Good afternoon, everyone. Thank you for joining us for the next session with Elanco. My name is Balaji Prasad. I'm the senior analyst for the Spec Pharma space for Barclays. Joining us from Elanco side, we have Todd Young, the Chief Financial Officer of Elanco. Todd, thank you for joining us today, and I hope you had a productive conference till now.
We have. No, I appreciate it, Balaji, and appreciate the coverage that Barclays provides, so thank you for inviting us.
Yeah. I know it's an exciting phase for Elanco with multiple upcoming launches of some pretty strong products out there. But I would leave it up to you to maybe provide a brief overview of the recent earnings and what you're seeing, and the outlook as you see it, and we can dive deep into this.
Sure. Now, okay, the opportunity to talk about Elanco and where we are as we move forward here into 2024. We finished 2023 with earnings about two weeks ago now and provided guidance for 2024 that has us, you know, growing 1%-3% in constant currency and delivering, you know, EBITDA between $960 million and $1.01 billion. So, you know, overall, that does not include our three big products that are currently being reviewed by the FDA. Bovaer, which is a methane reduction product in dairy cows. Credelio Quattro, which is our broad-spectrum parasiticide for the U.S. market. And Zenrelia, which is a JAK inhibitor for atopic dermatitis.
Those will be accretive to sales and to EBITDA upon launch, but we kept them out of the guidance just to provide the baseline. The other element is we announced earlier this year that we're selling our Aqua business to Merck Animal Health for approximately $1.3 billion. We expect that to close mid-year. Our Aqua business is still in our numbers and our guidance up until close, and we'll update at that point. But that transaction is gonna allow us to focus our R&D efforts in, you know, pet health, parasiticides, pain, and dermatology, and farm animal side will be on animal sustainability and livestock production.
It will provide, you know, significant cash for debt paydown and allow us to get, by the end of 25, into the high three, low fours on our net leverage versus-
Mm-hmm.
- the approximately 5.5 x leverage we were at the end of 2023. So, very excited currently. Inside the company, people are excited for what we're bringing from an innovation perspective. Our international team, our U.S. farm animal team, had, you know, nice, good growth last year and accelerated, and our pet health franchises accelerated their growth in 2023 versus in 2022. So, you know, overall, a lot of exciting things going on at Elanco and a culture that's, you know, handled a lot of change over the last few years. And again, we just announced-
Mm-hmm.
- a restructuring two weeks ago as well. Not items we ever like to do, but again, allows us to allocate capital to where we think we'll get the biggest returns. I would say, you know, the team inside Elanco understands that and appreciates the investments we're making to drive growth.
Thank you for that overview, Todd. And maybe getting a couple of things. Both the guidance, I think, on the sale of the Aqua business, the message was well received by investors. We saw the market reaction to it. Let me get the Aqua business out of the way, I think. So considering that the Aqua protein segment is one of the fastest growth segments and maybe the one of the proteins of the future, as we think about it, what is the rationale in divesting this business and what is the way retaining it?
Yeah, at the end of the day, you know, we got over 7x multiple on sales for the business-
Mm-hmm.
and to do that, you have to have a good business. And we agree, the Aqua business is a good business. At the end of the day, I think we question it being the protein of the future from just the standpoint of overall market size today.
Mm-hmm.
- and general, you know, people's desire to eat the proteins we've been eating for a long time.
Mm-hmm.
and so it really became an issue of notional size and opportunity. The salmon market, the shrimp market, about $400 million-$450-
Yeah
million globally today. We had, you know, a little less than $200 million in revenue in that space last year. You know, the pet health market, you know, tens of billions.
Yeah.
You know, farm animal, $14 billion outside of Aqua. We just think there's better opportunities for our relative investment dollars relative to that notional size impact. So again, good business, we agree, but we just thought our capital returns could be bigger in other areas of the portfolio.
Got it. Getting back to the guidance, again, the 1%-3% constant currency growth, again, well received. A billion dollars EBITDA on the higher end of the side, again, that was well received. So as I think about this, can you maybe elaborate the pushes and pulls towards this guidance and what could face upside or downside risks to this?
Sure. You know, overall, when we think about, you know, we've been, I guess, good over the last couple of years of really controlling the expense base. You know, that is an element we continue to focus on. Now, the inflationary environment is one that we face as well with cost of labor and talent, as well as, continued inputs. But overall, you know, we feel good about that. We did have restructuring savings. I would say from a, kind of, P&L by quarter element, we think our best opportunities for growth is in our over-the-counter parasiticides-
Mm-hmm.
where we've got, you know, leading franchises like Seresto, the Advantage family, and now AdTab, which is our oral parasiticides that's been approved for OTC purchases in the European Union.... Those are Northern Hemisphere flea and tick seasons. We're making investments today in those markets. The savings from the restructuring will be more back-half loaded, because a lot of those are sales reps in certain Western European markets, where it just takes longer to capture the severance benefits. So there's a little bit of a disconnect between the investments we'll make in pet health and the $30 million-$35 million we'll get in savings from the restructuring this year. Then that, it'll play out over the course of the year. The other element that we've highlighted is we are slowing down our manufacturing facilities because we've got excess inventory on our balance sheet.
That will headwind of about 150-170 basis points on a full year basis, most of which will be hitting in the first half of the year. It gets to be pretty close to flat in Q3 and, and a tailwind in Q4, given we started this process in, you know, Q3 of last year. So again, that doesn't change the fact that the highest margin products are the OTC retail stuff that'll be in the first half, the, the headwind loss will be there. So again, just items we've called out.
We've as we look at growth, you know, the pet health business is the higher margin business, and so as we think about things that drive us to the high end of the range or the lower end of the range, a lot of it does get into, you know, that pet health growth and, and where it falls out. It is a competitive space. While we're excited by AdTab, you know, BI has an oral parasiticide in that same market they're excited by. So, you know, we'll continue to focus our efforts on, on driving continued penetration. Bobby Modi, who runs our U.S. pet health business, Ramiro Cabral, who runs all of international, you know, continue to execute.
And, we're seeing the value of continuity of commercial leadership with Bobby now in his role for two years, Ramiro back running all of international for a couple years, and José Simas in our U.S. farm business. Adding to that, is we're seeing the benefits of our innovation.
Mm-hmm.
You know, the Canine Parvovirus Monoclonal Antibody we launched last year. It's a great product. It is going to be highly efficacious in the clinics. We're getting good reorder rates from vets that have purchased it and used it, and that, you know, opens the doors to the vet clinic, as they're interested in this life-saving treatment for puppies, for our broader portfolio. We see that same portfolio effect on the farm animal side as well. Experior, it's our, on the label, it's for ammonia reduction, from feedlot cattle. The practical benefit is it adds, you know, significant weight at markets at the end.
Right.
As there's a low end on the herd size across the U.S., having more meat on every animal becomes an economically beneficial element, and we've seen Experior ramp as it's part of that feeding regime. As that happens, the complete portfolio makes it more efficient for many of those feedlot operators to buy Rumensin. That's been under a generic challenge for the last year. So in Q4, you saw a really nice growth from our U.S. farm business, both as vaccine supply came back, but as Experior ramped and brought Rumensin with it. That portfolio effect is what we're also excited about when we think about Bovaer, Zenrelia, and Credelio Quattro as well.
Great. Thank you, Todd. Interesting point about Rumensin. Are you saying that you're seeing a rebounding growth to Rumensin, and especially now with Bovaer expected in a couple of months from now, that there's a synergistic portfolio effect?
There absolutely is.
Yeah.
We saw it with Experior in the feedlot, as customers come back because the total pricing they get from the portfolio can make it more cost-effective than using the generic.
Mm-hmm.
Similarly, with a lot of generic Rumensin and monensin has been in the dairy side, and with Bovaer coming on board, we expect a similar effect as the farmer will be better positioned to buy both products from us versus just one.
Got it. Thank you for that. So shifting maybe gears towards the innovation side of things, again, exciting period for you. Let's start with the combination parasiticide side. As we think about Credelio Quattro coming through in a few months from now, your confidence on approval being on time, and how do you expect the positioning in the market relative to, of course, the market leader, Trio, Simparica Trio and NexGard Plus, and any expectations around the label that you think will help this differentiation?
Yeah, the differentiation, and we, we've called it out with respect to Quattro, you know, we expect to have month one heartworm coverage-
Mm-hmm.
which will be in line with Simparica Trio, but, superior to, at least differentiated from, BI. I'm probably not supposed to say superior. And then, with respect to all the products, we will have tapeworm coverage, which the other products don't have. So we do expect to have the broadest coverage in the marketplace, which we view as a positive item, because it seems like pet owners should want to prevent as much, parasiticides from their dogs as they can, and Credelio Quattro, will do that. So we're excited to bring it. I think everyone knows, we've had competitive share loss inside the vet clinic the last few years by not having, the broad spectrum in the U.S.
Right.
This will help, you know, again, stop that bleeding as we then, you know, grow and take advantage of our complete portfolio to, you know, really compete better there than we have the last few years.
All right. And expectations around the approvals?
Yeah, all three products, we continue to have a path to first-half approval. We've said, you know, contribution on revenue growth would be second half.
Mm-hmm.
No change on that, communication.
Got it. Okay. To the extent that you can, can you maybe discuss the commercial plans around Quattro pricing, commercial launch strategy?
Yeah, again, I think we're looking at it in terms of a complete portfolio. We know today the number one reason you take your dog to the vet is dermatology reasons.
Mm-hmm.
And with that, you know, get volume discounts. The more product they buy from us, the better pricing we're willing to provide them. Our competitors do the same thing. And so today, the biggest check they're going to write is to Zoetis for the derm products. We're excited that with Zenrelia and Credelio Quattro, we're gonna have parasiticides, we're gonna have dermatology, we're gonna have vaccines, and we're gonna have the clinical therapeutics like Galliprant, Canine Parvovirus, Zorvium, Bexacat. That'll put us on a, you know, even playing field with Zoetis and ahead of BI and Merck.
You know, we don't talk a lot about BI and Merck, given they're both, you know, inside, you know, bigger pharma companies, but, you know, they're tough competitors as well, and so we look forward to having a portfolio advantage relative to them as we go into the vet clinic. So our pricing will be in totality. It won't be specific to an individual product, but as a general matter, we don't view price as a lever to gain share. We view our differentiation, our sales, our ability to be what will drive our, you know, growth going forward.
Fantastic. Maybe just on the parasiticides side itself, Seresto, I think, it operated under a cloud for the last couple of years. That's been resolved fully.
Good.
Congratulations. How's the renewed interest been on this product?
Yeah, we're excited as we go into the parasiticide season, as screwy a statement as that is. But when it's your business, you know, fleas and ticks are good. To have Seresto without that overhang-
Yeah.
and be a little more aggressive on our marketing campaigns, we went with a little more edgy campaign at the end of last summer, but as we go into the season, we're excited for that. Our retail partners are really good partners. If you go into Walmart, you'll see some really great end caps featuring Seresto, that we view as a real positive, given the number of consumers that Walmart touches every day. So Seresto is a spot, you know, we're excited about going into 2024. Certainly in international, we'll have a bounce back in the Spain market-
Mm-hmm.
that was a headwind last year that, you know, we feel good about as we go into 2024. So, and the other part on Seresto, you know, we had MAP pricing suspended last year as we did our ERP cutover.
Yeah.
There was a lot of, you know, pricing where Seresto was in the market at $54-$55. As we looked at our overall pricing strategy for Seresto for 2024, we concluded that having a standard lower price was a better strategy than how we had typically done with lots of different promotional. And so you see the kind of MSRP for Seresto is now, like, $59.98.
Okay.
So you've got this. But it is higher than a lot of the pricing was in Q1 of last year. But overall, we think that will be a better overarching pricing strategy for us as we move forward.
Okay. Moving from parasiticides to derm, again, yeah, exciting time for you with approval on your first biologic for atopic derm. I think what we have seen in terms of competitive maneuver, at least from Zoetis, is to have a chewable Apoquel. So, help me understand, how relevant is this chewable formulation from a competitive perspective? And, how much of a barrier does it set up? And is that something that Elanco would want to develop or have in the future?
You know, we all know that in animal health, unlike human health, delivery into the animal is an important element.
Mm-hmm.
The easiest way to get medicine into a cow is through feed, and we lead and feed, and that's a very big pop. I think, you know, so we're certainly aware of, you know, palatability in dogs and cats and how you get the medicine in them is a critical component. We feel good about the product we're going to bring, and so, you know, I'll just leave it at that from a competitive standpoint.
Okay. Maybe a quick question on the pain side. Again, you have a market ed product, Galliprant, and we've seen launch Librela in the U.S. last year, Europe the year before. So how is this whole competitive dynamics with Galliprant playing out since the entry of Librela, and how should we think about Librela's growth in 2024?
Well, from Librela growth in 2024, I'll let you ask someone else.
I mean, fine.
From the standpoint of our... We, we've obviously factored it into our guidance.
Mm-hmm.
We're well aware of it. We've been competing in Europe with Galliprant. Galliprant's a great product. In the U.S., it has a bigger installed base and a better label than it does in Europe.
Okay.
Fundamentally, Galliprant treats inflammation, which is, you know, the big underlying cause of the osteoarthritis. And we think that's what you should treat with dogs that are suffering from that, versus just masking the pain and hoping that, you know, they don't hurt themselves if something happens otherwise. So for us, you know, we're very focused on continuing with our totality of our pain portfolio. The Galliprant is the one we talk a lot about, but we've also got Zorvium for post-operative pain. We've got Nocita inside the operating room. So we've got a lot of pain portfolio in addition to Galliprant, and we've got in our next wave of innovation that Ellen de Brabander is leading, we have more opportunities in pain.
We do think as dogs continue to live longer, age, have better care and treatment, that there'll be more opportunities in the pain space, and it'll be a market area that we can all be successful in from a facts perspective.
Great. Is there some incremental color that you can provide on what you're working on?
Nope.
I tried!
Sure.
Maybe before going on to the lifestyle side of things, considering that you're almost through the end of the first quarter, would love to get some update for you on how one quarter has planned and, are you on track with guidance provided, and how is the,
Yeah, I'm not going to comment on the guidance we gave two weeks ago. Again, I guess the benefit of providing guidance so deep into February is we have pretty compliant supply. Yes, we will.
Fair enough. Shifting to livestock again, as we discussed, Bovaer, exciting launch coming around. So help us understand the broader time for this opportunity and, especially as you have reiterated multiple times on this portfolio approach to both companion animal and livestock, it's clear Bovaer and Rumensin, help us understand the broader opportunity.
We've said that Bovaer, we believe, could be a $200 million product on the top line in the U.S. We're getting it a couple of years earlier than we expected it when we in-licensed it from DSM.
Mm-hmm.
As I know, we only have U.S. rights. You know, the broader livestock sustainability opportunity is very big, but in the U.S., there's about 9 million dairy cows. And so, you know, that's sort of the addressable market of, you know, cows that can be taking Bovaer and get a 30% reduction on the methane being produced. And it's really effective from a, you know, greenhouse gas, because methane is a 10-year short-lived gas versus carbon's much longer, and the fact that it's never produced versus trying to sequester it after the fact, do carbon capture and that sort of thing. Now, the complexity of Bovaer, you know, I'd refer everyone to our Q3 earnings materials from November. You can see the money flow in the chart we provided.
What we have done with other partners is, in order to be effective, we think the farmer needs to make money.
Yep.
Reducing methane doesn't give them an economic benefit. It doesn't make the milk taste better. It doesn't make more fat in the milk, so there's no incremental value to the dairy farmer. What we're doing is setting up a value stream where they can get paid from reducing their impact on the environment by less methane. That means we need the CPG companies and think right now, big focus is on the European ones, the Nestlé, Danone, Mars, Unilever, who have made lots of commitments on reducing their impact. To reduce their Scope 3 impact, they have to impact at the farm level, because that's where the methane's being produced as part of the milk that drives, you know, milk, chocolate bars, yogurt-
Sure.
- ice cream. Methane reduction by Bovaer is really effective. And so what we've done is, we've seeded a company in the middle called Athian. It certifies and makes sure that all of the protocols are followed. There's a calculator we've created called UpLook, that tracks the data and the usage of Bovaer on the farm, and that then is what creates the carbon credit. The credit gets sold to Nestlé, and then Nestlé, that cash gets into the farmer's hands, they can buy Bovaer from us. So there's a lot of pieces to this value chain, but we've shown it through protocols using Rumensin, that also will reduce carbon. So we've shown that it works, but once approval, I think there'll be more things from just a ramp perspective as this gets in, because of the complexity of the supply chain.
But it's gonna be really impactful because, creating a new value stream for dairy farmers is huge, because it's a pretty, capital-intensive, low-margin business. So for them to make more money without a lot of incremental work, has real value to them on the profitability of the farm.
Thank you, Todd. Maybe a quick update on where the carbon credit market is today, in terms of its maturity and how do you see this evolving over the next couple of years?
Yeah, I would say it's very immature. And really looking at, we're trying to do inset markets, so the whole value chain from farm to end consumer in the agricultural product, you know, think yogurt, can be one offset and claimed by the different participants. Is it possible the carbon credit can be sold to an airline as an offset? Yes, I mean, it'll be that. We think there's greater value. Nestlé, we had our board meeting, two weeks ago at this point, I think, and we had a dairy farmer in California. We had the California Dairy Association, that's the milk shed that organizes a lot of dairies.
We had the Athian CEO, and we had the Nestlé sustainability lead, and he was saying that the only way for them to get to their commitment is really impacting on the farm, and Bovaer is by far the best product for doing that. It's been approved in, you know, 40-odd countries around the world. Nestlé's buying it from producers in Brazil, and a few other countries already. So, you know, we're excited for the FDA to let it be used here in the U.S.
Got it. Maybe one quick question on the swine side of things. And, this used to be a reasonable-sized market for product for you, or area for you before 2019, and swine fever. So thoughts around recovery in this, in this market, and maybe also by extension, thoughts around recovery in the broader Chinese market.
Yeah.
- which has been a tough spot for it?
Yeah, I mean, we grew somewhat in China last year, but it was much smaller than what our expectations would have been back in, you know, 2021-
Yeah.
Going into 2022. The economics of, of the swine market continue to be, challenging for producers there. You know, I think from a market standpoint, you know, there's a desire to have pork prices lower for consumers in China, and that's what's happening. So for us, we actually had, poultry become our biggest species in China last year. Which again, we would not have guessed a few years ago that, poultry would have grown at that level of pace. But our installed base, our portfolio is, is, is very effective, keep the chicken flocks healthy and, growing. And so, you know, overall, we do think swine, of the, of the three big animal protein markets, is the most challenged. A lot of Western Europe swine is getting meat to Eastern Europe.
That's part of the reason we had to do the restructuring, is we needed to change where our headcount was, because the market dynamics have changed, and that led to us needing to restructure reps in certain locations to have more in others, as the market moves. But, in the U.S., swine's been doing well. We have a prevalent vaccine for PRRS that's been a market innovator in the last couple of years.
Okay, great. With that, we're out of time, and, Todd, thank you so much for your time and sharing your thoughts. As a reminder for investors, we also have, Todd, that there's a dinner meeting at 6:00 P.M. for those who are signed up. Looking forward to that meeting, too. That's all. Hope you had a productive call, and thanks for joining us again.
Thank you.