ZTS | Q3 2025

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Overview

• Non-GAAP EPS of $1.70 beats by $0.08.

• Revenue of $2.4B (+0.4% Y/Y) misses by $10M.

KEY Takeaways

• Revenue was flat on a reported basis but up about 4% organically, with nearly all of that growth coming from price rather than volume.

• Gross margin expanded to 71.6%, operating margin stayed near 37%, and net profit margin held around 30%—showing the business remains highly profitable.

• Net income and EPS still grew high single digits, reflecting strong margins and cost discipline despite slower top-line growth.

• Free cash flow totaled about $1.6 billion for the first nine months of 2025, which is down slightly from last year as more cash was tied up in receivables, inventory, and “Other Assets.” Still, the dividend is very well covered with a 43% FCF payout ratio YTD.

• Companion Animal revenue grew 2% operationally while Livestock rose 10%.

• Simparica and Simparica Trio continued to grow (7% globally, 2% in the U.S.) with retail and home delivery channels offsetting weaker vet visits.

• The dermatology franchise grew 3% globally, flat in the U.S. and up internationally, with new competition and heavy promotions creating short-term share pressure.

• Osteoarthritis (OA) pain products were the biggest drag, with Librela down 15% globally and 26% in the U.S. due to social media concerns, though management sees signs of stabilization.

• Two new OA drugs—Lenivia (dogs) and Portela (cats)—are expected to launch in 2026, both designed to expand the market and improve treatment compliance.

• Management trimmed full-year revenue guidance to 5.5–6.5% organic growth but maintained EPS guidance thanks to margin strength.

• The slowdown stems from tough comps in Q3 2024, fewer therapeutic vet visits, and short-lived competitive discounting—not from any fundamental deterioration in the business.

• Zoetis remains highly profitable with a strong balance sheet, over $2 billion in cash, and continued shareholder returns via buybacks and dividends.

NOTES

Zoetis (ZTS) had a pretty mixed Q3 overall, and saw (what I believe to be) a pretty non-sensical drop in share price upon reporting the numbers.

Revenue was basically flat on a reported basis at $2.4 billion, up about 1% year over year, but closer to 4% if you strip out currency and some one-offs. And pretty much all of that growth came from price rather than volume this quarter.

Net income grew faster than sales, up 6% to $721 million, and adjusted net income rose 5% to $754 million. That puts GAAP EPS at $1.63 and adjusted EPS at $1.70, both up high single digits from last year.

Under the hood, margins are still looking great. Gross margin improved nearly a full percentage point to 71.6%, helped by pricing and the sale of the medicated feed additives business, while cost of sales actually declined a bit year over year.

Operating margin held around 37%, and net income again landed at about 30% of revenue, which is very strong profitability for almost any industry.

Regarding cash flow, Zoetis generated about $1.6 billion in free cash flow over the first nine months of the year, which works out to a little over 20% of revenue. That’s still a very healthy margin, even though it is down slightly from last year as more money is tied up in receivables, inventory, and “Other Assets.”

Year-to-date, free cash flow has covered the dividend more than two times over—about 43% of FCF has gone toward dividends—leaving plenty of room for buybacks, R&D, and other investments without putting any strain on the balance sheet.

At any rate, the business continues to throw off plenty of cash, and the core economic engine is doing exactly what you’d want. It seems that the real issue this quarter is more about growth tempo—specifically on the top line—rather than business quality.

Breaking it down by segment, Companion Animal revenue grew 2% on an operational basis to about $1.7 billion, while Livestock grew 10% operationally to $725 million.

The U.S. was softer, with revenue down 2% reported but up 3% organically. And International grew 3% reported and 6% organically, with particularly strong growth in Simparica and dermatology outside the U.S.

The overall pattern is this quarter is that U.S. Companion Animal is feeling more pressure, while International Companion Animal and global Livestock are doing a lot of the heavy lifting.

On the franchises investors actually care about, Simparica and Simparica Trio are still doing well, just not at the breakneck pace we saw this time last year.

Globally, the Simparica franchise grew 7% operationally, with Trio up 6% and especially strong double-digit growth outside the U.S., including a fresh boost from Trio’s approval in Brazil.

In the U.S., Simparica revenue was up about 2% despite a huge 27% comp from last year and softer vet clinic traffic. Management emphasized that alternative channels—retail and home delivery—are growing more than 20% and are increasingly important in keeping Trio’s momentum going even as wellness visits stay under pressure.

With that, the Dermatology segment was more mixed. The global derm franchise (Apoquel, Cytopoint, and now Apoquel Chewable/film-coated) grew 3% operationally, with the U.S. roughly flat and international markets up about 7%.

In the U.S., growth is being driven by new Apoquel formats and strong retail performance, but that’s being offset by lower dermatology clinic visits and aggressive discounting and sampling from new competitors like Zenrelia and NUMELVI. Internationally, it’s a similar story: solid underlying demand, but some short-term share noise around launches and promos.

Management kept coming back to the idea that the “denominator” here is huge—millions of dogs with chronic itch still aren’t being treated—so they still see a long runway even if the next few quarters are choppy.

Moving on, the real sore spot continues to be osteoarthritis (OA) pain, where the franchise declined 11% operationally in the quarter.

Librela sales were down about 15% globally and 26% in the U.S., with pressure particularly prominent in English-speaking markets where social media misperceptions about safety have made the most noise. Solensia, the feline OA product, was down a bit in the U.S. but continues to grow internationally.

Management is attacking this on several fronts: educating vets that OA is a chronic, progressive disease that needs proactive treatment; deepening outreach to specialists; pushing more science-based communication; and rolling out new Phase IV, third-party studies starting in Q4 to give vets more real-world comfort.

They said they’re starting to see early signs of stabilization in Librela prescriptions and forsee a return to growth in 2026, which matters because the OA pain portfolio is a big part of their long-term growth story.

That’s also where the product pipeline comes in. Zoetis highlighted two new long-acting OA drugs that should launch in 2026: Lenivia, a distinct NGF-targeting molecule for dogs with a three-month dosing interval, has been approved in Canada with a positive opinion in Europe; and Portela, a long-acting monoclonal antibody for feline OA pain, just earned European approval.

Both are expected to launch in the first half of 2026. The pitch is that Lenivia adds convenience and could expand the market (even if it cannibalizes some Librela), while Portela should help grow the feline OA category by lowering the friction of monthly vet trips for cat owners.

They’re backing that up with manufacturing investments, like a new advanced biologics facility in Atlanta and expanded monoclonal antibody capacity, so they can actually supply what they sell.

Zooming out, a big part of the Q&A was analysts asking, “What changed?” After raising guidance last quarter, Zoetis is now trimming its full-year revenue outlook to $9.4–$9.475 billion, implying 5.5–6.5% organic growth instead of something closer to the high end of their usual 6–8% long-term range.

Adjusted net income growth is now guided to 5.5–7%. They kept adjusted EPS guidance unchanged at $6.30–$6.40, thanks to strong margins and tight cost control.

Management’s answer on “what changed” boiled down to three things.

First, the comps really are tough: key franchises like Trio and derm were growing 20%+ a year ago, so even mid-single-digit growth now looks weak optically.

Second, they’re seeing a more persistent macro effect in U.S. vet clinics than they expected—specifically, “therapeutic visits” (the ones that drive derm and OA scripts) have been down for three straight quarters, not just total visits. They pointed out that vets have raised prices for both services and products over the last few years, and that’s starting to bite, particularly at larger corporate practices.

Third, the competitive discounting around new derm launches is hitting in a softer visit environment, which makes the impact feel bigger than it might in a healthier market. At the same time, the alternative channels that Zoetis has leaned on for years—retail and home delivery, including vet-owned home delivery—are still growing very nicely, which is part of why they don’t see this as a structural problem with the business itself.

Importantly, they pushed back on the idea that the low-single-digit organic growth implied for Q4 is the new normal. In their view, 2025 is an unusual combination of tough comps, macro pressure on therapeutic visits, social media noise around Librela, and launch-period promotions in derm.

As those things normalize, they expect to get back closer to their long-term 6–8% top-line algorithm, helped by price (typically 2–4% per year), a recovery in OA pain, continued strength in Livestock, and new product launches.

From a balance sheet and capital allocation perspective, everything still looks good. Zoetis has about $2.1 billion of cash, $7.1 billion of long-term debt, and equity of roughly $5.4 billion, which puts leverage in a comfortable zone for this kind of business.

They maintain solid investment-grade ratings from Moody’s and S&P, and they’re leaning into buybacks. In the first nine months of 2025, they repurchased 7.3 million shares for about $1.16 billion under a $6 billion authorization that still has $4.5 billion left. They also paid roughly $445 million in dividends over the same period.

In my opinion, if you zoom out, Q3 for Zoetis was not the “everything is broken” quarter that the share price reaction made it seem. It still looks to be a great, growing, and highly profitable business, and even those can have tough quarters.

The near-term debate is really about three things: how quickly therapeutic visits in U.S. clinics recover, how durable the competitive pressure in dermatology proves to be, and whether the OA pain franchise can move from stabilization back to growth as new data and new products hit the market in 2026.

If you own Zoetis for the long haul like I do, this feels more like a period to watch those underlying trends closely rather than a quarter that fundamentally changes the investment thesis.

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