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. I was going to kick off with the presentation, and we're going to jump over to Q&A from there. Jeff, I know a lot to talk about all the progress of the company. So looking forward to the update.

Great. Thanks, Chris. Thanks, JPMorgan, and excited to dig in here. I'll point you to our forward statement and disclosure slide before I get started here. But looking forward to jumping in and talking a little bit about Elanco Animal Health. We had an Investor Day in December, and we focused really on these 4 areas where we focused on our strategy, a really historical pipeline that we're bringing to the marketplace as well as our financial profile and a little bit of the executive team. What I want to do is put Bob and I a little bit of color and context to that today and give you some of the highlights of that. So an exciting time. If I had to say, boy, the last time we had Investor Day was 5 years ago, and even compared to even a year ago at JPMorgan, I think the headline on Elanco is that we're a different company. We've got a very solid, consistent flow of growth coming from historical innovation, and I'll get into that in a little bit more detail with a much stronger financial profile. And I think if you look here, this is kind of the summary of really our current state of state as a company. We've got a mid-single-digit growth company right now. It's diverse. It's quality. It's been 9 consecutive quarters of growth, and it's come in both Farm and Pet, international, U.S. volume price. I think second is, historically, in Animal Health, there's been maybe one innovation in one quarter -- or excuse me, in one part of the industry -- one part of the segments of the industry that everyone is heavily dependent on and Elanco has got a basket of innovation. So we've launched a flow of innovation. We've got 6 blockbusters. The last one came in December. And we started in 2021, tracking our innovation, and we've now got $840 million to $880 million that we're guiding in 2025, and we're committing to another $250 million of growth of this basket of innovation in 2026 to $1.1 billion. So $1 billion-plus pipeline now unloaded into the marketplace. Second or third comment here is we've refilled the pipeline. We've got a pipeline now worth $2 billion. And in that, we'll talk about it, 8 therapeutic areas we're focused on and committing to 5 to 6 blockbusters the rest of the decade. And then a lot of challenge even a year ago was, hey, when is the EBITDA going to come? We've committed to an algorithm starting in 2026. Bob will talk some about this, but a high single-digit EBITDA growth, low double-digit EPS growth starting this year. And then I just conclude by creating about $1 billion of cash flow over the next 3 years and delevering under 3x by 2027. So that's just a little bit of the underpinning, and I'll add some color and context to this here over the next couple of minutes. I want to start with Animal Health. We're at the largest health care conference. And I will say almost 4 decades in Animal Health, get asked a lot about why are there high multiples? Why is this a durable industry? Why don't you have patent cliffs? And I would summarize it really in this triangle to say, we got really the best of all 3 dimensions. We got the best of pharmaceuticals. It's regulated. It's science-based. It's a high barrier to entry. There's a lot of complexities. I jokingly say, we got 20 species, not one. And all of that creates a barrier to entry. At the same time, we have a very CPG-like brand driven. Veterinarians and pet owners love their brands. You can get a next-generation product and you'll keep that dog and that pet owner with the old generation because they're so brand loyal. Even with the protein companies, the poultry and beef companies, they're very loyal to their brands because they're small percentages of cost to a high brand value. So all of that really limits patent cliffs and really allows 50-year-old products like a Rumensin and Elanco to still be growing. And then the third is we are not a payer market. We are a cash market. So a value proposition really matters. You need interface with farms, you need interface with the 30,000 vet clinics in the U.S. and doing that, that's why being a global independent company outside of Lilly that can have that interface, you need to sell value. If you've got innovation that has value, be careful, be ready because it will get rewarded. I think this is what's demanding a $42 billion industry that we think could be as much as $60 billion by the end of the decade. I'm going to just double down just on some trends that matter, kind of we get talked a lot about, hey, I heard this data point. We, Elanco believe these 5 trends will drive the value, the 50% growth in the industry in the next 5 years. And I'm going to start with the pet business. It's a $17 billion industry, growing faster than farms, high single digit, we predict. But we hear a lot about vet visits. And we will say, we think you're over-indexed on vet visits. We think these 5 trends matter most. One is really this pet owner's willingness to spend is a big deal. If there's innovation, as there's convenience, it really matters. Believe it or not, the under 35-year-old is willing to spend more. There is definitely fewer kids, but more pets, and there's more willingness to spend. And that -- we're seeing that right now today. Even in an economic time where the share of wallet and the pressure is there, we're not seeing that necessarily here. The other is just like on the human side, the pet owner is getting the power. So CRM systems to be able to influence and know what the pet owner wants. Yes, the veterinarian matters, but the pet owner is taking on more and more power along the way. And I think the next 5 years, that's going to play out a lot in the channel. The third is why we bought -- one of the reasons we bought Bayer, and that is omnichannel matters. Reaching more pet owners where they want to shop at price points they want to shop at, whether that's Chewy, that's Pet Express, Walmart or in the vet clinic, this really matters. And the doorstep of where your products land is where more and more of the product is landing is that drop shipping to the pet owner. Having comprehensive portfolios, you need the 4 legs to the stool on the pet side. You need therapy, you need the vaccines, derm and para. We're now the second company that has all 4 pillars to a portfolio. And then lastly is just the globalization. It used to be 7, 8 out of 10 homes in America and Europe had pets, 2 or 3 in Brazil out of 10, 2 or 3 in China. That's accelerating. The humanization of pets outside of the U.S. is accelerating in a big way. And I think these 5 trends will be what drive a lot more than maybe -- I think the change in visits is probably being driven a lot more by the convenience of the channel than about the willingness to spend. On the farm animal side, I'd point, it's bigger than pets. Some people don't realize this. It is a big industry. It grows slower, but it's a lot more durable. Here's the 5, I think, trends that matter the most very quickly. First is just this whole global animal protein consumption. Everybody 5 years ago, I stood on the stage and we were talking about impossible burgers and meatless Mondays and it was going this way. It has come back with vengeance in a big way. Animal protein matters a lot. Yes, the dietary guidelines is very significant. 1.2 to 1.6 grams per kilogram of body weight is a major step up and it wasn't necessarily a government guideline, it is being followed. The U.S. dairy industry invested close to $12 billion last year. There's 4 fairlife plants being built right now as we speak. Dairy, poultry and beef are benefiting from this swing. GLP use, 30% to 60% more consumption of meat for people that are on GLPs. And then in the developed world, as GDP grows, the UN says there'll be 50% more growth in the next decade with animal protein than there was before. The second is we see ruminants and poultry being where there's the most opportunity. This is where they're more stable. There's more opportunity. This is broiler chickens. This is dairy, beef and sheep. Pigs have a tendency to be more volatile and a little bit more regional. Livestock health needs continue to be food safety, disease prevention. The new quiet segment that's growing the fastest is this whole area of sustainability and hold on, it is economic sustainability, productivity, combined with anything you can do to help the CPG brand. The Danone's, the Nestle's are spending millions to make sure that the next generation comes to their product. And that mix we can talk about is something that's driving, we think, a $2 billion market. You got to have comprehensive portfolios, and Bob will get into it here in a minute. This is a more efficient market to reach. We can get low single -- or high single-digit OpEx. So actually, the EBITDA can be very similar to pets because it's an efficient consolidated market. Okay? These are the trends we think are critical. So look, we've never been more relevant as a company. We touch almost every life every day. This whole -- really the 3 Ps of really pets and protein and even planet are really having an impact as we look as a company. This draws a lot of talent. We just had to go out and hire 20 AI talents, Bob and I, and this right here is actually the next generation is pretty excited about our industry as well. Real quick, we're just shy of $5 billion. We've got really -- we're set up just like we want to be a nice mix between U.S., international, pet livestock. But the one area I would really focus on is we've really said, where can we win? Where can we be #1 or #2? Pet retail, we're #1. That's 1/3 of pet owners don't go to the vet, the OTC business, we're #1 there. Farm Animal, we're #1 or #2, and we're #1 in taking share right now. And then on the pet vet side, we've got the most innovation and got now the leading U.S. pet health growth company in the U.S. side. So that's -- we've really, in the last couple of years, really trimmed down to say where can we win. This has really been our story since becoming independent. It's had 4 chapters. It's been intentional. The Board, the executives, it hasn't been an easy ride. We know that, but we have been intentional to get to the point where we are today, which we believe is very sustainable. It was the stand up as an independent company, a lot of standup costs, SAP system. We can now reach 90 countries with SAP regulatory supply chain to reach the world's animals. Only a couple of companies can do that. We had to buy Bayer, and we're glad we did. We went from 30% PET to 50%. We went from $150 million R&D to over $300 million, and that really has given us the strength and the scale to be the company we are today. And KindredBio brought us the mAbs that have really been critical. We're only 2 companies in animal health that have mAbs in the market today, monoclonal antibodies. And then the focus, Ellen and the team develop an R&D engine. The last 3 steps in R&D and Animal Health are the hardest, the last clinical set of trials, CMNC and regulatory. And I think we've proven. We've taken -- we had 12 approvals in December in major markets. Some of those are moving, but the engine works, 6 blockbusters. We've had 9 in 60-some years. We've had 6 in the last couple of years. And that's just a sense of our focus here. So a growth innovation cash story. This has been the strategy for 10 years, a real focus here on a consistent flow, trying to avoid the air pockets of innovation, which our industry has had challenges with. So a consistent flow, consistently strengthen our portfolio. We've tightened the portfolio of places we want to be in. That's been a big part of stabilizing our core. That's been a big part of why we're getting the leverage on the innovation growth. And lastly, and Bob will talk about this in bringing Bob in as a new CFO to really focus heavily on a company-wide initiative called Elanco Ascend to drive a consistent productivity across the company. All of this really is -- you've heard me for 2.5, 3 years, say, 3 outcomes matter to you, 3 outcomes matter really to our customers and to our employees' incentive plans is growth, innovation and cash. And just a couple of slides you've all seen on the earnings calls for me. Growth has improved. The quality has improved. We've become a mid-single-digit company. What I like is we've really got 4 segments or 4 targets we have is Farm and Pet, international, U.S., and we're seeing nice growth in all of those and nice growth volume and price as well. This is a chart we showed in December of 2020 saying we're going to create a basket of innovation. We started in 2021, and we have increased, I think, now for almost 2 years straight, our innovation goal. And again, we're guiding to $840 million to $880 million. We'll report our earnings at the end of February. And our intention here is that we'll be looking at about $1.1 billion of innovation in 2026. What's great about this that's very different from our competitors maybe is that we're not dependent on one innovation in one market. And all of these innovations are becoming globalized as I speak, which is great as well. This is a really key slide. This is what we're kind of calling. You're going to hear a lot from us over the next 3 years. If you said, we got to get one thing right. It is globalizing these 6 blockbusters. What I love is they're in major markets. Everybody, we don't need to create markets to create value for you. We're going into markets where we have small market share. The markets are growing, and we believe these are best medicine, and I'll show you some proof points right now to where we believe we can take market share. And that's the exciting piece for us. We have made a commitment that these 6 blockbusters will double between 2026 and 2028 in overall value. So let's just double-click on a few of these, and then we can get into the Q&A with Chris on these. Credelio Quattro. My prediction in 70 years, this will be our biggest product in the history of the company, fastest blockbuster that we've ever had from launch to $100 million. It's only in the U.S. right now. It has 4 dimensions of differentiation. That differentiation is not making it look like third to market. It's making it look like best medicine. And you can see that on the chart to the left. And actually, the trajectory out of the gate, it's actually growing faster in the first year than one of the market leader. Number two is in the middle. The fastest-growing animal health market today is the oral pill broad-spectrum parasiticide and pets in the U.S. It's a $1.4 billion market that's growing at about 30%. So we are coming in and rising with the tide of a fast-growing market. A lot of predictions that maybe long-acting injectables would take the share. I think that's not been the case at all. They haven't really performed to the level of maybe expectation. That's driving more growth here. We see a good $2 billion market in the future here that we can be part of. What's exciting for us is we're only in the U.S., we're only in 1/3 of the clinics, and we're only at about 30% market share. And one good lead indicator I always look at when I pick the data up is I look at the puppy index. The puppy index is on a relative basis where are you. We're #1 in the puppy index on a relative basis. And that says 2 things. You get the puppy, usually keep the dog, so the future runway. But the second is it's really a lead indicator of confidence of the veterinarian and whether they want to put puppies on a new product. So that's Credelio Quattro. That product will be launching internationally throughout this next -- throughout 2026 will be another key driver for our growth. Now I move to the $2 billion derm market. #1 reason pet owners take a dog to the vet is an itching dog. It is a market that's been growing double digit. We keep saying it's going to lessen and slow, but I think it's a dissatisfied market. And we're seeing about anywhere from 15% to 20% in every market, new starts. So the market is still because of all the promotion from us as companies, there's more and more of an expansion here of new and more dogs coming on, mixed breeds, other things that have driven this. So $1.3 billion of the $2 billion in the U.S. split between JAKs and monoclonal antibodies, 2 market incumbents. Zenrelia came into the market in 2024. We did have a label restriction. We've improved that label. Today, I can say at the end of the third quarter, we were at 46% of the clinics on. We more than doubled between Q1 and Q2 share. We nearly doubled again in Q3. And at the end of Q3, we're at about 5% market share. We see the big driver here is efficacy and a strengthening label has been key. The others we're now approved in over 40 countries with not a restricted label. And I think that's had a big impact on the loyal 46% of the clinics that are using this. We've moved to first-line treatment in a lot of them. Second is at the end of the year, we got our next blockbuster, our last of the 6 Befrena, our second monoclonal antibody, second derm product. This we will compete in the mAb sector in U.S. derm approved by the USDA. We will launch this in the first half of the year. All I'll say is we're not getting into the details of the label now. It won't be actually public until we launch the product, but we do see positive differentiation in efficacy, value and convenience. And when we showed the label to 350 veterinarians, we had about 83% respond that there's a high likelihood of use. What's driving that is really the differentiation and probably the dissatisfaction in derm. So that's a little bit on Befrena, getting your friend back, being a friend after an itching dog situation. And then look, Zenrelia is off to an amazing start. I head to Canada tonight. Zenrelia in the first 3 markets we launched in ahead of the U.S. Very important data, I think, here. Brazil, Japan and Canada, where we launched ahead of the U.S. with a nonrestrictive label, we're over 20% market share after a little over a year. And so we're launching in Europe right now. And I would say the efficacy profile, we're the only company out there with head-to-head data that shows strong performance by Zenrelia, and that's playing out. So we're excited about the growth of Zenrelia internationally. And we're in about, just as I said, 40 countries without a restriction on the label. So -- and then look, Experior is a cattle product that has been a quiet sleeper that has gone from 100 million. It's nearing 200 million. It's used mainly just in the U.S. and Canada in feed yards. It's got a very unique label. And as you all have probably heard, the cattle herd size and the rebuilding of the U.S. cattle herd with the beef demand has been a real challenge. Producers are making a lot of money, Packers are not necessarily making as much money. This is actually benefiting the producers in a really strong way. We see a TAM of about $350 million in U.S. and Canada and the ramp rate to continue. Good timing for this product given what's going on in the marketplace. So really, in summary, as I just share a couple of slides on the pipeline, we've got a base business that we're saying is up and down low single digit. Why? I think it's targeted markets where we can win. Innovation is helping us as well. The big 6 innovation and the basket around them will be a big driver the next 3, 4 years. We do that right. We're not looking for approvals here for the growth in the next 3, 4 years. They also, Bob will share, have really good margin profile. And then Ellen has built 2 waves of innovation past this. Our goal is really to have this consistent flow of innovation. So very quickly, 2 slides on innovation. We've got 8 therapeutic areas that we're focused on. We've got 15 projects. And of the 15 projects, we're committing to 5 to 6 blockbusters over the next 5 years, the rest of the decade. Really, the big message here is in major markets. All of these markets we're pointing to are $1 billion markets, most of them, they're growing, and we're coming in, we believe, with best medicine. Ellen has also built kind of the next wave behind that. And what we've done really everybody is we've moved over $1 billion into the market the last 2 years, and we've got a $2 billion pipeline. And what's different, I think, about Elanco than maybe 5 years ago is projects that are in clinical that are differentiated, that are in very major markets. All of that, I think, is key. And this is just a little bit of a picture of that, just kind of showing the commitment that we have is 5 to 6 blockbusters here between now and the end of the decade and then the next wave that's coming behind that. And I would highlight there's really 3 internal platforms we've built kind of coming out of human pharma. Monoclonal antibodies. We're 1 of 2 companies that has monoclonal antibodies. We built manufacturing. We've built an internal new R&D center and new headquarters we opened in October. Second is all around immunotherapeutics and then small molecule. Animal health is used usually their parent company for small molecule. So we've built those 3 platforms to drive what I believe is what's got our industry in trouble when we have the air pockets of innovation, and our intention is to have this sustainable flow of blockbusters as we go forward. The third is just on the cash and the balance sheet. We've turned 2 turns of debt down in 2 years. And again, as I've highlighted, we're going to generate about $1 billion of cash flow between now and 2028 and break under the 3x leverage in 2027. Bob will share a little bit more on this, but we launched last year, Elanco Ascend. This is a company-wide productivity initiative. This allows us to give high single-digit EBITDA growth, maximize launches and generate cash flow. And this is just really an extension of looking at everything from AI procurement across the board. So I close by, hey, how do we win? We've got growing momentum. We've got a proven strategy. We've got a more stable base an R&D engine that's proven. We've got the most experienced team when you look at years of animal health. We've also established some things. Bob focused on margin. Tim, with all of his experience focused on cash. We're the only animal health company that splits the U.S. between pet and farm animal because they're very different businesses. That also has been beneficial. And Grace is bringing a lot of Lilly manufacturing experience as we really are driving a gross margin agenda that's pretty significant. And this is really the algorithm that I've just talked about, our commitments relative to what we're committing to over the next 3 years that's really going to drive, we think, the next couple of areas of value creation for you as investors. So -- and look, in 2026, we'll get into some of this, Chris, but I think some of the tailwinds and headwinds, we see a nice balance. We think our guidance that we'll put out in February will be balanced and we'll be on the right side, I think, of expectations. And again, we see a really nice strong opportunity for us here in 2026. And this was a slide I ended the Investor Day on. We've got a differentiated company and a durable industry with 3 pillars we're focused on growth, innovation, cash. So with that, maybe I'll turn it over to you, Chris.

Great. And Jeff, while you're grabbing the seat, maybe Bob, I would love to just have -- bring you in the conversation. You've been in the seat about 6 months now. Just any thoughts and observations as you've settled into the CFO role.

Yes. Chris, thanks for the question. So listen, it's been tremendously fun for me and great to really work in this industry, work with a fantastic global Elanco team and Board. And for those that participated and saw our Investor Day, I think you saw that come through. We've got a lot of momentum. We're operating from a position of strength. The algorithm that Jeff just highlighted today and again, back in December of that mid-single-digit top line growth, the high single-digit EBITDA growth, low double-digit EPS growth and then continue to delever. There's just a lot of confidence in that algorithm because of, again, the momentum and the strength of the team. As I think about 2026, right? So we'll obviously provide some more guidance here in February and formal guidance, but that algorithm applies to 2026 as well. Jeff quickly showed what the headwinds and the tailwinds will be. And certainly, we're taking a balanced approach to what we see. And so we're paying attention to vet visits. We're paying attention to the macro, including inflation and competitive response to our success. But if you look at the tailwinds we have, our innovation growing to $1.1 billion, that continues to scale. And so those margins on that revenue are higher than our corporate average. And so we'll see some profitability come through. We're moving past some launch investments. Obviously, launches are continuing to be part of our future. But obviously, the last 12 to 15 months, we've had significant investment there. Elanco Ascend, we talked about that at Investor Day and Jeff highlighted, but this is us being proactive on the cost side to not only drop more earnings to the bottom line, but also continue to fund R&D and fund launch investments to continue to grow that top line. And then the last tailwind I'd really highlight would be pricing. And that's been a recurring question and theme that's come out of this conference for us. But listen, I just want to be clear, like we are absolutely expecting price in 2026. Our pricing on the U.S. pet side is public that went out in November, December to distributors. And listen, it's the highest pricing we've taken in the U.S. pet side in the last 5 years. And we have and we'll continue to price based on the value we bring to the market. And I'd tell you that the share that we've gained is because of the value that we're bringing to that end customer. So listen, there's a lot of puts and takes, a lot of momentum. I'm excited and certainly more in February, but certainly committing to that algorithm in 2026.

Good to hear. Maybe jumping to individual products, Credelio Quattro coming off a great 2025. Just remind us market share exiting 4Q kind of overall with puppies. And then just how do you see this progressing over the next few years? I mean it seems like this drug could have a very long runway of growth ahead of it.

Yes. So I think most importantly, it's just the space itself. I think -- I don't think 5 years ago, we would have predicted that monthly oral broad spectrum [indiscernible] would be headed towards $1.5 billion to $2 billion. And I think some of that is stealing from some of the legacy segments. Some of that is stealing from the retail. Some of it is just more compliance quietly. We don't talk enough about this. But when you have 12 monthly pills and you're only averaging 4 to 5, moving it to 9 or 10, well, how do we do it just like Chewy and everybody else, we drop it off your door and you become more compliant. There's more companies that are capable of doing that. So I think the space growth, watch out this is a big market. Two is, could anyone ever put 4 active ingredients in a pill and get the dog to take it has been the monster, and we did it. And people wondered with PraziQuantel, would it be better? Palatability has maybe been the quiet sleeper of the 4 dimensions of differentiation. So I think it is -- we are putting a lot. We're going to lean in heavy -- why we need to send to save money is because we're going to spend money because we know you don't take share in these big markets without leaning in. So the multimedia, what Bobby has built, I think, is really playing out nicely in Romero as well. And then globalization, Chris, you know this. I think we have Credelio Plus international markets. We didn't think -- we now know that Quattro will become a big market, and I expect earnings call to earnings call to be talking about international markets adding. So we have a best -- we have something special here, and we need to treat it that way.

Yes, absolutely. Zenrelia, can you just update us on the U.S. business and any trends you've been seeing since the label change and just general feedback you've been getting from vets as that's played out?

Yes. I would just say that, look, I mean, there was the concern coming out of the gate in the U.S., but here's new data. We have a year of pharmacovigilance data, and it's good. It's strong. It's a safe product. Two is we had a loyal base and that loyal base has grown. We've added about 2,000 clinics per quarter. And that's really come from, I think, the label change made the loyalists become more loyal and bring on the middle. There's still a segment that we'll probably wait until a full label change. But I think that created a little more exuberance. Then we've got nearly 40 countries approved, all with a clean label. So you put all that data together, I think that's created -- and then the most important thing, and we're really seeing this now in a competitive market in Europe is the U.S. is just seeing efficacy, Chris. I mean we got thrown into second line, third-line treatment situations, and this product works. And in derm, you got to work. There's nothing more disturbing than an itching dog, and it's probably the only problem in pets where you can say it's working or it's not working visibly as a pet owner. So I think that's the energy. And derm is continuing to grow. The new dog starts, I think, surprising us and our competitors. There's just a lot more, I'd say, different breeds of dogs, but the more we promote it, more people say, oh, the dog is itching, let's take it in.

Yes. Building on that topic, I mean, the derm category is becoming more competitive. How do you balance what I'm assuming has been more promotional activity, et cetera, with those volume trends that you're seeing? So just like health of the category as a whole, like how should we be thinking about that?

You're saying in terms of the -- just the..

The overall growth of the category.

Yes, yes. So look, I think that portfolio matters, differentiation matters. I mean to get the response we got on the Befrena market research by showing them this, it's -- they went right to the data shows it is if it's differentiated, veterinarians, what do they want? They want happy pet owners, pet parents, and they don't want them coming back in with a problem. So it's got to work and it's got to take care of a problem. And today, you've got labels out there that are saying x percent respond, but that means quite a bit percent don't respond and vets know that. So if the dog is still itching after it's been put on something, they're going to get it changed quickly and vet doesn't want to change in the clinic. So I think it is a market with real opportunity here. So that's but also people ask me, is the product good or not? Well, we're going to find out by what it does in the marketplace, different than the parasiticide market.

Yes. And can you just elaborate a little bit more on that Befrena launch, how you're going to approach the market? So how aggressively do you go upfront? Is this something we should expect could ramp quickly? Or...

Thank you for the question. It is a monoclonal antibody. So you've got the bioreactor scale up. Good news is we are in Elwood, Kansas that did the Kindred plant that we purchased. We do our parvovirus monoclonal. So we can make it. We're scaling it. We're scaling it now. But we'll launch in the first half, but it will be a phased-in launch.

Okay.

Definitely, the sales will be more second half driven. Margins will come as you scale as well. We like the margins of mAbs, but that takes a little while as well, Chris. So it's in our -- it will be in our guide, but it's definitely something over the next 3 years that will become a major product.

Yes. That's helpful. Any more granularity on -- let's say you're targeting $225 million to $250 million of maybe incremental innovation based on the slides. How much of that's coming from Quattro versus Zenrelia versus [indiscernible] maybe a smaller piece of that, but just any directional color you can provide?

Yes, it's a common question we had here. Look, we're going to guide quarterly. We're going to get on the right side of the expectations. But we also are not going to -- as we've shared, we're not going to guide by product, by market or by quarter. We -- the good news is we've got a really -- we'll get the dynamics of the market and how we're doing in those markets. But what I'll tell you is no question, look at Quattro, look at Experior, Adtab quietly has really grown and become quite a product itself. And then Zenrelia has probably got the most momentum and Quattro. So we feel very good about how the math adds up in the basket of innovation, but we aren't going to get into the specifics. Again, Befrena will be more back-end loaded and more '27 driven to lap that growth that we just had, but that's kind of.

But the globalization of a lot of these products is really going to drive that, not only in '26, but beyond.

Yes, absolutely. You mentioned price. Just directionally across the portfolio, like how much price should we be thinking about for Elanco as we go forward?

Yes. I mean -- so think about 2025, we've guided 2% price. We expect -- I would expect more than that in 2026 and beyond. One of the key factors to our price, as you think about the lapping of the launches we had this year, all of the Zenrelia and Quattro sales are all volume because we don't have the year-over-year comparison. So we are taking price again to be value-based pricing because of the science and the efficacy and the value bringing to the customer. So I would expect pricing to be a little bit better than that 2% as we look for the next several years. But again, more formal guidance in February, but price is absolutely going to be a tailwind for us.

And I just want to -- because clarity matters at these conferences is we are pricing to value. We're pricing up, as Bob said, I mean, 5% to 8% price increases, there's a gross to net thing that will happen afterwards. But we're not getting share because of price. We are getting share because of efficacy, and that is very clear in the marketplace and Elanco, it's public. We've taken our prices up because the value is there, full stop. That's really important for everybody to know.

Right. From a broader perspective, has this string of new approvals in the pet space improved traction with vets across the portfolio. So is there some benefit of as you're delivering all these new offerings into the office?

There is. Yes, absolutely. You think about going into a clinic and they're sitting there saying, "Hey, we don't want to take on more inventory." So which area am I going to move out? So I got 3 broad-spectrum endectos. Okay, if I take on derm, then maybe -- so I think there is some replacement and some -- you got to have some switching to occur. I think that's one dynamic that definitely is there. And then you start going up the chain from the buying groups to the small corporates to the larger corporates. Once you start getting pet demand that's going into these corporate clinics saying, I want Quattro, I want Zenrelia. That's given us the leverage we need to take the share as we go up that chain. We haven't gone up that aggressively because it takes some margin to go up that. And now we've got the demand. We're on the right side, I think, of the demand side now for that.

Excellent. Farm Animal has accelerated for Elanco and the broader industry. Just how durable do you see that growth? Like what's the runway look like for this one for that segment of business?

Yes. So listen, so the farm business, it's half of our business. And Chris, you may know this, I'm extremely excited for the value that it brings to our portfolio. So we expect that farm business to grow at mid-single digits over the next several years. As I highlighted at Investor Day, the profitability of the Farm business is underappreciated. The EBITDA percent value that it provides is the same as our pet side. And that's because the operational cost to run the business is much lower. In the U.S., for instance, our OpEx as a percent of sales is 10%, all right? So we've seen a lot more drop to the bottom line. And so it's something that from the CFO's perspective, it's a great business. It's a great cash generation business. We're going to continue to see the growth. We're going to continue to innovate. But it's an important part of our portfolio, and we think it's, again, a stable business that's going to grow at mid-single digits and provide some good profitability.

Excellent. Shifting over to Elanco Ascend. Maybe just starting with where are the cost savings coming from with this program? Like where are you most focused?

Yes. So think about, I'll call it, 4 or 5 pillars, right? And so the largest bucket is really going to be in the operations and the procurement, those 2 buckets. So the operations is going to continue to see benefit as we continue to perform better within our 4 walls through continuous improvement opportunities. On the procurement side, we've got a global supply base. And as volumes are ramping and just negotiations with new suppliers, we're getting raw materials at a fraction of what we paid in the past. And so those are the 2 bigger buckets. But I would also say on our gross to net approach and rebate approach, there are going to be some opportunities there. And so those 3, by the way, will improve gross margins. And then we've got -- we took a restructuring charge, as you know, and that's going to attack some of the G&A cost as well. And so those are the 4 buckets, enabled by the fifth bucket, which will be AI and automation. And so that's really going to enable really the other 4 buckets. And as you think about where these benefits fall through the P&L, about 75% is going to hit gross margin, 25% through G&A. And then the last thing I'd leave you with Chris, is on that restructuring announcement we made, we very quickly started executing. And so as I think about some of the phasing of the overall Elanco Ascend benefits, we're going to see about 30% of that achieved in 2026 and then more ratably as we get beyond.

Okay. So post '26, you're kind of pretty...

Pretty flattish.

Okay. And then maybe last minute or so here. You're targeting less than 3x leverage by 2027. What does capital allocation look like once you get down to that 3x level?

Yes. So first off, no change to our capital allocation strategy. And you're right. So we guided we'd end at 3.7 to 3.8 at the end of this year. We expect to be in the low 3s by the end of 2026 and then below 3 in 2027. Our capital allocation strategy is going to be consistent. We're going to continue to focus on investing organically in the business. And so that includes the manufacturing facilities to make sure we bring the best cost of product to the market. We'll continue to obviously have a no-regrets approach to launches and fund innovation. So we'll invest organically as our first priority. Very second close priority is going to be bringing down leverage through paying down debt, all right? And so we'll see that as number two. M&A will be a part of our growth strategy as we think going forward. But listen, it is going to be small tuck-under opportunities that will not derail us from getting below 3 in 2027. And when we get there, obviously, that opens up optionality to shareholder return. And certainly, as we move closer to that date, we'll give more color. But certainly, we'll have a mix of dividends and share buybacks. But again, more color as we work with our Board and more color as we get closer to that time line.

Great. Well, I think we're just out of time. Thanks so much for the comments today. And congrats on the progress.

Yes. Thanks, Chris. Thanks, everybody.