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

Hey, everyone. Thank you all for joining us. Super excited to have Elanco management with us. I know there's a lot going on, Todd, I'll let you kick things off, and there's some very specific topics we want to dial in on.

Sure. No, thank you for hosting the conference, Umer and Mike, and I appreciate your coverage. We're very excited at Elanco. We're launching products. It's been -- the innovation journey has come, and we've got products coming out with approvals from the FDA. And so we did 1% sales growth a year ago. We've guided to 3% constant currency sales growth for '24, and we're accelerating that to mid-single-digit sales growth on an organic constant currency basis in '25, led by the innovation. And that's very exciting for us. It's on both the Farm Animal side and the Pet Health side with Bovaer, our methane reducing product for dairy cows and then Zenrelia, which is our JAK inhibitor for dermatitis as well as Credelio Quattro, the all-in-one broad-spectrum parasiticide. So we couldn't be more excited. We're pleased with how the launches are set up and in the progress we're making and look very much to delivering increasing profitability in '25 and accelerating even more in the years to come.

Outstanding. So there's a lot of things to drill down. Obviously, next year is a growth year for you guys, adjusting for Aqua business. I think you guys expect mid-single-digit growth. So I want to touch up on all of that. But just ahead of that, I know there was the Zenrelia update, the label update that -- Zenrelia label, the way you got it. And there was some feedback you guys were going to get from FDA for some additional, can you remind us how's the meeting happened? And what feedback have you had?

The meeting's happened. It was a very productive and constructive meeting. We've got some good feedback as well, but at the same time, expectations that to change the label, we'll need to run another clinical trial. So that makes it for a multiyear process with the FDA. But pleased with the overall tone and tenor of that meeting. I hail Mary, not hail Mary, but a one-off chance that they would have just accepted our booster data that makes it very clear that there is no issues with vaccinated dogs more than the year of age that are -- have had their booster vaccines, which is very much what the label is for, which is for dogs more than a year of age, that we did at the ISCAID conference that showed no interference. We would have loved for them just to accept that and change the label based off that data. We weren't expecting that and we haven't communicated that expectation. So again, very much in line with what we thought would happen, which is improvement over time, but not in the near term.

I guess, Todd, the way I think about it is it's -- if you start the trial now or, let's say, over the course of the next month, you could have that trial wrapped up in 6 months and have something ready for resubmission by next summer. I know you mentioned it could take couple of years or a multiyear process. Why is that?

If we can go that fast, Umer, we'll be more than happy to accept it. I mean, again, based off the timings of -- and working with the FDA on our trials to get a new trial and have it all go through and get a full change, we just think 2 years is a better marker to put out there than to suggest it could be done much faster than that. We will go as quickly and efficiently through this process as we can. And if we get upside from it, that would be wonderful.

Got it. And as it relates to -- look -- got it. So when you say a 2-year process, you're saying next year spent on the trial 2026 bent on FDA review. Is that the way you're thinking about it?

Again, that's generally speaking the right way to think about it. Again, we're confident in the product. We're confident that based off the data and the trial we've done that there's no issues with the vaccine interference. But nonetheless, we have the label we have in the U.S. Now outside the U.S., this isn't an issue. We didn't have this in Japan, which has obviously got a very strenuous and good regulatory body. We've been approved there without the label, similarly in Brazil, Canada and the like. So again, we're very confident in the product. It's approved. It's on the market, and we'll look to improve it over time.

Todd, I know it's early in the launch, but among the U.S.-based vets that are using the product, I mean, say, out of 10 vets, how many actually care about the label versus how many say, listen, I don't dose at 3x the dose, I don't care about this, it's a nonissue for me?

Yes. I think it's very clear that the vets understand the data and the science and look at the studies as well as the booster data and say, okay, we don't think this is likely a clinical issue. They still then need to decide do they want to have that conversation with their pet owners, and there's the label implications of that. So generally speaking, we don't think there's a scientific worry. Once they've been educated and as we've said, our first part of this is educating the vets, spending the time, getting there. We know there's about 300 board-certified dermatologists in the U.S. They get referrals on the really hard cases. They're very excited about Zenrelia because as we've shown in our European head-to-head study, it just worked so well. It get more dogs to clinical remission than the alternative, and they see that as they have a lot of nonresponders that their practices see, they use Zenrelia, and they're getting those results. So they're the ones that we get out there and they have a lot of influence over the general practitioner of vets and having those conversations. So as that happens, I think they get very comfortable with the science and the data, they still have to decide from a consumer perspective and their customers, do they want to say, hey, trust us. We've looked at other data. You don't have to worry about it. So again, as we all know, big continuum of how vets operate and react. Some are quick adopters, and we know there's clinics that have already thrown the competitor out of the clinic and are only using Zenrelia because they view it as more efficacious and a better value for their customers, and they're concerned about that. Others don't want to have the label implications and have those conversations. So again, we're tracking with all of our internal metrics on average and feel good about the progress of the launch here, 2 months in to the launch.

Todd, I think there's a little bit of confusion from the dinner last night. I think one of the points you made was you said you're definitely seeing orders, reorders are very good. But the size of the orders, I think you implied were a little smaller than that. Maybe if you could clarify that because I think there's some confusion in the marketplace on that comment?

Again, the only point being, right, like reorders are better and the size of the initial order is a little smaller. Those things may be hand in hand where you end up in the same place, but it's a timing element there on things. But overall, the clinic penetration is going very well. We're pleased with how the uptake, the responsiveness. So no, if there's confusion on that, Umer, there shouldn't be. It's probably providing more details than what the investors should be because the reality is it doesn't -- again, if you're -- if it's a $900 order on day 1 and the reorder is $1,000, and it happened at 2 weeks versus a $1,200 order and then the reorder happened at 4 weeks, right, like this is noise in the nature of the launch.

So maybe ask differently because I think everyone really zoomed in on when you said size of reorders is a little lesser than anticipated. Let's ask...

The size -- the reorder is faster. Size of order is a little smaller than what our expectations were at because again, averaging out to being a nonevent.

Averaging out to being a nonevent. So is it reasonable to say the launch is tracking in line with expectations?

Yes, very much so, maybe a little ahead, yes. I mean, again, we're pleased with how the education is going. We're pleased with the response. I mean we know the efficacy is really good and that's what we believe carries the day. And the value for the customer is also really strong. And again, that's always a positive in the marketplace as well.

Got it. And maybe I think it will be helpful for folks to let's just remind ourselves of the expectations. I think you guys have put out some numbers on launch expectations for next year. And again, it's not specifically on Zenrelia. But I know if you're launch bucket is, let's call it, $450 million this year, midpoint for next year's $650 million. So it's about a $200 million in sales add. I think could you remind us of the $200 million, how much is non-Zenrelia, Quattro, so that we could kind of put some parameters?

Yes. So again, our guidance for this year is $420 million to $450 million. We did $275 million last year. We've seen really nice growth from Experior, which is our cattle product in the U.S. and Canada. It's going to be a blockbuster this year and has had a really strong year. Adtab is the oral parasiticide in the over-the-counter market in Europe. It's growing well. Parvo doing well, our monoclonal antibody for the parvovirus therapy. We're going to add to that Zenrelia, Quattro, Bovaer. And all of this product of 6 potential blockbusters are all launching such that we're not needing just one product to hit to be successful. We've got this portfolio of blockbuster products we're bringing to market. All of these together are going to drive that continued growth up to the $600 million to $700 million you mentioned. So for us, we don't know which one is going to be specifically right or wrong in the dollars, but we're very confident in the growth of this complete portfolio. Animal Health is very much a portfolio business. We've seen that. Rumensin's had the best year in 2024 than it's had in the last 5 years. It's almost back to 90% of where it was when the generic entry happened 5 years ago because the farmers are using Experior and then they're bringing back and using Rumensin with it. So again, that portfolio effect is a big part of, again, us going from 1% sales growth last year, 3% this year, accelerating mid-single digit in '25.

Got it. So maybe -- and there's 2 things there, but just to specify. For about $200 million year-over-year in sales growth on the launch products, considering there are 6 of them, is it reasonable to assume that at least half of that $200 million could come from non-Zenrelia, Quattro, perhaps even more than half?

Certainly. Again, we're not quantifying the specifics of any individual ones, but we feel really good. The reminder on Experior, in November, it got approved to be used with heifers. Heifers make about up about 40% of feedlot animals. And so that's been a market that we've not had access to until here in just last few weeks. And so very excited that the Experior growth can continue. Similarly, Adtab, this is its first full year of launch in Europe. We'll have more countries being approved in 2025, and that's really grown nicely. And we've not seen much cannibalization. One of our big questions was, would it cannibalize Credelio in the vet clinic or would it cannibalize the Advantage and Advantage products and Seresto at retail? And we've not seen that. It's really gone through a pharmacy channel where it's been new growth for us, which has been a really nice win across the European pet business.

Got it. So again, I'm kind of going back to that $200 million constantly just to keep it all in a framework. A couple of hundred million in additional new product revs. Zenrelia is some subset of that, somewhere between $20 million, $40 million, whatever that range would be. And I think based on some of the FDA label discussions, it sounds like the scenario where Zenrelia just puts up a $70 million or $80 million a year next year, that's probably not on the table. But conversely, a scenario where it grossly under performs the base because that's also off the table. So it's tracking at least in line with expectations probably ahead of that. Is that a reasonable way to summarize that situation?

I'm not going to commit to any of the numbers, as I said, but we feel very good about how Zenrelia is performing, the clinic penetration we're getting, the usage of it and expect it will be a significant contributor to our growth next year, along with Credelio Quattro, along with Bovaer, along with Experior, Adtab, Parvo and those products.

And are we finding physicians sort of pause Zenrelia ahead of vaccination is that dynamically playing out?

It's so new. I don't have great data on that yet, Umer. Yes.

Excellent. Mike?

No, I think we could transient some questions on Quattro.

Okay. Let's do it.

Todd, just looking at the history of regular Credelio, it launches like the fourth isoxazoline in the market in 2018, but it still achieved blockbuster status despite being fourth to market. But you're in an environment where, I guess, you're taking some share away from injectables. So was that like kind of a unique environment as compared to now? I know now the whole pie is increasing. So now that Quattro will be third to market, I mean, can we kind of expect like a mega blockbuster in that sense? Or is there -- if there is such a term in alpha...

Fair. I mean, we've said it will be a blockbuster. As you know, we have Credelio Plus outside the U.S. So this will be primarily a U.S. product. It will have -- we'll get it approved in international markets, and it will be additive, but primarily in the U.S., and we do expect it will be a blockbuster in the U.S. Whether or not it becomes 200, 300, it is the biggest market in animal health. And so it needs to be a big product for us given the importance of it. And it's going to be the broadest coverage a pet owner can get. They're going to have more worms covered with this product. And with load aligner, as you've seen in the clinical data we published this fall, it's got significantly faster killing of ticks than the other competitive products on the market. And that has real value as well is that the faster you kill the ticks, the better off you are to avoid other issues coming up either with xenotic transmission or to your pet. So we feel very good that this product will provide the consumer the broadest coverage they can get, which we believe will resonate well with them.

Got it. Got it. In terms of tapeworm coverage, it's one of the attributes of Credelio Quattro. I mean, your competitors are kind of dismissing this as if it's really a huge value add. According to some competitors, all you have to do is kill the flea vector and then you eradicate tapeworm. I kind of want to get your thoughts on that and whether Quattro would kind of be more, I guess, less attractive in less endemic regions of the country because of...

I mean, again, if you don't have something, obviously, you don't think it's important. Dog Park study done by us a few years ago showed that there was about 5% prevalence of tapeworm in that study. So is 5% proof that all the ticks are getting killed or is that proof that no, there's an issue here that consumers should be worried about? If you've got a tapeworm crawling around in your bed, you're probably more concerned about it. So again, we think the tapeworm has value in the sense that you're just protecting your pet against everything. And why would you not want to do that? Just you're going to trust that all your fleas were killed. Again, we know compliance has improved. And the online delivery is improved. Compliance as part of the market expansion we've seen. But compliance isn't perfect. And so there you get into -- if you do get some fleas and then you end up with the tapeworm, having a product that kills it would seem to be beneficial.

Got it. And what my -- will it be priced probably -- we get questions on pricing all the time. Will Quattro be priced kind of at the same that Zenrelia is as maybe a 20% discount to the competition?

No. We would not. I mean it's going to be the best product on the market with a clean label. We don't view that as the right way to price new innovation in the space.

Okay. And just to kind of level set, too, I think you had mentioned on prior calls that the gross margin for this product, even though it's a combination of 4 different ingredients, it will still be above the corporate average because it's essentially small molecules, right?

Yes, exactly, in the U.S. pet market, which, again, is generally speaking, the highest gross margin space in our industry.

Okay. So you have Quattro, Zenrelia with above-average gross margin profiles. Kind of just thinking about this and thinking about the spend that's happening right now that will continue, arguably until at least the midpoint of next year. As we think about EBITDA cadence going over the next 4 quarters, it's fair to assume that it will probably really start to grow, I guess, really start to grow in the back half of the year, right?

Yes. I would say from a cadence perspective, it would be more back half than front half as you have to have to make the investments before the sales ramp comes with it. As we've called out in our November earnings call, we are expecting the low single-digit EBITDA growth for next year, inclusive of a headwind on gross margin from the U.K. manufacturing facility we bought out of bankruptcy. That's about a $25 million to $35 million headwind that keeps us from growing EBITDA a little faster than sales in '25.

Got it. Two -- last question on Quattro, unless you have any other questions, Umer. I mean, I guess there's a different marketing strategy such that since the parasiticides are kind of a more, I guess, mature marketplace, I think you said in a prior call that less will be -- there'll be less DTC spending. Is that true?

No, like it could be more DTC spending. We term the parasiticides as sort of an uninvolved category. It's not a place where that has to spend much time because we have really good products. And so it becomes one where you're really trying to get that consumer to believe in the broadest coverage having real value as it's not something that's -- an itchy dog is the main reason pet owners go into the vet clinic. And it's really impactful on the pet owner, the lifestyle for the dog, they're itching, they're scratching, you feel bad for them, that itching creates other infections. And so that's a very involved category, which is where the vet education is such a big part of it, unlike parasiticides, which, generally speaking, are an uninvolved category.

Got it. Maybe in the last minute or so, Todd, I think it will be helpful for folks to -- I think from the broader stock set of perspective, one dynamic was value story transitioning to potentially growth. I think you've spoken to mid-single-digit growth. But there was another dynamic that's also holding back a lot of investors, which is the leverage. So could you remind us where we are on balance sheet? And what do you realistically see happening over the next 12 months?

Yes. So we're -- we ended Q3 at 4.3x net leverage. We expect to be generally in that range here at the end of the year, low 4s. We've communicated for next year, we'd expect to be in the high 3s to low 4s with that then improving as we grow EBITDA in the years ahead into where we expect this business will get down to a 2 handle on net leverage because of just the cash flow generation as well as the continued growth in EBITDA that's going to come from the accelerating sales and innovation is going to bring. We've kept OpEx, think OpEx in '25 will likely be less than it was in 2021, even with the investments behind the brands because of all the costs we've rung out of the system over the last few years. So we feel very good about where we're going to get to on leverage.

And what about credit ratings, what should we expect on that?

I mean I think they will continue to improve. Again, we don't have a refinancing obligation until 2027. So we're going to continue to take that tower and think about how to do it effectively. And with increasing profitability, we think there'll be better opportunities for credit upgrades from here, but not committing to anything at this point.

Got it. Should we envision some sort of credit upgrade perhaps in the back half of '25? Or is that more a 2026 phenomenon?

Yes, I think we...

We need to be in the mid-3s for a consistent period, I think, right?

Generally speaking, that's probably the right answer. Obviously, we're at a level where the ranges are pretty big right now. But again, we're having good dialogue with the credit rating agencies right now.

Excellent. Unless anything else from the audience, we'll wrap it up right here. Thank you again, Todd. Thank you.

Very good. Thank you.