All right. Well, good morning once again. We're delighted to have Elanco with us here at Cowen's 44th Annual Healthcare Conference, representing the company, Jeff Simmons, who's President and CEO. So Jeff, thank you so much for making the journey to be with us. We'd like to keep this interactive. Chris and I, my colleague, will ask some questions, but please chime in and follow up, ask any questions that you'd like to pose, and we'll make sure we get you answers. So Jeff, let me just start out kind of big picture. What are the top three priorities for the company, for you in 2024?
Yeah. Thanks for the opportunity, Steve. I will highlight just for us the three priorities, and we've been talking a lot about this over the last probably year. And the same priorities inside as outside, and what's gonna drive the value of the company is growth, innovation, and cash. And let me just link to our 2023 results and our 2024 guide in that regard. So excited about our company's return to growth in 2023, full year, 1%, two quarters in a row of 5% constant currency revenue growth.
Quality growth, probably the most diverse growth we've seen, a stabilizing core, business that has really been driven by price and innovation, has been driven by stronger portfolios, especially on the pet retail side, on poultry, overall, pet and farm animal, different elements of growth on both sides. So, and we're guiding for growth 1%-3%, so that growth's gonna step up in constant currency, and that's before our major new products that I know we're gonna talk about, so they are not in that guide. So, you know, and we believe that makes the innovation even more appealing with that base continuing to grow.
On the innovation side, our innovation sales, as we started tracking those innovation sales, as we, you know, launched post-Bayer in 2021, we set an external kind of target of $600 million-$700 million of innovation by the end of 2025. We've doubled innovation in 2023, led by Experior, by our Parvovirus, by AdTab, you know, numerous, numerous things that are driving that growth. So we're at the 275, and we're guiding for another approximate $100 million of growth, again, before the major new products. So we continue to see the existing innovation growing, as we've talked, and I think that'll be, that'll be key.
And then, of course, the late-stage pipeline, the three key differentiated assets that are coming that have a path for a first-half approval in 2024, Zenrelia, that'll be all accretive in the derm area for us. Parvo, a major player, largest market, $6.5 billion, broad coverage parasiticide with a path as well, Credelio Quattro, and then, then Bovaer, a new product, major, differentiated product, in the whole area of livestock sustainability. So those late-stage assets. And then the next wave of innovation, we had a pretty significant year in 2023 of new products going into development that will actually drive the innovation growth in the second half of the decade. So that's, that's the second big priority for us. And then third is cash. Really, really critical for us. It's been a key priority.
We base our pay on EBITDA growth, but also the use of cash, for all employees. So this has been a big factor. We paid a little more debt than was expected in Q4, so you know, generating about $76 million of debt paydown. We expect now that the stand-up is done, Todd guided last week, that we'll be in the neighborhood of $300 million of cash. So a 4x step-up in free cash flow conversion, and that's before the close of our Aqua deal that should generate over $1 billion. So we have a path to be at going from mid-five debt to EBITDA to going to mid-4s approximately by the end of this year with those things happening and a path by the end of 2025, low-4s to high-3s.
So again, return to growth, guiding to growth before the new products, historic innovation for the company, six, you know, potential blockbusters, a few in the market, a few more coming between now and 2025, and then a significant step up in free cash flow conversion as a company. Those are the three drivers. These aren't things that are coming; these things are in the works that are happening.
Okay, great. One more big picture question-
Yeah.
Then we'll drill down into some product-specific questions. But when you look at 2024 specifically, what are some tailwinds that could make results hit that high end? What are some headwinds that can make it hit the low end? And what are the scenarios that would play out for each?
Yeah, I think no question, innovation. I... You know, we point to Experior's end of the year at $54 million cattle product was at a run rate of $70 million. So you can do the math, and we continue to see levers, probably our next blockbuster. So in the bucket of innovation, we see Experior as a key player. Parvovirus, we have moved. It's our first monoclonal antibody. We were limited at a small bioreactor at 200 liters. We're now to 2,000. We've got really unrestricted supply. We're over 3,000 clinics. So look at Parvovirus in the US vet clinic. And then over in Europe, AdTab. It's really Credelio's active ingredient using the Advantage brand in an OTC market. And, you know, some of even our restructuring to create more cash to invest behind these three innovations.
I think, Steve, that's gonna be probably the opportunity for some of the biggest growth and opportunity. You know, I think Global Poultry continues to be a leadership position for us. It ended the year with a lot of momentum, and we see continued momentum. I mean, poultry consumption in places like the Middle East, you know, South America, et cetera, just continue, and our portfolio gets stronger. Our food safety business in the U.S. and Europe continues to get bigger. I think our retail business, US and Europe, especially in Europe, we had a really tough, you know, retail market last year in Europe, especially in the first half. We continue to see that being a driver. And then, you know, we've built a better price capability.
Pricing has been historical for Elanco in the industry at 2%. We ended the year last year at 4%, and we see, and we're guiding to 3%, and I think a lot of that is just multiple SKUs, multiple species and geographies, a stronger pricing capability. So those are. And what the U.S. team is doing with, you know, in the vet clinic, with all of our new know-how, we've got a 20% larger sales force. You know, my, my hope here in the first half of the year is even in some challenging markets, those would be the positives. I think on the other side, it's just, look, we've got increased consolidated competition in the U.S. vet clinic. We have a nice, strong portfolio. We've got an omni-channel approach, but there is a lot of intensity in the U.S. vet clinic.
There's some challenges even in that market. We're not as indexed on vet visits, but when you look at the overall, there was a cooler January. I do think that, you've got to keep your eyes on, as you look at headwinds, the US pet vet clinic market. Always on the farm animal side, you got to look at generics. We believe we're doing well there, but that's something to keep your eyes on as a headwind. And look, markets that we still have hope for growth in but are a little softer, like China, you know, the China economy, the China pet market, are things that we, you know, got to watch relative to potential headwinds as well. So... And then we've got a couple countries we're doing differently.
We noted Argentina, where we're gonna move. We're about 90 countries, 45 with people, approximately 45 with distribution. We're moving a few more to take the volatility out of our business by doing that, and I'll point to Argentina. That will impact some revenue, be a little bit of a headwind that we noted in our guidance last year. So that's, I think, a good, good balance. We're confident in our guidance, 1%-3% growth, and then the new products will be on top of that.
Before we move into specific questions or, products, questions from the audience on the big picture outlook? Okay, we can always come back to it later. Let me turn it to Chris to, drill down into some specific products.
Yeah, of course. So moving to the new launches, could you provide an update on the regulatory status of these products? And then in your experience, what are the most common reasons filings could be delayed? And then just, is there any upside to a delayed filing, maybe a stronger label, maybe a more differentiated label with more data?
Yeah, good, good questions. Yeah, so we've just to reiterate, again, three assets, Zenrelia, our JAK-1 and Derm, Credelio Quattro, broad-spectrum parasiticide, and Bovaer, all FDA approvals, starting with U.S. market. We did announce, though, that Zenrelia, we've got 9 submissions we've made in international markets, so that should play out into 2025 as a nice lift as well. So those submissions are made. But if I talk specifically about those assets in the U.S. with the FDA, I think, hey, we're in a productive, proactive dialogue. There is an Animal Drug User Fee Act where there's, you know, steps, but, you know, in these final phases, it's very rolling, it's very iterative. And what we say is, if there's anything significant that changes, we'll share that. So we're still in that stage.
And look, it's a lot about timing, label, and, you know, maybe any other final questions. Those are the factors. We believe these assets are differentiated, but until you have the final label and until you have the final product in the market, you know, that differentiation is still, you know, still being defined. So that's... And as we've said, just to be very open, again, we stand and are excited about the differentiation. Remember, Derm is all accretive for us. It's a $1.2 billion market, and it's globalizing. Bovaer is all accretive, and then Quattro is coming into a market that's really welcomes and rewards innovation. So we stand with, you know, we believe we're well-positioned.
And as we've said, when these assets do come, likely they'll be additive in the second half and of course, very much so in 2025. Todd shared in the guide, they not only will be additive to our guide on the revenue side, but because we've already added the sales force, etc., they also will be additive on the EBITDA, accretive to the EBITDA side as well.
Great. Then can you talk a little bit more about those underlying markets, kind of the market size, the overall growth rate for canine parasiticides, derm, and then, sustainable protein?
Yeah. So all three markets. So maybe I start with the biggest, parasiticides. We spent a lot of time talking about flea, tick, you know, the worm market and post-worm market. That's a $6.5 billion market, continuing to grow. As you look at the innovation that's been introduced from the isoxazoline in the first generation to now this broader spectrum, second generation, the market growth continues to grow. The market's globalizing more. I think the biggest growth driver to us is the convenience. I mean, the ability to be more convenient and have things like drop shipping and reminders and digital and all the things that have been added by both distribution, Chewy, all sides, it's making people more compliant.
Parasiticides, it's a very, you know, pet owners and vets aren't that active in tick, flea, heartworm, so getting them more active on compliance is the greatest growth driver for us. The second is the globalization. More markets are, you know, growing. So that's a $6.5 billion market that I think is durables, growing, and rewards innovation. The erosion comes from the legacy, two, three, four generation back, as pet owners that are loyal start to, you know, transition dogs. That's where you see the erosion mostly. On derm, a market that's dynamic, but it is growing. Number one reason people take the pet to the vet, we say often, is an itching dog. About 17 million dogs in the US have this problem, atopic dermatitis.
About 11 million are treated of the 70-80 million dogs in the US. And this market is globalizing. It's probably growing faster internationally than it is in the US. It's why we've made 9 submissions, and Zenrelia will be our fastest global approval and launch of a product that we have. So that's a $1.2 billion market, that's globalizing high single-digit growth approximate. And then, look, Bovaer is something new. It is a methane, enteric methane reduction. Maybe we can talk more about the market. We see a $1-$2 billion market. Bovaer is approved already in 45 countries with DSM. We've got the rights to the US.
This will be first a dairy product, and again, this will be, you know, not, not, not necessarily led by ESG, but led by profitability to the farmer, driven by a Nestlé or a CPG company, and actually an inset market that's already been created. So that's how we see a $1-$2 billion... We see Bovaer with a $100-$200 million potential here in this first phase.
Wonderful. And then you mentioned some erosion that could possibly occur in the parasite market. Could you talk about Elanco's exposure there and how you'll manage that conversion?
Yeah, good, good question. So, you know, we've got legacy brands that have been there. We've seen some of that erosion already. On Advantage, we see a Advantage Multi, which is a, a legacy product sold inside the vet clinic. We've seen erosion from that, as well as Trifexis. We've been pretty open to say we've seen a, approximately a little over $100 million. I think we ended sales at a little over $80 million in 2023. We see that legacy business is probably the one that's gonna be vulnerable. A lot of loyalty to Credelio plus Interceptor Plus, so we see a little less. And look, a, a Credelio Quattro is gonna be targeted to people that want broad coverage, people that have- we've had two diagnostics be launched with tapeworm. We've been open to say that tapeworm is a differentiator with the product.
We're gonna target people that are in vets that are aware of that. Zoonotic disease, when there's a diagnostic awareness, drives usually an interest to have that coverage and people who want broad coverage. That's where we're gonna go with Quattro. But yeah, there will be some cannibalization in that $600 million-$700 million number that we talk about with products like Trifexis and Advantage Multi.
Then moving to derm, what's the current market penetration there, and is there a large population of new pet owners who haven't been treated, or is it mostly fighting for existing patients?
Yeah, as I've mentioned, that 17 million dogs or so in the approximate current set, again, I think new innovation always creates more awareness, more options. It's a market that not just like JAK and human, they don't all respond. So even labels show that there's not full response there, so it's a dissatisfied market. There's really only two, you know, significant products today that are out there, and and only one JAK one. So we think that, you know, of the 17 million, 11 that are, that are being treated, you've got that six million dogs, plus you've got, I think, some unsatisfied market and people that do want options. We've never seen a market this big have as few of options, and veterinarians want, want options being offered. So, we, we see opportunities.
And then I think internationally, you know, with more companies, with more innovation, it's just gonna continue to grow. Every dollar for us will be accretive. I mean, we really don't have a derm business at this point in time.
Great. And then just thinking about kind of the product profiles and what feedback have you gotten on differentiation from pet owners, vets, for your Zenrelia and Quattro?
Yeah, so we really, you know, on Quattro, we've been a little bit more open on that. Four active ingredients, first product with four active ingredients, thus Quattro, broad coverage, doing market research. Again, we say we, you know, believe that, we've got a very differentiated asset here that the, the marketplace wants. Marketplace usually wants a broader coverage product. Again, we will wait for the final label and to see what we have in terms of a product. We've not been as clear on the differentiation of Zenrelia other than to say the market dynamics I just described. It is gonna be welcoming to new innovation and new options, and, that, that's all we're seeing at this point in time until we get closer to the marketplace, so...
Moving to Experior and Bovaer, can you just talk a little bit about those, that market dynamic, how that market's gonna develop, and how producers monetize the value of these products?
Yeah. So very, very quickly, this is a new area of opportunity that we believe is quite significant. It's really where animal health converges with environmental health. Just very briefly and very simply, we have established in 2023 an inset carbon market to where you actually line up, and I'm just gonna be very specific to US dairy, to where you have consumer packaged goods companies that are dairy-driven, and then you have dairy processors in the middle, and you have a dairy farm. What you have is we have created an in-set market by an independent company called Athian, that actually aggregates carbon data. So the simple steps are a dairy farmer with an analytics package can actually show the emissions that it's creating and any intervention in how much they lower their emissions. That data goes to this independent company.
It's certified by independent environmental companies, and then the carbon comes up for sale. And then the dairy processor and the CPG company will buy those credits for maybe 1%-2% of total product cost. They get a lot of value. Most importantly, is they get a brand value on the number one need their consumers want right now, is they want more environmentally sustainable products. That money goes all the way to another income stream to the farmer.... So when Bovaer is used and reduces enteric methane 30%, that's more than anything that's been done in dairy in the last, you know, 20 years. For Nestlé and the dairy farm, and a dairy farmer picks up farmer profitability, another income stream. We see this being a $1 billion-$2 billion market.
It is, you know, to these large CPG companies, it is not a nice feel-good ESG Scope 3, it is a brand essential for their future and an investment to their brand. So that's, that's what we see, and Bovaer will be transformational. In the beginning, there will be some federal incentives. Think human health payer-type program. They've already designated $90 million, the USDA, into incentives designated around feed additives like Bovaer, specifically to Bovaer, that they'll actually be allocated those incentives upon approval of Bovaer.
Do you see any opportunity for that market outside the US?
Yeah, absolutely. So we wanted to create this inset market so that it can cross species and cross borders, so that it can actually-- and there's a lot of interest in some of the others. We wanna actually, you know, scale it and utilize it mostly for Bovaer and US dairy initially, but there's absolutely interest in Canada, Mexico, other countries as well. Something we haven't spent a lot of time talking about because we wanted to prove this market out, so our product Rumensin has actually been monetized as a proof point. Bovaer will actually initiate it in a pretty big way. A lot of interest. I was in Washington last week, national dairy producer, milk producers, others. There's a lot of interest here.
Let's just pause for a moment. Questions from the audience? We covered a lot of material. Any... Yes?
I'm relatively new to your name, but could you discuss the pros and cons of pet insurance in terms of demand for your products? There's one side that you can say, "Hey, if you have pet insurance, that's kind of guaranteed in terms of you're going to maximize utilization with insurance. That's great for your demand profile." But there's also the other side, where you can argue underwriting for pet insurance is awesome.
Yeah.
And so that ends up being. That's supposedly a subsidy, and those subsidies get more tricky.
Right, right. So questions around pet insurance and the dynamics of pet insurance. Very good question. Look, at this point in time, pet insurance has evolved. It's a lot further along than maybe it was at 10 years ago, but maybe not as far along as people had expected. For us, with products, it's probably less pertinent as it is for maybe big surgeries or the bigger costs. So when you start saying the $1,000-$2,000 cost, if a dog or a dog breed that has cancer, maybe that's a bet you wanna make. When you look at somebody that's buying a product that we serve on a monthly basis, it really is, you know, to a, to a, to a chronic problem, it's probably less so. It doesn't economically, it doesn't make sense, and we haven't seen...
You know, dependency on insurance for Elanco is less. It's not in our models at this point in time. We're a value-based market that we need to price accordingly and create value with our differentiation on our products. There won't be a dependency on insurance.
Okay. Other questions from the audience?
In that case, maybe we can move to financials. You have a great setup on the top line. Could you maybe talk about how these new launches and this launch window will affect your bottom line, operating leverage, and just more, mid to long term, how you're thinking about operating margins?
Yeah, we have. You know, I think as you look at what we've been doing with this growth, innovation, cash is also a concentrated focus as a company. We are looking at bigger assets that are coming in bigger markets with higher margins, with greater growth profiles for us. I was even into the decision for the aqua business or some of our restructuring we announced last week. We had to really think about, you know, pigs we're moving to B2B, certain countries we're moving out of to really concentrate our focus. That's gonna drive more margin over the next few years than anything we can do across the base. I mean, we're constantly looking at our cost base, but each one of these products have stronger profiles.
I will point to Zenrelia and Credelio Quattro. They are already in Elanco's existing plants, already approved by the FDA, and our manufacturing process and the active ingredients will be, you know, accretive to our current gross margins. So and then when you think about these launches, we've already put the fixed base in, in terms of we've got the sales force we need. That's in the guide that we had. And really, we've done a lot of the stuff, the basic digital setup, the pricing, and really the manpower. So, you know, really what happens is we're gonna get out there and create a lot of share of voice to create clinic penetration. Then we'll turn on the DTC. That will be the additive cost that will come.
So as highlighted in our guide last week, these sales, this will be additive on sales, and it will be additive on EBITDA. The real ramp will start to happen in the second half and then really into 2025 as well. So that's the case. Bovaer a little differently. Bovaer, there'll be a little bit more stand-up cost with the carbon chain. Bovaer is also with a contract manufacturing, so not as accretive on Bovaer. Probably bigger, longer runway with that livestock sustainability, but initially, Bovaer sales will not be as accretive to the company as our current gross margins.
On the balance sheet, you've set a high 3x-low 4x net leverage target by 2025.
Yeah.
Can you talk about kind of the path to get there?
Yeah, as I just mentioned, I think that, first of all, is all around, you know, we've taken a lot of measures relative to, you know, net working capital. A big one, that there's some short-term pain, is slowing down our plants to decrease internal inventories. With a lot of the shifts in the business, we started to see the benefit of that in Q4. That will be, that will be one of the key factors. The second is just the whole ERP setup. We will, the synergies from that will create, when you compare 2024 to 2023, we'll pick up another $100 million or so of just savings from the lack of stand-up, and the, the synergies and the efficiencies of the ERP system.
So you combine those with the EBITDA and the sales that we have, that's where we're looking at taking cash flows of $300 million this year. That's organically on the business. That's a 4x step-up. That will be going right to debt paydown, and then with the Aqua deal that we're expected to close with Merck mid-year, that'll be a little over $1 billion. You put those two together, mid-4s, mid-5 ratio, 5.5, 5.6, will go to 4.5, and then as you go into 2025, with the continued margin expansion expectations and cash increasing, we'll be in the low 4s, high 3s at the end of 2025.
And we'll have a lot more of a concentrated focus on bigger assets and bigger markets with faster, you know, earnings profile and aligned with our pipeline that's coming.
We're almost out of time, but maybe you could just touch again on the pipeline. Kinda what area do you see as the most exciting, differentiated aspect of Elanco's pipeline?
Yeah. Well, look, I think, you know, I'll start with livestock sustainability, and then I leave here tonight, I go to London. There's gonna be a lot. I'm going to an innovation summit. There's a lot of innovators that are innovating in the space of enteric methane and the opportunity here. But as you come back over on the pet side, you know, derm is exciting 'cause it's a, it's a big market that wants alternatives, and it's gonna be exciting for us to bring differentiated assets. We have an IL-31 short-acting product, a monoclonal antibody coming in. I think, you know, pain is a market where we have a, a, a large portfolio. We've got a pipeline following it. There's, there's innovation going on right now in pain.
Pain's the third fastest, so para, derm, and pain, and we, you know, you've got to win in those, and we've got differentiated assets in a pipeline coming in all these markets, and they're large markets. And then, look, we're leaning in on diabetes. We think diabetes is also an opportunity on the pet side and some new spaces as well that we're working on.
Great. We are actually out of time. Is there one question from the audience, that you'd like to ask before we conclude? Thank you so much, Jeff.
All right.
This has been a wonderful-
Thank you.
- Overview.
Thank you.
Thanks so much.
Thank you.