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

Good afternoon everyone. Welcome to the day 1 of Bank of America Healthcare Conference in London. My name is [ Lou ], and I am part of the U.S. Life Science tools. And we are very fortunate to have Jeff Simmons with Elanco Animal Health, President and CEO. And I guess maybe Jeff has some statement to begin and then we do go back there.

Yes. Obviously, not the disclaimers that we normally do in a conference like this, thanks to Bank of America -- it's been great to be in Europe with a lot of our customers and traveling to a lot of our operations here, and we have the opportunity here with investors. So thanks for the interest I would just make a couple of comments. I mean we noted our 8-year anniversary as an independent company coming out of Lilly on Friday. It's been a very intentional journey as we've stood up as we've acquired Bayer, so we built an omnichannel, build a pipeline. We've been very focused the last 3 years, especially on growth, innovation cash. We just finished a great quarter, where we delivered 10% reported growth that came from Farm, Pet for a 50-50 split. U.S. international, 50-50 price volume. So we really had high-quality growth that came from the quarter. I think the second priority is all around innovation. We've got a basket of 6 innovations, 6 blockbuster products that are in big markets where we're in early days, but we have a clear differentiation. We believe medical differentiation that's taking really great share, Zenrelia, Quattro, Experior across a lot of markets. And now as I'm out here traveling, we're just starting to globalize those innovations. So -- and then third is cash. We've delevered the company after acquiring Bayer. We were 6 to 7x levered. We will be at approximately 3x by the end of the year headed into the 2x next year. We know that will unlock even more investors. And then in December, we had an Investor Day to talk about the next 3 years. That was kind of -- we've been a steady beat raise per quarter in the last 3 years, the next 3 years, we have an algorithm where we've committed to mid-single-digit revenue, high single-digit EBITDA, low double-digit EPS, $1 billion of cash created between now and 2028, margin expansion to occur year-on-year and the delevering that will get us into the [ 2 ]. So -- and then our pipeline today, we have a pipeline -- a basket of 6 innovations we're launching, but we have projects in clinical development now that are blockbuster potential products. We've had no attrition since December, and we're committing to 5% to 6% coming through that pipeline of those between now and 2030. So that's a little bit of a summary, growth innovation cash, last 3 years, next 3 years, durable. We've seen good response in the market, and we're in a really good place. I think Campbell Health is a $40 billion industry had to do a $60 billion industry. So we're not only going to get market share growth, but we really like the market growth.

Great. That's a very good starting. So you put out a press release last week. Some mentioned the bins gain order today versus Q2. Maybe we can start from that here, given that the pricing has been a big top on the quarter. Can you maybe just talk a little bit about that? And how do you think about the pricing dynamic in the market right now, where do you see the market, especially from the competitor assets?

I think we've got to stick with facts here, right, and what's happened. So first of all, Animal Health last year grew 7%, 10% Farm, 5% Pet. First semester this year, for 6 months, we grew 2% in price and growing high single digit overall in the business driven by innovation. 10 of the 12 companies in Animal Health grew in the first semester. Most all the major markets globally grew. So Derm, Para, Pet, Arm, all grew. And so I start with just that growth overall. When you look at specifically price, price is definitely correlated to value of the business. So what we're seeing is we announced in that release that in July and August, our prices actually accelerate. And we're seeing that because of the medical differentiation we have in markets that matter to pet owners. Pet owners today, we surveyed at the end of May, 1,400 pet owners in the U.S. and 86% said we will spend the same or more for health. There is a backing down on food supplements, hard goods, but not for health. So if you've got medical differentiation, we're proving that we can take price we're seeing that. We see a responsible market. There's no price war going on. There's always targeted promotions. It's probably more with corporates than general practices, the differentiated innovation, you can take price and take share.

That's great. I guess when you talk about the channel between like the corporate and journal. Do you expect to change in the last like maybe see quarter given that contract doesn't renew all at the same time, you're probably going to see a little bit more dynamics in the future?

Yes. I'm meeting with some corporates here in Europe is on here as well. I think the corporate market in the U.S. and U.K. are the primary corporate markets. So today, about 1/3, a little less than 1/3 of the clinics. There's 30,000 clinics in the U.S., a little less than 1/3 or corporate or conglomerate purchasing and the U.K. is probably a little higher than that. But what I would tell you is we are very under indexed with corporates. And so I think the big message on Elanco is corporates are an area of opportunity but it's not a market that we need to drive growth over the next few years. So I think that's -- so I think that corporates, just like other practices, they want differentiated medicine. They want the itchy dog to stop itching. They want the ticks to be taken care of, and that's where we're spending a lot of time as medical differentiation and building brands with pet owners. When pet owners want their brands. And today, they're walking into a vet clinic, there is more aware and have more information than they've ever had. That puts us in a good position. So I would back up though, I think what's more important is we acquired Bayer 6 years ago to do something. It is now playing out really well. We bought Bayer because they had OTC products and that 1/3 of pet owners don't go to the vet, and they buy OTC. That market continues to grow really nicely. Elanco is one of the only companies in that market. And so Chewy, Amazon, Walmart, have become -- we are the #1 animal health company to them. And that's probably the more price sensitive, so we can offer more pet owners, more products, have more price points than any other company. So we're able to address even parts of the market that might be a little more price sensitive.

Okay. That's very helpful. So let's move on to more of the product categories, such as like para. Quattro has been a pretty kind of like strong performance so far. I'm wondering like what is really like driving the growth? And then how do you kind of see that going, clinical profile, DC investment or like any few you want to highlight?

I have to stop on Quattro and just say because I know there's a lot of investors that spent a lot of time in pharma. I was an officer for Lilly, I was inside of Lilly running Animal Health, but for 10 years inside of Lilly, and so we had an opportunity to have a front row seat the GLP-1s were being developed and everything, but to contrast human and animal health. But there is one common barrier, one common threat. And it's not only is it regulated and science-based, but medical differentiation matters and people will pay for medical differentiation, whether it's for their animals or for themselves. And that really matters. So what's happening today, and I will say 30 years of growth in Animal Health, we've grown for 30 years in a row, 5% to 6%, 2% price. This is one of the most durable industries that exist today. But I think it's really important to that to emphasize when someone enters a market with something differentiated, it takes share. And Quattro is taking share with mostly just in the U.S. business right now. We picked up more than 50% of the clinic. It was the fastest blockbuster we've ever created in 71 years, and it's because it has 4 dimensions of differentiation. That's the only pill you can give a dog for parasites that has 4 active REITs. It covers the broadest coverage with tapeworm. It has the fastest tick kill compared to another competitor, it controls heartworms on month 1 through month 6. and it's palatable. People best want the dog to be able to take it, roll it up in baloney or peanut butter. 5 dimensions of differentiation that we see. We believe we've got best medicine. We've captured half the clinics in the U.S. and it's moving to first-line treatment. This will be Elanco's biggest drug we've ever created in 71 years. It's in a $6 billion payer market, $2 billion oral that $2 billion, we believe that we're in early innings. We're -- we said we're over $100 million, but we're really early with what we think the investments. Yes. And there will be -- people have asked me about international today. We'll start to roll it out internationally we hope to bring it here to the U.K. and Europe next year. So it will be a growth driver 2027 as we take it internationally.

I guess let sticking to that point. There were so many different individual markets in Europe. You've recently been to Brazil as well. So maybe just talk a little bit about what is your international strategy? How do you align the tech?

Bayer data scale and R&D, give us scale in all the affiliates. So we're in all the major countries. We would say today, we have the right, when we say SG&A, we got the right S, we've got the right sales organization. We really don't need to -- we've been building it for other innovations over the last 5 years. So we've got the right sales force in all the major countries, bank Europe, Japan, Australia, U.S., Canada are the big ones. The emerging markets like Brazil and others, East Europe are growing. So we've got the right sales. It will be the promotional activity where our spend will come will be more in marketing promotion. So -- but no, we've got the right infrastructure. We're rolling it out. Zenrelia is a great success. We have brought Zenrelia as fast as any product to the 140-some countries, and it's doing extremely well.

That's a good way to pivot to derm. Zenrelia, so the first line usage has actually increased from like below 20% and then right now to more than 40% of the users just seeing what year. So how do you -- so what is really driving the shift to prescribing behavior? And how much runway that you expect that to continue?

So you've got, let's just back up because back to the our market is growing, what's happening in animal health. This is one of the most attractive markets in all of animal health. An itching dog is the #1 reason people go to the vet. It's -- I kind of say the only way the animal can -- the one thing in animal can self-diagnose, but it is what vets have to do, if you take about a niching dog walking into a clinic and I've had it with my family. It's like get that dog to stop at itching. So efficacy prevails. If the dog keeps itching, what it will say is, hey, they will change vet after the second visit, if a dog doesn't stop itching, they will try something else. So this market is $2.5 billion. Internationally, improved 9% in the first half. So it's an unsatisfied market. And so Zenrelia has come in and very quickly taken share. And the reason so I've never seen like in raws in Brazil, we were over 50% market share in 18 months after 2 incumbent products then they're over. So why? Because if you stop itch in our press release that we put out last week, we also had shared on the news this morning, this hotter weather in Europe calling up, itching is actually -- the season has gone from 3 or 4 months to 5, 6, 7 months. So the season's expanded with the weather change. The itching dog matters and Zenrelia has become a product that has high efficacy. It started as maybe second line treatment. It is now in over half the clinics in the U.S., 40% of those are used in the first line, and we see those numbers climbing. We're picking up 400 to 500 clinics a month from usage, and that's been a big growth. We're in 44 countries outside the U.S. Here in Europe, there's another competitor that's come in, like we launched at the same time, and we announced in that press release, we picked up 10 points more of market share in the first half here in Europe, while the new competitors picked up 2. So we like our efficacy. And now we're coming with another product of Brenna, in the U.S., which will be 2 products at this point.

How do you expect this to go up to kind of work together?

You see about a 60-40, 70-30 split of the JAK product until you take home to the -- what we kind of say, the allergy shot that lasts 4 to 8 weeks, Befrena has some differentiation to the product that's in the market today. So it's a monoclonal antibody and the label in the U.S. is 6 to 8 weeks of control compared to the incumbent, which is 4 to 8 weeks. So surveying the U.S. veterinarians, 85% said they want that product ready the Dominion is far surpassed supply. So we're ramping the monoclonal antibody supply to have full supply first half of next year. So it will be a big growth driver in the U.S. next year. So if you think about a $2.5 billion market, 30% to 40% of the market is. The other is the Zenrelia, the JAK market.

The manufacturing capacity, though, like slower than you expected? What you say line? Or like how should we think about that? Like, are you worried about your talking have capacity or like vice versa?

It's a good problem because right now, we're 24/7 manufacturing for Zenrelia, and we're ramping against a bigger demand line, we're a year out forecasting demand now. because a lot of people want Befrena right now. And remember, the other 2 major competitors in Animal Health don't have monoclonal antibodies yet. So we're the second company that's common. We've got them differentiated. So manufacturing is common with maps to scale the bioreactors. So we've gone from the 200-liter to 2,000. We're scaling to the 5,000. Things are tracking nicely. It's just more of a demand problem and supply.

Back to Zenrelia. I think you have an FDA submission when there was a potential label. Maybe just talk a little bit about that and then what will become the impact.

Yes. So we're in -- we keep adding countries. We're in around 45, 46 countries today. We have a clean label in all international countries, including Canada, U.S. had a box label on it, where trials were required to be at 3x the dose with vaccine-naive dogs and a tighter reaction was the question. So we ran a booster study that's been helpful to a lot of veterinarians. We've got rid of fatally induced with PCR data. Now we're running a trial to continue to improve. We should finish that trial at the end of this year, which would put us on pace for a 6-month review, middle of '27, we could see further changes to the label potentially middle of next year. But I step back and say, we're 24/7 manufacturing. It's probably the fastest-growing product we've ever had in 7 decades as a company and it's a market that is growing. So people -- I think what's probably misunderstood about Elanco is even with all the questions about Animal Health is we're early innings here. We're $100 million in on a $2.5 billion market, growing at 9% with 2 differentiated assets. And the same with Quattro, a $2 billion road spectrum and deco market, still growing globally, and we're $150 million in with what we believe is best medicine. So we're set up well, and we'll scale the manufacturing and continue to support the products.

Maybe stepping back, I think you asked, there were a lot of concerns on what the U.S. attend that kind of stuff. Are you worried about versus cat dynamics side. Maybe just talk about what is like the common long market growth for this market.

Yes. So Pet is 40% of the animal health market. Farm animals still 60%. The rest of this decade, farm animal will still be bigger than Pet Health. Protein revolution that's going on with everyone wanting more animal protein that continues. I start there. Then in Pet, 1/3 of the pet market is not retail. We pay there. Most of our competitors do not. Now we're down to 20%, 25% of Animal Health, which is pet vet. We've seen flat dog numbers we see that numbers in the U.S. We've seen 70% of new puppies and outside the U.S. And actually, dog and cat numbers are growing outside the U.S. that vet visit, we believe, is more of a change of behavior of the pet owner. Pet owners are not going to the clinic to purchase as much as they're going online. They're still that that's important. But growth of online ordering is 2x the growth of inside the clinic. So we see purchase visits down but nonwellness visits and itchy dog with pain, a dog median surgery visits are actually on.

So what would be your pricing strategy on different channels like what are the so then the other online, are you going to let to it differently...

So it's all product related. So if we have a topical product that's only for treatment or is in a dollar store in the U.S. That will be priced according to that value proposition compared to, say, a Quattro, new innovation, most differentiated inside of vet clinic. So it will all be priced relative to the product and the channel, but it's more product-driven than it is channel driven.

Okay. Let's switching in to arm because I feel like that has really not getting the attention that they should be. I mean it's 50% of the business. I wonder, maybe just my same question. high level, what is the driver, -- everyone want be or like any other company needs that do you think will becoming a bigger market going forward?

Yes. So look, I think that it all starts with and underlying demand for animal protein. I spoke in London 5 years ago, and all the questions were on impossible burger, fabless Mondays, veganism, animal protein is coming to the end. It has absolutely flipped totally the other way. Why? Taste cost nutrition. The plant proteins didn't win in the taste category, the cost category or the nutrition. There's been a wellness movement the last 5 years. And it is attributed to the first time -- this data point is an important one, the first time in 30 years that farm animal outgrew pet health. Farm animal grew 10% last year, I'm talking to the industry and Pet grew 5%. So chicken Roble bank will say chicken, numbers are up 3%. Chicken is winning. Dairy is winning. Dairy cow numbers are up 4%. I might say it's a little different in Europe, but it is. And there is a beef shortage. . Then I would say Cork got some religious barriers, but I would say it's more regional, Europe, U.S. and China. There's 3 trends now that they want to taste cost attrition and they've innovated. There's meat sticks. There's yogurts, there's no shakes. Everyone needs 150 grams of protein a day. There are 3 things: wellness. Over 80% of consumers, Europe, U.S., a lot more protein than in the 3 years. Two is there's an aging population. The new disease talked about even at this conference is muscle retention. There will be 25% more people over 60 years of age after this decades done and muscle retention is the big problem. The third is GLP use. GPU use has created 30% to 50% more animal protein consumption with GLP user. So believe it or not, our parent company that we spun out of Eli Lilly, their big focus is, hey, working with protein companies as well to make sure that the diet is right from the slippage. Those 3 trends are driving animal numbers to be up. And so do animal health, they held the animal as a more productive animal. We want to give consumers what they want, animals more help. Right now, there's a 20% mortality morbidity challenge with farm animal so that people want to solve that so they can create more protein. The beef shortage is something a little different. There's a cattle problem in the U.S., but Brazil, Argentina, as cattle in Australia will make up some of that shortage goal.