Elanco Animal Health Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2025

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.

Operator

I would now like to hand the call over to Tiffany Kanaga, Head of Investor Relations. You may begin your conference.

Speaker 1

Good morning. Thank you for joining us for Elanco Animal Health's fourth quarter twenty twenty four earnings call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer Todd Young, our Chief Financial Officer and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.com.

Speaker 1

Today's discussion will include forward looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the Risk Factors in today's earnings press release as well as in our latest Form 10 K and 10 Q filed with the SEC. We do not undertake any duty to update any forward looking statement. The information we provide about our products and pipeline is for the benefit of the investment community.

Speaker 1

It's not intended to be promotional and is not sufficient for prescribing decisions. Our remarks today will focus on our non GAAP financial measures. Reconciliations of these non GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Speaker 2

Thanks, Tiffany. Good morning, everyone. Elanco enters 2025 with momentum. Fourth quarter revenue, adjusted EBITDA, adjusted EPS and net leverage were all in line with our expectations. We're pleased to report our sixth straight quarter of revenue growth, up 4% on an organic constant currency basis with growth across both our pet health and farm animal businesses.

Speaker 2

I want to open by highlighting several accomplishments from the full year, which position us well for accelerating growth into 2025. '20 '20 '4 organic constant currency revenue growth of 3% represents a meaningful step up from 2022 and 2023 driven by our innovation, a stabilizing base, pricing and importantly the durability of our diverse portfolio and balanced geographic presence. That 3% reflects growth in both pet health and farm animal and market share gains in global pet retail and U. S. Farm animal where we hold leadership positions.

Speaker 2

Additionally, we experienced broad based organic constant currency top line growth across our top five product franchises and in nine of our top 10 countries. We have launched our diverse portfolio of innovation with six potential blockbusters now in the market. Through focused commercial execution across global markets, we exceeded our innovation revenue target for 2024. We have also raised the range for 2025, reflecting our confidence in the continued contributions from these new products. Additionally, in 2024, we concentrated our strategic focus on the highest impact opportunities, successfully divesting our Aqua business.

Speaker 2

The sale proceeds combined with more than $500,000,000 in operating cash flow allowed us to pay down approximately 25% of our debt and support increased investments in our strategic product launches. When we started 2024, we highlighted the three value drivers for Elanco growth, innovation and cash. We have made strong progress on each front. We accelerated growth, launched all six key products, exceeded our innovation plan while delivering our biggest year yet of operating cash flow. Looking to 2025, growth innovation and cash remain the priorities to expand our value proposition.

Speaker 2

We continue to anticipate an acceleration in organic constant currency revenue growth of 4% to 6%. Excluding the anticipated impacts of FX and the Aqua divestiture, we expect adjusted EBITDA to grow 1% to 5%. With the increasing contribution from innovation and stabilization of our base business, we expect sustained growth over time, while our optimized infrastructure and product mix should enable margin expansion in 2026 and beyond. Notably, like many other global corporations, we are negatively impacted by the stronger dollar. On Slide five, to highlight the strength of our core business, we broke out the impact of foreign exchange on our fourth quarter results and 2025 guidance.

Speaker 2

Our global team is focused on commercial execution and full year underlying expectations are essentially unchanged. Overall, we are pleased with our fourth quarter performance against this dynamic macroeconomic backdrop and remain confident in accelerating fundamentals in 2025. Turning to the fourth quarter on Slide six, we break down the 4% underlying organic constant currency revenue growth, which excludes the impact of the Aqua divestiture in prior periods. All four areas delivered growth or were stable in the quarter, marking our best broad based performance in more than three years. U.

Speaker 2

S. Farm animal was up 6% led by cattle. Exterior reached blockbuster status from The U. S. Sales alone benefiting from the use in heifers that began in November after we received FDA combo clearance.

Speaker 2

This growth supported demand for Reminsen, demonstrating the increasing value of our comprehensive portfolio. International farm animal was flat despite challenging swine economics in Asia. The sequential improvement from the 3% decline in the third quarter was driven by stronger global poultry demand and less impact from our due different commercial model changes in certain geographies. International pet health delivered robust growth of 11% driven by continued strength of ADTAB and Seresto. We now expect ADTAB peak sales to exceed $100,000,000 reflecting successful DTC efforts in Europe.

Speaker 2

By geography, international pet health achieved growth across a very diverse range of markets with contributions from Europe, The Middle East, Latin America, Asia Pacific and Canada. Finally, The U. S. Pet health revenue grew 2%, including early contributions from XENRELLIA, which launched in late September. Importantly, Galliprant posted its best results since the third quarter of twenty twenty three and our vaccine portfolio achieved 8% growth in the quarter.

Speaker 2

We continue to lead the retail market with share gains and increased points of distribution, capitalizing on positive trends and serving the one third of pet owners who make purchases outside the veterinary clinics. Turning to Slide seven, we continue to advance our innovation portfolio and productivity or IPP strategy. Starting with productivity, we paid down $1,475,000,000 in debt in 2024, resulting in a net leverage ratio of 4.3 times at the end of the year, down from 5.6 times to start 2024. This achievement was a direct result of the strategic Aqua transaction and a company wide commitment to cash conversion improvement. From procurement to our incentive plans, our company has created a cultural priority on cash generation and debt pay down.

Speaker 2

On portfolio, we saw benefits across both sides of our business and around the globe, ultimately driving twenty twenty four's durable growth. In U. S. Pet health, we are now one of the two animal health companies to offer a comprehensive portfolio with products in all four key markets, parasiticides, dermatology, vaccines and pain and other therapeutics. Vet clinics prioritize partners who offer a complete set of solutions, allowing us to leverage innovation to generate a broader lift across our entire pet health portfolio.

Speaker 2

Building on the strength of our advantage brands and OTC retail leadership, we recently introduced PetProtect, a complete line of veterinary formulated science backed supplements. Additionally, in the European pet health market, growth in ADTAP and Seresto underscores our leadership in retail parasiticides. In U. S. Farm Animal, the portfolio achieved $100,000,000 in organic growth in 2024 driven by multiple species.

Speaker 2

Our recent data indicates we ended the year as the market leader in The U. S. In beef, swine and poultry with good momentum in dairy. Our fifty year old flagship product, Rometzen, captured volume and dollar growth with revenue up 19% in The U. S.

Speaker 2

This growth was driven by our full complementary portfolio and further supported by the new value generated by the carbon inset market enablement in dairy. More recently, we launched Pradylax, a medically important antimicrobial treatment for bovine and swine respiratory disease conveniently given as a one low volume shot. Targeted innovations like Pradylax bolster our wider portfolio of solutions. And we continue to boost our portfolio even further to bring solutions to emerging unmet needs. We've just announced our agreement with Medgene to commercialize high path avian influenza vaccines for dairy.

Speaker 2

The vaccine for use in dairy cattle is in the final stages of USDA conditional approval review. The cross species transmission of the disease into nearly 1,000 dairy herds across The U. S. Along with the zoonotic transmission shows that more interventions are quickly needed. A cattle vaccine will be critical to slow the spreading of the virus between birds and cattle.

Speaker 2

Elanco is pleased to partner with Medgene to bring customers options to fight this devastating disease. Now on to innovation. Elanco delivered five new U. S. Product approvals and market authorizations in 2024 alone.

Speaker 2

Ellen and her team have built an integrated engine well positioned to deliver a consistent flow of high impact innovation into major markets. On top of the progress made to bring late stage developments to recent approvals, her team is focused on a robust portfolio of differentiated and transformational early and mid stage assets, including a strong monoclonal antibody platform that address significant unmet needs in core and emerging spaces. Looking at Slide eight, we delivered $140,000,000 of innovation revenue in the fourth quarter and $461,000,000 for the full year, surpassing our target of $420,000,000 to $450,000,000 With growing momentum from our six potential blockbusters, we are increasing our expected innovation contributions for 2025 to $640,000,000 to $720,000,000 This does not assume any revenue from IL-thirty one, which we expect to be approved by the USDA in the fourth quarter of twenty twenty five. Let's double click on the progress of these six blockbusters on Slide nine starting with XENRELIA. Five months ago, we launched XENRELIA and entered the $1,800,000,000 global dermatology market, which has demonstrated robust double digit growth over the last decade.

Speaker 2

XENRELIA is now used in nearly 8,000 U. S. Vet clinics or approximately 30% of the total, of which about 6,000 have fully adopted the product and more than 2,000 are piloting use. Customer reviews have been positive, driven by the efficacy and the value of the product. Our reorder rate is above 60 and growing with adoption and time, a clear testament to Xarelia's efficacy and value proposition.

Speaker 2

The number of vets willing to prescribe the product is growing, demonstrating the success of the Tech2Tech launch approach. This feedback gives us confidence that use per clinic will continue to increase and as XENRELIA can and will be used increasingly as the first line treatment over time as we have seen in international markets. We've experienced good momentum to date and have reached critical milestones with vet education and clinic penetration, including our sampling program. We've accelerated investments in DTC and other targeted multi channel marketing into January. We are proactively communicating our message of efficacy, convenience and value directly to pet owners ahead of the allergy season.

Speaker 2

Outside of The U. S, Xarelia launched in Canada in January, joining Brazil and Japan, all with less restrictive labels than in The U. S. We also expect approvals in Europe, The UK and Australia this year as part of our fastest globalization rollout to date. Now shifting to Credelio Quattro.

Speaker 2

We launched and shipped product in January ahead of the parasiticide season. Again, it's early days for Quattro, but we are thrilled with the initial product reception, which has exceeded our expectations for distributor uptake, early clinic adoption and vet response to the three dimensions of differentiation: broad coverage including tapeworm, speed of tick kill and heartworm coverage from month one. These differentiators are resonating with veterinarians across The U. S. Remember that Indecticides or flea, tick and intestinal parasite combination products is the fastest growing category in pet health market today with broad spectrum products now representing nearly 30% of the $3,900,000,000 U.

Speaker 2

S. Parasiticide market. And although it's early, we see notably less cannibalization of our core portfolio than with other recent launches in the Inducto space. Quattro is a meaningful accretive growth opportunity for Elanco as it significantly increases our portfolio competitiveness and our value proposition in The U. S.

Speaker 2

Vet clinic. In the European OTC market, we offer AdTab for flea and tick protection for both dogs and cats. The product leverages the same active ingredient found in Credelio and is labeled under the Advantage family. AdTab is achieving robust growth through DTC efforts and share gains also with minimal cannibalization. In January, we shared that AdTab is now expected to become a blockbuster at peak and we are encouraged by the brand's momentum entering the parasiticide season.

Speaker 2

Rounding out pet health, adoption of our canine parvovirus monoclonal antibody has been somewhat slower than initially expected as customers balance the vital importance of defending puppies against this deadly virus versus the cost of treatment. We continue to explore strategic interventions to accelerate clinic penetration across all channels. Additionally, we received conditional approval in Canada at the January. In Farm Animal, we remain encouraged by Bovera's progress and what we estimate can be a $2,000,000,000 carbon market. Last year, we created and substantiated the first independent carbon inset cattle market creating additive economic value for both dairy farmers and consumer product good companies.

Speaker 2

As a proof point in the fourth quarter, U. S. Dairy farmers earned approximately $10,000,000 in credits created by using Rumensin. More than 1,000,000 cows or over 11% of The U. S.

Speaker 2

Dairy herd are now enrolled in our outlook database, Elanco's digital solution for quantifying greenhouse gas emission reductions and the first step to enabling farmers to monetize their on farm interventions to lower their footprint. We see strong demand from farmers and multiple CPGs have contracted with a carbon marketplace to buy Bovair credits in 2025. Our attention is now focused on the center of the value chain and bringing the product use into implementation among co ops, processors and feed mills. We expect Bolvera's revenue trajectory to follow a positive but measured ramp through 2025 as we execute our ground game state by state, farm by farm, feed mill by feed mill. Finally, Experia became the first farm animal blockbuster in over a decade.

Speaker 2

Experia ended 2024 on a strong note with the benefit of The U. S. Heifer clearance. The increased access is significant, opening a larger market as heifers comprise about 40% of the feedlot animals. We are confident in Experia's growth trajectory in The U.

Speaker 2

S. And Canada in 2025 and its strong value proposition to feedlot owners allows us to increase price while leveraging greater overall portfolio strength. In summary, our global team is entering this new era of Relanco equipped with game changing innovation and comprehensive differentiated portfolios. Our six potential blockbusters are all in the market and we are in commercial execution mode. Early indicators on these launches are broadly positive, driving our increased expectations around innovation sales and continued confidence and acceleration to 4% to 6% organic constant currency revenue growth in 2025.

Speaker 2

With that, I'll hand it over to Todd to discuss our fourth quarter results and outlook in more detail.

Speaker 3

Thank you, Jeff, and good morning, everyone. I'll focus my comments on our adjusted measures, so please refer to today's earnings press release for a detailed description of the year over year changes in our reported results. Our fourth quarter results demonstrate good execution in the face of FX headwinds with revenue, adjusted EBITDA and adjusted EPS all in line with our expectations and net leverage also reaching our year end target. Starting on Slide 11, we delivered $1,020,000,000 in revenue, representing a 1% reported decline. Excluding the impact of foreign exchange rates and the divestiture of our Aqua business, we achieved organic constant currency growth of 4%.

Speaker 3

Price contributed 3%, while volume increased 1%. Changes to FX rates since we provided our guidance in November caused a $10,000,000 reduction to our Q4 reported revenue. Slide 12 shows revenue by the four quadrants of our business in the quarter. Total pet health revenue increased 6% in constant currency in the fourth quarter with price growth of 3%. Our U.

Speaker 3

S. Business increased 2% driven by contributions from key innovation products, including XINRELIA and the OTC retail parasiticide business, partially offset by competitive pressures in the veterinary clinic. International Pet Health delivered robust 11% constant currency growth, driven by strong demand for innovative products led by ADTAB and the continued strength of Seresto. Moving to Farm Animal. Globally, fourth quarter organic constant currency revenue growth was 2%.

Speaker 3

The U. S. Farm Animal business achieved $223,000,000 in sales, a 6% increase. This was driven primarily by market expansion and increased share within our cattle business with continued strong demand for Expiry and Rumensin, partially offset by the comparison to last year's vaccine resupply. Swine product sales saw growth in the fourth quarter due to improved vaccine supply compared to constraints a year ago.

Speaker 3

Lastly, the timing of poultry rotations was a headwind in the quarter and is expected to continue to impact purchasing patterns in the first half of twenty twenty five. International farm animal revenue was flat as innovation and strong demand in poultry across multiple geographies was offset by the impact of the Kextstone recall and our strategic do different approach in certain geographies. We estimate these two items were combined four percentage point headwind to year over year growth. Continuing down the income statement on Slide 13, gross margin increased by 80 basis points to approximately 51%, primarily due to price, beneficial product mix, especially in our farm animal business and improved manufacturing performance. These positive factors were partially offset by the Aqua divestiture, inflationary pressures and foreign exchange headwinds.

Speaker 3

Operating expense saw a 3% uptick, driven primarily by increases in employee related expenses and investments to support our expanding pet health business. These increases were partially offset by savings realized from our first quarter restructuring initiative. As we've stated before, strategic investment in the key product launches, while presenting a near term headwind to adjusted EBITDA, are critical for long term brand success and profitability. Interest expense decreased significantly from $67,000,000 to $46,000,000 due to debt reduction funded by the third quarter Aqua divestiture. On Slide 14, we include a bridge for fourth quarter results compared to the prior year.

Speaker 3

Adjusted EBITDA was $177,000,000 in the quarter, an increase of $12,000,000 on a reported basis or approximately $42,000,000 excluding the impact of the Aqua divestiture and foreign exchange headwinds. Adjusted EPS grew by $0.06 to $0.14 per share, including the benefit of lapping last year's Argentinian peso devaluation. For the full year 2024 on Slide 15, we generated over $4,400,000,000 in reported revenue. While this is flat year over year, it's important to consider the impact of the Aqua divestiture, which was a headwind of approximately 200 basis points to growth. Strong demand for our innovative products was the key driver of our performance.

Speaker 3

Innovation led value creates pricing leverage and the portfolio benefit stabilizes the base business. Further detail on revenue broken down by top affiliate and key products is available on Slides twenty eight and twenty nine. Continuing down the P and L, gross margin was 54.9%, a decrease of 140 basis points compared to 2023. This decrease is mainly attributable to the impact of the Aqua divestiture, the strategic approach we've taken to slowing manufacturing throughput to optimize inventory levels, foreign exchange headwinds and persistent inflationary pressures, all partially offset by higher realized prices. These factors combined with increased investment in our commercial launches resulted in adjusted EBITDA of $910,000,000 for the full year as shown on Slide 16.

Speaker 3

Full year adjusted EPS came in at $0.91 compared to $0.89 in 2023. The Aqua divestiture impact on our adjusted EPS was neutral due to the interest expense savings achieved through our resulting debt reduction. The adjusted tax rate for 2024 was 18.1%, a year over year decrease of four twenty basis points due to the recognition of non recurring tax credits in 2024 and adjustments to tax reserves in 2023. Now let me offer a few words on our cash, working capital and debt on Slide 17. We achieved a significant improvement in operating cash flow throughout the year, driven by a focused approach to working capital management.

Speaker 3

Cash provided by operations in the quarter was $177,000,000 For the full year, we generated $541,000,000 of operating cash flow or 120% of adjusted net income. This was an improvement versus last year of February driven by improved inventory performance, strong collections and lower project expenses. We exceeded our net leverage target for the year, underscoring our commitment to disciplined financial management. We ended the quarter with net debt of $3,880,000,000 and net leverage of 4.3 times. Let's move to our financial guidance starting on Slide 19.

Speaker 3

We remain confident in the underlying drivers of the 2025 outlook provided during the November earnings call. For the year, we continue to expect mid single digit organic constant currency revenue growth. We expect adjusted EBITDA up 1% to 5%, excluding the impact of FX and Aqua. Reported revenue is expected between $4,445,000,000 and $4,510,000,000 This projection incorporates a 2% contribution from price offset by an estimated $110,000,000 headwind from FX. Gross margin is expected to decline as the benefits of price growth are expected to be more than offset by the margin impact from The UK CMO transition and FX headwinds.

Speaker 3

We anticipate operating expenses up approximately 6% in constant currency with strategic investment in the global launches of our innovation portfolio. Full year adjusted EBITDA is expected between $830,000,000 and $870,000,000 including an estimated FX headwind of approximately $45,000,000 year over year and since our November outlook. We expect H1 to represent a relatively smaller portion of full year adjusted EBITDA versus the 61% weighting in 2024 and 2023 as the commercial investments impact operating expenses earlier in the year and then drive greater contributions to revenue in the second half. We anticipate adjusted EPS of 0.8 to $0.86 including an estimated FX headwind of approximately $0.07 year over year and since our November outlook. I'll share a few comments on our cash and balance sheet expectations for 2025.

Speaker 3

We anticipate 2025 CapEx to be approximately $225,000,000 to $255,000,000 an increase versus $147,000,000 in 2024 due in part to the expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas and our expansion in France for our Credelio franchise. As a reminder, cash available for debt pay down will be reduced by approximately $150,000,000 due to the deferred cash taxes related to last year's Aqua transaction. Given the FX impact to adjusted EBITDA and that our debt is dollar denominated, the calculation of our net leverage ratio is affected by unfavorable currency. Consequently, we expect net leverage in the low to mid-4s at year end with an uptick in the first half of the year, including typical seasonality in working capital. A weaker U.

Speaker 3

S. Dollar would create a potential path back to the high 3s at the end of twenty twenty five and our company wide focus on operating cash flow and our prioritization of repaying debt should lead to further significant improvements in net leverage over time. Slide 20 walks through the year over year bridge for revenue, breaking down our expectations for mid single digit organic constant currency growth. We expect contribution from innovation to drive growth of approximately $180,000,000 to $260,000,000 year over year. We also anticipate stability in our base portfolio with the benefit of innovation and pricing more than offsetting volume declines for mature products in the competitive U.

Speaker 3

S. Pet health vet clinic business. Slide 21 provides year over year bridges for '20 '20 '5 adjusted EBITDA and adjusted EPS and Slide 31 in the appendix provides a number of additional assumptions to help support your modeling efforts. Now let's move to our Q1 guidance starting on Slide 22. We expect organic constant currency revenue growth of 2% to 4%, including some softness in the broader U.

Speaker 3

S. Retail market in January. On a reported basis, including an estimated FX headwind of $40,000,000 we expect $1,155,000,000 to $1,180,000,000 in revenue. Operating expense is expected to increase 6% to 8% year over year in the quarter on a constant currency basis, primarily to support our recent pet health launches. Consequently, we anticipate adjusted EBITDA of $240,000,000 to $260,000,000 including an estimated FX headwind of approximately $15,000,000 and adjusted EPS of $0.29 to $0.34 including an estimated FX headwind of approximately 0.03 We expect our adjusted effective tax rate in Q1 to be in the mid single digit range as a result of a discrete tax item falling in the quarter that will also benefit our full year expected tax rate of 21% to 22.

Speaker 3

Lastly, on Slide 23, we summarize the headwinds and tailwinds that are expected to impact our results in 2025 and are factored into our guidance. The list is essentially unchanged since the third quarter, except for the addition of currency volatility to materially impact results, which we did note at an investor conference in January. Now I'll hand it back to Jeff for closing comments.

Speaker 2

Thanks, Todd. Elanco delivered a strong finish to 2024, achieving our sixth consecutive quarter of organic constant currency revenue growth and building momentum as we head into 2025. This performance with both pet health and farm animal contributing to this growth in the fourth quarter underscores the effectiveness of our innovation driven strategy. The collective portfolio led by our six potential blockbuster products is exceeding expectations with 2024 innovation revenue surpassing our targets and setting the stage for an even stronger performance in 2025. We are reaffirming our outlook for accelerating organic constant currency revenue growth of 4% to 6% driven by innovation and focused commercial execution.

Speaker 2

This is a much awaited period for Elanco and our strategic trajectory. The energy and enthusiasm within our organization can be felt at every level, evidenced by a four year high for employee engagement as we build on our seventy year legacy of going beyond to transform animal care. Thank you to our global teams for your focus and discipline in delivering a successful 2024, positioning us well to create long term value in 2025 and beyond. With that, I'll turn it over to Tiffany to moderate the Q and A.

Speaker 1

Thanks, Jeff. We'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow-up. Operator, please provide the instructions for the Q and A session and then we'll take the first caller.

Operator

Your first question comes from the line of John Block from Stifel. Your line is open.

Speaker 4

Great. Thanks. Good morning. Jeff, sincerely is U. S.

Speaker 4

Penetration slightly ahead of our diligence, if you would. So where do you think this can go by year end 'twenty five? And maybe more importantly, what about market share at these practices by year end 'twenty five? And also curious, any differences in the international markets for XINRELIA where, call it, the label was less onerous? And then Todd, I guess I'll just ask my follow-up here.

Speaker 4

The accelerating revenue growth off the 1Q 'twenty five levels, I think you talked a bit about it, but is that just a function of, call it XINRELIA and Credelio Quattro, the contribution ramping throughout 2025 or anything else to call out to give investors or people more comfort with the accelerating constant currency revenue growth off the 1Q twenty five guide? Thanks guys.

Speaker 2

Thanks John for the question. Yes, we're excited about XENRILLIA and where we stand and maybe how we're looking at it. And maybe to start with your specific question, we're adding use and growing revenue every week on a relative basis with XENRILLIA and we see that trajectory coming. But if I step back, the $1,800,000,000 DIRM market as you know John has grown 16% in 2024. It'll very likely surpass $2,000,000,000 So we're in a market that is growing.

Speaker 2

Since the launch, as I mentioned, we are at 8,000 clinics today. That's about the same number of Credelio and we've come through really the three lowest months of derm in the overall season. 6,000 clinics have adopted and we've got 2,000 piloting and probably one of the greatest right now converters to clinic penetration is a sampling program that's quite aggressive in the field. Once people see this efficacy in vet clinics, they begin to bring the product on. So as we start to head into the season, here's our strategy as we look at this accelerating use and adoption of XENRILLI as you talk about by the end of twenty twenty five.

Speaker 2

First is all around the vet clinic, it's continued acceleration of vet clinic adoption with a heavy focus on tech to tech. Right now we've got more vets willing to script this month than last month and that's growing. And also this sampling, sampling is driving more clinics to try. Try is turning to conversion at a better than we expected rate. So we'll continue to be very aggressive with our sampling.

Speaker 2

Now we enable DTC, which we've noted. DTC is turned on. We're now bringing the pet owner in and we believe not just efficacy but the affordability and convenience are really resonating and we think they'll resonate even more with pet owners. So when we kind of see coming into the season, we also have the number of seasonal and acute cases, John, that we will see rising as well. And we think that will drive us, which is our ultimate goal, is not just clinic penetration to move more into frontline treatment during peak season.

Speaker 2

This will be the key success factor for accelerating use as we go forward. So I do as I step back, I think efficacy continues to resonate. It's what we hear the most globally, not just in The U. S. But globally.

Speaker 2

To answer your international question, as I mentioned, we've added Canada to Brazil and Japan. Launches are on or above expectations, doing extremely well on Brazil and Japan. Canada, it's very early. They do have less restrictive labels. And we point to EU, a very large market, U.

Speaker 2

K. And Australia as key factors to make XENRILLIA significant impact here in 2025 in our international pet business. So that's where we are. We're happy where we stand and we're excited to be leaning in as the season starts to ramp up on the Derm side.

Speaker 3

And John to your question on revenue growth, clearly 2% to 4% constant currency in Q1, but then getting to 4% to 6% for the full year. I'd start with a few one time items or headwinds from Q1 of last year that we called out at the time. We put products from Bayer into distribution that increased sales in Q1 of last year in U. S. Pet.

Speaker 3

We were still working through the Argentinian exit as well as Kext Stone and some of the two different opportunities in international farm that became headwinds yet here in Q1, but then we don't have that same headwind in Q2 through Q4. I would also then address the innovation ramp. As Jeff mentioned, we're really penetrating ZINRELLIA into The U. S. Bed clinics in preparation for the season.

Speaker 3

That's spring and summer hitting Q2 and Q3. Similarly, ad tabs continued growth, again, Q2, Q3 inflection on OTC retail in Europe. And then, again, just continued growth of innovation portfolio, especially Boveraix, which we expect to start to be a bigger contributor to growth in the back half than the first half, all of those items that make us confident that while starting at 2% to 4%, we'll deliver the 4% to 6% for the full year.

Operator

Your next question comes from the line of Michael Ryskin from Bank of America. Your line is open.

Speaker 5

Great. Thanks for taking the question guys. First maybe this is a follow-up to John's question just now on the rally. But just looking at your innovation contribution for 2025, I mean, first of all, you came ahead for twenty twenty four fourth quarter, so that was really encouraging, but you raised your 25 innovation numbers by I think $30,000,000 at the midpoint. I'm not going to ask for sort of like specific point estimates for each of your contributing products, but directionally, what gives you more confidence than that?

Speaker 5

Anything that I can call out whether that is in Ralia or your first month at Credalia Quattro versus what's behind that? And I'll

Speaker 2

follow-up. Yes. Michael, I'll start here. Todd, anything that I may miss. I think the momentum at the end of the year, no question, our U.

Speaker 2

S. Farm Animal business led by Exterior, the heifer clearance definitely accelerated use. And with that heifer clearance, it just enabled more feed yards to be able to feed it to steers. And as we see kind of the decline in the herd level off, that's going to be positive as well. So the value of Exterior has done well in The U.

Speaker 2

S. And Canada and it gives us a lot of confidence and a lot of growth opportunity in 2025. And AvTap, probably our best launch I've experienced in the last five years. What our U. S.

Speaker 2

Retail team has done, it's even contributed to nice growth in Seresto across the European affiliates as well. Those two products are definitely driving growth. And then look, when you step back and say XENRILLI going into a now close to be $2,000,000,000 derm market that's growing globally and Quattro that's got three dimensions of differentiation going into fastest growing market segment, Michael, I think we see the early uptake in interest in Quattro combined with a third of the clinics on XANRELIA are using gives us a lot of excitement. Bovair, as Todd mentioned, will probably be a little bit more of a second half, but we like the progress we've made since November with Bovair.

Speaker 5

Okay. And then maybe as a follow-up, I think in the prepared remarks you called out your IO monoclonal antibody, I mean, you said 4Q25 approval, but it's not in your guidance, not in your expectation. Just given what we see with regulatory, clearances, a lot of things that are taking a little bit longer frankly and there's a lot of uncertainty in the regulatory environment overall. Just what gives you confidence in that this far out? Any color you can provide on how those conversations are going?

Speaker 5

Thanks.

Speaker 2

Yes. Thank you, Michael. So we look at IL-thirty one again. We see it as a differentiated asset going into the DIR market, going to play very nicely with XINRELIA going into the marketplace. You're right, it does not have an ADUFA like you have in the FDA with the USDA.

Speaker 2

But again, nothing has changed relative to the progress. We continue to progress with the USDA. We just simply are putting more clarity on that it is not in our guidance and we expect a late twenty twenty five approval. But again, nothing has changed with the programs and we continue to be confident in its differentiation and its role in our portfolio.

Operator

Your next question comes from the line of Daniel Clark from Leerink Partners.

Speaker 2

Great. Thank you for taking the question.

Speaker 6

I was just curious, when you talked about the successes of sampling in ZENRALIA thus far, is that causing you to maybe change how you're sort of approaching your sales and marketing strategy for that launch? Thank you.

Speaker 2

Yes. Thank you, Daniel. Again, I would step back and say we feel good about Bobby and the team, really a lot of expertise and a lot of work in prepping for this launch and Quattro helping it too is we've got a multifaceted approach. We've got multimedia kicking in, the vet tech to tech approach and now we know the sampling and even right down to the sales rep incentives and distributor incentives all aligned to say, hey, we know that we get a vet clinic to experience XENRYLIA, it creates adoption. So we will continue to look at this in a very focused way.

Speaker 2

And I would say that the sampling program, what it does is it elites, it takes us just a few examples. And yes, we've been put in some of the hard cases and that's actually been a good thing because it just shows the demonstration of the efficacy that we saw in the head to head studies and that's driving the adoption. So look at us to continue to lean in on sampling as we head into the spring, summer derm season as well as continue to incent clinics. And then when the pet owner walks in from the DTC and multimedia, they're going to see the value differentiation. All of these things we believe set us up well to become more of a first line treatment in clinics, which we think is the next critical success factor.

Speaker 6

Got it. And then just on the point of becoming a first line treatment, can you share some of the feedback you've been getting from vets? Like, can you give some color on how many are using it as a first line treatment today? Thank you.

Speaker 2

Yeah. Every segment is a little different, but what what we would say is experience what is what is needed. The demonstration of efficacy, how the product can be used into, you know, different vet clinics and how vets are looking at it is essential. These tech to tech meetings really matter. Being able to bring KOLs in, which we've got really good support from KOLs, we're seeing a nice uptake on the strategic side.

Speaker 2

Bobby and the team have done a lot with the strategics, but it really allows vet to vet exchange, KOL exchange to be able to give those that maybe have less comfort or want to know more about how to manage the label. That's what's I think helped bring more vets into their willingness to script, which we're seeing in the surveys that are being done. So continued progress. And I think as the season ramps up and the challenge, and as I mentioned, the acute and seasonal cases ramp up, this opens a nice door for XINRELIA.

Operator

Your next question comes from the line of Andrea Alfonso from UBS. Your line is open.

Speaker 7

Hi, good morning, everyone. Thank you so much for taking my question. I did want to switch gears a little bit to sort of asking about how the early launch of Credelio Quattro is going so far. In the prepared remarks, you identified that legacy products were sourcing low cannibalization within the portfolio. So curious about just the color of the initial momentum, if you can frame maybe the commercialization strategy, what might be different this time around as well as appetite for partnering with retailers?

Speaker 7

And I did have a follow-up question after that.

Speaker 2

Yes. Thank you, Andrea. Great question. Yes, it's really early days with Quattro, but we're excited. We've got the product in the market.

Speaker 2

We're shipping. There's orders. Nice launch at BMX. We'll be at Western Vet next week, and things are moving nicely. I think a few things resonating early.

Speaker 2

There's no question, I think three dimensions of differentiation and they all resonate differently with different vets. I think the first is, I would just say speed to tick kill is what we're seeing. If you look at the Credelio franchise growth last year overall globally, I mean this technical data and speed to tick kill has really had a nice impact with veterinarians. We've got a lot of uptake on an interest on the tapeworm and the broad coverage and then the heartworm coverage on month one. So three dimensions of differentiation.

Speaker 2

I think that we plan to take an aggressive approach on DTC. We see this as a little less involved pet owner category. So you need to get the pet owner involved. And so we spent a lot of time on our multimedia DTC approach. We brought in a lot of expertise to ensure that we can really resonate with pet owners going into this year.

Speaker 2

And yes, we will take an omnichannel approach as we have with others. And I think we're as best equipped with our Bayer capabilities to be able to do that. And I also think that, hey, the energy around XENRELLIA will play off positively with Quattro and vice versa as well. And we will have the right introductory offers to incent usage as well out of the gate.

Speaker 7

Great. Thanks. And just a separate question, just probing a little bit more to the Galliprant callout. Maybe if you can just discuss the dynamics of the surge there in the quarter. Is that entirely driven by switchers from another therapy versus those who are newer to therapy?

Speaker 7

And if you could just sort of speak to the durability of that 4Q trend persisting into 2025? Thanks so much everyone.

Speaker 3

Andrea, thanks for the question on Galliprant. It's always been a really strong product as it directly impacts the inflammation claim for osteoarthritis. The trend here in Q4 was positive for us as best quarter in a few for us on Galliprant and we're really leaning in just given the strong safety profile it has to address pain for the patients. Similar to what we saw from just the improvements in Europe, it's similar here in The U. S.

Speaker 3

As well. And again, we're looking forward to Galliprant delivering in 2025 for pet parents across The U. S.

Operator

Your next question comes from the line of Erin Wright from Morgan Stanley. Your line is open.

Speaker 8

Great. Thanks. A follow-up on Durham. As you think about the competitive environment in Durham, do you anticipate new competitors in 2025? Is that embedded in your guidance at this point?

Speaker 8

And just how can you better leverage that, I guess, expanding portfolio with the injectable product as well? Can you also remind us how differentiated the injectable IL-thirty one product will be? Thanks.

Speaker 2

Yes. We're not seeing anything here in different on the competitive front than I think what everyone else sees. And it is assumed in our guidance. So competition is a headwind assumed in the guidance. We continue to see though the robustness of the growing market is exciting for us in The U.

Speaker 2

S. And globally. The unmet need, the number of untreated dogs that are out there and the opportunity that we see with Zendrelia again. A third of the clinics coming into the season, the ramping and the international approvals will all drive that. And then back on IL-thirty 1, we continue to see this as one of many derm assets that Ellen has coming in this category.

Speaker 2

We've got other things that are coming, yes, not just the long acting, but next generation derm. So we're really beginning to build what we believe is going to be a great decade and beyond of derm leadership and opportunity in this marketplace. And then I haven't really noted the specific differentiation on the IL-thirty one, but we do continue to see that as we go forward.

Speaker 8

Okay. Thanks. And then can you speak to the sequential progression for margins here and in the cadence of some of those investments that you're making around the commercialization of new products and kind of how to think about sort of those stepped up investments I guess in the first half? Thanks.

Speaker 3

Certainly, Aaron, we appreciate the question. As we called out in the prepared remarks, we do expect to have less EBITDA on a percentage basis in the first half of twenty twenty five than we've had the last couple of years. That's driven by two things primarily. The first is the investment we're making to really drive this adoption and launch curve for both Cronella and Quattro as well as ZINRELLA as well as ADTAP. And those investments we believe will pay off over the long term as we think about how to best position Elanco for the next three to five years, not next three months.

Speaker 3

So that one is certainly in play as we called out in November. The other part is the FX headwinds are higher in Q1 than they are in the back half of the year from just the current spot rates versus how last year played out. So that would be the main thing to call out, confident in the underlying growth that these investments will make for us over the next few years.

Operator

Your next question comes from the line of Balaji Prasad from Barclays. Your line is open.

Speaker 9

Hi, good morning. And two questions from me. Firstly, a follow through on IL-thirty one. So is 2025, are we going to only see an approval? Or if I read through your lines in January where you said that it's coming in 2025, should we also expect a launch?

Speaker 9

Or is there a meaningful gap between approval to launch? That's one. Two, poultry, a pretty important segment, organic growth rate declined here. Could you maybe then comment on the broader poultry market, the drivers and the wins that we see here? And any major innovations or changes that we can expect to see in the segment in the near future?

Speaker 9

Thank you.

Speaker 2

Thanks, Balaji. Yes, on the IL-thirty one, we expect again a Q4 twenty twenty five approval. We don't have sales or a launch planned. We will continue to have a nice efficient from launch to or approval to launch timing. But again, that is not in our '25 plans at this time.

Speaker 2

On the poultry market, it continues to be durable global, probably the protein that is the most durable. We've seen nice low single digit growth last year in the marketplace. We continue to have we've got no question some poultry rotations that happen market to market that may change. But when we step back and look at our market share, look at our portfolios and our growth, it continues to be a very strong market for Elanco that we have a leadership position in. We now are number one in The U.

Speaker 2

S. Poultry market as well. And we see that market, the current prediction is about 3%, continues to be one of the best economical, environmental and even from a religious standpoint, freer market for the overall protein. So we like our position and like our portfolio going forward.

Operator

Your next question comes from the line of Umer Raffat from Evercore ISI. Your line is open.

Speaker 10

Hey, guys. This is Mike DeFiori in for Umer. Thanks so much Umer. Two for me. I just want to dig in more on Quattro and the whole concept of cannibalization.

Speaker 10

And I think you touched on this slightly before, but in terms of the omnichannel strategy here, any specific strategy here in terms of your channel approach that could be done to mitigate cannibalization? And my second question in regards to tariffs, just I may have missed this, but any effect on input costs and overall supply chain dynamics expected due to potential tariff wars? Thank you.

Speaker 2

Yes. Mike, I'll anchor back just to the notional difference when you look at this $3,900,000,000 market, we've got about $300,000,000 of parasiticides in The U. S. In this marketplace. So we notionally are smaller and we've seen as we're tracking the early uptake of Quattro less cannibalization relative to other broad spectrum products that have come into the marketplace.

Speaker 2

I think the differentiation is driving that. I'm not sure from an omni channel standpoint, this is definitely going to be focused initially on the vet clinic and activating pet owners to get into the vet clinic to leverage that. It's already online on the key kind of omni channel options like our competitors. So access will not be a problem. But if I had to point to one thing, I think now is we're not as concerned about cannibalization.

Speaker 2

We haven't seen any trend early to be concerned about that. It's all about activating pet owners to move and have an interest in Quattro and that's where our focus is. And that's where our investment is and why it's quite sizable that Todd mentioned. Todd?

Speaker 3

Yes. And then, Mike, on the tariffs, we're very focused on the global dynamics that are out there today. The only tariffs that are currently impacted are the 10% additional in China. We factored that into our guidance for 2025. It's about a $3,000,000 to $4,000,000 impact on our cost of goods sold in 2025 based on just the timing of when those products would hit into the products that we sell and recognize revenue on.

Speaker 3

We're continuing to look and make sure we're aware of the future tariffs that may come into play. Mexico and Canada are not big players for us from a manufacturing standpoint. So if those are reintroduced later this month that will have less of an impact. So again, we're very focused on the global macro and the tariff impact on the dollar seems to be the place where we've had the bigger headwinds as we called out today relative to November.

Operator

Your next question comes from the line of Chris Scott from JPMorgan. Your line is open.

Speaker 11

Great. Thanks so much. Just a couple of questions for me. Maybe just on the margin dynamics over time. Can you just talk a little bit about as we look beyond 2025, how we should think about the cadence of gross margin and operating margin improvement for the business.

Speaker 11

I guess some of the kind of the headwinds from this year on the gross margin side kind of fade away and you leverage some of this OpEx investment. Do you want a sense of like how quickly should we think about those margins stepping up over time? And then my second question was just on Bover and just a little bit more color on how to think about that launch curve and maybe compare and contrast a little bit of what how you're thinking about that relative to what we saw with Exterior? Thank you.

Speaker 3

Sure, Chris. On the margin side, we do expect to have better margins going forward from an improvement standpoint. The big headwind we've got this year is the reacquisition of the SPEAK manufacturing facility in The UK as we called out in November. That's

Speaker 5

$25,000,000

Speaker 3

to $35,000,000 headwind on gross margin. We bought that because of the $160,000,000 to $180,000,000 of Farm Animal revenue that comes with it. And from the standpoint of the cost to maintain that revenue, it's a very good return on our capital, but it does have a percentage impact on gross margin. With respect to the operating margins, again, that's where we are investing behind these launches. The innovation portfolio is accretive to our overall corporate gross margins and we expect that to play out over the next two to three years as we make these initial investments begin higher peak revenues in later years.

Speaker 3

So we do expect subject to no surprises on tariffs to increase EBITDA in faster than revenue in 2026 and beyond. But again, we continue to be focused on delivering the 2025 and setting ourselves up for the longer term margin expansion opportunities. I'll let Jeff address Bovera.

Speaker 2

Yes. Thanks, Chris. A question on Bovera. First of all, I want to just highlight that this is very much of an economic driven initiative from Elanco. We believe it's critical for Bovera.

Speaker 2

And if we look at the milestones in 2024 that matter, that will drive this question you have on ramp is one, we had to create a carbon market. We proved that in the fourth quarter with CPG companies actually contributing $10,000,000 that went through for the reminsulin use to actually dairy farmers. And then the two nodes that need to have the demand we see. One is farmers getting that additive money from really a carbon check from the CPG companies. That demand we have farmer demand very high with now 1,000,000 cows with the Uplook system and we've signed numerous CPG contracts that want to buy the carbon.

Speaker 2

So the two nodes of value are locked in. So now what's going to drive the ramping is going to be in field implementation. In between a CPG company and the farm is a co op, a dairy processor and feed mills and every state's a little different. So we're doing what we do best in Farm Animal, which is kind of in field implementation Exterior in terms of as operations come on, it will become sticky. Once you get something into a feeding program like we've seen with Exterior, it's positive.

Speaker 2

People will be demonstrated the value by our teams with our systems that will make it sticky as well. And then more use by the big high profile dairies will start to create an increased demand that will speed that adoption. But again, I think it will be a little bit more second half, as we said, positive but measured ramp to 2025. But I do believe a resilient one and a sticky one once we get there. And again, we're creating this market.

Speaker 2

It is a new market, which is a real opportunity for us here.

Operator

Your next question comes from the line of David Westenberg from Piper Sandler. Your line is open.

Speaker 12

Hi. Thanks for taking the question. We're up on the hour, so I'll ask both of my questions upfront. So just in 2023, during the launch of Nexgard Plus, we did see multiple competitors discounting in anticipation of launch. Are you seeing anything like that now?

Speaker 12

And if so, why is the dynamic here different? Is it maybe because the one Nexgard used to be like the or still was like kind of more leading product whereas you're playing, not necessarily from the same market share standpoint? And then just the same thing on Galliprant. If you look at Rimmadol, you had some starts and stops in the incoming of competition. Is this here really an acceleration point in Telia maybe the next competitive launch?

Speaker 12

Just looking at that in history. And then my second question here is on the biologics manufacturing. You called out 225, 2 50. I'm not asking for specifics on the pipeline here, but do you think you can have some first to market products in biologics in say 2027, '2 thousand and '30 kind of time frame? Because that is a lot of investment into biologics manufacturing.

Speaker 12

Sorry, that's a lot of questions.

Speaker 2

Yes, David. Just on Quattro, we see again, I think the whole market dynamic of this is the fastest growing market. It's growing between 4050%, the broad spectrum. I think that growth is maybe we are not seeing the price dynamic that you mentioned. We are pricing to parity to that marketplace offering incentives to get into the market to drive first time use.

Speaker 2

But so we're not seeing that and I think a lot of that is just because of the actual market growth and the size dynamic. And we again, I think to Todd's point on Galliprant, we continue to see this as an in home safe option that creates I think our differentiation has grown over the last year and that's what is representative and we'll continue to stand behind that brand and really push because pain is going to be a long term play for us.

Speaker 3

Yes. And David, with respect to the manufacturing, as we called out previously, the investment for the monoclonal facility in Kansas is $130,000,000 spread over both 2024, '20 '20 '5 and a little bit into 2026. We're also expanding in France for our oral solid dose that's really for the Credelio franchise as we see the nice opportunity with Credelio Quattro while continuing to have good growth with Credelio CAT, Credelio Plus as well as the maintenance of Interceptor Plus. And then we're also needing to expand our vaccine capacity in Iowa. Our preficent vaccine for PRRS and swine continues to be a growth driver for us both in The U.

Speaker 3

S. And internationally. And so there's a number of different facilities we're expanding right now all driven by continued revenue growth and demand for these products across the globe. So it's not just biologics, but certainly we are excited by the next wave of biologics that Ellen and her team are working on inside the R and D investments.

Operator

And that concludes our question and answer session. I will now turn the call back over to Jeff Simmons for closing remarks.

Speaker 2

Yes. Thank you, everybody. And I want to thank our customers around the world, just the vets, farmers and pet owners. It's an honor to be able to do business and add value to animal health. It continues to be more relevant to society than ever.

Speaker 2

Thanks to the Elanco team for the loyalty, the engagement, but most importantly just the determination to execute. Elanco enters 2025 with a lot of momentum as I opened up with. We've kept it real simple and we're going to continue to this year like we did last year. It's all about growth, innovation and cash. That's what's going to drive an increased value proposition that we already see happening.

Speaker 2

Growth accelerating. We're guiding 4% to 6% on the top line on a constant currency basis, 1% to 5% on the bottom line. The six blockbusters, our confidence is raising and has grown since November as we've raised the guidance. And on cash, it's as Todd mentioned, it's really become cultural in our company and we're all incented to continue to drive free cash flow conversion and debt pay down. Yes, there is a volatile environment, but we've got a durable company.

Speaker 2

We're controlling the controllables and we're going to continue to keep this company growing. Our value proposition is increasing to our customers and we believe that will drive an increasing value proposition and investment thesis to you and your investments. And thank you for your investments in our company, and we look forward to working with you in 2025.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Elanco Animal Health Q4 2024
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