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

Well, good afternoon, and welcome back to TD Cowen's 46th Annual Healthcare Conference. We're delighted to be hosting Elanco Animal Health. From the company, we have Corporate CFO, Bob VanHimbergen; CFO of the U.S. Pet Health in the U.S. Farm Animal business, Luke Smith; and from Investor Relations and ES -- IR, we have Tiffany Kanaga.

To start off, Bob, what are the most important takeaways from Q4 results? And how should investors think about 2026 in the context of the midterm outlook laid out at Elanco's December 2026 Investor Day?

Yes. So thanks, Chris, and thanks for the question. So listen, Elanco has really started off on a great foot in 2026, really leveraging the momentum that we came out of Q4 2025. And so we did have 9% growth in the quarter. Our basket of innovation continues to outperform from our expectations, landing at $892 million in the year. And so we saw four quadrants of our business performed well. We saw the basket of innovation performed well. Cash came in better than we had expected as well on just good fundamentals of the business. And so we're able to pay down debt even a little bit more than we had projected. And so we landed leverage at 3.6x. So we ended the year with a lot of momentum and then kicking off 2026 with that continued momentum. We did give guidance for the year last week and really right in line with our Investor Day targets that we gave out back in December, where we expect mid-single-digit top line growth, high single digit EBITDA growth and low double-digit EPS growth and a plan to continue to delever and bring leverage down into the low 3s. And so like we're really pleased with the performance, the momentum we're seeing across all four quadrants.

Maybe going back to 2026 guidance. What are the biggest areas of uncertainty, and what scenarios or outcomes could allow Elanco to exceed the top end of guidance?

Yes. So listen, like we do give a wide range of guidance, reflecting a couple of different things. If I think about the momentum of the business, obviously, that's certainly some upside. And the globalization of our products. So we've got some fantastic products with Zenrelia and Quattro and so the continued globalization of those products. So if you see the macro improve, if we see those products and the ramp of that basket of innovation improve, certainly, that's going to help us get to that top end of guide. But listen, like we're also cognizant of the competitive environment. And the industry is growing great, but competition certainly is bringing products to the market as well. And so we think we're balanced with our guide, but certainly pleased with the momentum we're seeing and certainly, the high end of the guide could -- we could get there just with continued success in the products that we've launched.

And are there any specific data points you'll be watching for near term that we could have updates on by Q1 results?

Yes. I mean maybe not so much on Q1 results, and I probably won't put a time line on this. But listen, with our Zenrelia label, certainly, that's something that's what's baked into our guidance is the label as is. Now with that being said, the FDA has asked for data from us back in October. So we have provided data at their request on our label. And listen, like we're in active conversations with them and good robust discussions on really what the label could and in our view what should be. But listen, we've got 1 million dogs that have been on Zenrelia. We're in 40 countries with a clean label, and it's been in the market for close to 1.5 years now. And so those are some data points that could get us to a clean label. But listen, we're not putting a time line on that. It's our hope and expectation we'll get that eventually. But listen, when we hear from the FDA, obviously, we'll assess where we are and continue our no-regrets approach to continue success with Zenrelia.

So one area that was updated in Elanco's 10-K guidance was an update on U.S. Seresto generic. Can you update us on what percent of Seresto sales are in the U.S., and your expected time lines for generic impact in the U.S. and ex-U.S.?

Yes. So Seresto is a global brand with sales composition roughly 50% U.S., 50% OUS. And as you mentioned, we've seen some recent competitive entrants into the market, but we've shared that we've been planning for this for some time now and feel like the brand is well positioned to perform going forward. I maybe just begin by first acknowledging that we believe strongly in our intellectual property, and we'll continue to defend through the duration of the patent, which extends here in the U.S. through Q3 of 2027. But with that stated, we feel like the brand is well positioned to compete given a variety of factors. We have a leadership position in the retail channel. We have broad points of distribution, which gives us access to customers, and we also have incredibly high brand awareness and loyalty with Seresto. So at this point in time, we expect limited impact from the generic. We factored that into our guidance for the year. And we perhaps point to our experience with the topical category as a helpful analog, where the advantage family of products remains the market leader despite being off patent now for a number of years. And so maybe I'd also just offer that we continue to bring innovation and life cycle management to the category, including our recently approved four-month collar, that we'll be selling under the Advantage Family brand name. So again, I feel like Seresto is in a great position to compete and excited about the performance that the brand has.

And maybe longer term, kind of where do you see this brand in 2030?

Yes. I mean we think that the OTC business will continue to be relatively stable, kind of plus or minus low single digits, and we think Seresto will continue to perform. We'll have the basket of innovation -- not basket of innovation, but the basket of the portfolio that we have here to really sustain that performance.

Maybe going back to some of the potential headwinds, tailwinds in 2026. Can you maybe talk about the U.S. vet landscape? How are vet visits and consumer spending on pets trending? And are there any specific factors like tariffs that might be driving this pressure?

Yes. So we've been really pleased with the robust consumer response to our portfolio, both on the pet side of the business and on the farm side of the business. As Bob mentioned, we saw 9% constant currency growth here in Q4, 7% for the full year with great fundamentals across the business, price and volume, all four businesses of the business -- or quadrants of the business growing and continued accelerating contribution from our innovation portfolio. We also remain very bullish on the animal health industry in general and see continued runway for expansion here as well as an opportunity for Elanco to play a leadership role going forward. Maybe specifically on the pet side of the business, we believe that vet visits continue to be an important metric to track, but would also point to the shift in consumer behavior where access, convenience and willingness to spend are becoming more and more meaningful. Today, roughly 40% of sales in the pet market are subscription-based. And omnichannel shoppers, on average, are spending 30% more annually than we see from single channel shoppers. So our focus on the pet side of the business will continue to be meeting that mono pet owner where, when and how they choose to engage. On the farm side of the business, we continued to capitalize on the accelerating global animal protein consumption trends, which in the U.S. is now projected to grow annually about a 5% clip. And this is driven by a variety of factors. 70% of U.S. consumers have indicated that they plan to increase their protein intake, given changing dietary guidelines, giving the aging population where protein will become more important due to muscle retention as well as the emerging trends of GLP. So we remain very bullish on the animal health industry in general and believe that our strategy and our portfolio is well positioned to capitalize on some of this evolving macro backdrop.

And amidst these macro pressures, have you made any changes to your business pricing strategy to -- at this point?

Yes. I mean, on pricing, I mean, we continue to price to value. Listen, we believe we've got best medicine, and we'll price accordingly. Just think about pricing overall to the company. We did have 2% pricing in 2025. We expect that to accelerate in 2026. In Luke's business in the U.S., we did take the highest pricing out to the vet clinics. It's the highest we've had in 5 years. And so listen, we'll continue to price to value. We expect in 2026, an acceleration, not only from 2025, but also accelerating throughout the year. And I'd remind you that we're lapping key launches we had in 2025 with Zenrelia and Quattro. So it will be a good driver to margin improvement.

You mentioned some potential competitive headwinds to be aware of. How do you approach modeling competition as you think about midterm and full year guidance?

Yes. I mean -- so listen, we do consider competition in our guide. I mean if you take a step back and just look at the industry, we expect the industry, the animal health industry, to grow by $20 billion over the next decade or so. But listen, it's a robust industry. But listen, competition is here as well. And listen, right now, we feel like we've got a lot of momentum with the best medicine or the best products. We've got an omnichannel approach that helps us reach customers where they want to shop. We have a full portfolio now with Zenrelia and Befrena will certainly just continue to enable that. And that's helping us make inroads with corporate accounts in 2025 specifically. We grew 90% of our corporates, and that's compared to 13% last year. And that's just showing the value of the broader portfolio. But listen, like we saw, obviously, Merck launched there or had approval of their derm product last week. And our view is with Zenrelia, we've got best medicine, and we'll continue to lean into a no-regrets approach to launching that product. But you think overseas, we've highlighted some key market share profiles last week at our earnings call. But listen, in Brazil, we've got a 40% share. In Japan, it's 30%. And in several countries across Europe, we have double -- low double digits, and in U.S., low double digits. And so listen, we believe that the efficacy of the product is important, and we're running right now based on the efficacy of the product and not price. And so listen, we know competition is going to be there, and that's embedded to our guide. But listen, we're going to lean in to what we have.

Since you mentioned the Merck product, I think their label lapped a claim for treatment of chronic dermatitis. Any thoughts on that label, any thoughts about positioning in the U.S. versus expectations?

Yes. I mean -- yes, so obviously, we saw the label last week. Not a surprise to us with the announcement that was embedded into our guidance that we expected Merck's product to come to the market. But our view is, listen, we believe Zenrelia to be best in the market. We've done a head-to-head study with the incumbent, and that's a great tool for our commercial teams as we go out to the market. And then I'd highlight -- listen, we've launched Zenrelia overseas around the same time that Merck had their product come to the market, and we've seen extreme success because of the efficacy. And again, I'd point to those margins that those market shares that I just referenced.

And then maybe taking a step back, you have 6 big products launching over the next couple of years. What percent of innovation revenue was from the Big 6 in 2025? And where do you see that going over the next 2 to 3 years?

Yes. So we don't talk about each individual product within the basket of innovation, but we did have $892 million of revenue from that basket in 2025. We saw continued momentum near the end of the year. And so at Investor Day, we did say we'd expect about $1.1 billion of revenue coming from that basket in 2026. And because of the momentum that we saw here at the end of the year, we raised that to $1.150 billion for 2026. But no surprise that basket is led by Quattro, Zenrelia, Experior on the farm side, Adtab in Europe. And listen, like we're going to continue to see the globalization of these products as we move forward in 2026 and beyond, which is important for us because the margin profile of this basket of innovation is higher than our corporate average, right? So we'll see a higher degree of profitability flow through with growth.

And from a growth contribution standpoint, is it fair to view Quattro as kind of the leading contributor to growth to your midterm outlook, or how should we think about that composition?

Yes. I mean -- so think about -- I mean, so Quattro was the -- it acted like the first to market, right? It was third to the market, hit blockbuster status in late summer for us. We continue to see strength there. We see that the value of Quattro and Zenrelia really stabilizing our base portfolio with a halo effect of getting into clinics and the broader portfolio, really bringing up base -- our base business. You go back to Q1 last year, our base was down a little bit more than you saw in Q2, 3 and 4 of 2025. And again, it's because of the halo effect of these new products coming in. And so as we look forward, we expect the base to continue to be stable, and we view stable as up or down low single digits. And I'd tell you that can shift by quarter and by region, but certainly see the benefit of these products coming through.

You touched on the gross profit margin profile of the Big 6. Is 60% gross profit margin a good way of thinking about this, or how should we think about this in modeling out the company?

Yes. So listen, like -- so I know historically, we've put out a 60% gross margin target. Is that achievable? Yes, right? We're not putting a time frame on that, but I would -- I'd give you just a couple of points of interest for modeling purposes. Our basket of innovation does carry a higher margin profile than our corporate average. We've also have Elanco Ascend that's coming in, and we've started to execute that program. And Elanco Ascend is about not only really addressing costs within our P&L. And I'd say that's really across all levels of the P&L. But it's also about enabling and leveraging some new capabilities with automation and AI. And we expect $200 million to $250 million of EBITDA improvement from Ascend by 2030. 75% of that, we expect to get gross margin and 25% on OpEx. And so we'll see not only the natural gross margin benefits from the basket of innovation that mix profile, the natural benefits of just volume leverage, but also Elanco Ascend and really improving margins. So 60% achievable, absolutely yes, we're just not putting a time frame on that.

Makes total sense. Maybe diving into some of these specific products, what percent of U.S. dogs today are on broad spectrum products. And what do you see as the biggest contributor to Quattro growth in 2026 and over the next 2 years? Is it price, share gains, growth of the class overall or ex U.S. launches?

Yes. So the U.S. parasiticide market is roughly $4 billion in size. Broad spectrum constitutes roughly $1.4 billion of this. And perhaps equally important, has been growing at a 30% annual clip here recently. As we think about our performance with Credelio Quattro in the first year, we've been incredibly pleased, as Bob mentioned. We've seen the product reach blockbuster status in just 8 months on the market, which is the fastest pet health product to achieve that status in the history of Elanco. And it's been really define the typical third market archetype that we see with products. We believe that's because it's best medicine that offers four separate degrees of differentiation. It's broadest coverage. It's speed to kill of ticks. It's heartworm efficacy in just the first month, and it's also exceptional palatability, which has really been a pleasant surprise as we've seen how the product has performed in the market. As we think about vectors of growth going forward, I'd perhaps point to three separate areas. The first is share. So we're in roughly 1/3 of the vet clinics here in the U.S. today, and we continue to see that number steadily increasing each and every month. We are growing our partnership with corporate accounts, but we've also been leveraging that key relationship with distribution, which we feel is really critical to launching the product with success. But furthermore, we see an opportunity to grow share in the clinics that we already have penetrated in as our portion of the business here is still relatively low. And our confidence here is driven by the recent kinetic puppy index metric, which Quattro was ranked highest in Q4 relative to all other broad spectrum products and grew sequentially relative to Q3 2025. So share will continue to be one of the key vectors for growth. The second will be price. So we believe that this is best medicine, and we'll continue to price to value and want to ensure that, that value is reflected in how the product is positioned in the market. And then third is globalization. So the international broad-spectrum market is roughly $700 million in size. And we've already initiated our global rollout, including the recent approval in Australia as well as submissions in Canada, the EU, the U.K. and Japan. So again, multiple vectors of growth for us going forward. Really pleased with the performance in its first year and excited about the runway that's in front of us.

Could you maybe talk a little bit more about your ambitions long term? It seems like Quattro has a best-in-class or potential best-in-class profile. Why wouldn't it have the largest market share of the broad-spectrum class in 2030?

Yes. So I think we've been very intentional about balancing our ambition for the product with the current market reality. So we anticipate that this will continue to be a highly competitive space and one that will continue to breed innovation. But again, we feel that Quattro is well positioned to compete in this space. We were the only animal health manufacturer to grow share in the U.S. vet clinic parasiticide prescription market in 2025. We think that this is largely due to Credelio Quattro, not only because of the individual performance of the brand itself, but also for the positive halo effect it has on the rest of our portfolio.

And are there any risk factors investors should be aware of thinking about the outlook for Quattro? Do you expect the generic isoxazoline before 2031? And anything else to be aware of?

No, I mean nothing specific to call out here. I would just kind of acknowledge that we can take -- we continue to take a very analytical data-driven approach to how we're launching the brand and investing behind it. Bob and I meet regularly with our commercial leaders to measure the ROI of the media investments that we have, and we will continue to follow this approach as long as we're on the positive slope of the curve. So again, we feel like we're in early innings here, and why we expect that this will remain a competitive space, we're pleased with how the product has been performing in its first year.

Maybe moving to Zenrelia. What's the likelihood of the vaccine washout period being removed from the U.S. label within the next 12 months?

Yes. So we're not going to outline a specific time frame, but we just would acknowledge that we continue to expect that Zenrelia will reach blockbuster status in both the U.S. and international markets, respectively. And I'll just acknowledge that we think we have a really special product here, one that offers differentiation across the dimensions of efficacy, of convenience and value. And we've already seen some really exciting proof points. So we're in roughly half of the U.S. vet clinics currently and are seeing reorder rates north of 80%. And then in the international cohorts of launches that we've had, specifically Canada, Brazil and Japan, we're already seeing year 3 or year 4 analog share gained in the first year on the market. Regarding the label update, we remain committed to making the U.S. label consistent with what we see in the 40 other markets that we've launched, where we've received approval without restriction. And we have a multipronged strategy for accomplishing this goal. I'll just offer a quick reminder that the first step here was submitting existing data to the regulators, which resulted in the fatally induced disease language being removed from the label back in September of last year. And since that point in time, we've already seen 2,500 new clinics purchasing the product. And then we've also submitted additional booster study to the FDA and continue to have very constructive dialogue with the agency. And we remain steadfast in our belief that this data, combined with the evidence at hand, as Bob mentioned, 40 markets using the product, over 1 million dogs worldwide, a strong pharmacovigilance profile continues to support label enhancements, and I'll just remind you that our guidance for 2026 assumes the label as is. So any improvement to this profile just creates a tailwind for the business.

And what has your market research shown on willingness to use Zenrelia with versus without the vaccine washout period?

I don't think we have anything specific to add at this point in time. But again, really pleased with the performance. We've seen it be used moving more towards that first-line treatment, and we continue to expect that as we see label enhancements that will only improve going forward.

And just to clarify on Zenrelia region blockbuster status, did you have a time line?

No specific timeline at this point.

Great. Maybe moving to Elanco's P&L. Can you quantify the impact of inflation on the P&L, both gross profit margin and OpEx?

Yes. I mean so think of inflation for us in our guide. It's largely aligned with CPI. I mean as I mentioned last week in our prepared remarks for our '26 guide. We do have some higher cost inventory flowing though the P&L. We saw some of that in Q4 and expect a little bit more in Q1, Q2, but with that flowing through, we'll expect pricing and margins to improve certainly 40 basis points in the year and probably a little bit more heavier weighted in the second half of the year.

And you touched upon Elanco Ascend, how is that implementation progressing? And are there any opportunities to accelerate those cost savings?

So listen, like I'm extremely excited for Elanco Ascend. Really Elanco Ascend for us is, again, taking a proactive approach to the P&L and cost save on top of just the natural benefits we'll get through mix and volume and then also leaning into the benefits of AI. And so listen, our procurement team has already done a nice job of locking in some favorable pricing compared to what we've had in the past. And so we'll see those benefits flow through. Our manufacturing and quality teams have identified several opportunities and continuing to improve what they're doing within the four walls and their manufacturing facilities every day. And then on the restructuring charge that we took in December, very quick action from the global teams to initiate those activities. We're well on our way to achieve the $25 million of restructuring save this year. Those will all be completed this year, and so we do expect about $60 million of benefit from that on a run rate basis starting in 2027. So listen, the team has done a nice job of executing. We've got a great governance model in place that's tracking these initiatives at a detailed level, and listen, high degree of confidence for execution there.

And you've laid out a long-term leverage target of 2.0x to 2.5x. How should we think about capital allocation as Elanco moves beyond that or toward that target?

Yes. So really no change in what we've communicated in the past. So listen, we're going to continue to invest organically and paying down debt as a priority. And we do expect to get leverage in the low 3s by the end of this year and get below 3 in 2027. I've been clear that we do expect M&A to be a part of our growth strategy, and I would tell you in the near term here those are going to be smaller opportunities, primarily around R&D. But with that being said, it's not going to derail us from our deleveraging time line. With the financial algorithm that we gave at Investor Day, I expect our acquisitions are going to be accretive to that model, right? So if we laid it out mid-single digit, high single digit, low double-digit growth on revenue, EBITDA and EPS, these acquisitions will be accretive to that model. And so in 2026, we did announce a smaller acquisition last week. Now 2026, we're not going to see a significant opportunity. But as we get into 2027 and 2028, it's going to check those boxes. And then the other thing I personally look at is ROIC, and how quickly are we going to exceed our WACC. And generally speaking, I want to see that in 3 to 5 years. And reflecting that it could be closer to that 5 years based on the nature of the launch of a product. But with the HP acquisition and the announcement last week, we expect that ROIC to achieve WACC on a shorter time frame of that time horizon. So we'll continue to focus on paying down debt. We're going to get to that 2x to 2.5x. And I'd say, once we get below 3 in that 2027 time frame, that unlocks the opportunity for returning to shareholders. And so that will be the plan and certainly more to come as we work through the timing of that deleveraging.

And is it fair to say most of your potential acquisitions will focus on therapeutics. Some of your peers have looked at diagnostics a little bit for the field or too early to say?

Yes, I think it's probably early to say. I'd tell you, though, it's going to be across both of our businesses. And so when I say both of our businesses, that needs going to be both on the pet side and farm animal side and to make sure it's going to be something that's within our longer-term strategy.

You also touched on AI. What areas of the P&L might see the most tangible benefit from AI over the next 5 and the next 10 years?

Yes. So great question. So if I think about just the near term, I mean where you'll see the benefits of AI for Elanco in the near term. It's really going to be on the cost side and specifically G&A. And I can give you several examples where we've already launched AI within the organization in our shared service center. And so we're seeing benefits, hard savings of benefit already through procurement and finance. But then as you kind of think about the next several years, we're going to use AI for manufacturing as we think about predictive maintenance and supply chain, and how do we get more effective with supply chain. On the commercial side, getting real-time data to our frontline sales team, so we understand the impacts of marketing and promotional discounts and touch points with customers. And then as I think more midterm, we also expect AI to enhance our R&D capabilities. And so not only regulatory filings and celebrating some of that, but also how do we use AI to test the molecular capabilities, and how to molecules work together, and so we can think about failing faster which will enable us to bring products to the market a little bit quicker.

Before we move to my final question, if we have any questions in the room or from Steve?

Actually, I did want to follow up on one. On Zenrelia, you said the reorder rate was north of 80%. It's hard for us or at least me to put that into context. So tell us why that's a great number, like what compare it to something else?

Yes. So we think it shows just the vets willingness to continue to use the product. As Bob mentioned, we're more so in secondary line treatment right now, but we see that continue to move into first-line treatment. So really pleased with the responsiveness that we're seeing there.

I got that, but I'm wondering, compared to another product, what's the reorder rate for another product? What is it for another recent launch from Elanco?

I don't think we've shared that formation in the past. I don't know if we're in a position to do that right now.

Okay. But suffice it to say this is above what are those...

Yes. I'm pleased with the performance, correct.

Last question is what could be the biggest surprise or change at Elanco over the next 10 years?

Yes. I mean as I think about just Elanco, I mean, we're a different company today than we were a couple of years ago, right? You just think about the profile of Elanco. We spun out from Lilly in 2018. And so the first couple of years were about separation and standing up ourselves. And then we acquired Bayer. There's a lot of integration work to be had. And now we're really entering this next area of growth. And so we're seeing now the fruits of the investments on the innovation front. And so as we sit here today, like, listen, we're entering this next area of growth. And we have a strong growth company today with a lot of short-term potential with our basket of innovation. We continue to fund the pipeline. And there's a high priority high at us -- high priority for us to continue to fund that pipeline. We do expect another 5 to 6 potential blockbusters to hit the market by 2031. And so -- the last thing I would tell you is just the balance sheet and continued strengthening of the balance sheet, paying down debt and providing the opportunity to return cash to shareholders, right? So I think we're really entering a fun area for Elanco and investors.

Great, Bob. Well, with that, I think we're out of time, but thank you for joining us today.

Yes. Thank you.

Thanks, guys.