Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health Third Quarter 2024 Earnings Conference Call. All lines at this time have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, thank you. I would now like to hand the call over to Katy Grissom, Head of Investor Relations. You may begin your conference..

Good morning. Thank you for joining us for Elanco Animal Health's third quarter 2024 earnings call. I am Katy Grissom, Head of Investor Relations and ESG. Joining us on today's call are Jeff Simmons, our President and Chief Executive Officer, Todd Young, our Chief Financial Officer, and Beth Heaney from Investor Relations.

The slides referenced during this call are available on the Investor Relations section of elanco.com. 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 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 and is not intended to be promotional, nor is it sufficient for prescribing decisions. 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'll now turn the call over to Jeff..

the intentional due different commercial model changes we introduced with the initial 2024 guidance as well as the impact from the Keckstone product recall.

Overall, we're encouraged by the performance of the business, with growth led by price and the new products along with a stabilizing base allowing us to report our fifth consecutive quarter of underlying revenue growth. Moving to slide six, we continue to advance our innovation portfolio and productivity strategy.

To hit the highlights, our net leverage ratio was 4.3 times at the end of the third quarter and price growth is 3% on a year-to-date basis. Now on to innovation, which delivered $112 million of sales in the third quarter and $321 million on a year-to-date basis as shown on Slide seven.

Today, we are tightening our expectations for 2024 innovation sales, bringing up the bottom end of the range by $20 million with $420 million to $450 million now expected for the full year of 2024 and $600 million to $700 million next year.

Third quarter growth was driven by continued momentum from Experian, AdTab, and Credelio Plus as well as the U.S. and Brazil launch of Zenrelia late in September. Now let's talk about our three key innovation products in more detail on slide eight.

We are thrilled to be the second animal health company to enter the $1.7 billion global dermatology market. Since our U.S. approval in late September, the launch is progressing very well.

We are pleased to be hitting all our key internal metrics as we've now been executing the strategy we laid out in our conference call on September, focusing first on vet education, driving positive experience, and accelerating the incentive to buy.

Our vet education strategy starts with our field sales team, who bring the product benefits and considerations to life in the clinic utilizing the U.S. product label and the head-to-head study data results.

Additionally, over the past several weeks, we have hosted numerous medical education meetings, advisory boards, weekly webinars, and regional dinner meetings where board-certified dermatologists and well-respected veterinary thought leaders have shared their positive experiences.

These discussions include clinical data outcomes and successful case studies from trial participants. Our survey data shows the intent to buy increases significantly after these educational touchpoints with KOLs and veterinary peers. Additionally, in mid-October, a Zenrelia vaccine booster study was presented at the ISCADE Symposium.

The promising results concluded that when dogs were administered ilecitinib for 56 days at one time or three times the labeled dose, the number of dogs with protected titers on days 43 and 56 following administration of canine core booster vaccinations, including rabies, were similar among all treated and control groups.

No serious adverse events were observed. The data is accessible to interested veterinarians, and our Elanco regional consulting veterinarians continue to provide support on questions and individual treatment decisions. The second pillar of our strategy is driving a positive experience. We continue to execute a targeted sample strategy.

We have a number of early adopters enrolled in our early experience program, allowing us to gain valuable success data around real-world outcomes of Zenrelia in a variety of different case types. We see a clear opportunity for Zenrelia to be used in all types of allergic itch cases and believe it has the profile to be a first-line treatment.

It is very clear Zenrelia works, and it works really well. Both veterinarians and pet owners that have experienced the product have been very pleased with the speed and the level of improvements of their dogs.

With only a few weeks past since the booster vaccine data was presented, key launch metrics including clinic penetration, reorder rates, and average order size are all progressing in line with our expectations. We are tracking reorder rates for many clinics, demonstrating the product is being used and replenished.

The key leading indicator we are tracking is clinic penetration. We are seeing the product placed in hundreds of new clinics each week. We plan to update the market quarterly on this metric beginning early next year. Our global launch is in full motion, and we continue to invest in and execute a no-regrets approach.

Overall, we are pleased with the launch of Zenrelia and encouraged by the adoption we are seeing in both the U.S. and Brazil. We look forward to the fastest-ever globalization of a launch for Elanco, with Canada and Japan now approved, both with less restrictive labels than the U.S., and launching over the coming months.

We are thrilled to be just the second company to offer an innovative new treatment in the canine dermatology space and strongly believe in the efficacy benefits Zenrelia has to offer.

We see relevance for all cases of atopic dermatitis for this product and believe Zenrelia has the potential to grow the market while unleashing a significant growth lever for Elanco. We are focused on building a sustainable leadership position in dermatology, and Zenrelia is just the beginning.

Additionally, as expected, less than a month after the approval of Zenrelia, we received U.S. FDA approval for Credelio Quattro, the newest addition to the Credelio franchise, which includes Credelio Dog, Credelio Cat, and Credelio Plus.

Credelio Quattro is the first and only canine oral parasiticide to protect against fleas, ticks, heartworms, roundworms, hookworms, and three different species of tapeworm in a single monthly dose. We are thrilled to bring this differentiated product to the U.S. market.

Indecticides or flea, tick, and intestinal parasite combination products are the fastest-growing category in the $3.8 billion U.S. parasiticides market, with these broad-spectrum products now making up nearly 25% of the market. And Quattro is positioned also to strengthen Elanco's value proposition in the prescription parasiticide market.

We are progressing nicely through the final stages of manufacturing scale-up to optimize the launch, which remains on track for the first quarter of 2025, prior to the major parasiticide season.

We expect Credelio Quattro to be a major consumer-focused launch, contributing to the growth of the overall parasiticide market and driving share growth for Elanco. In the third quarter, shifting to farm animal innovation, we are encouraged by the progress of Bovair.

We achieved several key milestones, notably permission was granted for the sale and use of Bovair in production states, and the first cows were also fed Bovair. We continue to expand the reach of our Uplift database, with approximately 800,000 dairy cows enrolled and activated, expected to trend towards one million cows by the end of the year.

Overall, farmer demand is very robust. And finally, multiple large CPG companies have signed contracts with Appian to purchase inset carbon credits. We've updated our pipeline chart on slide nine, and as you can see, we are now in or entering the commercial execution phase for the majority of these products.

We're excited to share more information on the progress of these launches in the coming quarters, but early indicators are positive. We are focused on investing appropriately to ramp adoption, take share, expand markets, and build strong brands. With that, I'll hand it over to Todd to discuss our third quarter results and outlook in more detail..

Thank you, Jeff, and good morning, everyone. Today, I'll focus my comments on our third quarter 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. Starting on slide eleven, we delivered $1.03 billion in revenue, representing a 4% reported decline.

Excluding the impact of foreign exchange rates and the divestiture of our Aqua business, organic constant currency growth was 1%. Price contributed 2%, while volume declined 1% when excluding the Aqua divestiture impact. Slide twelve provides revenue by the four quadrants of our business in the quarter.

Total pet health revenue declined 2% in the third quarter with price growth of 2%. Our U.S. business declined 4% with supply volatility for vaccines and competitive pressure in the veterinarian clinic contributing an estimated twelve percentage points of decline in the quarter.

We are pleased by the volume growth from our OTC retail parasiticide business, which saw the normalization of retailer purchasing patterns more in line with demand in the third quarter, and by the contribution of increased sales of new products, which together contributed eight percentage points of growth.

Importantly, next year, as supply headwinds are expected to subside and innovation contribution continues to ramp, we expect a return to growth in U.S. Pet Health.

Outside the U.S., constant currency Pet Health revenue growth of 2% was driven by Europe, led by AdTab and Seresto, as our retail investment strategy and execution continues to drive demand growth throughout the region. This was partially offset by competitive pressure in Australia.

Moving to Farm Animal, globally, third quarter revenue growth was 3%, excluding the unfavorable impact of foreign exchange rates and the impact of the Aqua divestiture. In the U.S., revenue growth was 11%, primarily driven by strength in cattle across both new and legacy products.

Experian and Remington continue to be key contributors to growth, along with poultry in the third quarter, partially offset by the profitability challenges for swine customers. We are very pleased with the 18% growth in U.S. Farm Animal over the trailing twelve months as our innovation has driven greater benefit across the portfolio.

In 2025, we expect growth will decelerate from this elevated level but remain above average industry growth rates driven by Experior and Bovair. Outside the U.S., farm animal revenue declined 3%, excluding the impact of the Aqua divestiture and the unfavorable impact of foreign exchange rates.

Aligned with our expectations, the decline was driven by the strategic decision to change our go-to-market model in certain geographies, including Argentina, and exit low-margin distribution agreements. We estimate this due different approach and the Kextone recall in Europe drove three percentage points of decline year over year.

Excluding these discrete impacts, increased demand for our poultry products in Europe was offset by declines in Australia driven by drier weather and generic pressure. Continuing down the income statement on slide thirteen, gross margin declined 230 basis points to 52.2% of revenue.

The decline was driven by the impact of the Aqua divestiture on product mix, inflation, and unfavorable manufacturing performance. The impact from slowing down the plants over the last four quarters was largely neutral in the quarter.

Operating expense increased by 3% in the third quarter, driven by higher employee-related expenses and increased expenses supporting the U.S. pet health business, partially offset by savings related to our first-quarter restructuring announcement.

Strategic investment in the key launches is critical to the long-term success and profitability of the brands despite being a temporary near-term EBITDA headwind. Interest expense was $46 million, a decrease of $26 million year over year as the proceeds from the Aqua divestiture enabled significant debt paydown at the beginning of the third quarter.

Adjusted EBITDA was $163 million in the quarter, a decrease of $51 million on a reported basis or $27 million excluding the impact of the Aqua divestiture. Adjusted EPS was $0.13, a decrease of $0.05 in the quarter. On slide fourteen, we include a bridge for the third quarter results compared to the prior year.

Additionally, in the quarter, we recorded a gain on the sale of our Aqua business, which impacted reported EPS by $0.94. Now let me offer a few words on our cash, working capital, and debt on slide fifteen. Cash provided by operations was $162 million in the quarter.

On a year-to-date basis, operating cash improved by $250 million driven by improved inventory performance, strong collections, and lower project expenses. We ended the quarter with net debt of $3.897 billion, inclusive of the $1.3 billion of debt paydown from the proceeds of our Aqua sale.

The net debt to adjusted EBITDA ratio was 4.3 times at the end of the quarter, down from 5.7 times at the end of the third quarter in 2023. We remain confident in our year-end net leverage in the mid-four times range. We've updated slides twenty-five and twenty-six in the appendix to reflect updates to our key debt information.

Based on our third-quarter debt paydown, we now expect income statement interest expense of approximately $225 million and cash interest of approximately $295 million in 2024. We expect 2025 income statement interest expense to improve by $5 to $15 million and cash interest to be lowered by $20 to $30 million.

Additionally, we expect an incremental $150 million of cash taxes next year for deferred tax payments related to the Aqua transaction. Next, I'll provide an update to the September thirteenth press release regarding the UK contract manufacturing organization that entered court-supervised insolvency in September.

This CMO is a critical supplier for Elanco, representing approximately $160 million to $180 million in annual farm animal revenue across species and countries. The entity remains in court-supervised insolvency. We are working closely with the parties involved to maintain continued product supply.

For 2024, we continue to expect an adjusted EBITDA headwind of approximately $5 million to $10 million, primarily in the fourth quarter. For 2025, we believe there are a variety of scenarios, all with an expected year-over-year adjusted EBITDA headwind between $25 million and $35 million, primarily on gross profit.

We expect to reach a resolution in the coming weeks and have reflected this expected outcome in our 2025 growth outlook. Finally, let's move to guidance on slide seventeen. For the full year, the outlook for our underlying business remains positive.

We are narrowing the range for revenue to be between $4.42 billion and $4.45 billion, representing 3% growth when excluding headwinds from foreign exchange rates and the impact of the Aqua divestiture. There is no change to the midpoint of the sales guidance range as increased expectation for innovation sales is offset by lower expectations for U.S.

pet health parasiticide revenue. We expect adjusted EBITDA of $900 million to $930 million, reflecting expected gross margin headwinds from product mix and manufacturing performance.

And finally, adjusted EPS is expected to be between $0.89 and $0.95, with improved expectations for interest expense and tax offsetting the items impacting adjusted EBITDA to result in no change to the midpoint compared to August.

Our fourth-quarter guidance is detailed on slide eighteen, with organic constant currency revenue growth expected to be between 1% and 4%.

Despite the headwind from Aqua, adjusted EBITDA and adjusted EPS are expected to grow primarily based on the comparison of the fourth quarter of 2023, which included meaningful headwinds related to Argentina as detailed on slide nineteen. Finally, we wanted to provide some additional context on our expectations for 2025 on slide twenty.

On the top line, we remain confident in our trajectory towards innovation sales of $600 million to $700 million, with expected organic revenue growth to accelerate to mid-single digits compared to our expected 3% growth in 2024, with growth expected in both pet health and farm animal.

In pet health, growth is expected to be enabled by increased contributions from new products and strength in our Pet Health OTC business. We expect continued headwinds on our legacy U.S. pet health and vet clinic business, although lessening as Credelio Quattro and Zenrelia are expected to contribute to this business area to growth.

On the farm animal side, we continue to expect above-market average growth led by new products in cattle, and anticipate headwinds resulting from poor swine producer economics, generics, and unfavorable comparisons related to strong poultry rotations in 2024.

Based on our updated guidance for 2024, the jump-off point excluding the estimated Aqua contribution to the full year should be approximately $875 million of adjusted EBITDA. This reflects our 2024 guidance midpoint of $915 million less approximately $40 million of estimated Aqua EBITDA contribution in the first half of 2024.

Looking forward to next year, we expect the underlying business to drive mid-single-digit organic adjusted EBITDA growth, inclusive of meaningful strategic investments in our key blockbuster potential launches.

As I shared earlier, the anticipated $25 million to $35 million headwind from the UK CMO situation ultimately puts our organic adjusted EBITDA growth expectations in the low single digits range.

From a cash perspective, we expect a few headwinds to our cash available for debt paydown, including deferred tax payments from the 2024 Aqua proceeds and increased capital expenditures to support capacity expansion at our monoclonal manufacturing facility.

With all this in consideration, we continue to expect net leverage to be in the high threes to low fours range, continuing us on our deleveraging path. We will continue to keep our eyes on the foreign exchange markets over the coming months and look forward to providing our detailed 2025 guidance next February.

Now I'll hand it back to Jeff for closing comments..

Bovair, Zenrelia, and Credelio Quattro, with growing tailwinds from Experior, AdTab, and Credelio Plus. 2025 presents an invigorating opportunity to strengthen our position in pet health globally and see the market come to life for livestock sustainability.

Building on our momentum this year, we expect revenue growth to accelerate next year to mid-single digits. We expect to grow adjusted EBITDA low single digits in 2025 excluding Aqua as we make intentional investments with expected multiyear benefits, aimed at building our brands and maximizing the returns on our innovation investment.

This sets us up for continued top-line momentum coupled with shifting our focus towards the bottom line growing faster than the top line. We think this creates an exciting value proposition and look forward to updating you more formally on our 2025 guidance in February next year. With that, I'll turn it over to Katy to moderate the Q&A..

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

Thank you. We will now begin the question and answer session. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Michael Ryskin from Bank of America. Your line is open..

Great. Thanks for taking the question, guys, and congrats on the quarter and the update. Jeff, maybe one for you to start. You know, you talked about Zenrelia and obviously a lot of focus there. You mentioned a couple of times hitting key internal metrics. Specifically, I think you outlined clinic penetration as something to really watch.

Any early indications of what those metrics are exactly? Just give us some specifics in terms of where you are now, where you hope to be at the start of the year or middle of next year, just any important points you said we can track progress.

Obviously, revenue contributions are expected to be small in the first couple of months, but what should we be looking for? Anything you can quantify to give us a sense of that early progress..

Great. Thank you, Michael. Great question. Yeah. Let me just step back. The launch is going well. Rapid evolving dynamic launch. We are six weeks in. And the metrics that we are focusing on and then we will communicate more about. We're not going to do that today in great detail, but we will as we get towards the next earnings call and we get into 2025.

And those metrics being clinic penetration and reorder rates. So placing the product into clinics and then seeing it being used and replenished. Those are the two key things. I think a couple of things I would focus on that I think are really important at this stage. The first is it's all about efficacy.

And let me share that, you know, as I've said, you know, Zenrelia works. It works really well. That's what we saw in the head-to-head studies and the studies as we move forward with the registration. And what I can say is, yes, olumucitinib is a different active ingredient. And it is delivering great efficacy.

And, again, as I said, we saw it in the head-to-head. We're now seeing it in the field. You know, of course, it's been given the tough cases where other products did not work. That's been obvious in the early stages. What I can share, Michael, is it's performed exceptionally well.

Some of these have become case studies that are being used with other veterinarians. I think a couple of things I would say, you know, we do see, you know, several hundred new clinics are taking on Zenrelia each week. The ramp is tracking nicely to our expectations. Clinic reorder rates have stepped up every week for the six weeks since the launch.

And the early signs are our strategy is working, and just a reminder on the strategy, you know, it's around vet education, experience, and high share of voice. And our first kind of round of incentives for our reps are targeted for the end of the year. And, again, we'll be reporting those results as we get into Q1 with you.

And I think it's just a couple of other quick points. You know, it's been asked about where this product's being used. We will say in the early stages, it is being used in all three segments of chronic, seasonal, and acute. It's being used in general practices. And we continue to make good progress with strategic accounts.

We've actually secured agreements a little faster than we originally thought with strategics. It's being placed online. So and look, I will point to the segment of there are veterinarians that actually, you know, desire more information before full adoption. This is where we've taken a very tech-to-tech approach. The booster data has been helpful.

And what we're seeing there is that there's a longer selling cycle or maybe a lower first order rate initially. So that's where we are, and we'll continue to give you more specifics as we head into 2025..

Okay. Okay. That's helpful. And then maybe for my follow-up, a little bit more of a big-picture question. So you touched on it at the end of the prepared remarks in terms of the 2025 framework. As you indicated before, not expecting a ton of operating leverage in 2025 because of the investments to drive those new brands.

So hence the, you know, mid-single-digit top-line growth, but then EBITDA is sort of mid-single, low single depending on what you're looking at. But I think what we're focused on is sort of that underlying operating leverage or what the operating leverage could be in 2026, 2027.

Not going to ask you to guide to 2026 just now, but just could you sort of walk us through that bridge of what's holding back 2025 operating leverage and how much.

So you know, how much from the gross margin pressures, how much from the incremental investments, how much from sort of, you know, these are going to be Quattros that are all going to be low volume products, so not as much contribution to margins.

And that'll help us get a sense of sort of, you know, let's say you do mid-single-digit growth going forward, what kind of operating leverage we could expect in the out years. Hopefully, that makes sense. Thanks..

Yes, Michael. It's Todd. You know, thanks for the question. We obviously wanted to give some framework here for 2025 a little earlier than we normally would. Yeah. We're excited to have these products approved in the marketplace. The sales growth from innovation is what's going to drive the bottom line.

As you rightly point out, in 2025, you know, it won't be as fast as the top-line growth. The UK CMO situation is clearly pulling us down at the gross margin level.

And then, you know, we're going to work really hard to, you know, keep our G&A functions flat to declining so we can take incremental savings from there and really invest it behind these potential blockbusters.

The Credelio Quattro and Zenrelia, we're really excited to have in the field and want to get understanding consumers and vets about how applications and good these products are. So, you know, we'll be growing, you know, those sorts of investments, you know, in line or faster than the sales growth that comes from that.

All of an expectation of building, you know, momentum for the next, you know, three, five, ten years, where we'll start to get that leverage you spoke of and start driving our profitability faster on the bottom line than on the top line in 2026, as Jeff mentioned in the prepared remarks..

We'll take the next caller..

Your next question comes from the line of Jon Block from Stifel. Your line is open..

Thanks, guys. Good morning. Todd, yeah, thanks for the 2025 preliminary guidance. I certainly think it's helpful. I guess, you know, you have 2025 preliminary and then we'll all sort of noodle and see what else we can get.

So going down that road, I just think, you know, the EBITDA low single-digit growth adjusted for Aqua, I'm just trying to, again, at a high level, think about the cadence.

You know, do we view that as somewhat back-end weighted because it's suppressed because of the investments, and should we think about the investments, you know, more prominent or at least it's all cash out call in the early part of the year, so revenues will follow for both Zenrelia and Quattro, maybe even IL-31.

But when we think about the low single-digit, again, anything on the cadence and sort of where I went with the question, is that the right way to maybe work it through the model in 2025?.

And, Jon, you know, I didn't even want to give guidance for 2025 this early, and now you want me to give quarterly. Now appreciate the question. And, yes, I think you're thinking about it correctly. We're going to make the investments.

You see it even here in the Q3 numbers where, you know, both the investments are really driven by, you know, the expanded pet health sales force that we brought at the start of the year. They know their customers, the customers know them well, and so that's really set up here as we launch Zenrelia, and then close on the heels will become Quattro.

Think about being a little more front-end on investment with sales growth over the course of the year.

At the same time, you know, Experior and the HEPA clearance is we've got here in the last couple of weeks, we'll keep it ramping up and growing, and then AdTab, which is, you know, that parasiticide season first half continues to grow really nicely as well.

So, yeah, we're excited by all the innovation we have, especially on a global footprint, not just, you know, what Zenrelia and Quattro will do for our U.S. pet business..

Got it. Very helpful. And then I'll just shift gears and go back to Zenrelia. And Jeff, is there a percent of practices that are saying the label's a nonstarter for me? You know, hey, look. I just can't get my arms around this, and even with your additional data around dosing, this is a nonstarter.

You know, is it ten percent of practices that you reached out to? Was it forty? You don't want to give that, maybe give you help us out if it's been in line with expectations. I mean, clearly, we want to see where practice penetration falls, and I'm guessing that takes several visits from an Elanco rep to eventually get there.

I'm just curious in the early days if that noise around the label and the nonstarter and how that compares to company expectations. Thank you..

Yeah. Great question, Jon. I would say if I look at the segments that are occupying our time right now and really provide the great opportunity is the early adopters, and they're ramping, and we're servicing them, and that's expanding. So as you get into more and more clinics, then starting to see the size of orders and the replenishing grow.

And so we continue to see that segment being, you know, quite material and significant, and we'll lead our ramping of clinics, as I said, to several hundred or so per week. And then I think the second one is what you're highlighting is we don't see any stopping.

What we're seeing is, you know, the vets that we expected that really want to just be able to have that scientific discussion tech to tech, review the booster data has been extremely helpful and alleviated a lot of questions and concerns. And then what does that lead to? It leads to two metrics, Jon, that we're seeing.

One is more call frequency needed. When you may have needed one or two calls, that may go up a little more. So we're increasing, you know, whether it's tele approaches to make it more efficient, more dinners so we can have more touchpoints more efficiently in a more accelerated way. And then second is the orders tend to be a little smaller.

So they on that segment, which is, hey. We want to get it in. We want to try it. We want to try it on maybe your trouble cases. And then that ramp. So, actually, we like the trajectory of these metrics and these segments and the approaches. We haven't had to adjust our strategy. We have shifted some resources, but, again, we're very pleased where we are.

And, you know, I would back up, Jon. You know this is we continue to be very excited about the size of the derm market. It continues to grow. I believe in the U.S., it's growing, you know, at fifteen percent. The last twelve months, and we're making nice progress.

We also have our regulatory team has the meeting with the FDA this month, and the submission of that additional data to the FDA has already happened prior to that meeting. So great progress..

Thanks, Jeff. Appreciate it..

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

Hi. Thanks so much. So on IL-31, can you give us an update on your conversations with the USDA on that product and how we think about the timing of the launch versus the second half? And just the opportunity with the long-acting in light of Zenrelia, and it sounds like you're scaling up the manufacturing in mass.

And just how you think about the competitive landscape evolving in derm. Thanks..

Yeah. Thank you, Erin. There's no question. I'll start with the overall derm market. We have numerous assets. As you know, we're starting with Zenrelia. We've got short-acting and long-acting, cummins, short-acting. Expecting an approval in 2025, as you know.

And then this is a key area of focus for Elanco, and we really are excited about what is in our pipeline in derm. And, again, next generation, first in class overall. Specific to the IL-31, the engagement is going well. Not really anything new to report other than it's progressing well.

We continue to see it as a blockbuster product differentiated from the incumbent in the market today. And it'll be a nice complement to Zenrelia and will globalize the launch as we are with Zenrelia. But again, things are progressing, and all we'll say at this point in time is approval expected in 2025..

Okay. Thanks. And on Credelio and Credelio Quattro, I guess, how are you thinking about pricing here? And with when you launched, I guess, legacy Credelio, you were at a premium.

Do you expect to take a similar approach just given the differentiation of the product? And on Zenrelia and pricing, so two pricing questions here, just given the dosing for larger dogs, is the pricing still shaking out to about a 20% discount relative to the competitor, or is that playing out according to plan? Thanks..

I'll take the first one. I'll give Todd the Zenrelia here. But on Quattro, we're looking at this as overall think, Erin, most importantly is, you know, the biggest trend I see right now in animal health is this broad-spectrum parasiticide market, especially here in the U.S.

Growing and now accounts for about 25% of the $3.8 billion market in the U.S., and it's taken share really from legacy products inside the vet clinic. And so we look forward to entering with Quattro. This will be a very heavy consumer component type launch. It's more of an uninvolved category.

So to Todd's earlier point, we do expect, you know, launching this product ahead of the parasitic side season in Q1 and taking a, you know, a DTC and a heavy investment approach as it's a little bit more of an uninvolved category as a whole. When it comes to pricing, we'll take a value-based approach.

Believe we got, as you know, a differentiated asset here but also, again, back to the no-regrets approach, we want to take share, want to gain experience. We believe notionally, our core portfolio is still smaller. We see, you know, this is without question will grow our share in parasiticides in the U.S. and be a key accelerator to returning U.S.

pet back to growth as we go into 2025..

With respect to the pricing question on Zenrelia, Erin, it is on average about a 20% discount with this introductory pricing that we started with Zenrelia to really give a great value for consumers as they think about how to treat their itchy dogs.

Given the way we've structured the pricing for larger dogs, it's a bigger discount than 20%, which is really valuable given the nature of the dosing they need to get the animal under control. You can see, you know, the pricing deltas, you know, on the online retailers that, you know, both outside our competitor uses.

But, overall, we're pleased with the price strategy that Bobby and his team have launched and are thrilled to be, you know, allowing pet owners to have, you know, a more reasonable price to offer to really solve their itchy dog problems..

Your next question comes from the line of Brandon Vazquez from William Blair. Your line is open..

Everyone. Thanks for taking the question. As we go into 2025, you talk a little bit about I think there was a comment about this earlier with your sales force. Are there going to be any changes in comp? You obviously have a lot of new good products that the sales force is going to want to push.

Any changes to the comp works to make sure that the entire portfolio is kind of moving forward? Just curious if there's anything notable there to talk about..

It's a great question, Brandon. It's something we've put a lot of attention on the last couple of years. Bobby, his team, some of Todd's team brought in some outside expertise. We believe our incentives for sales reps are key to sell and prioritize the portfolio.

What I would say is, you know, we will have incentives that will be geared definitely with a little bias to the new products and the ability to sell that broader. At the same time, they're going to be more enabled where another investment is coming is really just around next-generation commercial.

Where we've got, you know, the digital ability to actually, you know, know what we need to detail. What wasn't detailed is being followed up with telesales or with, you know, electronic engagement. And we've really proven that out. We've some of the new products like Zorbium and the parvovirus monoclonal antibodies.

So those are the two areas of investment. We, again, as I said, have our reps very incented on Zenrelia now to the end of the year, and we'll be updating that as we bring Quattro to the marketplace..

Okay. Great. And as a follow-up, Seresto and Advantage, if I collectively do those revenue year to date, up about 7% reported, probably a little higher even on an organic basis. Which is encouraging. So I'm just curious if you could talk to the is almost, I think, 40% of your pet health sales at this point.

How durable is kind of, like, a 7% level? Is this you guys feel like this might be a new level here where you can maintain or grow up within to 2025? Thank you..

Thanks for the question, Brandon, on the portfolio. Yeah. Seresto's had a nice year. Some of that is influenced by the bounce back in Spain that puts that growth rate a little higher than what we'd say the normalized level is.

In the U.S., we continue to make nice progress with our physical availability, more points of distribution, or different price points by bringing back the Advantage family originals with classic. You know, I wouldn't say we expect 7%. We're probably closer to a low single-digit expectation for the portfolio.

As a reminder, we've added AdTab in given the uses the Advantage family name. And so that's a real positive. The drag on the Advantage Family is with Advocate inside the vet clinic. Where, you know, like the legacy portfolio of parasiticide, getting impacted and why we're so excited to bring Credelio Quattro to the U.S.

like we already have Credelio Plus outside the U.S. and then on the Advantage Family. We're also we've relaunched our supplements inside our retailers under the Advantage family name. Don't expect that to be a massive product category for us.

But it continues to build out our relationships as a key supplier to the Walmarts, the Petcos, the tractor supplies, stores that are so important for this business to help customers, you know, get our products wherever they want to shop..

And I would link it too. There's a common question in our industries about VET visits, and this has really been part of our strategy as the omni vet clinic has actually helped us insulate. We're seeing that now with that trend as well as with the economic pressures.

As some pet owner segments trade down, as Todd mentioned, we've been able to actually, you know, capture that share with the Advantage Classic and others. So those are two trends externally that actually we think Elanco is actually competitively well-positioned for..

Thanks. We'll take the next caller..

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

Hi. Good morning, Aaron, and thanks for the questions. So firstly, I can't help but feel that the expanded portfolio should give you significant portfolio advantage that you don't have much of clinics. So with that, I'm surprised the competition in U.S. pet health vet clinics is still being called out as a material event for 2025.

So which are the areas where you to be at a competitive disadvantage and where you are in the market? Secondly, congratulations on reaching Experior blockbuster status. So what does it mean for the long-term direction of growth? How would you quantify the current level of market penetration or market saturation? Thank you..

Sure. Yeah. What we feel good about, that portfolio, but there's a reality of the pair of business inside of that clinic, where we expect Credelio Quattro to, you know, cannibalize some of our own brands, but also continue that competitive pressure. Net debt, we're going to grow in U.S.

Pet Health here in Q4 and next year because of the innovation, you know, we're bringing to the marketplace. With respect to Experior, you know, we're thrilled with respect to the launch, the ramp, as we said, calling out that it will exceed $100 million globally in 2024.

And now with these HEFFER clearances, we're accessing about 40% of the feedlot animals that we couldn't access before. So that allows this growth to continue, and it'll be a big driver of our mid-single-digit growth in 2025..

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

Great. Thanks very much. Just two questions for me. Maybe first, just talk about kind of bigger picture pricing outlook as we head into next year. It's been maybe a healthier environment for pricing the last few years. I was wondering if you expect that to be able to continue into 2025 or normalize a bit.

My second question was just on Quattro and just can you just elaborate a little bit on how you see the product ramping next year as you come to market? I guess, my question here is should we initially expect that a lot of the use here are prior Credelio users, I guess, initially in 2025, or do you think you can kind of right off the bat, target maybe a broader swath of vets to adopt that plays out more over time? Thank you..

Yeah. Thanks, Chris. You know, on pricing, we've seen as an industry higher in pet, higher in the new innovation areas, lower in farm animal and the generic categories. We saw that rise up a little higher coming out of inflation the last couple of years. You know, I believe that it's, you know, probably headed back more to historical levels over time.

But no question, innovation coming into a portfolio gives you the ability to leverage price, and that's what we're doing. The portfolios that have significant innovation in them, we're able to actually raise the price of the portfolio. So I think it's going to fall somewhere in between for us as we head into 2025. As you look at Quattro, look.

As I mentioned, you know, how do we see this ramping? There's no question or reiterate. We believe that we're bringing this product and made a lot of good progress to prepare for the launch to be in the market in Q1 ahead of the season. We will, you know, be investing accordingly because we do believe the season matters.

But I also would say that this broad-spectrum parasiticide segment has shown less seasonality and much more, you know, focus on launching, penetrating in the markets that you're going to target. So we expect it to ramp, but we do expect that will occur over the course of the full year..

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

Hey, guys. This is Mikey Fury in for Umer. Thanks so much for taking my question. Three quick ones for me. First, regarding the Zenrelia vaccination booster study, noticed in that trial that except for canine distemper virus, a hundred percent of dogs remained above the prespecified protective thresholds at the one x and three x dose levels.

Just kind of curious as to what explains the canine distemper component not hitting these levels. And is that a sticking point among vets who may be on the line? Because I have two follow-ups. Thank you..

Yeah, Michael. The booster study again, was, you know, run very well. One, three times the Zenrelia dose. Number of dogs achieving, as I said, appropriate titers, above the vaccine, and this has been received very well and very results.

And then, again, no serious adverse events were observed, and this has been extremely helpful in the vet-to-vet conversations..

Got it. Okay. Next moving on to Quattro.

Obviously, tapeworm is surely more endemic to certain geographic regions in the U.S., but in geographic areas that it isn't endemic, can you speak to the level of enthusiasm and receptiveness for this product? And would you expect more seasonality for Quattro in these non-endemic regions? And lastly, and separately, I noticed that your expected innovation sales in 2024 have crept up ten million dollars at the midpoint from four hundred to four fifty.

Now that's four twenty to four fifty. I may have missed this, but what's expected to drive this incremental increase in innovation revenue? Thank you..

Yeah. I'll let Todd take the second one. On the first one, look, the first thing, Mike, that's going to drive is what you're seeing is this trend. You got $3.8 billion in the U.S. of parasiticides. A little over a billion now is these broad-spectrum Indectos. We're coming into that market.

We see the natural growth of taking share across that larger market is probably one of the best tailwinds that we see overall. Broadest coverage always is or broad coverage always is a benefit.

We also would add not just the tapeworm element, but we put out recent data around tick efficacy, which I think is a real positive, and we've got, you know, heartworm for first-month control and prevention. So a few layers of differentiation, a big fast-growing market, and we've got a lot of expertise in one of the largest sales forces in the U.S.

and a good distribution relationship as well. All of these are components that give us great advantage going into 2025 with Credelio Quattro..

And then, Mike, on the innovation increase, it's really the Experior continuing to ramp a little faster than we expected last quarter. As well as AdTab and Credelio Plus outside the U.S..

The next question?.

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

Hi. Thank you for taking the question. So it's going to sound like I'm jumping around, but in all actuality, I'm just trying to get to kind of contribution margins as we're moving into 2025 and 2026. So on the farm animal side, update on Bovair.

Are there any other states or countries in the pipeline that could be active and staying on Farm Animal, hepar Experian, a hepar update, that's great.

Can you give us a little bit of flavor in terms of the size of this opportunity? And is it Experian have more of a pet margin or more of a farm animal margin, and maybe it's going to change as we get, you know, more volume.

And then if we are going to see Quattro replacing Credelio, how should we think about, like, Credelio becoming a blockbuster? Because I would imagine that, you know, maybe it's at the fifty million dollar point. It's dilutive to accretive or something like that. Okay. Thank you..

Yeah. Yeah. David, real quick on Bovair. We have rights for North America, including Canada and Mexico, but our focus is on dairy even over beef. The clearance is for dairy here in the U.S., and the size of the market is significant. And the efficiency to reach that market and, you know, the inset market chain that we've set up. So that will be our focus.

And that has great opportunity. Again, as Todd just mentioned, we've got about 40% of heifers with Experior with this superior clearance. So and still a lot of fears. There's still a lot of feedyards out there that maybe we're holding to feed their steers with also heifers.

So and it's a strong good margin profile with an efficient OPEX reach because it's more of a B2B model in U.S. beef. And Canada where Experior is sold. And then as we've mentioned, our overall parasiticide business is notionally smaller with Credelio, Interceptor Plus.

So we see cannibalization being less, and we do see Quattro being a catalyst to drive our U.S. parasiticide business back to growth. And to take share as well..

Your next question comes from the line of Navan Tai from BNP Paribas. Your line is open..

Hi. Thanks for taking my question. I have one. So maybe if you can share early vet feedback on the vaccine booster study.

Does it already or has the potential to influence vets regarding the withholding period before a natural label change? And also, we have heard from vets that twenty to thirty percent range of Apoquel non-responders, which is higher than we expected.

Is that in line with your expectation and feedback? And then on the CMO, how long does it take to transition supply, and how much visibility do you have on the proceeding to estimate the 2025 EBITDA headwind? Thank you..

Yes, Naveen. I would just say overall, the booster study has been very effective. That being able to give vets comfort of, you know, how this actually worked again in more, I would say, is real conditions for them in the field. And then that leads to whether it's cases or a protocol for them to use it.

And again, there's a lot of market available as we continue to focus on with the label that we have today a lot of opportunity here. I won't speak specific to the number of non-responders. That varies. It varies by time of year and by segment. But overall, what we like is we've been thrown into those cases, and Zenrelia has performed extremely well.

Todd, on the CMO..

Yeah. I mean, yeah, we're working very closely with the bankruptcy administrator in the UK to maintain the supply of our products to continue to serve customers here.

In 2024, there's a lot of ongoing discussions regarding the future, but, you know, I'm very confident that got a very good feel of the 2025 EBITDA impact given, you know, how well we're working with those administrators and understanding the overall operations of that CMO..

Thanks. With that, we'll hand it back to Jeff to close this out..

Hey. Thank you for the time today and the interest in Elanco. Just a couple of comments as I close, I think it's important. First of all, just a real focus on Elanco's growing again.

We are guiding at this earnings call for six consecutive quarters as we close the year, and we've shifted really truly as a company from regulatory to commercial mode, and that's all built on a stabilizing base.

I think when we step back inside this company, we're looking at a portfolio of products that are either ramping, launching, or entering launch. We look at AdTab, CPMA, Credelio Plus, Experior, and now the big three, Bovair, Zenrelia, and Credelio Quattro.

These are differentiated assets that are in our major markets that will be the driver to accelerate our growth. The Elanco team is firmly focused, and on our course, engagement and execution are ramping. We have this no-regrets disciplined approach when it comes to trade-offs.

Our focus and our resourcing, and I'm already seeing that payoff in the company. All of this is really intended to drive sequential accelerated revenue growth in Q4 and into 2025, expand our innovation sales, and ultimately increase shareholder value. Thanks for your time.

Special thank you to the global Elanco team that's achieved a lot this past quarter but mostly a lot the last few years to get us to this point of opportunity on our seventieth year as a company. Look forward to engaging with all of you here in the coming months..

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