An Animal of a Quarter

Unlike Pfizer , which had a rough quarter as it struggled with Lipitor exclusivity, the pharma's animal-health spinoff Zoetis turned in a solid first quarter.

Revenue was up 4% year over year, which would have been 5% if the dollar hadn't strengthened against other currencies. Treatments for companion animals, mostly dogs and cats, helped raise revenue with sales up 8%.

Part of the benefit came from a competitor's supply issue that has been resolved. Pfizer didn't say which competitor it was, but we can guess it probably wasn't Merck ; sales of its animal health division were up 4% at constant currency, and the company cited "strong performance in companion animal products" as part of the reason for the increase. Elanco, Eli Lilly's animal health division, didn't do quite as well, with sales up just 2%, but the slow growth seems to mostly be due to animal food products that don't compete with Zoetis. The other two big players in the animal health space -- Bayer and Sanofi -- haven't reported yet.

Zoetis' livestock products were a little light, up just 3%, dragged down by treatments for cattle. The drought has caused farmers to reduce their herds. It could take a couple of years to get the cow population back to the same levels. They don't reproduce nearly as quickly as something like chickens.

On the earnings side, adjusted earnings per share was up 20% year over year. The disparity between revenue growth and earnings growth is quite dramatic, but doesn't seem to be attributable to any one area. On an adjusted basis for one-time items, the company was able to cut expenses across the board. Adjusted gross margins increased a little, from 62.9% last year, to 63.5% this year. SG&A and R&D expenses also fell year over year.

Increasing revenue, decreasing expenses, what more could investors ask for?

Should Pfizer have let Zoetis go?
Pfizer would have been better off with Zoetis, but it wouldn't have changed Pfizer's earnings number all that much, because Pfizer still owns 80.2% of Zoetis. It includes that fraction of Zoetis' earnings in its earnings report.

More importantly, the decision to spin out Zoetis wasn't to benefit Pfizer (the company), but Pfizer's shareholders. The company got $6 billion from the IPO and, if shares continue to rise -- Zoetis is trading more than 25% higher than its IPO price -- it can sell additional shares and raise more capital for buybacks and beefing up the pipeline.

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