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

Good afternoon, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be introducing Elanco today. From the company, we have Jeff Simmons, President and CEO and we're going to have the company's CFO, Todd Young, joined for the Q&A as well. So with that, Jeff, happy new year, and thanks for joining us.

Great. Thank you. All right. Thank you, Chris and JPMorgan for the focus on animal health, and we will reference on Slide 2, the forward-looking statements, and we did drop this presentation in an 8-K earlier yesterday. So -- and I'll go through some of the informative stuff a little quicker. But let's get started. And I'll just say that we're entering an exciting era of Elanco, something that we've been working on for many years. We've got a compelling value proposition that we will highlight and dig into today, all with really the tailwinds of this durable animal health market that we continue to see even in volatile times, externally, the durability of the industry. We're well positioned, and we noted this on our November call to be set up for mid-single-digit growth in 2025 on a constant currency basis. That top line is going to accelerate into value as we go past '25 into '26 on the bottom line and throughout the balance sheet. Before I get stated -- I get started, let me be very clear. Last year, we were a story of late-stage approvals and a regulatory research story. We have quickly transitioned into Elanco in 2025 as a launch and a growth and a commercial story. And we are looking right now at a diverse portfolio of 6 potential blockbusters that are in launch mode at this point in time, that will be the key drivers for the accelerated growth going forward. Let me highlight a few of these updates that are since the November earnings call that we put right up front so that everybody can see the kind of key new important information. The first 1 is we are launching Credelio Quattro this month, here in January, we will be shipping and launching the product, and this product will be entering into the fast-growing, large, broad spectrum endecto U.S. parasiticide market, and we'll be doing that ahead of the parasiticide season. Secondly, as we have moved our DTC campaign for Zenrelia, our new dermatology product up into January. We've seen nice momentum with this launch. We've seen efficacy and convenience and price value resonating with customers in a pretty significant way. We're adding several hundred new clinics every week to Zenrelia, combined with we saw an acceleration of reorder rates in that fourth quarter as well, and that's led to just net more clinics purchasing Zenrelia on a monthly basis. And I'll get into a little bit more details on that in a minute. So we believe now is the right time to go direct to pet owners with a DTC campaign. Third is we're adding Adtab, an incredible launch in Europe, a pet retail product, there's more OTC kind of access in Europe. And we've seen between '23 and '24, the acceleration in the trajectory of Adtab to actually be a blockbuster product. And as a reminder, that's $100 million on the Animal Health side. Mentioning blockbusters additionally Experior, our cattle product has reached blockbuster status in U.S. alone. You add Canada on top of that and that was really catalyzed by a late year clearance and other regulatory approval for us for heifers, about 40% more cattle market access with that clearance. And then additionally, and lastly, and we've had a lot of questions about this new market that we're creating as we have a key goal we had in 2024 was to set up a carbon inset market in cattle. And this is where from the contracts of CPG companies going through a spun-out company that we've created that actually monetizes carbon to actually an on-farm database for dairy farmers that anything they do that lowers their footprint they will get economic gain. And we have distributed in the fourth quarter, $10 million of that carbon inset chain has back to U.S. dairy farmers. So in summary, these 6 innovations, the progress on these key milestones really will be the accelerator of growth and moving us to this mid-single-digit growth. We had 1% constant currency organic growth in 2023. We've had guiding to 3% in 2024, accelerating to mid-single-digit constant currency growth in 2025. Our base business has stabilized, which is making that growth become accretive, the innovation growth. We also are winning and growing shares in the markets that we're leading in, Farm Animal and pet retail and we've seen good success in a really strong market in 2024 there. So 2024 was a very productive key year with the critical milestones getting achieved, setting up a very strong 2025. And I've been pretty consistent on the earnings calls inside and outside the company. We have 3 priorities in this company: growth, innovation, and cash, and I'll touch on that as we go forward here. So just quickly, just an overview slide here on the next 1 is just kind of a setup on Slide 4 is just a high-level summary of a few things here. We're positioned well in this durable market for sustained growth, not just in '25, but beyond. We have been on a strategic journey that's really been methodical to set up this independent company really focused on an innovation capability and a launch capability as we come into this era. And really, we've got the tailwinds of an attractive durable animal health market that continues to become durable and attractive and continue to grow. Our broad portfolio has high-impact innovation. We believe that will gain share. That will put us back in leadership in a lot of these key categories. While against an infrastructure that Todd can share a little bit more on that's really a goal of optimizing and creating much more bottom line leverage in 2026 and going beyond. So we believe the expectations of accelerating growth that will lead to further deleveraging, set up a really compelling multiple expansion for us. If we look briefly for those maybe not familiar with the industry very quickly, Elanco is 1 of the few global players that is set up to be a leader in this $41 billion market. Simply my kind of perspective on Animal Health after 3 decades is this is a durable cash market that's been growing mid-single digit price at about 2% to 3%. And the added volume growth, most all of the major markets are expanding and growing, especially as you look at it through a global lens, it's a market that rewards innovation, it's loyal to brands. It's driven by value because it is a cash market, and it really needs direct access and influence to farmers and veterinarians globally. There's 3 dimensions of complexity in Animal Health to make it durable. There's multiple species. There's multiple geographies inside with multiple channels and multiple therapeutic classes. On the pet side, $16 billion market, really, I think, these 3 trends are the ones that we see most material, the global humanization of pets, the increased compliance, even though visits have been down. We believe compliance being able to have more pet owners because it's easier when it's dropped to your door to be more compliant will more than offset any decrease in visits and then, of course, innovation in and outside of the vet clinic. On the Farm Animal side, look, you go into any major protein company anywhere in the world, protein is growing. Even with a movement in the new administration, protein is going to go up as carbs and processed food goes down, but the challenge here is going to be, do it more sustainably. That's what the next generation of consumers wants and that's the top priority for all the protein customers and we will get into that here in a minute. As you go forward here to Slide 6, we have set ourselves up as one of the only couple of companies that can reach the world's animals independently. And that's something that we've been on this move for quite some time and what does that mean that's local expertise, especially from a sales standpoint and regulatory standpoint and having those local teams that also have the regulatory, the supply chains, the SAP systems. We can do that now in over 90 countries, 200 brands, 9,000 employees and we have narrowed our focus this year on the 5 major species that are most important. So on our 70th year, Elanco here, we believe, all of us that making animals lives better makes life better, from pets to protein and Elanco is now opening a third door on the environment side. Really setting up a one health platform of value that's being offered by Elanco. Very quickly, it has not been an easy road since the IPO, but it's been an intentional one. It's been one of persistence. It's been one of preparation. That has really led to this blue tier of the pivotal time, this next era that I opened up with. We set up an IPO in 2018. The whole idea there was to become independent from Lilly, set up our own systems, SAP systems, all aspects across the value chain. But then we quickly knew that we didn't have the size, the scale, enough pets, the right mix, and that led to a major acquisition of Bayer and Aratana. And then over the last 3 years, our real focus has been on innovation, very much like our parent company. And we leaned in heavily on this with Ellen and the team, the KindredBio. We're 1 of only 2 companies that has monoclonal antibodies into the marketplace, and we brought this late-stage pipeline. Now we're at a pivotal time of sustainable. Sustainable growth, top line, bottom line and sustainable flow of innovation. That's what '24 marks in this next era that we're coming to. The strategy has been consistent for the 5 years so that we've been on this journey for 6 years with this IPP strategy. We show the progress, Todd and I, at every earnings call, the consistent flow of high-impact innovation. Ellen's heavily focused on the early and mid-stage pipeline now, optimizing our portfolio. Every portfolio we have is more stable and creating a higher quality growth than it has in the 6 years, and we're gaining share in the markets we're leading in and then the continuous focus on productivity. This just shows a little bit of how the diversity and the durability on Slide 9 has shown this consistent trajectory of growth. And I would just say that the diversity and the quality of growth that we have today is better. And again, we see the trajectory of moving to a consistent mid-single-digit growth rate is something we can do with the innovation that we have in hand today. As I go forward and just look a little bit at the market we serve, first to the pet lens, a kind of key aspect that I would focus on here is on the pet side, it's all about healthier, longer life, more active life of pets. Something we've been very intentional on is adding this fourth dimension to our portfolio. Vet clinics want and desire 4 portfolios to work with fewer companies, more robust portfolios. And by adding derm, we've added this fourth dimension. We are now the only 2 animal health companies that can offer all 4 dimensions across these key areas. We believe this is critical as we go into this next era of growth. We've actually done the same on the Farm Animal with intentionality by adding sustainability as something that we believe is absolutely critical. As I said, a comprehensive portfolio on the Farm Animal side matters. We hit all of these areas. And when you're in a boardroom of a major protein company, they desire all of these and all of these have an economic bent, especially from a protein standpoint. I want to just double-click on this carbon market very briefly, and I want to emphasize that the force behind this, and this has been quite a few years in the making, we have a long history in Farm Animal and it's an area that we lead in a lot of ways. In this new market, we believe, is a $2 billion market. It's really driven by 2 economic forces. On the CPG side, I think, major animal protein -- animal protein companies on the dairy and meat side, they are desiring to please consumer preference and create brand strength. On the dairy side, for less than 1% cost they can create $20 worth of value to a dairy farmer. And so what we've done is we've proven this model. It's set up independently, verified by the environmental organizations and again, not driven by Scope 3 or ESG, it's driven by that. And dairy farmers, we have a robust demand by dairy farmers for actually executing this to pick up a second stream of income besides a note check. They're getting a carbon check. And again, that happened in the fourth quarter. This opens the door for Bovaer that we see as the next $200 million product in dairy for Elanco, and we've got Experia and Rumensin that are already being executed on today. As you look at innovation and Ellen's kind of agenda, very clearly, we've had this late-stage pipeline that is robust that I'll show here in just a minute, but she's heavily focused right now on really 2 key objectives. It was exiting this late-stage pipeline into the marketplace. We're now doing that globally, which I'll get into here in a minute and also leveraging our monoclonal antibody capability and platform from manufacturing to R&D. And this has been the real key thing is to actually -- we've got the robust, probably the most robust pipeline we have from early to mid-stage and some of the key biggest areas that are noted here as well as some emerging areas as well. This is the pipeline we've actually made some adjustments since the November earnings and just put the blockbusters on the pipeline. So we have the six above the line that are actually in the marketplace with the announcement of Credelio now launching this month all in launch mode, all differentiated, all going into markets that are growing and candidly, all of them really with limited cannibalization. There'll be a little bit in the parasiticide area, but otherwise none. And then we do expect our IL-31, our second monoclonal antibody, the IL-31 short-acting derm product differentiated to be coming this year here in the U.S. So this is our agenda here in the near term and in the medium term to drive growth on the top line and bottom line. All of them also with strong mix and higher profit profiles than our core portfolio today. This just gives you a little bit of the progress we've made on -- we said in late 2000 that we would have our 2020 -- going into 2021, we'd have $600 million to $700 million of innovation by the end of 2025. We hold to that commitment. The last slide is validation that we have multiple paths to get there. And that calculates to a little over $200 million of growth from innovation between 2024 and 2025. The exciting thing is this hits all segments, which helps all portfolios, international, U.S., Farm Animal, Pet Health. I want to take just a double-click very quickly on a few of the big products, starting with Zenrelia. The global dermatology atopic derm market is $1.8 billion. It's growing double digit, continues to grow double digit. This will be 100% accretive to Elanco. This is our first entry into that market with a JAK-1 inhibitor. It adds this fourth dimension to the portfolio that I mentioned. And I would just highlight efficacy and value are what is resonating with customers. Recently, we published our head-to-head study against the market incumbent, showing the efficacy advantage, and we're now seeing that in real-life conditions. Zenrelia has been put in some of the toughest non-responding dogs in derm and the efficacy profile is what has driven increased clinic penetration, as I said, several hundred per week, a reorder rate that is climbing and more clinics overall per month ordering. Vets' surveys also from October to December, has shown a nice increase in vets willing to prescribe the product. So with this data, we've made a decision to move to go direct to pet owners with a direct to consumer campaign that starts this month before the season, the actual peak season of derm and itching dogs. And I think this slide just shows this is a major problem. Number 1 reason pet owners take their dog to the vet, 17 million dogs here in the U.S., probably 6 million that are untreated today. A high percentage of nonresponders, and we see a great response from KOLs, vets and now even on Chewy and others you can see pet owners' reviews as well. So that's the update on Zenrelia. You move to Credelio Quattro. Credelio Quattro is entering the largest market, the fastest growing and probably the biggest trend has been you've got a $3.8 billion parasiticide tick, flea, worm market in the U.S. Of that market, you've seen in the last couple of years, this broad spectrum endecto. A couple of products actually grow pretty significantly and now represents close to 25%. We're entering that market. We're entering really notionally with a small base. We've got about $300 million in that market. So we see minimal cannibalization because we're notionally smaller. And we have 3 nodes of differentiation that are highlighted here. A broader spectrum with 4 active ingredients. We actually get tapeworm that none of the incumbents get. We actually have heartworm prevention on month 1 of control, which 1 of the incumbents doesn't have. And probably what's got the most traction for Credelio is the speed of kill of ticks that is superior to the other 2 market incumbents. And again, adding Zenrelia to Quattro will also be advantageous. So we are moving that product to the marketplace and shipping here this month. And then Bovaer I've already mentioned, we've got strong consumer product, good demand, farmer demand. We've set up the carbon insect market the real challenge now for Bovaer is really a ground game, state by state, farm by farm, feed mill by feed mill. The good news is we're creating a new market that's sticky that will stay and be reoccurring like we've seen with Experior. I'll just kind of wrap up here. The third pillar is our productivity. Very important to just highlight that we had a big year in 2024 led by Todd and really, we've reduced our debt by approximately 25%. Our stand-up cost really decreased in 2024. The cash accretion of the company increased. Our #1 allocation priority is paying down debt. We also narrowed our focus and sold our aqua business and that allowed us also to accelerate debt paydown as well. I will also highlight all employees' bonuses are tied to TSR aligned objectives of EBITDA growth over last year, not versus the plan as well as beating the cost of capital on the cash side. This was the slide we ended our November earnings with. We continue to see some of these similar pushes and pulls. We've talked a lot with investors today that we'll continue to monitor the FX situation, and that impact will highlight in our guidance, we'll give it at the end of February. But I think the focus here is we continue to feel very good about the $600 million to $700 million of innovation and the constant currency mid-single-digit growth. So I end by saying it's our 70th year as a company. It's a year we've been going after for a long time. I would say our purpose has never been more significant as we look at this one health platform. Our potential has never been more clear. inside and outside of the company with a growth innovation cash focus and our people have never been more engaged. We're at a 6-year high on internal Elanco employee engagement. We know that we have to launch well. Our heads are down and focused on that. But there's multiple paths and a lot of innovation in a lot of major markets. So we're confident in that. We expect accelerating revenue growth this year and then that will get levered in the income statement going forward, and we believe our strategy will drive meaningful value for you, our investors. So with that, Chris, I look forward to some discussion with Todd and I.

Well, thank you for those comments. If I can transition over here. I thought I might just start the Q&A with just a little bit more digging into Zenrelia a bit more. What can you tell us about the initial pet owners that are adopting the products. Is there any specific characteristics that are standing out? Are these -- you mentioned tougher to treat animals, but these like Apoquel failures, are they novel patients, just help us a little bit there.

It's a challenging category. If you even look at the existing labels that will say on the existing labels, only a percentage of the dogs will respond. So this is a -- atopic dermatitis is a challenging one. And I would say whether we wanted to or not, we quickly got thrown into the cases on dogs that it did not work, whatever the product was. And I would say that's probably the headline out in the field is this product is working extremely well in cases where other things did not work. So that was kind of our entry point. You always have the early adopter segment as well -- but as we said, the first 100 days was a tech-to-tech strategy. So we did a lot of tech-to-tech learning. We published our booster data on additional research. We've recently published the head-to-head data. So I think it's been a scientist-to-scientist KOL. But I would say there's nothing more effective than a room of 12 veterinarians, maybe 3 or 4 that have used it. All from the same community exchanging with the other 8 or 9, and that's helped with the conversion. I think value is important. We priced it at a lower value, but to vet clinics, that's probably secondary, that will probably be a lot more beneficial as we start to go direct to pet owners themselves.

And just on that initial piece, what percent of Apoquel users from your research have struggled with the product? And how big a percent of the market could that be?

Yes. I mean, Todd, you can build on this, but the label has a limitation of, you can say, 68% to 70%. But that can vary by case. But I think every vet clinic can say, "Hey, I've got some dogs that did not respond. I've tried different mechanisms, even steroids. It didn't work." And that's the cases we've been put into. But what I would say, Chris, is as we looked at the fourth quarter, probably the least quarter where you have itching dog issues, we continue to see the acceleration of reorder rates, several hundred new clinics coming on, but when you hand out 90 pill bottles at 1 per day, it takes a while, but the early testimonials have led to vet clinic saying, I am reordering, I am opting for more. So that's where we...

Encouraging, yes, excellent. On the DTC program, how quickly do you typically expect a response from when you launch that to when it starts to pull through?

It takes some time and DTC today is different than it was 2 years ago, right? It's a very targeted multichannel. We're using all the most advanced. We brought in a lot of expertise over the last 3 years on multimedia and digital and to take kind of the next-generation approach. So it's more efficient for Todd. But very effective for Bobby. And so this will take some time, but that's another reason to do it in January. We see this March to July window being really critical, and we want to make sure we're having full effect by then.

In terms of competitive response, anything surprising so far or anything you'd note?

No, I expect continued. It's a competitive segment. But I think what's exciting is every major market in Animal Health is growing significantly. I mean, derm $1.8 billion headed to a $2 billion market. This broad spectrum parasiticides, $1.2. I see the $3.8 billion overall market going over $4 billion. So price value, volume, value, market expansion, and then it's even probably bigger than that when you look at it globally. So I think that's the positive in this animal health market.

Great. And maybe another one on the competitive front. Merck, expected to come into the market this year. What does the third player do into the space? Does that change pricing dynamics or anything you think about there?

We've seen this in parasiticides, other segments, pain. There's been multiple players. I think, vets want differentiation, vets want multiple options. Veterinarians are very creative and every case is looked at a little differently. So it all comes, I think, to -- this was expected by us. And so we continue to play our strategy.

On the label, talking about the path to improve the label given some of the data you've generated?

Yes. No question with the efficacy profile, the convenience profile and value that we see with Zenrelia, we will pursue this with life cycle management, Ellen's team, like we do anything else, but with the value we see. So there's multiple paths. We've had the good engagement with the FDA, and we'll look at the multiple paths, both with what things we can do with existing data, with new data with language of the label or a change of the label. And all of that is well underway and moving nicely. And then the international approvals, I didn't say, but we'll be launching in Canada this month, and we're in Japan and we expect to be in Europe and Australia this year as well, so...

That angle coming in. Maybe 1 last 1 on the derm. Just updates on IL-31, just kind of time lines around that. Any additional color on how do you think about that program?

Yes. Great product, differentiated from the market incumbent. Another monoclonal antibody from Elanco, coming through the same manufacturing facilities, we're putting CapEx to expect to have the approval in 2025. And again, that's a USDA-approved product, not an FDA approved product.

Excellent. Shifting over to Quattro. Just talk latest thoughts about launch here, how should we level set just the ramp and what to anticipate as going to this year?

Yes. I mean we plan -- we want to be in the marketplace before the season. There is a little bit of a seasonal aspect going into the spring. The 3 dimensions of differentiation matter. We do believe that having both the derm asset and parasiticides. And again, the Credelio momentum we've seen both in the U.S. and Credelio Plus internationally. We have a broad spectrum internationally with the tick kill with a broader spectrum, we think we'll do well, but it will be a straight up competitive play. We'll obviously go direct more to pet owners. It's a little bit more of an uninvolved category. That clinics are much more interested in talking about surgery and pain and derm and maybe ticks and fleas. So we will get the pet owner engaged more earlier.

Another one, just talking about competitive dynamics. I know this market segment has been growing really nicely. How do you think about competitive -- how difficult is it to dislodge share in the space?

Yes. I think the big news is I haven't seen in a long time, a segment get created so fast than the broad spectrum endecto market. So I think a lot of people want to talk about the head-to-head, but I think the overall pie is this going to blow through a $4 billion size? Yes, it will. And internationally, it's the same thing. And I think this convenience of a broad spectrum oral that's effective will continue to grow. So I think share is going to come a lot from the legacy brands. And that's why I mentioned notionally, we're a little bit smaller and don't see quite the cannibalization maybe as others have.

Maybe 1 last 1 on the kind of like the pet innovation side. What's next? What are you guys most excited about as you think about the next wave of assets.