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

Thanks, everyone. Good afternoon. Jon Block with Stifel, and we're going to continue down the animal health road. Next, we have a relatively new addition to our coverage universe, Elanco Animal Health, one of the largest players in the animal health industry. And with us today, we have Jeff Simmons, President and CEO. As I talked to you guys throughout the past couple of days, feel free to shoot me questions via e-mail or the chat room, and I'll do my best to multitask and get them in front of Jeff. We're going to go through a pretty comprehensive talk track.

And just to start off, Jeff, in our April initiation pretty recent, we wrote, to our belief, that some of the past noise for the company, which, I think, quite honestly reflected some bad breaks, maybe some self-inflicted were behind the company. It was just going to be overall a cleaner story going forward for investors. 1Q was another data point on that. I mean there was another beat relative to consensus. It was similar to that of the fourth quarter of 2020, and it really seems like the company has some solid momentum. So maybe we can kick things off there. Just talk to us about some of the really big strategic decisions that Elanco made since the spin-off. And maybe most importantly, if you think some of that noise is officially in the rearview mirror.

Yes, Jon, thank you for you and Stifel on the conference. Thanks for your coverage. Great opportunity here. So yes, no question, Elanco, second major independent animal health company, and launched in September of 2018. And when we came into the market, I say 2 pandemics and a lot of change and a lot of industry challenge, 4 hard choices we've made that actually create today, I can say, a greater value proposition today than in September of 2018. First was the Bayer acquisition. The ability to create a more durable company, 50-50 now pets and farm animal. We had never been able to get there in that regard. And 50-50 U.S., international. The other one was changing distribution, hey, putting demand in our hands, taking some of the noise out of the channel, especially in the U.S. And that is you see everything from pricing to gross to net to just a more durable supply chain that we can be more competitive with. Changing 80% of the commercial leadership, which actually created to me, a blend between Bayer, Elanco, pet, farm animal, retail, B2B, it just created to me 2 layers down a more disciplined, deeper industry experienced company, I think, was key. And then 2 restructurings that we accelerated to get through some of the change. Jon, I think you saw in the first quarter, and actually, we've seen since August 1 when we took over Bayer a year ago, delivery almost every month, every quarter with right plans, right people, disciplined process. Elanco is an execution story. 25 new products by 2025, 1,000 points of margin expansion. And I think those 4 hard choices set Elanco up be a solid value proposition, more so than when we launched in September of 2018.

Okay. Great. Great color, Jeff. And certainly off to a really great start. With Bayer, you also talked about giving Elanco an increased omnichannel presence. And maybe talk Advantage longer term, we've had several veterinarians as part of this conference talk about how people need to buy and secure their products through multiple avenues and with a level of convenience. So just talk about what this means for Elanco? And then maybe what it means for the industry and just bringing up compliance rates would seem like to be advantageous to a lot of players.

Yes. Everybody is talking about, and I think COVID highlighted the importance of pets to society. But let me just hit a few things that I think probably have been iterated that are important and were even the premise for the Bayer deal, is meeting pet owners where they want to shop. So -- and look, statistics we saw before Bayer was the 1/3 of pet owners were not going to the vet clinic. It wasn't the kind of experience they want in, especially with even cat owners, it's even higher than that. Now we add another 1/3 kind of in that same kind of pool that have started buying online and plan to continue. So what I want to emphasize is, I think, is it's access. It's meeting pet owners where they want to shop with the veterinarian. And I believe what we can do with Bayer that no other company can do is be able to provide a portfolio, partnerships and capabilities to meet them there, but also bring that veterinarian into that equation and actually help that. So to me, those are a few statistics that are absolutely critical going forward, and Elanco is the leader in U.S. pet retail, and we believe we'll be well positioned to pick up on this trend that's coming out of COVID.

Let's kick things off with maybe some of the products that you got from the Bayer Animal Health acquisition, and I'll go down the road of parasiticides, specifically the Advantage family. I really like the focus, defend bucket layout at the Investor Day. Within the defend bucket, you've got Advantage. And that's the biggest component to the defend bucket, yet it's been doing really well. I think some specific numbers, it was up mid-single-digit growth in 2020 and then 14% in the first quarter of '21. We'd love to play around with the numbers. It's really hard for that defend bucket to go down if Advantage is growing double digits, even with the headwinds with Rumensin and Trifexis. So just talk to us about Elanco's initiatives around Advantage. I think you've done some work in China. What's allowing Advantage's growth rate to be much more resilient than initially thought?

Well, you know, Jon, studying this market, pet owners are brand connected. This is a little bit CPG like, consumer product good like, is brands matter. Advantage is, and we saw this with the Bayer acquisition, Advantage is one of the most well-known brands globally in the pet industry. So our plan right away is to say life cycle management. We've got CPG people on our board. It is how do we expand this Advantage brand even with life cycle management and innovation going forward. How do we fuel it with digital, reaching pet owners that are. So when we came through COVID and saw that growth you mentioned, the first initiative we put in play in August was to retain those pet owners that had moved to Advantage maybe for the first time or return users or new start puppy users and that's what we've done. And so that's number one. Two is globalize the brand. It is growing faster in China than anywhere else in the world. China is a multinational brand kind of market that has an immature vet market, and we're planning to expand there. So there are a few things: retaining post-COVID, globalizing life cycle management fueled by digital.

And Jeff, do you think maybe the growth rates around Advantage is a little bit more sustainable than what you may have perceived it to be upon acquisition roughly 6 months or so ago?

Well, we were very public coming out that we saw Advantage as a defend brand. We modeled when we acquired the company that it would be a slow decline. No question, COVID, pet retail, a lot of things have turned the other way. We are going to be very intentional, very, very aggressive in investing to attempt to continue to really expand this brand and continue to drive it. No, I don't think it will sustain Q1 growth rates or even last year, but continuing to make this defend brand something that we could actually grow going forward is definitely something that we're going to intend to look at and do everything possible to do that.

And certainly Advantage is such a growth construct that you guys could have. I'm sure, a lot of helpful statistics on the earnings call, while some more information in the 8-K. You noted you provided additional product surveillance on Seresto to the EPA. Just on the next steps, like where -- just a lot of noise out there. Where do we go from here? And maybe most importantly, and maybe this is more of a Wall Street thing, but is the overhang ever officially removed? Or does it just sort of die a slow death?

Yes. I think let's be clear, the 8-K was to set the record straight. Here's the facts. Here's why this is one of the top 5 brands ever in animal health. It is a safe product, a convenient product that offers an awful lot of value at a really value price, too. And it has one of the most loyal users I've ever seen in my 31 years, Jon, in animal health, with recent surveys, 98% of pet owners post the issue still saying, hey, I'm going to use this product. And vets that are very aware of the issue being even more advocates than maybe ever before. So look, our focus is really 3 dimensional. First, the customer. Keep the focus on the customer, keep building this brand, keep globalizing it and continue to highlight the importance of it. We've increased our investment as we highlighted during the second quarter to do that. That's important. The second is with the EPA, to continue to work with the EPA, to provide the pharmacovigilance data as we put in that 8-K. I mean, this product has got a profile of one of the safest products ever in animal health, and we're going to continue to represent this product and stay behind the science and work with the regulatory body. Last, I think, is there ever closure, to your question, Jon, I'm not sure. What I would say is, if you're in the consumer business, which you are, if you're in the pet business, then you need to be able to have the capability like we did with Seresto to be able to address issues and be able to stick to facts and be able to move forward and keep your focus on the customer. That's where we are.

Okay. And look, we're all trying to rely on different data points for insights into what's going on there for Seresto. So I'll throw some of the volume -- we were using this IRR (sic) [ IRI ] scanner data around the time of our initiation. And it had been very strong. It was up about 10% for March and April. So there did seem to be some softening of the trend since the end of April, call it, with May arguably down. And I want to be clear, this just picks up a segment of the U.S. market. Jeff, your thoughts on the softening May IRR -- IRI scanner data? In other words, is that just maybe timing of purchases back in 2020 and some noise factor, if you would, with COVID? Or is there anything to talk to specifically with this one, call it, data point rolling over a little bit as of late?

I'll probably broaden the question from 1 data point out, Jon, to a few things that I think you need to consider. First of all, with the Bayer portfolio, as we've highlighted, we want to highlight the importance of seasonality when you put Advantage and Seresto into the mix, almost 65% of the sales in the first half of the year. So Q1, Q2 really matter. That, I think, is really important. The tough compare to the COVID year of 2020. So we're looking at a 2-year compare. I think that's important, looking at '19 and '20. And we highlighted that during the earnings. I think the other factor is in retail pet parasiticides, weather matters. So if I'm on a vet-scripted product, the vet has a big impact on me and setting me up to make sure I'm using it. If I'm a retail purchaser, I may be a little more dependent if I was out walking my dog, is it warm? Should I worry about fleas or not? So I do think that coming out of the Texas freeze, but also the cooler spring, these are factors we need to consider as we look at a retail pet parasiticide business. And we'll share more as we move forward, but these are things we're learning as we picked up this Bayer business.

Okay. To your point, that literally warrants, as if you were around weather patterns and what it may be from a timing perspective.

Right.

Fair enough.

We feel very -- I want to be very clear. The 8-K set the record straight. We've managed the issue. Our focus is on customers. We have tremendous support by our customers and our retailers that work with this product.

And you mentioned the 98% metric as well.

Yes.

Other areas of pet health. Let's go down to your conviction, Credelio and Interceptor Plus can grow double digit in the face of inroads from Simparica Trio. So you've really been trying to get that messaging out there of broader world protection on Interceptor Plus. How is that resonating? Is that one of the factors, Jeff, that gives you conviction that you'll be able to grow double digits in what seems to be a pretty competitive market?

Yes. Double digits and forecasting products by category by year, I'll be a little careful of. I keep coming back to the algorithm of growth of that 3%, 4% growth as we go forward, the importance of innovation in these focus brands. And these are focus brands, Jon, that you're talking about, Credelio and Interceptor Plus. These 2 together had the broadest coverage, so bundling. 1 out of 5 pet owners that we saw in these dog park studies with IDEXX that have intestinal parasites and worms. If you're going to have full coverage and anything that's offered in the U.S. market, you're going to need 2 products. These 2 offer the broadest coverage. So yes, that's a key pillar to our strategy. It's working, and we see continued growth for both of these brands going forward. I want to also note we just this week got the Credelio Plus approval for Australia. So we've got Credelio Plus outside the U.S. And outside the U.S., single product-wise, we've got as much of a competitive offering as anybody else. So internationally, very competitive. U.S., we've got omnichannel, retail and in the vet. We've got the best pairing with Credelio Plus and Interceptor -- excuse me, Credelio and Interceptor Plus as we go forward. So again, all fitting in this growth algorithm that I talked about in December.

When we think about the Credelio Plus, maybe to try to go down that road, you were a little bit late, pardon me, with Credelio here in the U.S. market, NexGard [ but also ] Simparica. Is that something, Jeff, where you think you can move up the food chain. I mean, can you be the second to market here with a triple in the U.S. behind that of Trio in your opinion?