Investing.com -- S&P Global Ratings has upgraded the issuer credit rating of New Jersey-based animal health company, Zoetis Inc (NYSE: ZTS )., from ’BBB’ to ’BBB+’ due to the company’s significantly improved business position over the past decade. The issue-level rating on the company’s senior notes has also been raised to ’BBB+’ from ’BBB’, while the ’A-2’ short-term credit ratings have been affirmed.
Zoetis, an industry leader in animal health, has seen substantial growth in revenues, EBITDA margins, and market share over the last decade. The company’s profitability, scale, diversity, and reach place it in a strong position to capitalize on the expected long-term growth in the animal health market.
The company has demonstrated marked improvement in its business over the past several years, setting it apart from its competitors. Since 2016, Zoetis has increased revenues by 89% and expanded EBITDA margins by 665 basis points. The company ended 2024 with animal health revenues 57%, 71%, and 108% greater than its leading competitors Merck (NSE: PROR ), Boehringer Ingelheim, and Elanco, respectively.
Zoetis holds a market-leading position with approximately 20% share in the $50 billion global animal health market. The company has a dominant 25% share in the higher-margin companion animal segment, which generated $6.3 billion of revenue in 2024, and about a 12% share in the livestock segment, which generated $2.9 billion.
The company’s product pipeline offers opportunities to increase its presence in key areas such as vaccines and diagnostics. Additionally, Zoetis is developing therapies for kidney disease, oncology, and cardiology that could further accelerate its growth.
However, the company’s ratings are constrained by its relatively permissive financial policy. Despite maintaining net leverage below 1.5x for the last five years, Zoetis’s public gross debt to EBITDA target remains 2.5x-3x.
Risks to the rating include market share erosion in key franchises and a prolonged economic slowdown that may reduce consumers’ willingness to spend on pets and meat. Zoetis derives about 60% of its revenues from three product categories—parasiticides, vaccines, and dermatology.
S&P Global Ratings expects current international trade dynamics to have only a modest effect on Zoetis’ creditworthiness. As a net exporter from the U.S., with 56% of revenues coming from the U.S., and with about 3% of revenues coming from China, Zoetis is relatively well-positioned to absorb any short-term tariff impact.
The stable outlook reflects S&P Global Ratings’ expectation that Zoetis will maintain its leadership position within the animal health market, sustain organic growth that exceeds industry growth, and maintain leverage below 3x.
A lower rating on Zoetis could be considered within the next two years if the company’s debt to EBITDA increases and remains above 3x due to prolonged operating weakness or a more aggressive financial policy. Conversely, a higher rating could be considered if Zoetis maintains its debt to EBITDA below 2x and commits to a more conservative financial policy.
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