Hey, everyone. Thank you all for joining us. Super excited to have Elanco Management with us. I know there's a lot going on, Todd. I'll let you kick things off, and there's some very specific topics we want to dial in on.
Sure. No, thank you for hosting the conference, Umar and Mike, and appreciate your coverage. You know, we're very excited at Elanco. We're launching products. It's been the innovation journey has come, and we've got products coming out with approvals from the FDA. And so, you know, we've did 1% sales growth a year ago. We've guided to 3% constant currency sales growth for 2024, and we're accelerating that to mid-single-digit sales growth on an organic constant currency basis in 2025, led by the innovation. And that's very exciting for us. It's on both the farm animal side and the pet health side with Bovaer, our methane-reducing product for dairy cows, and then Zenrelia, which is our JAK inhibitor for dermatitis, as well as Credelio Quattro, the all-in-one broad-spectrum parasiticide. So we couldn't be more excited.
We're pleased with how the launches are set up and the progress we're making and look very much to delivering, you know, increasing profitability in 2025 and accelerating even more in the years to come.
Outstanding. So there's a lot of things to drill down. Obviously, next year's a growth year for you guys, adjusting for aqua business. I think you guys expect mid-single-digit growth.
Yep.
So I want to touch up on all of that. But just ahead of that, I know there was this Zenrelia update, the label update that Zenrelia labeled the way you got it, and there was some feedback you guys were going to get from FDA after some additional. Can you remind us, has the meeting happened, and what feedback have you got?
The meeting's happened. It was a very productive and constructive meeting. We've got some good feedback as well, but at the same time, expectations that, to change the label, we'll need to run another clinical trial so that makes for a multi-year process with the FDA, but pleased with the overall tone and tenor of that meeting. A Hail Mary of, not a Hail Mary, but a one-off chance that they would have just accepted our booster data that makes it very clear that there are no issues with vaccinated dogs more than a year of age that have had their booster vaccines, which is very much what the label is for, which is for dogs more than a year of age, that we did at the ISCAD conference that showed no interference.
We would have loved for them just to accept that and change the label based off that data. We weren't expecting that, and we hadn't communicated that expectation. Again, very much in line with what we thought would happen, which is improvement over time, but not in the near term.
I guess, Todd, the way I think about it is, if you start the trial now, or let's say over the course of next month, you could have that trial wrapped up in six months and have something ready for resubmission by next summer. I know you mentioned it could take a couple of years or a multi-year process. Why is that?
If it can go that fast, Umar, we'll be more than happy to accept it. I mean, again, based off the timings and working with the FDA on our trials to get a new trial and have it all go through and get a full change, we just think two years is a better marker to put out there than to suggest it could be done much faster than that. We will go as quickly and efficiently through this process as we can, and if we get upside from it, that'd be wonderful.
Got it. So when you say two-year process, you're saying next year spent on the trial, 2026 spent on FDA review. Is that the way you're thinking about it?
Again, that's generally speaking the right way to think about it. Again, we're confident in the product. We're confident that based off the data and the trial we've done, that there's no issues with the vaccine interference. But nonetheless, we have the label we have in the U.S. Now, outside the U.S., this isn't an issue. We didn't have this in Japan, which has obviously got a very stringent and good regulatory body. We've been approved there without the label. Similarly, in Brazil, Canada, and the like. So again, we're very confident in the product. It's approved. It's on the market, and we'll look to improve it over time.
Todd, I know it's early in the launch, but among the U.S.-based vets that are using the product, I mean, say out of 10 vets, how many actually care about the label versus how many say, "Listen, I don't dose at 3x the dose. I don't care about this. It's not an issue for me.
Yeah, I think it's very clear that the vets understand the data and the science and look at the studies as well as the booster data and say, "Okay, we don't think this is likely a clinical issue." They still then need to decide, do they want to have that conversation with their pet owners? And there's the label implications of that. So generally speaking, we don't think there's a scientific worry once they've been educated. And as we've said, our first part of this is educating the vets, spending the time, getting there. We know there's about 300 board-certified dermatologists in the U.S. They get referrals on the really hard cases. They're very excited about Zenrelia because, as we've shown in our European head-to-head study, it just works so well. It gets more dogs to clinical remission than the alternative.
And they see that as they have a lot of non-responders that their practices see. They use Zenrelia, and they're getting those results. So they're the ones that we get out there, and they have a lot of influence over the general practitioner vets and having those conversations. So as that happens, I think they get very comfortable with the science and the data. They still have to decide from a consumer perspective and their customers, do they want to say, "Hey, trust us. We've looked at other data. You don't have to worry about it." So again, as we all know, big continuum of how vets operate and react.
Some are quick adopters, and we know there's clinics that have already thrown the competitor out of the clinic and are only using Zenrelia because they view it as more efficacious and a better value for their customers, and they're concerned about that. Others don't want to have the label implications and have those conversations, so again, we're tracking with all of our internal metrics on average and feel good about the progress of the launch here two months into the launch.
Todd, I think there was a little bit of confusion from the dinner last night. I think one of the points you made was you said you're definitely seeing orders. Reorders are very good, but the size of the orders, I think you implied, were a little smaller. Maybe if you could clarify that, because I think there's some confusion in the marketplace on that comment.
Again, the only point being, right, reorders are better, and the size of the initial order is a little smaller. Those things may be hand in hand to where you end up in the same place, but it's a timing element there on things. But overall, clinic penetration is going very well. We're pleased with how the uptake, the responsiveness. So no, if there's confusion on that, Umar, there shouldn't be. It's probably providing more details than what the investors should be because the reality is it doesn't, again, if it's a $900 order on day one and the reorder is 1,000 and it happened at two weeks versus a $1,200 order and then the reorder happened at four weeks, right? This is noise in the nature of the launch.
Maybe ask different because I think everyone really zoomed in on when you said size of reorders is a little lesser than anticipated. Let's ask them.
No, no. The reorder is faster. Size of order is a little smaller than what our expectation was. But again, averaging out to being a non-event.
Averaging out to being a non-event. So is it reasonable to say the launch is tracking in line with expectations?
Yes, very much so. Maybe a little ahead. Yeah. I mean, again, we're pleased with how the education's going. We're pleased with the response. I mean, we know the efficacy is really good, and that's what we believe carries the day, and the value for the customer is also really strong, and again, that's always a positive in the marketplace as well.
Got it. And maybe I think it'll be helpful for folks to, let's just remind ourselves of the expectations. I think you guys have put out some numbers on launch expectations for next year. And again, it's not specifically on Zenrelia, but I know if your launch bucket is, let's call it $450 million this year, midpoint for next year is $650 million. So there's about a $200 million in sales add. I think, could you remind us of the $200 million, how much is non-Zenrelia Quattro so that we could kind of put some parameters?
Yeah. So again, right, our guidance for this year is $420-$450. We did $275 last year. We've seen really nice growth from Experior, which is our cattle product in the U.S. and Canada. It's going to be a blockbuster this year and has had a really strong year. AdTab is the oral parasiticide in the over-the-counter market in Europe. It's growing well. Parvo doing well, our monoclonal antibody for the parvovirus therapy. We're going to add to that Zenrelia, Quattro, Bovaer, and all of this product of six potential blockbusters are all launching such that we're not needing just one product to hit to be successful. We've got this portfolio of blockbuster products we're bringing to market. All of these together are going to drive that continued growth up to the $600-$700 you'd mentioned.
So for us, we don't know which one's going to be specifically right or wrong in the dollars, but we're very confident in the growth of this complete portfolio. Animal health is very much a portfolio business. We've seen that. Rumensin's had the best year in 2024 that it's had in the last five years. It's almost back to 90% of where it was when the generic entry happened five years ago because the farmers are using Experior and then they're bringing back and using Rumensin with it. So again, that portfolio effect is a big part of, again, us going from 1% sales growth last year, 3% this year, accelerating to mid-single digit in 2025.
Got it. So maybe, and there's two things there, but just to specify, for the about $200 million year-over-year in sales growth on the launch products, considering there's six of them, is it reasonable to assume that at least half of that $200 million could come from non- Zenrelia Quattro, perhaps even more than half?
Certainly. Again, we're not quantifying the specifics of any individual ones, but we feel really good. The reminder on Experior: in November, it got approved to be used with heifers. Heifers make up about 40% of feedlot animals, and so that's been a market that we've not had access to until here in just the last few weeks, and so very excited that the Experior growth can continue. Similarly, AdTab, this is its first full year of launch in Europe. We'll have more countries being approved in 2025, and that's really grown nicely, and we've not seen much cannibalization. One of our big questions was, would it cannibalize Credelio in the vet clinic, or would it cannibalize the Advantage and Advantix products and Seresto at retail? And we've not seen that.
It's really gone through a pharmacy channel where it's been new growth for us, which has been a really nice win across the European pet business.
Got it. So again, I'm kind of going back to that $200 million constant currency just to keep it all in a framework. A couple hundred million in additional new product revs. Zenrelia is some subset of that.
Absolutely.
Somewhere between $20-40 million, whatever that range would be, and I think based on some of the FDA label discussions, it sounds like the scenario where Zenrelia just puts up a $70 or $80 million year next year, that's probably not on the table. But conversely, a scenario where it grossly underperforms the base case, that's also off the table. So it's tracking at least in line with expectations, probably ahead of that. Is that a reasonable way to summarize that situation?
I'm not going to commit to any of the numbers as I said, but we feel very good about how Zenrelia is performing, the clinic penetration we're getting, the usage of it, and expect it will be a significant contributor to our growth next year, along with Credelio Quattro, along with Bovaer, along with Experior, AdTab, Parvo, and those products.
Are we finding physicians sort of pause Zenrelia ahead of vaccination? Is that dynamic playing out?
You know, it's so new. I don't have great data on that yet, Umar. Yeah.
Excellent. Mike?
No, I think we could transition to some questions on Quattro.
Okay, let's do it.
Todd, just looking at the history of regular Credelio, it launched as like the fourth isoxazolidine in the market in 2018, but it still achieved blockbuster status despite being fourth to market.
Sure.
But you were in an environment where I guess you were taking some share away from injectables. So was that like kind of a unique environment as compared to now? I know now the whole pie is increasing. So now that Quattro will be third to market, I mean, can we kind of expect like a mega blockbuster in that sense? Or if there is such a term in animal health?
Yeah, fair. I mean, again, we've said it'll be a blockbuster. As you know, we have Credelio Plus outside the U.S. So this will be primarily a U.S. product. We'll get it approved in international markets, and it'll be additive. But primarily in the U.S., and we do expect it'll be a blockbuster in the U.S. Whether or not it becomes 200, 300, it is the biggest market in animal health. And so it needs to be a big product for us given the importance of it. And it's going to be the broadest coverage a pet owner can get. They're going to have more worms covered with this product. And with lotilaner, as you've seen in the clinical data we published this fall, it's got significantly faster killing of ticks than the other competitive products on the market.
That has real value as well, is that the faster you kill the ticks, the better off you are to avoid other issues coming up, either with zoonotic transmission or to your pet. We feel very good that this product will provide the consumer the broadest coverage they can get, which we believe will resonate well with them.
Got it. Got it. In terms of tapeworm coverage, that's one of the attributes of Credelio Quattro. I mean, your competitors are kind of dismissing this as if it's really a huge value add. According to some competitors, all you have to do is kill the flea vector, and then you eradicate tapeworm. Kind of want to get your thoughts on that and whether Quattro would kind of be more, I guess, less attractive in less endemic regions of the country because of.
I mean, again, right? If you don't have something, obviously you don't think it's important. Dog park study done by us a few years ago showed that there was about 5% prevalence of tapeworm in that study. So is 5% proof that all the ticks are getting killed, or is that proof that, no, there's an issue here that consumers should be worried about? If you've got a tapeworm crawling around in your bed, you're probably more concerned about it.
He does.
Yeah. So again, we think the tapeworm has value in the sense that you're just protecting your pet against everything. And why would you not want to do that? Just you're going to trust that all your fleas were killed? Again, we know compliance has improved, and the online delivery has improved compliance. That's part of the market expansion we've seen. But compliance isn't perfect. And so there you get into, if you do get some fleas and then you end up with the tapeworm, having a product that kills it would seem to be beneficial.
Got it. And will it be priced? Questions on pricing all the time. Will Quattro be priced kind of at the same that Zenrelia is as maybe a 20% discount to competition?
No, we would not. I mean, it's going to be the best product on the market with a clean label. We don't view that as the right way to price new innovation in the space.
Okay. And just to kind of level set too, I think you have mentioned on prior calls that the gross margin for this product, even though it's a combination of four different ingredients, it'll still be above the corporate average because it's just essentially small molecules, right?
Yeah, exactly. And in the U.S. pet market, which again, is generally speaking, the highest gross margin space in our industry.
Okay. So you have Quattro, Zenrelia with above average gross margin profiles. Kind of just thinking about this and thinking about the spin that's happening right now that will continue arguably until at least the midpoint of next year. As we think about EBITDA cadence going over the next four quarters, it's fair to assume that it'll probably really start to grow or I guess really start to grow in the back half of the year, right?
Yeah, I would say from a cadence perspective, it would be more back half than front half as you often have to make the investments before the sales ramp comes with it. As we've called out in our November earnings call, we are expecting the low single-digit EBITDA growth for next year, inclusive of a headwind on gross margin from the U.K. manufacturing facility we bought out of bankruptcy. That's about a $25-$35 million headwind that keeps us from growing EBITDA a little faster than sales in 2025.
Got it. Too, last question on Quattro unless you have any other questions, Umar. I mean, I guess there's a different marketing strategy such that since the parasiticides are kind of a more, I guess, mature marketplace. I think you said in a prior call that there'll be less DTC spending. Is that true?
No, like more DTC spending, so we term the parasiticides sort of an uninvolved category. It's not a place where a vet has to spend much time because we have really good products, and so it becomes one where you're really trying to get that consumer to believe in the broadest coverage having real value as it's not something that's an itchy dog is the main reason pet owners go into the vet clinic, and it's really impactful on the pet owner, the lifestyle for the dog. They're itching, they're scratching, you feel bad for them. That itching creates other infections, and so that's a very involved category, which is where the vet education is such a big part of it, unlike parasiticides, which generally speaking are an uninvolved category.
Got it. Maybe in the last minute or so, Todd, I think it'll be helpful for folks to, I think from the broader stock setup perspective, one dynamic was value story transitioning to potentially growth. I think you've spoken to mid-single digit growth. But there was another dynamic that's also holding back a lot of investors, which is the leverage. So could you remind us where we are on balance sheet and what do you realistically see happening over the next 12 months?
Yeah, so we're in Q3 at 4.3 times net leverage. We expect to be generally in that range here at the end of the year, low fours. We've communicated for next year, we'd expect to be in the high threes to low fours. With that then improving as we grow EBITDA in the years ahead into where we'd expect this business will get down to a two handle on net leverage because of just the cash flow generation as well as the continued growth in EBITDA that's going to come from the accelerating sales and innovations going to bring. We've kept OpEx. I think OpEx in 2025 will likely be less than it was in 2021, even with the investments behind the brands because of all the costs we've wrung out of the system over the last few years.
So we feel very good about where we're going to get to on leverage.
What about credit ratings? What should we expect on that?
I mean, I think they'll continue to improve. Again, we don't have a refinancing obligation until 2027. So we're going to continue to take that tower and think about how to do it effectively. And with increasing profitability, we think there'll be better opportunities for credit upgrades from here, but not committing to anything at this point.
Got it. Should we envision some sort of credit upgrade perhaps in back half of 2025, or is that more a 2026 phenomenon?
Yeah, I think we'll.
Need to be in the mid-threes for a consistent period, I think, right?
Generally speaking, that's probably the right answer. Obviously, we're at a level where the.
Thank you all for joining us.
We appreciate your coverage. We're very excited at Elanco. We're launching products. The innovation journey has come, and we've got products coming out with approvals from the FDA. We did 1% sales growth a year ago. We've guided to 3% constant currency sales growth for 2024. We're accelerating that to mid-single digit sales growth on an organic constant currency basis in 2025, led by the innovation. That's very exciting for us. It's on both the farm animal side and the pet health side with Bovaer, our methane-reducing product for dairy cows, and then Zenrelia, which is our JAK inhibitor for dermatitis, as well as Credelio Quattro, the all-in-one broad spectrum parasiticide. We couldn't be more excited.
We're pleased with how the launches are set up and the progress we're making and look very much to delivering increasing profitability in 2025 and accelerating even more in the years to come.
Outstanding. So there's a lot of things to drill down. Obviously, next year's a growth year for you guys adjusting for aqua business. I think you guys expect mid-single digit growth. So I want to touch up on all of that. But just ahead of that, I know there was this Zenrelia update, the label update that Zenrelia labeled the way you got it. And there was some feedback you guys were going to get from FDA after some additional. Can you remind us, has the meeting happened and what feedback have you had?
The meetings happened. It was a very productive and constructive meeting. We've got some good feedback as well, but at the same time, expectations that to change the label, we'll need to run another clinical trial, so that makes it for a multi-year process with the FDA, but pleased with the overall tone and tenor of that meeting, a Hail Mary of, not a Hail Mary, but a one-off chance that they would have just accepted our booster data that makes it very clear that there were no issues with vaccinated dogs more than a year of age that have had their booster vaccines, which is very much what the label is for, which is for dogs more than a year of age that we did at the ISCAD conference that showed no interference.
We would have loved for them just to accept that and change the label based off that data. We weren't expecting that, and we hadn't communicated that expectation. So again, very much in line with what we thought would happen, which is improvement over time, but not in the near term.
I guess, Todd, the way I think about it is if you start the trial now or let's say over the course of next month, you could have that trial wrapped up in six months and have something ready for resubmission by next summer. I know you mentioned it could take a couple of years or a multi-year process. Why is that?
If it can go that fast, Umar, we'll be more than happy to accept it. I mean, again, based off the timings and working with the FDA on our trials to get a new trial and have it all go through and get a full change, we just think two years is a better marker to put out there than to suggest it could be done much faster than that. We will go as quickly and efficiently through this process as we can, and if we get upside from it, that'd be wonderful.
Got it. So when you say two-year process, you're saying next year spent on the trial, 2026 spent on FDA review. Is that the way you're thinking about it?
Again, that's generally speaking the right way to think about it. Again, we're confident in the product. We're confident that based off the data and the trial we've done, that there's no issues with the vaccine interference. But nonetheless, we have the label we have in the US. Now, outside the US, this isn't an issue. We didn't have this in Japan, which has obviously got a very strenuous and good regulatory body. We've been approved there without the label. Similarly, in Brazil, Canada, and the like. So again, we're very confident in the product. It's approved. It's on the market, and we'll look to improve it over time.
Todd, I know it's early in the launch, but among the U.S.-based vets that are using the product, I mean, say out of 10 vets, how many actually care about the label versus how many say, "Listen, I don't dose at 3X the dose. I don't care about this. It's not an issue for me."?
Yeah, I think it's very clear that the vets understand the data and the science and look at the studies as well as the booster data and say, "Okay, we don't think this is likely a clinical issue." They still then need to decide, do they want to have that conversation with their pet owners? And there's the label implications of that. So generally speaking, we don't think there's a scientific worry once they've been educated. And as we've said, our first part of this is educating the vets, spending the time, getting there. We know there's about 300 board-certified dermatologists in the U.S. They get referrals on the really hard cases. They're very excited about Zenrelia because as we've shown in our European head-to-head study, it just works so well. It gets more dogs to clinical remission than the alternative.
And they see that as they have a lot of non-responders that their practices see. They use Zenrelia, and they're getting those results. So they're the ones that we get out there, and they have a lot of influence over the general practitioner vets and having those conversations. So as that happens, I think they get very comfortable with the science and the data. They still have to decide from a consumer perspective and their customers, do they want to say, "Hey, trust us. We've looked at other data. You don't have to worry about it." So again, as we all know, big continuum of how vets operate and react.
Some are quick adopters, and we know there's clinics that have already thrown the competitor out of the clinic and are only using Zenrelia because they view it as more efficacious and a better value for their customers, and they're concerned about that. Others don't want to have the label implications and have those conversations. So again, we're tracking with all of our internal metrics on average and feel good about the progress of the launch here two months into the launch.
Todd, I think there's a little bit of confusion from the dinner last night. I think one of the points you made was you said you're definitely seeing reorders are very good, but the size of the orders, I think you implied, were a little smaller. Maybe if you could clarify that because I think there's some confusion in the marketplace on that comment.
Again, the only point being, reorders are better, and the size of the initial order is a little smaller. Those things may be hand in hand to where you end up in the same place, but it's a timing element there on things. But overall, clinic penetration is going very well. We're pleased with how the uptake, the responsiveness. So no, if there's confusion on that, Umar, there shouldn't be. It's probably providing more details than what the investors should be because the reality is it doesn't, again, if it's a $900 order on day one and the reorder is 1,000 and it happened at two weeks versus a $1,200 order and then the reorder happened at four weeks, right? This is noise in the nature of the launch.
So maybe ask different because I think everyone really zoomed in on when you said size of reorders is a little lesser than anticipated. Let's ask them.
No, no. The reorder is faster. Size of order is a little smaller than what our expectation was. But again, averaging out to being a non-event.
Averaging out to being a non-event. So is it reasonable to say the launch is tracking in line with expectations?
Yes, very much so. Maybe a little ahead. Yeah. I mean, again, we're pleased with how the education's going. We're pleased with the response. I mean, we know the efficacy is really good, and that's what we believe carries the day. And the value for the customer is also really strong. And again, that's always a positive in the marketplace as well.
Got it. And maybe I think it'll be helpful for folks to let's just remind ourselves of the expectations. I think you guys have put out some numbers on launch expectations for next year. And again, it's not specifically on Zenrelia, but I know if your launch bucket is, let's call it $450 million this year, midpoint for next year is $650 million. So there's about a $200 million in sales add. I think could you remind us of the $200 million, how much is non-Zenrelia Quattro so that we could kind of put some parameters?
Yeah, so again, our guidance for this year is $420-$450. We did $275 last year. We've seen really nice growth from Experior, which is our cattle product in the U.S. and Canada. It's going to be a blockbuster this year and has had a really strong year. AdTab is the oral parasiticide in the over-the-counter market in Europe. It's growing well. Parvo doing well, our monoclonal antibody for the parvo virus therapy. We're going to add to that Zenrelia, Quattro, Bovaer, and all of this product of six potential blockbusters are all launching such that we're not needing just one product to hit to be successful. We've got this portfolio of blockbuster products we're bringing to market. All of these together are going to drive that continued growth up to the $600-$700 you'd mentioned.
So for us, we don't know which one's going to be specifically right or wrong in the dollars, but we're very confident in the growth of this complete portfolio. Animal Health is very much a portfolio business. We've seen that. Rumensin has had the best year in 2024 that it's had in the last five years. It's almost back to 90% of where it was when the generic entry happened five years ago because the farmers are using Experior, and then they're bringing back and using Rumensin with it. So again, that portfolio effect is a big part of, again, us going from 1% sales growth last year, 3% this year, accelerating to mid-single digit in 2025.
Got it. So maybe, and there's two things there, but just to specify, for the about $200 million year-over-year in sales growth on the launch products, considering there's six of them, is it reasonable to assume that at least half of that 200 could come from non-Zenrelia Quattro, perhaps even more than half?
Certainly. Again, we're not quantifying the specifics of any individual ones, but we feel really good. The reminder on Experior, in November, it got approved to be used with heifers. Heifers make up about 40% of feedlot animals, so that's been a market that we've not had access to until here in just the last few weeks. So very excited that the Experior growth can continue. Similarly, AdTab, this is its first full year of launch in Europe. We'll have more countries being approved in 2025, and that's really grown nicely, and we've not seen much cannibalization. One of our big questions was, would it cannibalize Credelio in the vet clinic, or would it cannibalize the Advantage and Advantix products and Seresto at retail? And we've not seen that.
It's really gone through a pharmacy channel where it's been new growth for us, which has been a really nice win across the European pet business.
Got it. So again, I'm kind of going back to that $200 million constant currency just to keep it all in a framework. A couple hundred million in additional new product revs. Zenrelia is some subset of that.
Absolutely.
Somewhere between $20-$40 million, whatever that range would be. I think based on some of the FDA label discussions, it sounds like the scenario where Zenrelia just puts up a $70 million or $80 million year next year, that's probably not on the table. But conversely, a scenario where it grossly underperforms the base case, that's also off the table. So it's tracking at least in line with expectations probably ahead of that. Is that a reasonable way to summarize that situation?
I'm not going to commit to any of the numbers as we said, but we feel very good about how Zenrelia is performing, the clinic penetration we're getting, the usage of it, and expect it will be a significant contributor to our growth next year along with Credelio Quattro, along with Bovaer, along with Experior, AdTab, Parvo, and those products.
Are we finding physicians sort of pause Zenrelia ahead of vaccination? Is that dynamic playing out?
You know, it's so new. I don't have great data on that yet, Umar. Yeah.
Excellent. Mike?
No, I think we could transition to some questions on Quattro.
Okay, let's do it.
Todd, just looking at the history of regular Credelio, it launched as the fourth isoxazolidine in the market in 2018, but it still achieved blockbuster status despite being fourth to market.
Sure.
But you were in an environment where I guess you were taking some share away from injectables. So was that kind of a unique environment as compared to now? I know now the whole pie is increasing. So now that Quattro would be third to market, I mean, can we kind of expect a mega blockbuster in that sense? Or if there is such a term in Animal Health?
Fair. I mean, again, we've said it'll be a blockbuster. As you know, we have Credelio Plus outside the U.S. So this will be primarily a U.S. product. We'll get it approved to international markets, and it'll be additive. But primarily in the U.S., and we do expect it'll be a blockbuster in the U.S. Whether or not it becomes 200, 300, it is the biggest market in animal health. And so it needs to be a big product for us given the importance of it. And it's going to be the broadest coverage a pet owner can get. They're going to have more worms covered with this product. And with Lotilaner, as you've seen in the clinical data we published this fall, it's got significantly faster killing of ticks than the other competitive products on the market.
That has real value as well is that the faster you kill the ticks, the better off you are to avoid other issues coming up either with zoonotic transmission or to your pet. So we feel very good that this product will provide the consumer the broadest coverage they can get, which we believe will resonate well with them.
Got it. Got it. In terms of tapeworm coverage, that's one of the attributes of Credelio Quattro. I mean, your competitors are kind of dismissing this as if it's really a huge value add. According to some competitors, all you have to do is kill the flea vector, and then you eradicate tapeworm. Kind of want to get your thoughts on that and whether Quattro would kind of be more, I guess, less attractive in less endemic regions of the country because of.
I mean, again, if you don't have something, obviously you don't think it's important. Dog Park study done by us a few years ago showed that there was about 5% prevalence of tapeworm in that study. So is 5% proof that all the ticks are getting killed, or is that proof that, no, there's an issue here that consumers should be worried about? If you've got a tapeworm crawling around in your bed, you're probably more concerned about it.
He does.
Yeah. So again, we think the tapeworm has value in the sense that you're just protecting your pet against everything. And why would you not want to do that? Just you're going to trust that all your fleas were killed. Again, we know compliance has improved, and the online delivery has improved compliance. That's part of the market expansion we've seen. But compliance isn't perfect. And so there you get into if you do get some fleas and then you end up with the tapeworm, having a product that kills it would seem to be beneficial.
Got it. And will it be priced? Questions on pricing all the time. Will Quattro be priced kind of at the same that Zenrelia is as maybe a 20% discount to the competition?
No, we would not. I mean, it's going to be the best product on the market with a clean label. We don't view that as the right way to price new innovation in the space.
Okay. And just to kind of level set too, I think you have mentioned on prior calls that the gross margin for this product, even though it's a combination of four different ingredients, it'll still be above the corporate average because it's essentially small molecules, right?
Yeah, exactly. In the U.S. pet market, which again, is generally speaking, the highest gross margin space in our industry.
Okay. You have Quattro, Zenrelia with above average gross margin profiles. Kind of just thinking about this and thinking about the spin that's happening right now that will continue arguably until at least the midpoint of next year. As we think about EBITDA cadence going over the next four quarters, it's fair to assume that it'll probably really start to grow or I guess really start to grow in the back half of the year, right?
Yeah, I would say from a cadence perspective, it would be more back half than front half as you often have to make the investments before the sales ramp comes with it. As we've called out in our November earnings call, we are expecting the low single digit EBITDA growth for next year, inclusive of a headwind on gross margin from the U.K. manufacturing facility we bought out of bankruptcy. That's about a $25-$35 million headwind that keeps us from growing EBITDA a little faster than sales in 2025.
Got it. Two last question on Quattro unless you have any other questions, Umar. I mean, I guess there's a different marketing strategy such that since the parasiticides are kind of a more, I guess, mature marketplace. I think you said in a prior call that there'll be less DTC spending. Is that true?
No, like more DTC spending, so we term the parasiticides sort of an uninvolved category. It's not a place where a vet has to spend much time because we have really good products, and so it becomes one where you're really trying to get that consumer to believe in the broadest coverage having real value as it's not something that's an itchy dog is the main reason pet owners go into the vet clinic. It's really impactful on the pet owner, the lifestyle for the dog. They're itching, they're scratching, you feel bad for them. That itching creates other infections, and so that's a very involved category, which is where the vet education is such a big part of it, unlike parasiticides, which generally speaking are an uninvolved category.
Got it. Maybe in the last minute or so, Todd, I think it'll be helpful for folks to, I think from the broader stock setup perspective, one dynamic was value story transitioning to potentially growth. I think you've spoken to mid-single digit growth. But there was another dynamic that's also holding back a lot of investors, which is the leverage. So could you remind us where we are on balance sheet and what do you realistically see happening over the next 12 months?
Yeah, so we ended Q3 at 4.3 times net leverage. We expect to be generally in that range here at the end of the year, low fours. We've communicated for next year, we'd expect to be in the high threes to low fours. With that then improving as we grow EBITDA in the years ahead into where we'd expect this business will get down to a two handle on net leverage because of just the cash flow generation as well as the continued growth in EBITDA that's going to come from the accelerating sales and innovations going to bring. We've kept Opex. I think Opex in 2025 will likely be less than it was in 2021, even with the investments behind the brands because of all the costs we've wrung out of the system over the last few years.
So we feel very good about where we're going to get to on leverage.
What about credit ratings? What should we expect on that?
I mean, I think they'll continue to improve. Again, we don't have a refinancing obligation until 2027. So we're going to continue to take that tower and think about how to do it effectively. And with increasing profitability, we think there'll be better opportunities for credit upgrades from here, but not committing to anything at this point.
Got it. Should we envision some sort of credit upgrade perhaps in back half of 2025, or is that more a 2026 phenomenon?
Yeah, I think we'll.
We need to be in the mid-threes for a consistent period, I think, right?
Generally speaking, that's probably the right answer. Obviously, we're at a level where the ranges are pretty big right now. But again, we're having good dialogue with the credit rating agencies right now.
Excellent. Unless anything else from the audience, we'll wrap it up right here. Thank you again, Todd.
Thank you.
Very good. Thank you.