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

Good morning, everyone. Thank you all for joining us. My name is Balaji Prasad. I'm the spec pharma analyst for Barclays. And continuing with the spec pharma track for this session, we have Todd Young, the CFO of Elanco, joining us. Todd, it's a great pleasure to have you here, and thanks for joining us.

Thanks, Balaji. Happy to be here, and thanks for all your coverage.

Great. And Todd, it's been a couple of times we met this year, and the business environment looks very healthy and stable on all sides. But you also recently reported Q4 results, and I know there are a lot of talking points there. But maybe if you could just highlight the key points from there, and we could dig into some of the questions within that.

Sure. We finished 2024 well. We did our sixth consecutive quarter of growth. We grew 3% in constant currency for the year and delivered a Q4 that is very much in our expectations other than FX. FX was a pretty big headwind in Q4, hitting us on the top line and at the EBITDA line. But except for that, we are very pleased with the momentum the business continues to show with strong growth across most of our business areas.

Yes. And as we look into 2025, and I'm sure market especially understands the FX narrative, that's things beyond our control. But as we look into 2025 when Elanco, think you have your task cut out in terms of some of the new launches -- launch, but help us understand the key pushes and pulls towards your 2025 outlook and also the guidance that you provided.

Sure. Now we're excited for 2025 as we're in this commercialization of the innovation that we brought to the market over the last couple of years. And so we've guided to 4% to 6% constant currency sales growth on an organic basis. So as a reminder, we sold our Aqua business in July of last year to Merck. So we've got some pretty significant headwinds on the top line from just a reported basis in the first half of the year. But the driver of going from 1% top line growth in 2023 to 3% in 2024 and now 4% to 6% in 2025 is this innovation portfolio and the impact it has on our base portfolio. So we've got what we call 6 potential blockbusters. As a reminder, for animal health, the blockbuster is more than $100 million in revenue currently in the market. On the farm side, we have Experior. Experior is a feed additive in confined cattle. We sell in both the U.S. and in Canada. And in the U.S. alone, it became a blockbuster last year. For reference, it's the first blockbuster in the farm animal side of the industry in over a decade. So very excited by the growth of Experior. It expanded into [indiscernible] with a combo clearance from the FDA in November and think it has a nice runway to continue to grow well in 2025. We also had approval for Bovaer, which is a feed additive that reduces methane in dairy cows. That's getting off to a start here and we will be continuing to grow over the course of the year. The big part for both of these is it helps with Rumensin. Rumensin is our largest farm animal product. It's been on the market over 50 years, and it grew 16% in 2024 as that portfolio effect of being sold with Experior and Bovaer really came through. Then when we switch to the Pet Health side, in Europe, we've got a product called Adtab. This is an oral parasiticide. It's essentially Credelio, but sold in the over-the-counter market. Europe has been a little more, I guess, progressive in approving products for the over-the-counter market versus the vet channel. And so that product is off to a great start. This will be its second full year, plus we're expecting approval in the U.K. in 2025. And then in the U.S., we've got our parvovirus monoclonal. As a reminder, Elanco is 1 of 2 animal health companies selling monoclonal antibodies. Parvo is off to a nice start. It continues to get a little slower uptake than we originally expected, but we do think as it globalizes, it will continue to have good growth. We've received conditional approval in Canada earlier this year. And then the 2 big pet products we're excited about are Zenrelia and Credelio Quattro. Zenrelia is our JAK inhibitor for atopic dermatitis. This has approval in the U.S., Brazil, Japan and Canada with expected approval in the U.K., Australia and the EU later this year. Very pleased with its starting point. As we noted on our earnings call a few weeks ago, it's in about 6,000 clinics on a being ordered basis, and then we're sampling it in another 2,000 clinics and continue to add clinics each week. Its efficacy is great. As we know, it has a warning label around it, that is slowing the uptake. But our goal is to continue to get experience for vets as we get into the seasonal side of the allergy season here in the spring and summer. And then finally, we have launched and started shipping in January, Credelio Quattro. This is a broad spectrum flea, tick and worm product, and we're excited for its initial uptake here as we get in at the start of the year.

Todd, thank you. That's a pretty nice summary of all the new launches and the recent and current launches, which have been done. And clearly, there's a lot going on with the business side. I'd love to dig into each of it. But before that, maybe a couple of high-level questions still, especially around the guidance, 4% to 6% top line growth. And I'm sure investors can parcel that there is the reported growth numbers, which look different. But as we think about this guidance, what are the key upside risks to this guidance to achieving the high end of the revenue? I mean you've had 6 consecutive quarters of great growth, which is great. But as we think about 2025 and what will take you to 6% growth?

I think the top line will really be driven by both that innovation portfolio. I mean that's critical to see where within the innovation bucket, all of those 6 big products land, but then also the base business and the ability to continue to grow the base. And as we've seen, innovation is a huge driver of that. As I mentioned, Experior and Bovaer helped drive Rumensin. In the swine business, our Prevacent vaccine for PRRS helps bring along that base. On the pet side, we're excited to have a very broad portfolio in the U.S. vet clinic, significantly broader than either BI or Merck. And that, we believe, will help the overall portfolio. As we've known the last few years, not having a broad spectrum of parasiticide in the U.S. It's been a drag on our growth. And now that we have Credelio Quattro, that should help improve that business. So all of those items will be what pushes us towards the high end of the range.

Got it. And so maybe taking Credelio Quattro first, as I said, clearly covered a chink in the armor, so to say, for you and launched it earlier. So what can you tell us about what you have seen in terms of traction in the first few weeks? What's been the feedback, if any, from the field, both from the veterinarian side and maybe your own reps?

Yes, people are very excited. Obviously, sales reps are always excited to have something new in the bag. So that's not a surprise. But no, I think 3 key levels of differentiation. First, it does have heartworm coverage from month 1. So that's better than BIs where it takes 6 months before they have the heartworm coverage. We have the broadest coverage and that we cover tapeworms -- which in a dog park study with IDEXX a few years ago, we showed that the prevalence was about 5%, which you can say, is that a lot or a little, but if your dog has a tapeworm, then it's a lot. And so why not cover it? And then finally, we put out some data in the fall of last year showing that our active ingredients for ticks. Lotilaner kills ticks twice as fast as the competitors. And so given the zoonotic concerns in Lyme disease and the like, that speed of tick kill is also resonating. So again, you can get the broadest coverage product. That's a big part of our multimedia campaign on the digital to get the customer activated is for the same price, why wouldn't you want to cover your dog from the most parasites and kill ticks the fastest?

Sure. And clearly, I think all 3 of these differentiators and help you drive the uptake. And you had mentioned in your earnings call that you're seeing initial distributor uptake being faster or exceeding expectations. So can you elaborate a bit more on this and in terms of how we should think about uptake or at least in 1Q or the rest of the year?

Yes. I mean we're pleased to have started the selling in January that, again, before the season as we really get going on it. I think distributors are what they are. At the end of the day, we got to get the vet clinics to pull it through, and that's what the focus is. And the team is doing a nice job. As a reminder, we've got the stand-alone worm products in Interceptor Plus and then Credelio for flea and tick. And one of the items is Interceptor Plus is in a lot more clinics than Credelio is. That broad coverage of worms with tapeworms is very much appreciated by certain size of the vets. And so that's an opportunity for us to go and add the Credelio Quattro to those vet clinics that wanted that. And there's no impact on Credelio because Credelio wasn't in a number of those clinics. And so our team is very focused on continuing to add to the number of clinics carrying our full line of parasiticides and drive that portfolio effect across the U.S.

Got it. And when you have such a major product launch coming through and competitors obviously have been aware of this launch coming through. Are you seeing any kind of competitive response from Zoetis or Boehringer and what they're doing?

We've not seen. I mean I know there was a lot of different things that was Zoetis did in advance of the BI launch. We've not seen anything in this case, noteworthy.

Is it more a function of the fact that you feel confident in the market's ability to absorb 3 products and not have like any competitive action there?

Certainly, it's the biggest market in pet health, right? $3.9 billion market in the U.S. The all-in-ones have been growing phenomenally fast. I mean, even just ours, we have Credelio Plus outside the U.S. where we've been having very nice growth in that product. So again, I think it's -- the convenience side is certainly resonating with consumers. You also get a higher level of compliance. A lot of folks don't think they need fleas and ticks year-round, but they understand they need worms year-round. And so once you have an all-in-one, you just get a higher level of total compliance on all 3 areas for the full year. So yes, we view this market as very big, growing very fast and opportunity. As we know, there's a lot of parasiticides in the marketplace. So no problems there.

Okay. Great. And as we approach the flea and tick season, the peak flea and tick season, is there going to be any change in your launch in your current launch strategies, which are underway? Or do you need to adapt to it?

I mean we're just getting going here, Balaji. So yes, we're not changing already.

There's nothing to change. And lastly, would you like to leave any comments on the market share that you expect over the next coming years with this as a 1-, 3-year goal as to where you would like to see this product to say that this has been a spectacular launch for you?

Yes. We're looking right now at our total portfolio of launches and delivering as a reminder, we increased our expectation for innovation sales for 2025. We were at $600 million to $700 million on our call a couple of weeks ago. We increased that to $640 million to $720 million. And we're really focused on this total portfolio for the company to deliver the 4% to 6% acceleration on the top line.

Got it. Shifting from Credelio Quattro to Zenrelia, your other major launch. So what can you tell us about what you have seen in the initial wave of pet owners who adopted Zenrelia? And anything that's panning out for you, which helps you to augment or improve your launch further?

I think fundamentally, any pet owner that's using it is thrilled because it's solving the itchy dog problem on even the toughest cases, right? A lot of the failure cases from other products are getting put on Zenrelia and Zenrelia is working. The efficacy, we did a head-to-head study as part of our European submission that showed clear efficacy difference than the lead product in the market, getting more to clinical remission. And that's playing out in the field as the toughest cases are getting that. Our challenge is getting more first-line use and getting broader coverage and use of Zenrelia from the start versus just on those dogs that are not responding to other treatments in the marketplace. So we're continuing to focus on getting experience with the product, having the education, having vet-to-vet interactions so they learn about how they're managing the label and just getting more experience because the efficacy has really been great, and that's the focus as we move into the spring and summer time. I think December through February, there's 25% less scripts for dermatitis than there are July through September. And so our goal is to get in as many clinics with as much experience as we can. So that when you get to those seasonal cases where a dog is treated for call it, 75 to 80 days, there's probably less concerns on the vaccine interference side, and that means an opportunity for Zenrelia to provide a great outcome for dos.

Got it. And clearly, I get your message on efficacy. I think that was a message which was resonating with vets when we saw them at VMX. But as we think about the market penetration at all, I think you recently had mentioned that it's being used in around 8,000 U.S. clinics, which represents 30% penetration. So speak to us more about this penetration level. How do you expect to see this evolve through the course of the year? And where do you think you can get in terms of...

And we expect to continue to have it. I mean this is why we're continuing to expand the sampling program to get the experience and get vets more comfortable with using the product. So again, that's our goal is to get as much experience here before we get into the peak season so that more relief from the [indiscernible].

And also, as you mentioned, your goal wanting to position this with the first line. So it may be a good time to actually think about the broader market. Can you help us understand the TAM in terms of patient pet population for atopic dermatitis? And within that, what percentage of the TAM is like those who have not been managed on the currently existing products? And what is accessible to you as easy market?

Yes. I think the total sales are in the $1.8 billion market, $1.8 billion range, and those are being treated dogs. Again, untreated, lots of different numbers out there, call it, in the 20% range. So there's a decent sized market opportunity in just the untreated. And again, the $1.8 billion is a global market. As I mentioned, we've got Brazil, Japan and Canada already launched, less restrictive labels than in the U.S. and expecting the EU and the U.K. and Australia later this summer. So we're going to have $600 million, $700 million market available to us outside the U.S. as well here in very short order with what is the most efficacious product.

Got it. And commenting on outside the U.S. market and clearly, your label is less restrictive there in OUS regions, so be it Canada, Brazil and Japan. So can you highlight the key differences in the label between the U.S. and ex U.S. markets?

I mean the U.S. has the box on it talking about vaccine interference, OUS, that isn't a factor.

Right. And this is clearly what's driving a greater penetration also outside the U.S. market, right, in the OUS markets.

We're pleased with the start in those markets. As we all know, in pet health, right, you need a lot of international markets to get to a size that is relevant relative to the U.S. And so we need to get the approvals in Europe and the U.K. and Australia to get to that most of the addressable market outside the U.S.

Got it. And Todd, I think one of the things which is -- which I get a lot of questions around from investors is around Merck's product, and there's not much at least out there in the public domain on it. So how much does it weigh on your thoughts as you think about the competitive dynamics? And what should we think about this next-gen product that they are working on, on the derm side of things? Any comments there?

No. I mean, right? Like they were -- Western Vet happened in Vegas last week. It's the kind of Western U.S. equivalent of VMX, again, an empty booth. So we continue to wait just like everyone does to know is there a product.

Okay. We look forward to any news from that side when it comes about. Lastly, on the DTC program, so how is it tracking? And when can we expect to see the impact of the DTC program being felt through on the numbers?

We're pleased with the reach and the responsiveness as we look at the DTC metrics. Again, this gets into the ability to -- in today's day and age to do a lot of digital work that gives you reasonably quick feedback loops and do A/B testing between markets to see if you get the penetration lift from the investments. So, so far, Bobby tells me he's very pleased with what he's seeing and how it's progressing. And so we'll continue to work through that. But as we've communicated, our EBITDA between first half and second half is a little more heavily weighted second half than in previous years because we are making these investments behind Zenrelia and Credelio Quattro in the first half to really drive the launches. And so it's just skewing our historic EBITDA splits a little bit.

Got it. Maybe with a few moments remaining, I want to spend some time on livestock. And I remember asking Jeff in 2022 if Experior will be a blockbuster in a 3-year time span or a 5-year time span. Obviously, I didn't get an answer. And kind of I was thinking of a 5-year time span, but I'm pleased to see how well the product has gained traction, makes such a huge difference. a positive difference, too. So help us understand how much of the livestock performance in 2024 was Experior led? And as we think about the -- this year, what are the key factors which can accelerate Experior growth?

U.S. Farm Animal had a phenomenal year. I mean we're now #1 in U.S. beef, U.S. poultry, U.S. swine, and we think with [indiscernible], we can become #1 in U.S. dairy as well. And it really is, as I mentioned earlier, the innovation driving a complete portfolio as we just can provide more solutions to farmers, which is highly valued by them from just the ease of dealing with one producer. On the poultry side, it was a really strong year. across the U.S. A lot of that was the return to ionophores by Tyson and getting away from the antibiotic-free at Chick-fil-A that drove a lot of positives. Now as we called out, Q4 was light in U.S. poultry. Q1 will be light in U.S. poultry because of just rotations as how farmers use the different intestinal integrity products. But overall, we're very pleased with continued growth in poultry, both in the U.S. and globally. It's a very cost-efficient protein that is valued in every market. U.S. swine, swine producers have had a tougher time. The value for them, the breakevens have been pretty hard. We brought in this vaccine for PRRS that's done very well, and that's helped the broader swine market. But that's the one species that we probably have the most concerns about globally in 2025 is swine. And then when we get to beef, it really was a phenomenal year in U.S. beef with Experior and Rumensin combining to really grow nicely for us. Outside the U.S. in Farm Animal, continued strength in poultry, reasonable stability in swine, though that's a smaller percentage of the total. And then our beef business was fine that we had the recall on Kexxtone that was a pretty material impact on our profitability for OUS Farm Animal.

Got it. And on the question of Experior like products, Bovaer, again, I mean, you can understand that expectations will be high for the product now after Experior. How should we think about the launch curve? Can you kind of put us -- put out a range there in terms of what would be good first year traction for this product?

Yes. I think we're still -- the approvals because of just the nature of how this product was approved by the FDA under sort of an alternative arrangement has made it a little tougher with each of the states and getting that on. So it's been a little slower than we originally expected. We do have incentives from the Inflation Reduction Act. We're closely watching that with all the current uncertainty coming out of Washington, D.C. So there's a lot of different elements there that play into how and what the speed of pickup will be. Strong demand from the farmers. The farmers are excited by the product and the ability to continue to drive sustainability on their farms and use less environment to produce the protein that the world needs.

Got it. And you called out the -- each of the key livestock segments earlier. and especially poultry as we think about it, can you comment on the broader poultry market and the drivers or headwinds that we are seeing there? I think your major competitor speaks very highly about vector vaccines in the poultry market. What are the innovations that we can expect from you to come in this segment?

Yes. I think poultry overall, we're pleased with. We've seen good growth across the globe. It's our biggest business in China, and that continues to be more stable in China than the swine business does for us. I think the relative trade is very clean. Now again, trade is something we're all highly focused on at the moment as we watch about products crossing borders. But overall, we're attuned. We did sign a deal with a small vaccine player for influenza in dairy cows. They're still waiting on approval. So we'll see how the government continues to play on the influenza that we're seeing in bird flu. But overall, we're mainly in broilers and broilers have been a little more, I guess, insulated from the bird flu than the layer population, but it is something we're keeping close attention to.

Got it. 90 seconds left, I have like a dozen questions left. So I'll choose one. OpEx side of things. I mean 2024, obviously will be a big investment year for you given that launches are ramping up and you want to support new launches, too. How should we think about operating leverage in the space beyond 2025 and the good longer-term goal that you're working towards?

Yes. No, we certainly expect to accelerate profitability in 2026 and beyond relative to sales growth. This year, we did buy our U.K. contract manufacturer out of bankruptcy. That's providing a $25 million to $35 million headwind and keeping us from growing EBITDA faster than sales in 2025. But we do expect to not have that next year and to start getting more operating leverage. But we are going to invest behind these launches. We think getting that growth curve right early is the most important thing. And so that's our focus right now is really accelerating the top line from 3% last year to 4% to 6% in 2025.

Got it. And Todd, I think and this is reaching out to also kind of figure out what would be good defensive names to look at, especially in these times. And for me, I think the animal health space is one of the safest defensive bets is what I'm flagging out there. And clearly, you're there as a #2 player in this company. Any thoughts around the broader market volatilities and how do you think Elanco is well positioned to ensure that growth is intact?

Yes. I think we feel good that we've got the new innovation that's going to be a big driver, and that puts us a little different than in other years. Clearly, the FX volatility has been shocking with the kind of 99th percentile move here in the euro over the last couple of weeks, up over 109. So we clearly took a headwind. When we gave guidance based off where FX rates have moved, that's something we're paying a lot of attention to given the global uncertainty. Tariffs, we factored in. The China tariffs will hit us for $7 million to $8 million here in 2025, but we're staying close in the tune to the other ones, Mexico and Canada are less impactful for us just as we don't manufacture products there. So yes, a lot of uncertainty in the current environment.

Okay. Great. Todd, thank you so much for your thoughts and comments. Great having you over here, and I wish you a very productive conference.

Both for us.

Yes.