Elanco Animal Health Incorporated (ELAN) Earnings Call Transcript & Summary

Good morning, everybody. I'm Chris Schott at JPMorgan, and pleased to be introducing Elanco to kick off day 2 of the JPMorgan 2021 Healthcare Conference. From the company, we have Jeff Simmons, the company's President and CEO. [Operator Instructions] And with that, let me turn it over to Jeff.

Thanks, Chris. I want to thank JPMorgan. Thank you for all the work you do as a great analyst to the Animal Health business and look forward to engaging with all of you. Thank you for your interest in Elanco, and I'm looking forward to sharing the state of the company as we've come off from, as all of you know, an investor conference in December. So first of all, I'll start and make the disclaimers that are noted on Slide 2, and just highlight those as we begin. As we discussed, and I'll reference the December 15 Investor Day, we are excited to introduce the new company, Elanco since the conference last year, joining with the completion of the Bayer acquisition to really look at a detailed look at this new company that we're building. On Slide 3, let me summarize our expectations into the New Year and beyond right upfront. First, on innovation, Elanco's innovation will create a dependable revenue contributing 2 to 3 percentage points of top line growth annually. This starts in 2021, this year with not 5, but 8 new launches, contributing $80 million to $100 million in revenue in their first year. We look to innovation, our focus brands and defending blockbusters from competition to drive annual total sales growth of 3 to 4 percentage points and to grow adjustable EBITDA double digits. We will generate significant cash to reduce our net leverage to less than 3x by 2023, while delivering on 60% adjusted gross margin and 31% adjusted EBITDA margin targets over time. This starts in 2021 with revenue growth of 3% to 5%, adjusted EBITDA growth of 20% to 25% and $500 million of debt pay down. Additionally, we're establishing a more dependable and consistent commercial delivery through leadership and structural change. As I've noted, we've changed 80% of our commercial leadership team to drive better portfolio execution. We added Bayer leadership in key roles and increased the sophistication of our global marketing to take a brand and omnichannel approach. We are starting to see early signs of momentum from this change as evidenced by our tightened and raised Q4 guidance range in our December update. Looking at value capture and cost management, we're accelerating actions to deliver $300 million of EBITDA synergies at the high end of our earlier commitment by 2023, 2 years faster while managing increased costs from operating as an independent company with 2 systems through a company-wide productivity agenda. We'll accomplish all of this with industry-leading transparency, simplified reporting and expanded and strengthened board oversight and governance. One thing that has not changed into the new year, is that Elanco's value proposition, we believe, remains one of the most significant in our industry. With the addition of Bayer, our value creation opportunity is more material and more durable than when we launched this company in September 2018. That's what excites me about Elanco today, along with our tenacious, resilient people, driven by their passion for this industry to serve customers and our key customers, the farmers, the veterinarians and the pet owners all over the world. On Slide 4, let me emphasize that with these milestones behind us, Elanco really stands at an inflection point, positioned for accelerated long-term value creation for shareholders and society. Elanco's 3-pronged strategy, you've heard a lot about, innovation, portfolio and productivity, is strengthened and expanded. It remains the foundation for sustained growth and profitability. Innovation will lead that growth in the next few years with a balance of blockbusters with complementary as well portfolio solutions. Blockbusters matter, we all know that; while innovation is equally as vital to delivering consistent, dependable revenue contribution. Last month, we delivered an unprecedented view of our pipeline with a detailed makeup of our R&D portfolio and a clear articulation of projected outputs. We're increasing the R&D visibility beyond animal health standards, so you have a greater understanding of why we are confident that innovation will generate reliable annual growth through both blockbuster products as well as our portfolio contributions. So with Slide 5, let's turn our attention to who we are, Elanco, and how we got here. And I want you to see the decade-plus of building this leader in animal health that will persist into the future rather than a historical view. It comes back to 3 key principles that more than a decade we've kept our focus on: innovation, transformation and value creation. First, Elanco has a long history of pioneering innovation, first-in-class, best-in-class innovation and advancing new areas in animal health, from ruminant and intestinal health to revolutionizing the parasiticide market with the first oral combo. In 2007, Elanco began a period of rapid evolution. At that time, we were driven by just a few big brands. We lacked though the portfolio breadth and strength, so we set out to adjust our portfolio and strengthen the business in important areas. Every time we acquired a new business, we applied our ingenuity to bolster capabilities and expand the commercialization in new areas. Our transformation has always been backed with disciplined accountability, achieving business cases and creating value that transcended to our customers and for our shareholder at that time, Eli Lilly, and now to you, our investors. In that period from 2007 to today, our revenues quadrupled and the market values increased approximately 22x. Now after completing what we believe will be the last major acquisition with Bayer in our industry, we stand as a strategic global leader with a robust, diverse and durable portfolio, more access to the world's animals and at an inflection point to grow, innovate and deliver the next era of value. So if we step back and we look at the animal health sector, just a quick view on Slide 6, Animal Health, as we all know, is a resilient growth industry, strong fundamentals that create significant long-term opportunity. The importance of pets and protein has never become more clear than this past year with COVID-19, and the importance of pets and protein to society. A growing middle class as well and increased demand for technology to solve challenges creates positive potential across our business, greater spending power, driving pet ownership and care as well as protein consumption. Meanwhile, continued innovation in technology will give animals a voice like never before, helping us understand animal disease and pain, well-being and new ways and very interesting. On the pet health side, if we step back and look at that sector, we see several key consumer trends. More pets, more attention to our pets with increased care, compliance and spending, and more spending online. Omnichannel presence, now our sweet spot in Elanco with Bayer, has never mattered more. During COVID, we saw about 1/3 of pet owners shift their spending to online. And the vast majority expect to continue to use this channel. There is also a long-term opportunity for growth as about half of the world's 500 million animals are unmedicalized. And in addition, pets are living longer lives, creating a greater expectation of care, particularly for factors in aging like cancer and kidney disease. On the other hand, I do want to acknowledge that while there is meaningful potential in pet health, it's a highly competitive market. As you move to the farm animal space, increasing demand for protein across the world, plus a growing consumer concern for how animals are raised and their impact on the environment creates a unique opportunity that Elanco is very well positioned to support through new innovation, services and expertise. Simply said, on the farm animal side, we need to give consumers what they want, animals what they need and use less environment. That's the opportunity for the farm animal business. We will bring 5 new products into that space in farm animal in 2021. If you look at the other side, the headwinds, generic competition will continue to pressure this business, while regulatory and trade challenges create hurdles to innovation adoption. In the short term, pressure on food service, the restaurant business will linger in the first half due to COVID. Emerging from Bayer and the Bayer acquisition and bringing these 2 companies together, Elanco is a stronger company, better positioned to capitalize on these industry opportunities and mitigate the potential risk. Our expanded global portfolio as shown on Slide 7, will help us provide farmers, veterinarians and pet owners with a more comprehensive set of solutions for this industry. Today, our business is more evenly balanced between the U.S. and international, pet health and farm animal, with new strength in emerging growth economies. As you look at Slide 8, Elanco has 8 of the industry's approximately 40 blockbusters, with 2 more nearing the $100 million threshold. These big brands make up 35% of our annual revenue and service the anchors of our broad portfolios. In pet health, we provide a complete approach to care, from disease prevention and wellness for the youngest puppies to helping older pets remain active, healthy and happy companions. We are now the leader in retail and e-commerce. And we've been outpacing the double-digit industry growth in this market. We have a wide-ranging pain portfolio with the best-in-class product in pain. On the pet parasiticide portfolio, the largest segment of the animal health market, we have the broadest in the market when you look at our portfolio. We now offer options from every pet need or preference, lifestyle and budget in the parasiticide market, from over-the-counter topical treatments and collars, such as the blockbuster long-lasting Seresto collar and the flagship Advantage family of products to veterinary-prescribed chewables that prevent fleas, ticks and worms with Credelio and Interceptor Plus. And as leaders in parasiticides, we intend to launch a new innovation in parasiticides in this global market every year for the next 5 years starting this year in 2021. Our farm animal portfolio positions us as well to serve an even broader spectrum of the industry. We're going to add anchor brands from Bayer to our cattle, swine and aqua portfolios. Meanwhile, our poultry business remains a significant portion of our sales and growth. In 2021, we will provide new solutions for the lucrative U.S. poultry raise without antibiotic market. Turning to our key capabilities on Slide 9. Many of you asked, what are those key capabilities critical to succeed in animal health. Looking at our expertise in R&D, marketing, manufacturing and the highly engaged people that position Elanco to create value and long-term success. On the R&D side, I would note innovative dosing and delivery platforms and our proven late-stage development and globalization capabilities to fuel our ability to deliver and bring to the market key new products that address customers' most important needs. In sales and marketing, Elanco has omnichannel leadership, all the channels in this industry, and time-tested B2B account management knowledge. In manufacturing, we have demonstrated the ability to do that critical duality of deliver reliable quality supply while driving productivity and doing both of those. And finally, I turn to our people. There is a passion in the Elanco and Bayer. The unity is the passion for this industry and independence as a company that sets us apart. And I have seen historically that high engagement scores on the inside and the tie to this passion translates to a differentiated customer experience on the outside. We have a results-driven culture of ownership and accountability that has been key to transformation. Importantly, I want to note, there are 3 key measures: engagement, execution and delivery. They will be measured quarterly at the supervisor level to create increased discipline and full accountability across Elanco. With that backdrop, let's move to Slide 10. Let's take a deeper look into our long-term algorithm before moving to the 2021 guidance and our strength in IPP strategy that will produce expanded value. Growth will be driven by innovation, an expanded portfolio, more focused commercial leadership, and greater access to animals and customers through a bolstered geographic and channel reach. I'll speak more on revenue in just a moment. Moving to profitability, Elanco will optimize our footprint and operations. We will transform a fit-for-purpose structure as we're doing now. We've been able to fully understand the acquired Bayer business, and we're increasingly confident in our ability to deliver at the top end of our prior synergy range of $300 million in the first full 3 years. Furthermore, Elanco will apply our proven productivity levers and lean manufacturing practices to drive an additional $100 million in cost of goods sold savings. Our multiyear strategy on the Elanco legacy manufacturing is to keep cost of goods sold flat as we grow volume. Ultimately, the stronger combined company will reach our margin goals with expanded long-term opportunity. Finally, looking at results. Elanco will generate significant operating cash flow, will exercise strong cash management to pay down debt, reducing interest costs as quickly as possible, increasing the optionality of the business and most importantly, delivering double-digit EPS growth to create value for all of you, our shareholders. On Slide 11, Let's double-click into the revenue portion of our algorithm. Top line growth will be led by a number of new launches in key market segments and in areas that round out and strengthen our portfolio, including 8 new launches this year in 2021, many of them entering markets that are material in size, from parasiticides, pet therapy, poultry raise without antibiotics and one blockbuster potential in cattle. We expect innovation to contribute an average of $80 million to $150 million in revenue annually, including $80 million to $100 million this year in 2021. We will continue to augment our internal innovation with our proven strategy of seeking out appropriate platforms, alliances and late-stage technology development opportunities. External innovation will complement our pipeline and primarily be funded within our R&D expenditures. Moving to our existing portfolio, we'll maximize the value of our portfolio by investing in focus brands, those significant pet health, poultry and aqua brands that are accretive to overall Elanco growth. In the middle are our core brands, the vast majority of our portfolio that is aggregate -- in aggregate are stable, to growing slightly. And then this is balanced with our defend brands, Rumensin, Trifexis and the Advantage family, highly profitable material brands where we will work to maximize margins and preserve sales. In total, we expect declines in the defend brands to result in a 1 to 2 percentage point pull on our overall business. Importantly, underpinning our brands are 5 enablers to growth: launch excellence, price, geographic focus, digital and expanding this omnichannel leadership that I've referenced. Ultimately, we have a robust plan to achieve 3% to 4% annual sales growth on average. On Slide 12, let me recap the 2021 guidance that we introduced last month, which aligns our -- and very much aligns to our long-term growth algorithm. As we rebound from 2020, we expect total revenue of $4.52 billion to $4.6 billion, up 3% to 5% from the prior year pro forma. We expect to deliver $940 million to $1 billion in adjusted EBITDA. We also intend to reduce gross debt by $500 million or 1.5 turns of debt, and end the year at approximately 5.5x levered with a path to be under 3x by the end of 2023. Turning to Slide 13, Elanco's combination with Bayer has strengthened our IPP strategy. As I've highlighted, innovation will deliver dependable revenue growth. We have an expanded portfolio, capabilities and access to the majority of the world's animals. And our multiyear company-wide productivity agenda will continue unlocking value. The strategy is the foundation for how we'll achieve our growth algorithm; we have the people, the leadership and the know-how to deliver. Moving to Slide 14. In addition to achieving our business goals, Elanco believes more than ever, our business will and must be a force for good. I want to highlight Elanco's healthy purpose, the industry's first sustainability and ESG framework launched last fall. Our new protein, pet and planet pledges are based on an intersection of business outcomes with societal need, improving food security and human physical and mental health, as well as increasing the environmental sustainability. These pledges are aligned with our customers; I think this is important to note and they're customers' bigger agenda as well. And it creates an interdependency with Elanco and our customers in this decade-long mission. It will drive a healthy enterprise. To date, we've engaged stakeholders, conducted a materiality assessment and are now collecting data for our new larger organization. We're committed to this ongoing reporting that is aligned with leading sustainability and ESG frameworks. In closing, I'd like to summarize what I've shared today. Our IPP strategy does not change. In fact, we've expanded and strengthened this strategy with the Bayer Animal Health integration. The intent of our long-term algorithm is to create greater clarity in how to think about our company and how we'll achieve our long-term expectations. I personally have more resolve and confidence than ever that we are on the cusp of an inflection point for long-term value creation, which starts significantly this year in 2021. Two years into the Elanco's journey of building a fit-for-purpose independent global animal health leader, we are well-positioned to accelerate sustainable long-term value for customers, shareholders and society as a whole. Thanks for this opportunity, and I look forward to the Q&A session and the one-on-ones with many of you. Chris, back to you.

Great. Jeff, thanks so much for those comments that I think framed up the story really nicely.

One question, maybe just to kick off, with pipeline. I think every investor we've talked to really appreciates the color that you provided into the launch profile in the next few years. I guess one question I get is how should we think about future pipeline disclosure? I know in the industry, for competitive reasons, a lot of times you don't want to give away too much, I guess. But how do we watch and track your progress against the portfolio that you laid out to us in December?

Yes, Chris. It was our intent to go to this place. We heard loud and clear from the investors, and as a new company, we believe it was critical to actually create this unprecedented transparency of the pipeline. A few points I would mention is, let's anchor on the things that we highlighted that are critical to this algorithm to deliver this value. The 2% to 3% that comes from innovation, and then when you turn and look at that $500 million to $600 million over the period, that will come as additive on top. We've got 45 candidates that lead to 25 launch equivalents. So these are things that I would say are the pillars to the value creation that's important. Everybody wants to know do you have a blockbuster in this segment or that? Yes, we do. And we gave that transparency. I would also emphasize a second point, Chris, which is innovation is probalized. So there will be changes, and we've looked at this in a very staged way. We will update you as we see changes occur that drive the materiality, positive and negative, to those value contributors. We will also highlight as we come closer to a launch like we did with the Credelio Plus that is launching now into a marketplace. So those will be the areas, and we'll continue to share transparently. But again, we've given some key pillars that drive value, as well as that transparency by segment in the pipeline.

Great. The other question that we've had quite a bit is you're highlighting this kind of $80 million to $100 million opportunity in '21, which is a really robust new launch profile. I guess some people have got some questions of when you look at the $500 million or $600 million out a few years, why isn't that number bigger, I guess, in the context of just the near-term launch portfolio seems significant? You're targeting kind of these 25 launches in the next few years. Just a little bit more color of what went into that $500 million or $600 million and how conservative should we think about that target?

Yes, I believe it's balanced. Again, I'll come back to science, late-stage development in animals, the probalization of the pipeline. And then also, I think the adoption of new products. As you know, in farm animal globally, many more segments and reaching pet owners, the complexity of launching, that's why one of the key enablers for us is launch excellence is launching well. But some adoption curves are different than others. So when you put all of this together, we believe we've got a balanced approach, looking at the probability of the science, of those 45 candidates, to deliver 25 launches. And again, putting our focus on that $80 million to $150 million on average; this year, $80 million to $100 million, and that will be our focus. We believe it's a balanced approach to look at our pipeline And again, a significant contributor to value and growth as we go forward.

Great. And then maybe one final, we have longer-term pipeline question on the parasiticide market. How do you see this market evolving? I think there's been a lot of discussion around the triples coming to market and what that means. But it does seem like historically, for a market where there's been a lot of brand stickiness, it's still pretty fragmented. I guess the changes that are occurring in the market, both with the new products and with, I guess, the way these products are dispensed, does that change how you think about investing or how you envision this market over time? So I guess, is this a market that you see share consolidating to fewer products over time? Or does it actually go the other way and it becomes more fragmented with different pet owners having different requirements for their animals? Just trying to get a sense of where we're going to be 4 or 5 years down the line in flea and tick and worm.

Yes, I think this is a leading indicator of overall animal health, it's one of the largest segments. So 500 million animals, only half of them are medicalized. Parasiticides is one of the most obvious needs of pets. So I would start, Chris, by saying, look at this $5 billion market or so globalizing more over the next 5 years, as we're launching Advantage and Seresto today in China, as we've highlighted. Pet ownership is 8% compared to close to 70% here in the U.S. when you compare China to the U.S. So I think globalization of parasiticides is one. I think Canine/Feline is 2. I think Feline will continue to be a key market as we're launching Credelio Cats here in the U.S. this year. And then I think 3 is, yes, meeting consumers where they want to shop and addressing their needs. There's a big difference in many segments in this marketplace and many preferences. So that's why we have sophisticated our marketing, added digital as an absolute must and capability is 1 of the 5 enablers, and line that up with omnichannel to meet customers where they want to shop. So I actually see brand stickiness continuing, long legacy brands continuing and maybe life cycle management against those. And look at digital DTC. And bringing the vet, always bringing the vet into the center of that discussion. And the animal health industry has to enable that, partner with a veterinarian to allow that pet owner that's got a whole lot more preference to maybe shop online and COVID probably accelerated that trend multi years by doing it. So that's what I see, and that's why I believe Elanco is well positioned with the broadest portfolio and this omnichannel approach.

Great, that makes sense. And then maybe just in near term....

I'd also emphasize that you've got to continue to keep innovating. And that's why we highlighted we'll be bringing an innovation a year for the next 5 years in this parasiticide market as well.

Yes, excellent. Maybe just one other one on parasiticides. Can you talk through the pushes and pulls of your portfolio in '21? I guess we've got -- on one hand, we've got Advantage and Seresto had some very strong 2020 numbers. We've got Trio kind of impacting the market. On the flip side, there was obviously some COVID disruptions. I'm just having people kind of struggling with balancing, I guess, all these different factors as we think about the portfolio next year or this year now.

Yes, so there will be some compares, and we've been as transparent as we can, and we can highlight some of those and we'll definitely see that in Q1 when we saw the COVID push there in March. So those compares that Todd has highlighted. Let me just highlight it, I think on the positive side, we continue to see, as you just look and you step away from the compares and say, retail continues to grow, and we believe that will be a key growth driver that will be important. We see our focus brands of the leading and the strongest combination portfolio on the vet script side with Credelio and Interceptor Plus. We see also in the segment Seresto continuing to be a growth driver, and that will be important. For us, China and the Asia market with parasiticides and the Bayer leadership that we have, so look for even Advantage and Bayer to be growing in those markets; I think that's important. And then look at innovation. Credelio Plus entering this $1.5 billion international broad-spectrum parasiticide market and Credelio Cats in the U.S. Those, I would say, are the pushes. When you look at the pulls, it will be in this defend brand area. With new innovation coming competitively, it will be the Trifexis and the Advantage that we'll defend, that we will lock and use these enablers to lock into the loyal users and the segments where it works best, but they'll be the major pulls against this. But again, as I step back and look at the overall pet health market, we continue to see this growing in that mid-to-high single digit in 2021.

Great. And just a bigger picture question on the companion market. It seems like one of the takeaways from COVID was increased standard of care, increased pet ownership. I guess, how durable do you see those dynamics? And does that change at all how Elanco thinks about either investing or the way you invest in the companion side of the business?

Well, without question, I think COVID highlighted, first of all, the basics, right, pets and protein. I think we saw that firsthand. There's a lot of speculation about trends, and we saw this. I think that we've seen an absolute significant increase on the pet side in terms of pet ownership, pet care, compliance, and that's not just in the U.S., but that's globally; shopping online, 1/3, as I mentioned, more pet owners shopping online. I believe those trends will continue. The question I think you're asking, Chris, which we don't know yet, which I think we're going to be pressure testing as a company, and I think even as an industry, to say what's going to remain at what level? What will come down? I do think that one of the biggest things that has happened this year is the vet -- the veterinary practice, a tremendous job of transforming themselves with these changes. Whether it's curbside service to the vet clinic, whether it's partnering, whether it is telemedicine, they have adapted to this pet owner. And actually some that may be resisted change have jumped over that chasm because of the significance of it. What level and how much this persists, I would say is something we'll continue to look at. But for us, we see digital importance, omnichannel importance, partnering with the veterinarian, meeting pet owners where they want to shop and the globalization of pet ownership and pet care and taking advantage of that -- of this trend will be things that we believe will persist. It was a silver lining that came with COVID-19.

Yes, yes. Pivoting to the livestock part of the market, I think you mentioned the first half of the year still being impacted. Can you just walk through how you're envisioning markets recovering and normalizing as we think about -- is there going to be differences if you think about poultry versus cattle versus aqua? Just some of the factors that we should be keeping in mind as we kind of, I guess, move out of this pandemic, knock on wood, as we go through this year.

Yes, a durable market, one that definitely has lots of factors, and they can vary by geography as well and vary by species. So I know this is a -- but I always step back and say protein demand continues to grow. It's more than half of this industry. And there's a tremendous amount of opportunities as I say the critical triangle of give consumers what they want, they've never been more finicky, but they do demand protein. But that drives also animal needs like the poultry raise without antibiotic market that we'll be launching products into and less environment, and that will become even increasingly more important as we go forward. That's the sweet spot. So that to me, I always step back and say, we do see the durability because of those trends. And our 5 new launches, I'll start with kind of our balance sheet, Chris, the first is we have 5 new launches going into some big segments, broadening our respiratory portfolio with Increxxa, bringing in products into the race without antibiotics, bringing a major cattle product in that impacts the environment, we're tying into these trends with 5 new innovations. That will be one key push. We see the cattle and U.S. swine market stabilizing. We saw that at the end of 2020. We believe that they will be stable, durable markets we believe and key markets as we look at that. China's swine, we have as we've noted on our last earnings call, we've recovered to better than the industry, better than African swine fever levels. So that's showing the trend of an industrialized swine industry, more sophisticated, more wanting multinational brands. So those are a few things that I would say are the positives. No question, I think there's a few things you got to keep your eyes on is, one is generic competition. I think you're seeing more multinationals, more generic pressure. There will be some of those dynamics in the market this year. So the importance of defending brands and putting them in portfolios, how do you win in the generic farm animal business, you got to have innovation, keep innovating. You got to have portfolios, value beyond product and reach the boardrooms of the protein companies. And then I think lastly is we have these 2 trends, Chris, you mentioned. Until the restaurants open, we see persisting challenge on our salmon business as the salmon industry has been challenged by that. And then the poultry industry in some of those midsized international markets. We see those negatives probably impacting first quarter into the second quarter of this year. And then our expectations are that it returns to normal. Those are the pushes and pulls in farm now.

Great. And then maybe just a final question on farm, just longer-term growth for that segment of the market, maybe more broadly, it sounds like innovation is going to be key to this. You've got a number of launches coming. But once we get past the pandemic, what type of growth do you think this segment of the market can generate over time?

Yes, we haven't identified specifically. We do see it growing. It grows for us in 2021, it has for a long period of time. But I think as we look at this business, low mid-single-digit consistent growth. I think we've weathered the antibiotic transition, the portfolio transitions. Now it will be more of the competitive pressures. And a few maybe changes in public government policies, but I think fewer than we've seen in the past. But that would be the growth that I think you can expect, heavily dependent upon your portfolio offering, your presence with the customer, the value beyond product and the continual innovation. That will be the driver. But as an industry, I believe, if we can do that well, you're going to see those kind of growth rates.

Okay, just on the financials, last couple of minutes here, the longer-term gross margin targets you've laid out, can you just elaborate a little bit more how much of this is about, I guess, portfolio mix, so higher-margin, newer products? How much of it is productivity improvement and how much of it is price? I'm sure you get a sense of like the key levers to kind of bridge from where we are today to those longer-term targets.

Yes, I think, first of all, we start with the synergy of the business, bringing it together, as we've mentioned, as we look at gross margin 100 to 200 basis points. This year coming up are March to 60%, as we've mentioned. We feel very good about that. So it starts, I think, with the bringing together of the 2 companies. As Todd highlighted, we'll continue to look at footprint. We'll look at this $100 million of just lean manufacturing, fit for purpose and then the 2% price, Chris, I think will be the other factor. Mix over time becomes a little bit less of a factor, but innovation will continue to be accretive in the later part of the sector. I think those are the factors. I think keeping cost under control and continuing to be very aggressive on cost, as revenue climbs, our COGS, our cost of goods sold, is keeping those flat will be critical as we get into the later half of this 5-year period that we've talked about. So those are the drivers. And I believe we've got plenty of levers and plenty of opportunity to drive this gross margin to the 60%, as we mentioned, by 2023, 2024.

Great. And then final question just on -- a question more about kind of quarter-to-quarter volatility of the business. Because it seems like a business, I think you talked about this from the time you've gone public that if you look at this like a trailing 4-quarter basis, it tends to be a bit more predictable, but you can get these kind of ebbs and flows. Does the expanded portfolio help that at all in terms of, I'd say like less quarter-to-quarter variability? It seems like the Street gets really focused on a miss. Maybe it appreciates a beat a little bit less. And I think just kind of consistently hitting numbers can go a long way in terms of kind of people understanding the business. Can you just talk a little bit about that dynamic because I know something that I found investors struggle a little bit with of trying to separate out the kind of 1 quarter trend versus maybe like a 3- or 4-quarter dynamic playing out for the business?

Yes, and I mentioned in the investor conference, I take some accountability for that, and that's why we went to an unprecedented level of transparency and simplified reporting. And our intention is to -- and Todd will give guidance within the quarter from the last quarter for that quarter. So I think quarterly guidance also helped and assist that. A broader, bigger company with Bayer is definitely more diverse, which means it's more durable. That algorithm, I think, shows the durability. We've got our -- the 2 pandemics that we've weathered behind us. And then this continual innovation contribution as well. So we believe we're well positioned and it is a commitment from us with the transparency. The level setting that we did on December 15 through this investor conference, I believe, will make a much cleaner, more predictable Elanco as we go forward as we're on this inflection point, Chris, as you see it, of a tremendous amount of value contribution, we believe the #1 value proposition in the industry.

Absolutely. I think we're just out of time, yes. It seems like you've set the story up well, and we'll obviously watch closely with a lot of interesting developments as the year goes along. But I appreciate the time today.

Great. Thanks, Chris, thank you and JPMorgan.

Thanks.