Zoetis delivered a strong performance in 2018. The company had 10% operational growth in revenue and 31% operational growth in adjusted net income – well above estimates it provided in 2018 guidance: 5-7% for the former and 20-26% for the latter. Last year, the company launched $2 billion share repurchase program and acquired diagnostic instruments manufacturer Abaxis for the same amount.

The main driver of Zoetis' growth is the companion animals segment in the emerging markets. While the revenues from the livestock segment have mostly remained flat: $3,103 million in 2014 versus $3,154 million in 2018, the revenues from the companion animals segment have steadily increased for the last five years.

The increasing concerns about the use of antibiotics for growth promotion have contributed to the stagnation in Zoetis' livestock segment. The World Health Organization argues that this practice leads to “the rising threat of antibiotic resistance,” while both the European Union and, since 2017, the United States have significantly restricted it. Although Zoetis has publicly supported the new FDA regulations, last year the company faced criticism over its sales of antibiotics in India.

In contrast, revenues from the companion animals segment rose from $1,632 million in 2014 to $2,613 million in 2018. The segment boosted Zoetis's sales in China where revenues have increased from $174.4 million in 2017 to $211.4 million in 2018, and the country now lags behind only the US and Brazil in this metric.

Urbanization, aging society, and low birth rates lead to increase in number of companion animals and a change in attitudes toward them. In Brazil and China, these dynamics constitute a long-term trend, and it is not surprising that both countries are experiencing a pet boom. We expect the share of  the companion animals segment in Zoetis' revenues from Brazil and China to continue to grow. A few developments add credence to this claim. In 2019, Zoetis will launch Apoquel in China. Apoquel, allergy medicine for dogs, is Zoetis' best-selling drug and had sales of $464 million in 2018. By the end of this year, Zoetis will also complete the construction of a vaccine manufacturing facility in Suzhou. In Brazil, company stands to benefit from upcoming pension reform that is likely to strengthen the real. In 2018, weak Brazilian currency had a negative impact of 13% on Zoetis' revenues from the country.

Looking beyond 2019, Zoetis will, in all likelihood, strengthen its pipeline as a result of a deal with Regeneron. Announced last June, the five-year deal grants Zoetis a license to use Regeneron’s VelocImmune platform to develop monoclonal antibodies - one of the most promising medical research areas. In 2020, pending the FDA approval, the company is expected to launch parasiticide for dogs, Simparica Trio, that targets external and internal parasites, as well as heartworm disease. Recommended Strategy: Buy.