later in the year. We performed well at the beginning of the year, but when comparing our results for DRAXXIN internationally, we saw an overall decline due to multiple entrants arriving sooner in those markets. Consequently, we don’t expect significant changes in livestock trends. We did observe, as Glenn mentioned, a decline in poultry, with seasonality affecting cattle, swine, and poultry. Nonetheless, we remind you that our overall livestock performance was up 8%. It's important to note that 60% of livestock is outside the U.S., and while we've emphasized U.S. cattle, growth in markets like China, where swine increased by 128%, and Brazil indicates that livestock is performing well globally. Regarding parasiticides, I'll let Glenn provide additional insights on specific trends.

Yes. So thanks, Erin. So from a parasiticide perspective, we had a really strong quarter with the Simparica franchise, 133% growth in the franchise. Great performance from Simparica Trio with $90 million in the quarter alone, and Simparica also delivering $74 million with 38% growth. In terms of seasonality, we typically do see Q1 and particularly Q2 being the stronger quarters from a parasiticide portfolio perspective, particularly in the U.S. However, as we do see Simparica Trio on a ramp-up curve, the impact of that seasonality may be a little different this year as we do expect to continue to increase our clinic penetration and adoption and market share within the clinics as well. So there definitely is some seasonality within the parasiticide portfolio. But with the continued ramp-up on the product, it may not be as severe as you would typically see with an established product.

Our next question is from Michael Ryskin with Bank of America. Please go ahead.

I want to start by discussing China, which has shown remarkable growth this year and in this quarter. You've mentioned some key factors contributing to this, such as the rebound from African swine fever, and the companion sector has been performing well for some time now. It's encouraging to see that growth is continuing. I'm curious about the sustainability of this growth. Should we view the 123 million figure as a new baseline for future performance, with expectations for further growth? Or could it be related to bulk orders, particularly in swine, as producers restart their operations? Additionally, I have a question for Glenn regarding the operating expense guidance. Can you elaborate on the assumptions behind operating leverage for the second half? Are there any new direct-to-consumer initiatives for Trio? Are you beginning to see any increase in expenses? Is inflation a factor we should consider? I'm interested in understanding how we should approach the ramp-up of SG&A going forward.

Thanks. Thanks, Mike. So starting with China, and I'll let Glenn take the second question. We do think this is a very sustainable growth driver in China, and really what drives that is a few things. One, I think you'll see African swine fever continuing a rebuild of the herd there. It is going to take a few years to rebuild that, so I think that is going to be for the next few years of sustainable growth. You saw swine grow in the quarter at 128%. But I think what's also really important to focus on is how well companion animal did, which grew 59%. We've been launching a number of new products, as I mentioned in my opening remarks. We had the launch of Fostera PCV MH as well as Revolution Plus. So continuing to bring in new products, seeing really, really good growth across both companion animal and livestock, makes us believe that China and the investments we've even talked about in building additional facilities there and growing our biologics footprint, we are very bullish on China continuing to be a sustainable growth driver for the company. Do you want to take the question onwards?

Yes. And I just want to make other comments on China, Mike, to your other question as well. We did have $123 million in sales. Q1 typically does tend to be the larger quarter of sales for China, so that necessarily isn't one that you would run off of for the rest of the year. But to Kristin's point, I'm very excited about the growth prospects that we have for China for the year. In terms of the OpEx, we grew 8% in OpEx in the first quarter, which is pretty indicative of what the guidance range would indicate for the year. But there'll be different dynamics throughout the quarters to that. So for Q1 with the growth of 8%, that really was driven by a lot of the incremental DTC that we had for Simparica Trio in the quarter. And also, we didn't have savings from T&E in Q1. We had the savings from T&E in Q1 because in Q1 of 2020, that was pre-COVID. We still had our elevated T&E spend. As we move throughout the year, obviously we're not going to have that benefit. So the impact of the incremental DTC for Simparica Trio will be there, but we also increased our spending for DTC for Simparica Trio throughout the year last year. So a number of different factors, but the overall level of growth for the year perspective is pretty similar to what we saw for the quarter.

And our next question is from Jon Block with Stifel. Please go ahead.

First one, Glenn for you, just in the overall top line steps up, do we attribute that solely to companion animal? It seems like livestock, just based on your comments, might still be in the up low single-digit range. And maybe more specifically, is the step-up in companion just due to Trio? I mean if you annualize out the 90 million, you get to 360 already. And it seems like that was in and around the original guidance when we think about the contribution to growth. And then, Kristin, maybe just can you give a little more color on what you're seeing in the poultry market? Was those lower end competitive dynamics specific to the U.S.? Did it surface in international? Maybe what's going to be the Zoetis' response in coming quarters?

Sure. So in terms of the overall top line step-up in the guidance, there are a number of factors that drove that beyond just companion animals. So obviously very pleased with the performance of Simparica Trio, and that is definitely one of the drivers for the guidance range. But as Kristin mentioned, also very strong performance in China, off to a very strong start to the year. Strong performance in Brazil as well, Brazilian market grew 48% for the quarter. So that's off to a very positive start. And then our diagnostics business as well. We had 47% growth in our diagnostics business in the quarter. So many of our key growth drivers for the long term performed very well in the quarter, which also then enabled us to raise the guidance for the year. So it's across a number of different of our key strategic growth drivers that enabled us to raise that guidance. In terms of poultry in the U.S., we did see some challenges this quarter as our producer customers did move to some cheaper alternatives from our products. That is something that we'll evaluate through the year. We do expect that there will be a movement back at some point to our products, but that's something that will evolve over time in terms of the efficacy that they see from those cheaper alternatives compared to our more premium products.

Our next question is from Louise Chen with Cantor Fitzgerald. Please go ahead.

So I wanted to ask you how you think the animal health industry might change post-COVID? And do you still expect a headwind this year? And what have you factored into your guidance for recovery?

Sure. Thanks, Louise. Looking at the trends we've observed this year, many of them are quite sustainable on the pet care front, while the trends on the livestock side are somewhat different. Over the past few quarters, we've seen a steady increase in revenue per visit, which has proven to be sustainable. Last year, we noted a 10% rise in revenue per visit, as Glenn mentioned. This growth is primarily driven by a rise in pet ownership, which has remained strong. People are spending more time with their pets, and we've observed that millennials and Gen Z are adopting more pets and investing more in their care. We believe this trend will continue to propel growth in the overall industry. As these new pets age, many of our chronic products will become even more pertinent. This trend is also contributing to significant growth in our diagnostics business, which experienced a 47% increase this quarter. Since pets cannot express their ailments, veterinarians are increasingly focused on conducting diagnostic tests during wellness visits. When it comes to livestock, there are two noteworthy trends. First, as we produce more protein and as people start engaging in more activities outside their homes, a key factor for global improvement will be a rebound in travel and entertainment. With more individuals returning to school, going back to work, and traveling for various reasons, revitalizing the travel and entertainment sectors will facilitate growth in livestock globally in the upcoming quarters. Although the trends differ, we remain optimistic. We foresee growth driven by an expanding pet care business and are experiencing healthy growth in various pet care segments, including our in-line products, dermatology, and new monoclonal antibodies. We anticipate significant growth in markets like China and Brazil, which we believe is sustainable. Lastly, we are excited about the ongoing investments in our diagnostics business.

Our next question is from John Kreger with William Blair. Please go ahead.

Question about Librela, Now that that product is launched in the EU. Can you talk a little bit more about the clinical differentiation you're seeing compared to some of the existing oral alternatives?

Sure. We started the early experience in the EU and will formally launch Librela in Q2. The early experience information has been very positive. It has a strong safety profile, and the efficacy is faster than we expected, with significant improvements in the quality of life and pain for these dogs. We are optimistic that customers are seeking alternatives to current products on the market, and we have noticed a strong uptake. This market is substantial, with about $90 million in the EU today, where 40% of dogs have osteoarthritis, yet only 28% are currently treated. The early experience data and initial launch have made us very optimistic about this product's success, and we anticipate it to be a blockbuster.

And our next question is from David Westenberg with Guggenheim Securities. Please go ahead.

So can you remind us why there's such species-by-species differences in the U.S. and international livestock market, given that protein is inherently global? And then for my second question on the diagnostic portfolio, I think you confirmed 46%. That is a huge number. So can you talk about the components of growth of that, and if some of that in the kind of the organic growth rate there?

Okay. I'll address the first question, and then Glenn will answer the second. While protein is a global market, the dynamics vary significantly by species in several ways. For instance, consumer behavior shifts as people enter the middle class, typically starting with milk, then eggs, then poultry, followed by swine, and finally beef. Additionally, geographic differences affect consumption patterns. For example, China has a massive swine market, which is not the case in the U.S., where poultry and beef are more prevalent. There are indeed distinct consumption trends across species. Another key difference lies in production and export volumes in each market. The U.S. has a considerably larger export market for poultry and swine, leading to different dynamics for each protein source as consumers shift between them. It's also important to consider how producers adapt their supply; the time it takes to raise cattle spans several years, limiting immediate adjustments. In contrast, poultry producers can quickly opt not to hatch eggs and grow chickens, which only require a few months to mature. This disparity in responsiveness influences decision-making across the market. Recently, there has been a surge in demand for poultry, prompting producers to ramp up their operations swiftly. This adaptability is not as feasible for swine or cattle producers, which explains the varying dynamics observed among species.

And regarding diagnostics, a very strong quarter for our diagnostics portfolio. We grew 47% in the quarter overall. And that growth was really balanced from many different areas. So we saw the U.S. grew 59% in the quarter in diagnostics, with strong growth in our consumables really pulling through the increased instrument placements that we saw last year really drove increased consumables in the quarter. Also strong performance for our reference lab business and increased growth in our instrument revenue as well. So really strong performance in the U.S. And also for the U.S., it was an easier comparative period to Q1 of last year as well. International, very positive growth as well, growth of 24%, again really driven by strong growth in consumable usage in the international markets as well as increased instrument revenue as well. So very balanced strong growth in our diagnostics portfolio in the quarter. And we think that sets us up well for the year, and we do expect that our diagnostics business will outpace the growth of the overall diagnostics market in 2021.

Our next question is from Elliot Wilbur with Raymond James. Please go ahead.

A question for Glenn and Kristin, I guess with respect to expectations of additional competition on Trio and in the derm portfolio, I mean what's changed in terms of your line of sight there, based on specific feedback from the channel or just the absence of any competitive noise whatsoever? And then quick question for Glenn, just thinking about SG&A trends over the balance of the year. I mean the guidance at the midpoint on SG&A and the top line implies roughly a 300 basis point step up. How much of that is just sort of increase in normalized baseline expenditure versus targeted investment spend? And how should we be thinking about the progression of SG&A levels over the balance of the year, relative to some of the investment programs that you have budgeted?

Sure, thanks, Elliot. I'll address the first question. As Glenn pointed out earlier, we do not anticipate competition in the U.S. for Simparica Trio or for our dermatology portfolio, Apoquel or Cytopoint, until at least the second half of 2022. This assessment is based on our competitive intelligence, which isn't perfect, and the available information isn’t comprehensive. However, we can confidently say we do not expect competition this year. From what we've learned, it's unlikely to occur in the first half of next year either. We're always ready for potential competition, even if the timing is uncertain. We remain optimistic about growing these products, particularly in the first half of next year. We have seen significant success with Simparica, even as it was the third product to market, and we continue to expand this franchise globally despite the presence of competitors. Glenn, do you have anything to add? Would you like to address the second question?

No, I'll move to the second question in terms of the OpEx spend and what we there are a number of different areas that are driving the incremental OpEx this year. Part of it is a normalization from the COVID impact in 2020. We would expect that T&E expenditures would begin to increase, particularly in the second half of the year. But also our compensation costs as we ramped up hiring some positions that may have been on hold, with the impact of COVID, were just more difficult to fill. We are increasing our hiring really to support the strength of many of our key brands and to continue the growth there. From a DTC spending perspective, we would expect more DTC spending this year driven by a couple of different factors. A, we have some Simparica Trio on the market for the full year. So we will support that with advertising expenditures for the full year as well. And we also continue to see strong growth in many of our brands, such as our dermatology portfolio, and will continue to increase and support those brands of direct-to-consumer advertising, not only in the U.S. but outside of the U.S. as well where we are increasing our DTC spend behind many of our brands, including Simparica as well as our dermatology portfolio. So there are a number of areas will spend really to support the significant revenue growth opportunities that we see not only for this year but for many years beyond.

Our next question is from Balaji Prasad with Barclays. Please go ahead.

I have two questions regarding Librela. Could you share your thoughts on the gross margin impact of the price points in the 40 to 60-pound range that you’ve introduced? What are your internal expectations for the usage of this product, and how do you foresee its evolution? The recommendation is for a monthly injection. Secondly, about ASF, you've previously been reserved concerning ASF vaccines. Recently, we noticed news about trials and collaborations. Could you outline the timelines for these trials and when you anticipate participating in the ASF vaccine program?

Sure. So from a Librela gross margin perspective, I'll start with pricing for Librela, which is very important in terms of the overall profitability of the product. Now that we've launched in the EU, we have priced that product at a premium to the current therapies on the market, really consistent with some of the other products that have brought significant innovation in some of our other categories, such as dermatology. You would see Librela price at a premium similar to that. So we would expect that Librela will be a high-margin product consistent with the overall companion portfolio, which typically is above our overall gross margin level. So that will be a positive contributor to gross margin over time. In terms of ASF and our development for vaccines, as we've said before, this is a very complicated disease state. It's going to take many years to find a solution. We are active in those development studies, but it will be a multiyear time frame before we find a solution for African swine fever.

We’ll take our next question from Kathy Miner with Cowen & Company. Please go ahead.

Two questions, please, first on Librela. Can you clarify, I believe in your comments you said that you expected approval of Librela later in the U.S. than Solensia? Does this reflect just filing timing? Or is there some other dynamic here? And the second question, a little bigger picture on business development, it seems Zoetis has been pretty quiet in terms of M&A this year. Can you comment a little bit about your outlook for the rest of 2021 and some of the areas you may be focusing on there?

Thanks, Kathy. Yes, as we mentioned, we are expecting the approval of both Librela and Solensia in 2022. And if there's nothing specific about why Librela is actually later than Solensia, it has to do with filing timings and just general process on the 2 of those. But again, we remain quite confident and optimistic in the approval of both of those. And as we get closer, we'll be able to provide more specific guidance on revenue and launch timing, et cetera. But no, there's nothing specific as to why Librela is going to probably be later in the year than Solensia, it's just timing of submissions and back and forth with the regulators. So Glenn, do you want to take the second?

Yes. So from an M&A perspective and our areas of focus for 2021, so business development remains a key area and part of our capital allocation strategy, and we remain focused on that. A couple of areas that we continue to pursue, consistent with what we've discussed in the past, is any specific geography where we may have an opportunity to gain additional share or presence in an area, that we may not be at the level of market share that we are globally. Those are areas that we will continue to focus on and look to bring in additional products into our portfolio. Also, many of the areas that we've stressed as areas of strategic importance to us, whether that's in areas such as precision livestock farming, genetics, diagnostics, those are areas that we'll also continue to remain focused on as well as if there are only development assets that we believe would bring strength to our R&D portfolio and we can generate greater value than the existing company. So we remain focused on M&A. We evaluate many opportunities, and we will look to continue to use that as a prime area for capital allocation moving forward.

We’ll take our next question from David Risinger with Morgan Stanley. Please go ahead.

So congrats on the exceptional performance. I think you hear my 6-year-old puppy in the background barking, and I'm wondering if you have a barking consumption. Anyway, so I wanted to just move little bit a if my phone line cut out. So could you provide additional details on companion animal innovation prospects beyond monoclonal antibodies for pain? It'd be helpful to understand areas of unmet need and the potential cadence of material new companion animal product introductions in coming years. And I know that you can only comment on this at a high level, but anything you can offer would be helpful. And then second, given likely inflationary pressures ahead on costs, what is your plan for product price increases in companion animal and livestock?

We are quite excited with regards to our innovative portfolio in both companion and livestock. And as you think about companion animal, we're really focused on continuing to grow our franchise in parasiticide and look for additional products there. Continuing to look at exciting areas such as additional add-ons in our dermatology portfolio. And really, we think the platform of our monoclonal antibodies goes way beyond pain, to be honest with you. There's lots of other chronic and other conditions. We think that technology will help with and super excited about our portfolio in diagnostics. Really building new indications with our images platform, our AI, cloud-based diagnostics expanding reference lab. So I think there's a really bright future as we look at continuing to expand our pet care portfolio globally. So Glenn, I don't know if you want to take the question with regards to inflation.

Yes. With regards to inflation and the impact on pricing across our portfolio, so we do expect over the long-term to continue to be able to take price increases ranging from 2% to 3% per year. This year will be a little muted in 2021 because of the impact of the DRAXXIN LOE. But beyond this year, we do expect to be able to return to that 2% to 3% average pricing. That will vary based on the product as well as the geography. Typically, in our more innovative products, we're able to take a little bit above that 2% to 3%. Products that have been on the market a little longer generally get a little below that 2% to 3%. And then in higher inflationary markets, we typically take pricing beyond that 2% to 3%. So we don't see any significant changes to that in the short to medium term, other than the fact that in 2021, because of the impact of the DRAXXIN LOE, we'll be below that 2% to 3%.

Our next question is from Nathan Rich with Goldman Sachs. Please go ahead.

Maybe returning to the launch of Librela and Solensia in Europe, Kristin, based on your experience with the initial feedback from vets, have your expectations about the potential launch curves shifted? Since these are new products aimed at treating pain, I would like to hear your updated thoughts on what you anticipate the uptake will look like. Should we consider the launch curve to be somewhat similar to the derm portfolio, considering that both therapies were quite innovative when they were launched?

Thanks, yes. I think we are very bullish with regards to the launch curves of both Librela and Solensia in the EU. I think we're now just in early experience with Solensia, so it's probably a little earlier there. But again, as we said I think a little bit previously, I do think the launch curves are going to look different between Librela and Solensia a little bit. Librela is going to enter an established market. The great news is the vets are already very comfortable with injectable monoclonal antibodies even Cytopoint. So I think you'll see a really nice uptick, and I think we'll do very well there. Solensia is a little different. You have to get more cats to the clinic. You have to medicalize those cats and treat them. It's a little harder to sense OA in cats. That being said, we'll have a much better sense as we get to the next quarter since we're just beginning early experience right now. We're really bullish on this in the medium term how fast that uptake happened. I think early experience, which is what we're in right now, we'll be able to better inform that as we get to the next quarter. But the science behind it, the safety, and the efficacy is really, really strong. And what's different, as we've talked about for Solensia, there really are very few alternatives for cats. So if we can build a market, which I think Zoetis has demonstrated its ability to do, we're really excited about what that launch curve will be better informed as we finish early experience, which we're adjusted now. Anything you add on that one?

No, I just echo what you said, Kristin. I'm very excited by the feedback that we saw with the early experience program. It does give us even greater confidence and more enthusiasm around the potential for these products in the EU and globally. And we're continuing to update our forecast based on the feedback that we get.

And our next question is from Chris Schott with JPMorgan. Please go ahead.

Regarding Trio, with competition not anticipated until the latter half of 2022, does this influence your outlook on the peak market share potential for the product, considering you have a three-year period to firmly establish your presence before facing true competition? Also, on the topic of livestock, it looks like we've had a very strong start to the year, partly due to DRAXXIN. With most markets reopening successfully, do you feel more optimistic about these markets compared to the beginning of the year, or are you still somewhat cautious due to the uneven openings happening globally?

I'll start and let Glenn build on this. We are very optimistic on Trio, and ultimately it probably changes the curve a little bit of how fast we get that competition on the market. But I think it's important, as I mentioned in my earlier comments, these products still grow even when competition enters. And I think this is something we keep underscoring. When compared to there to market. It is growing like crazy and taking share. I think when you put the marketing muscle, the technical experience muscle of Zoetis behind the product. Even with competition, we still expect these products to grow. So we will probably build our share faster, but we do expect even with competition that these products in these categories will continue to grow also bringing more people into prescription products versus some of the over the cattle, really bringing new solutions I think we'll continue to grow these products in the longer term. I don't know if you want to build anything that and address the life back one.

Yes. No, just to say, obviously the longer out in the market alone, the better in terms of accelerating that peak sales curve. But to Kristin's point, this is a very large market, and we do see products on the market and franchises on the market that are approaching $1 billion today, even without a triple therapy in the U.S. So we think there is significant opportunity for future growth for this franchise. In terms of livestock, we are off to a strong start, and we do think that the reopening trends are positive for the overall animal health industry and the growth in livestock. We're also very pleased with the performance that we've seen in many of our key markets, particularly outside of the U.S. markets such as China and Brazil and what we've been able to accomplish there. We expect those trends to continue to be very positive. Obviously, we do have some dynamics, particularly to our portfolio within livestock with the impact of DRAXXIN. But overall the fundamentals in the industry are remaining positive. Profitability is up for many of our producers, which is also very encouraging for the overall industry, and we think will be positive for the longer-term outlook for livestock.

Next question is from Greg Gilbert with Truist Securities. Please go ahead.

On international livestock, obviously very robust growth in the quarter. And you spoke to the dynamics in China and some other markets. As the strong demand trends for the overall business continued in the second quarter? And how are you thinking about growth for international livestock for the full year?

Yes. So just when you look at our overall livestock portfolio globally, we grew about 8% this quarter. As you mentioned, that was really driven by the international growth of 17%. As we said in our February call, we do expect that globally, the livestock business will grow in the low single digits. That hasn't changed materially based on the strong performance that we saw in the first quarter. So with that growth, we would expect international livestock to grow more rapidly than the U.S., really driven by the dynamics with China and Brazil, but still expecting low single-digit growth for our livestock business for the year.

Navaan Ty with Citi. Please go ahead.

Actually, my question has been partly answered this. Could you comment on maybe the pet ownership and the average revenue per companion animal going forward and longer term? And remember, we expected growth to moderate once we all return to the office. Do you have updated thoughts on that front?

Sure. Thanks. When considering pet care, we have been experiencing several quarters with revenue per visit increasing by 10% or more. This trend is being maintained. The key factors behind this growth are increased pet ownership, which remains consistent. There was some concern during the third quarter of last year about many dogs and cats being returned or re-homed, but we have not observed a significant trend in that direction. We believe that even as people return to work, most will have flexible schedules, allowing them to spend more time at home with their pets than they did previously. This leads to stronger bonds with pets, and people become more attentive to their needs, developing habits that we expect to continue. Additionally, it's noteworthy that millennials and Gen Z, who generally spend more on pets, are the primary demographic adopting these animals. Thus, we foresee ongoing trends in pet ownership and spending. While I can't guarantee that revenue growth will consistently hit 10% each quarter, historically it has been around 5% to 6%. So, overall, it remains a solid growth driver for the industry, and I believe these trends might exceed historical levels going forward, considering who is adopting pets and the heightened focus on pets as vital family members.

We'll go next to David Steinberg with Jefferies. Please go ahead.

I just had one question to follow up on potential Trio competition. A year ago, you were expecting competition I think the second half of this year. And then you pushed it into next year and now second half of next year. And so just curious, I know you said you have limited visibility, but what do you think the sources of the delay might be? Would it be technical manufacturing or formulation issues or heightened regulatory issues, delays in inspection or FDA looking for different things. Just curious since you initially thought it would be relatively soon, what could be the technical and regulatory issues surrounding the potential delay in the launch of competitive.

Thanks, David. You’ve brought up some good points regarding potential reasons for the delays. The truth is, we aren’t entirely sure why there are specific delays, and whether they differ from company to company. It’s tough for us to evaluate that since there isn’t much detailed information available. Our thoughts align with the list you mentioned, but we can’t pinpoint which company is experiencing which specific delay. For example, one of the companies might be delayed due to launching their first litter, but for others, it’s not clear what is causing the delays. I wish I could provide more insight, but honestly, we don’t really know.

It appears we have no further questions. I'll return the floor to our speakers for any closing remarks.

Okay. Well, thanks for your questions today and for your continued interest in Zoetis. We look forward to keeping you updated as our business throughout the year and continue to deliver our results and innovations that you and our customers expect. So thanks so much. And stay well, everybody.

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