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What’s Really Driving Zoetis’s Margins in 2017?

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Operational efficiency programs

Zoetis (ZTS) expects to generate savings of over $300 million in 2017 through its operational efficiency program. The company has adopted several measures, such as the field force expansion in international markets like China and Brazil, focused investments in manufacturing network, and direct-to-consumer promotional campaigns for its key brands, including Apoquel and Simparica.

By implementing this multi-pronged strategy, Zoetis aims to report a revenue growth rate higher than the average industry growth in 2017. The company has also targeted an accelerated rise in its net incomes over and above its overall spending in 2017.

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Wall Street analysts have projected that Zoetis’s net profit margin in 2017 will be close to 21%, which would be 420 basis points higher on a YoY (year-over-year) basis. Peers Eli Lilly (LLY), Merck (MRK), and GlaxoSmithKline (GSK) are expected to report net profit margins of around 14.7%, 17.9%, and 14.2%, respectively.

Performance in 1Q17

While Zoetis’s operational revenues rose YoY by only 6% in 1Q17, its operational adjusted net income has grown at much faster pace—close to 10% on a YoY basis. Despite its operational efficiency programs, operating expenses demonstrated a 2% YoY operational growth. This growth has been attributed to increased spending for promoting and commercializing newly launched products.

Zoetis has also focused on revamping its manufacturing network to optimize the supply side of its business. In accordance with this strategy, the company plans to divest its manufacturing site located in Guarulhos, Brazil, in 2H17. This would be the eighth site to be divested or exited by Zoetis as a part of its operational efficiency program.

Notably, Zoetis makes up about 0.93% of the iShares Russell Mid-Cap Growth ETF’s (IWP) total portfolio holdings.

In the next and final part of this series, we’ll discuss Zoetis’s international market strategy.

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