Elanco Animal Health Incorporated ($ELAN)

Okay. Great. All right. Well, why don't we get started? Thanks, and good morning, everyone. Thanks for joining us. We're obviously very excited to have Elanco here with us today, and representing the company is Bob VanHimbergen, who's the Chief Financial Officer of the company; and to his left, Bobby Modi, who is Head of U.S. Pet Health and the Global Digital Transformation. I think I know many of you, but for those of you who don't, I'm Glen Santangelo, and I cover Elanco for Barclays amongst a bunch of other things. So we're very excited you all came down here to Miami and spend time with us. Both Bob and Bobby, thank you guys for sort of joining us. Great to have you.

Thank you. Glad to be here, Glen.

And I should mention, Tiffany Kanaga is in the front row. She heads the Investor Relations for the company that I think most of you know as well.

So maybe a good place to start, I think, would be helpful just to sort of level set the conversation. You came off a very strong quarter, gave very, very strong initial fiscal '26 guidance. Maybe that's a good place to start just to sort of bring people up to speed on some of those positive developments that culminated in 4Q '25 and provided the foundation for that 2026 guidance, and then we can sort of dig in after that.

Yes. No, sounds great. Thanks for the question.So listen, at Elanco, we've been focused on growth, innovation and cash. And we're just operating from a tremendous amount of strength, and we've got just a tremendous amount of momentum. We did beat our guidance in our fourth quarter really across the board on revenue, earnings and cash flow. Growth in the quarter was 9% organically. Bobby's business grew 10% and our U.S. Farm business grew 17%. And really all 4 quadrants, including the international business performed well. Internationally, we had 9 of our countries grew and really our top 5 franchises grew. So it's just a high quality of business growth there. And then on cash, right? I mean -- so listen, we continue to have good fundamentals around trade working capital and aligned on paying down debt. So we delevered to 3.6x, a little bit below what we had guided. And that momentum is continuing into 2026. And so we've guided 2026 right in line with what we did -- what we said at Investor Day with a mid-single-digit top line growth, high single-digit EBITDA growth, low double-digit EPS and then continue to delever. We expect to get below 3 in 2027, and that certainly unlocks the opportunity for shareholder return. So we're extremely excited about what we've seen across the board. And the last thing I'd highlight is a lot of this is enabled by our basket of innovation, where we've got some special products, but the entire basket performs well. And because of the strength coming out of Q4, we were able to, again, increase the guide for 2026 up to $1.15 billion on that basket.

Yes. Okay. Thank you for that. Bobby, Bob talked about some of the growth in U.S. Pet Health, right? Maybe that stole the show, right, in 4Q '25, and we get obviously a lot of questions on that. And if you look at sort of where we were in the first half of the year relative to the second half of the year, we saw some very nice acceleration and particularly night and day versus 2024. And I sort of feel like Quattro and Zenrelia, they suck all the oxygen out of the room, and that's what people want to talk about. But it feels like there's a lot more beneath the surface there as well. So maybe you can just sort of comment on those trends throughout sort of 2025 in your business with so many success stories to sort of talk about.

Yes, Glen, thanks for the question. So what I would remind you is that we grew share in every major category. So pain, vaccines, derm, OTC parasiticides and Rx parasiticides. So the total business is healthy. And yes, Quattro and Zenrelia get a lot of the sunshine, but we launched 12 differentiated assets across our OTC and Rx portfolio in the last 3 years, and all of them are contributing meaningfully to growth. And then the third thing I would say is yes, we are -- we have launched differentiated assets in large growing spaces that have allowed us to extend the growth of those spaces and also capture market share. But those new assets have strengthened our portfolio, which has allowed us to reach new clinics. For example, we are now in 2,600 clinics that never bought an Elanco product before because we have -- because they were interested in Credelio or Quattro, and that's been a really nice tailwind for our business overall.

That's excellent. One of the things that if I think back to the middle of last year, one of the concerns people had with sort of the innovation outlook and expectations was on the pricing side, right? And what strategies Elanco would sort of take. Could you sort of talk about the volume versus pricing dynamic as 2025 sort of played itself out? And we're going to segue soon and talk about 2026, where I think you guys are excited about sort of the pricing side of the story in 2026 based on the demand that you're seeing. But if you could just touch on '25 first and then segue.

Yes. Yes, sure. So maybe I'll take that, and then Bobby can answer or add anything else. But listen, pricing in 2025 was 2%, volume 5%. And we're seeing a good balance between the volume with this basket of innovation, not only growing, but also stabilizing our base business. And so we saw 2% of price. So we're seeing good volume, 2% price in 2025. We expect that to accelerate in 2026 as we continue to price to value. And so we have that mentality. Bobby's business, we took the highest list pricing out to vet clinics this year. It's the highest that we had in 5 years. And so listen, we're going to continue to price to value, and we do see acceleration in 2026 versus 2025 on price, and we also expect it to accelerate throughout the year versus Q1, Q2, if you will.

Okay. So much focus on U.S. Pet Health, obviously, right? But you participate in a lot of other things, right? I mean, outside the U.S., obviously, is big. You got Farm both in the U.S. and outside the U.S. When you think about those 4 quadrants, if we exclude U.S. Pet Health for a second, let's talk about some of those other quadrants. Let's talk about Farm in the U.S. and your international business and maybe some of the drivers there because I think there's a lot more to the story than just Zenrelia and Quattro as we were just sort of talking about.

Yes, great. So listen, I'm happy to do it. I'm extremely excited to talk about the Farm business. So the Farm business grew 17% in the fourth quarter, really led by cattle and poultry, and cattle, particularly led by the strength in our Experior product. And so right now, Elanco is benefiting from just a small herd size. And we believe the liquidation in the U.S. cow herd has stopped. The growth is -- or the rebuilding, if you will, has been stagnant. So we kind of expect a flattish year for herd size. But that low supply and high demand for proteins and beef is leading to higher beef prices. And Experior wins in that sort of environment. And so Experior, we crossed $200 million in revenue in 2025, operating in a TAM of $350 million in the U.S. and Canada. And we're seeing continued adoption of the product. We're seeing a high retention rate of the product. We have the ability now to take price and then we expect the geographic expansion to be a longer-term driver of Experior. So strong growth on the U.S. Farm side. Now as we move to international, the Pet business grew 8% in the quarter, really strength from our Credelio family, Adtab, as well as Zenrelia. And we've got a clean label with Zenrelia and some great market shares already in Brazil. We've got a 40% market share of the derm JAK market. In Japan, it's 30%. Internationally, in Europe, several countries, we've got double-digit shares already. And so some really good performance on Zenrelia. And then international Farm grew 4%. That's really led by, I'd say, ruminants as well as poultry and just that global demand for proteins.

So when you put all that together, right, when you talk about Adtab, Experior and some of the other growth drivers, you keep exceeding your expectations on your innovation bucket, and that's added, I think, over $400 million on a year-over-year basis. And the expectation is for something maybe less than that in this upcoming year. But can you talk about the continuation of those trends and what gives you the confidence to continue to guide that sort of innovation expectation higher?

Yes. I mean it's a great question. So listen, what's unique about Elanco is we have this entire basket. We don't have -- historically, there might have been -- or company may have one product in one sort of area of the business and we lean in heavily. But we've got this entire basket now, just really bearing the fruits of a lot of the investment over several years. And so the entire basket continues to perform well, which is incredibly important for us for two reasons. One, the margins in this innovation basket are higher than our corporate average. And two, what we're seeing is it's stabilizing our base business. And you look last year in Q1, our base business had a little bit deeper drop. But then as Quattro and Zenrelia launched, we saw a stable base in Q2, 3 and 4. So listen, we're going to continue our no-regrets approach to launching these products. We think they are best medicine. And maybe even more importantly, because of just the focus on R&D, we continue to fund the pipeline, and we've got more products coming to the market here over the next 5 and even 10 years. I know that's something we'll probably touch on later.

One of the things I also wanted to talk about and you touched on it in your prepared remarks is maybe the leverage that this innovation basket is sort of giving you in other areas of your business now that you're in the clinics in some of these new therapeutic areas, but it's maybe strengthening some of your portfolio in other areas, and that may be underappreciated by investors to an extent. Bobby, I don't know if you want to touch on sort of that leverage multiplier effect that you maybe get from penetrating these clinics in ways that are new versus just a couple of years ago.

Yes. I think I spoke about this a little bit earlier, but I think the real opportunity is Elanco has historically been underdeveloped with corporate clinics in the U.S. and having a full portfolio of products now gives us -- and differentiated assets, which they really want and which consumers are asking for, it gives us a sort of meaningful presence with corporate clinics and allows us to drive further penetration, not just of the differentiated assets, but our entire portfolio. And we will be sort of 1 of 2 animal health companies with monoclonal antibodies. We'll be 1 of 2 animal health companies with a full comprehensive derm portfolio, and we've got a differentiated sort of broad spectrum endecto. And then the nice thing from just an overall leverage perspective, Bob talked a little bit about sort of investing from a no-regrets perspective, but we expect our investment to ramp less than the overall sales ramp that we get on innovation. And so that will fuel sort of EBITDA growth to the bottom line.

Okay. I think it's obvious to say you've been very pleased so far with the launch of Quattro and you sort of characterized it on the most recent call as a first-to-market product where you're third to market, obviously. So could you maybe talk about the product and maybe what differentiates it and maybe what you're doing a little bit different on the commercial side that's driving these strong results?

Yes. So Quattro is differentiated in 4 areas. The first area, I would say, broadest coverage, we're the only broad spectrum that gets tape forms. The second area that is differentiated is speed to kill, specifically with ticks, which is important as you think about disease transmission. And so we've run head-to-head studies versus the competitive products in the marketplace. The third area of differentiation is heartworm efficacy in 1 month. So you don't have to wait to get that. And then the fourth area of efficacy, which we -- or differentiation, which we saw play out in the marketplace is palatability. And Alan and her team have done a phenomenal job making the product taste great, which allows vets to switch dogs from existing products to a new product much easier. And then our focus on how we continue to accelerate sort of the growth of Credelio, Quattro is twofold. We're just in 1/3 of clinics in the U.S. And so we have an opportunity to increase clinic penetration, and we're adding roughly about 500 clinics each and every month to the portfolio. And the second is, as of last year, our share in the clinics we were in was only about 40%. And so we have our opportunity to increase our endecto share in the clinics we're in over time as we drive more dispensing via consumer demand or DTC going forward.

As a category, right, these combo products are growing very fast, right, 30%. So there's clearly a rising tide lift all boats. Could you maybe talk about the durability of this growth that we've seen? And do you feel like it's coming from new puppies? It's just sort of just people sort of trading up from the legacy products. Like how should we think about the durability of the growth that we've seen in this combo market?

Yes. I think it's a great question. I think overall, what's driving the growth of the combo segment is consumers' demand for convenience, right? The ability to get an all-in-one and one pill versus having to take two pills or look at different modes of treatment has really helped. But I think a really good indication of where the market is growing is what's happening with puppies because typically, what you start a puppy on is what they ultimately stay on in their adult life. And 2/3 of puppies now are starting on a combo product, which sort of alludes to the fact that you've got a -- in the U.S., you've got a $1.4 billion business that's been growing at 30%. But the fact that 2/3 of puppies are on it indicates that you will sustain that growth sort of going forward.

Okay. All right. Maybe why don't we shift gears a little over to derm. You launched Zenrelia at the end of 2024. You're earlier in Europe. Could you talk about maybe the differences in the launch trajectory you've seen outside the U.S. versus inside the U.S. with the label differences between the two geographies?

Yes. We've seen a faster acceleration of market share outside the U.S. So we've gotten in the countries we've been in the market, OUS with a clean label, which is every country that we've been there for at least a year, we've seen sizable share advantage. We were public with a 40% share in Brazil, a 30% share in Japan, and we've now seen double-digit share sort of in Europe as we think about that launch. In the U.S., the ramp was a little bit slower. We exited December with double-digit share of the JAK market. Q4 was our best quarter yet when we got an updated label in the U.S. in October. Since then, we've added 3,500 new clinics to Zenrelia. We're now in over half the clinics in the U.S., and we're seeing that momentum sort of carry through in Q1. So we think the U.S. will get there. It will just take us a little longer.

I'm sorry, since the positive label update in October, could you give us that stat again?

Yes. Since the positive label update in October, we've had 3,500 clinics come on to Zenrelia and Q4 was our best performing quarter, which was -- is not peak derm season as many know.

And the timing on the potential FDA decision related to the boxed warning?

Yes. We haven't sort of given specific timing, but we feel really optimistic about sort of the data package we submitted as well as the confluence of data, the pharmacovigilance data we've had for the product being in the market for over a year, plus 40 countries with a clean label and over 1 million dogs on Zenrelia globally. And we'll continue to have constructive dialogue with the FDA.

Can we talk more broadly about the success of Zenrelia? I mean I know the company is going to increase its investment towards the product and maybe what's sort of driving the attractiveness of that investment? Do you think it's sort of having better head-to-head data? I mean, do you feel like pricing is differential or a combination of a bunch of different factors?

I think Zenrelia is a special product and what makes it special is the efficacy in market. And a little bit of a blessing in disguise is with the warning label that we originally had on the U.S. label, we got pigeonholed to maybe second-line treatment. So we were being used on the toughest cases where pet parents couldn't get relief for their pets and Zenrelia was working. And as vets saw this, they really started to believe in the efficacy. And so I think first differentiated on efficacy, but continues to be differentiated on convenience and value. And I think that's really driving the momentum of the product.

Do you think the market share shifts at all with a third competitor? I mean, I think people know that Merck has launched a product. And how do you think the competitive dynamics in the market may shift yet again?

Yes. I think we have experience with how Zenrelia is doing with a third competitor in Europe. And I'd say Zenrelia is doing extremely well. And I think what will continue to drive Zenrelia is the efficacy that it brings to pets and ultimately, what vets seeing those results in the marketplace.

Okay. All right. Can we talk about the pain market a little bit? I think you've disclosed that you view that as having a $2 billion TAM by 2030. Where do you stand today? And how we should think about sort of further penetrating that TAM over the coming years?

Yes. We're really excited about the pain market. We sort of were public in our Investor Day about a number of assets that we are pursuing in the pain market. So not only are we excited about the future assets that could come to market, but we're also excited about our portfolio today. We actually have a very sizable portfolio. We have a great product in Galliprant, which is the #1 branded NSAID for OA relief. And we have seen Galliprant continue to grow this last year, and we expect growth sort of going forward as more vets are shifting back to traditional OA treatment.

Obviously, a lot of scrutiny on that category. Does that factor into your thought process or your conversations at all?

I think the scrutiny on the category helps a product like Galliprant, which is known in the industry for efficacy and safety. And I think that's why we saw the return to growth in 2025. And I think as we think about our innovation going forward, we're really cognizant as to what vets and pet parents are looking for.

Last year, you gave that 3-year guidance, right? So people now have a framework to think about the growth algorithm, but we also have talked about -- or the company has talked about its pipeline and all the opportunities that you have, and we've talked about some of them here today. Help us think about sort of the launch cadence coming up in the next sort of several years and sort of layer that into the conversation around that sort of mid-single-digit revenue growth number that you provided the Street back 3 months ago, whenever it was.

Yes. Yes, so great. So at Investor Day, we laid out, obviously, our current portfolio, but then we talked about, call it, the next wave and then I'll say the next-next wave. And so listen, we're heavily focused on ensuring we don't have an air pocket without some innovative products coming to market. And we've got a fantastic R&D team led by Ellen that's just making sure that the team is functioning well and sharing knowledge and making sure we don't have those air pockets. But listen, what we see is by 2031, we expect to launch another 5 to 6 potential blockbusters in the market. And beyond that, there's probably another 5 to 6 in that category beyond that. But listen, the next 5 to 6, we have an unprobilized sales peak of $2 billion, which is twice what we had here in 2025. So I feel great about kind of the pipeline and also great about just the focus of the global team ensuring that.

Any specific therapeutic areas in that next wave that you want to sort of call out?

Yes. I mean we're going to focus on -- I mean, we don't have to go create a new market. And so we're going to really focus our attention on the bigger markets, the derms and the paras and have a differentiated product, Glen.

Okay. All right. Could we maybe talk about the 2026 guidance? We got a couple of minutes left. So I just want to touch on this because last year, you sort of raised prices 2% and you sort of talked about this year, I think that the pricing was even -- maybe even a little bit better this year versus last year, which would imply something greater than 2%. And when we look at the volumes that the company sort of generated in the second half of '25, and I kind of put all that in the mixing bowl versus your sort of 4% to 6% revenue guidance, it doesn't necessarily all add up. And so how do you bridge that sort of disconnect? Or how should we think about maybe some embedded conservatism or just not wanting to get ahead of yourself? Like how do I think about that revenue guidance in the context of the individual pieces that all seem like they're doing better than the guidance might imply?

Yes. I mean -- yes, first off, I mean, I think we feel great about the guidance we gave. It's right in line with the algorithm that we showed at Investor Day. We absolutely have a tremendous amount of momentum really across all 4 quadrants. I'd highlight we are lapping some bigger growth numbers we had from this basket of innovations. We grew that basket $400 million in 2025, and we're expecting to grow that another $250 million on top of that here in 2026. But listen, we said we're going to be grounded with guidance, and we're just being cognizant of the macro trends that we see as well as competitive response to the success that we've had. But again, we feel great about the guide that we gave that mid-single-digit growth.

Yes. Maybe let's just go down the income statement a little bit. Obviously, the adjusted EBITDA, sort of that high single-digit growth outlook kind of implies some modest margin expansion. Talk about sort of the margin trends in the business as this innovation bucket continues to grow faster than your overall total and maybe layering in some new product launches over the next couple of years as well. Just sort of talk about the general margin trends and some of the some of the tailwinds maybe to that margin trend to drive that faster EBITDA growth?

Sure. Yes. I'll highlight really three things. First is this basket of innovation growing. Again, these margins carry a margin profile higher than our corporate average, so that will be accretive. Number two, I'd say we're going to continue to leverage our existing cost base. And so as volumes accelerate, we're going to see some fixed cost leverage. And then the third lever is going to be Elanco Ascend, which is our proactive approach to improving margins really across the P&L, where we expect $200 million to $250 million of net EBITDA improvement by 2030. 75% of that is going to be through gross margin, 25% through OpEx. And listen, this covers the work we're doing within the 4 walls of our manufacturing facilities. It incorporates the procurement team. It's already done a fantastic job of locking in some better pricing, leveraging AI and automation to really improve efficiency across the P&L. And then we also announced a restructuring charge at the end of December, and we're well on path to executing those commitments, and we expect $25 million of save coming through in 2026 from that program. We expect to conclude all of those actions and get a $60 million run rate benefit in 2027.

Okay. Listen, we're out of time, but I want to give you all the last word to figure out how we can sort of tie all this together. I mean, obviously, a lot of trends are going in the company's favor now with the innovation basket. It feels like there's still opportunities in the pipeline. You're able to sort of take pricing. But even the strength is even beyond just U.S. Pet Health, right? It feels like a little bit more of a diversified strength if you sort of will -- if you will. I mean we've been recommending the stock for a couple of years now. 2024 could have gone a little bit better for us personally and yourselves, and that all sort of worked itself out and then some in 2025. But as we sort of sit here maybe with a more bullish outlook, is there something that you think that you want to leave investors with that you think maybe they should spend more time on, may not be fully appreciating, maybe we didn't spend time on it here today. Let me give you the last word to sort of close it out on what you want to leave, the message you want to leave the investors with.

Yes, great. So great. Thanks for loving to do that. So one, I think the industry is fantastic. We expect the industry to grow by $20 billion over the next decade. And that's going to be a mix between the Pet side as well as the Farm. I think we talked a bit about Farm and the financial profile of that business. But listen, there's some macro dynamics behind it that supports it, but also just the profitability of that business is unrecognized. Although it's got lower gross margins than the pet side, the EBITDA performance is -- and the margins are in line with the overall business, including Pet. So that's an underappreciated aspect of the business. And again, we talk a lot about vet clinics being down. But I would tell you, there's never been a more willingness to spend from the end consumer and take care of their pets. We have an omnichannel approach, which ensures that we can be and provide product to the consumer where they want to shop. And listen, I think our basket of innovation is going to continue to grow and the globalization opportunity we have with these products and then continued strengthening of the balance sheet just makes us someone that's going to participate and continue to lead in this animal health industry.

Okay. Bob and Bobby, thank you very much for joining us today.

Thanks, Glen. Appreciate it.