Good morning, everybody. I'm Dave Westenberg. I cover animal health here at Piper. Next up is our fireside chat with Elanco. With us today is Elanco's CFO, Bob VanHimbergen , and Bobby Modi, Animal Health EVP. Thank you for being here, and we'll jump right into Q&A. Bob, I'll start with you. You have products that can really drive gross margins. What are your thoughts about margin expansion? How much can you contribute to gross margins in the coming years, especially since you have all this innovation that's recently come out?
Hey, morning, David. Thanks for the question. Yeah, so as I think about just gross margin over the next several years, we're gonna have just a natural enabler with our basket of innovation continuing to grow and accelerate. The margins on our innovation basket does come at a higher rate than our corporate average. So we'll see that natural mix benefit. But you may have heard us talk in the last couple of months about Elanco Ascend.
Mm-hmm.
And that's where the company's taking a very proactive approach to some cost-related items and some productivity measures and really investing in things like automation and AI that will help us be more proactive towards improving margins, both gross margins when you think about the costs within the four walls of our manufacturing facilities, with the procurement side, partnering differently with suppliers, and then on the SG&A line item, which is more even margins, obviously, where we can make some choices around what we're doing and invest in R&D and marketing to grow that top line. So, we're gonna have a natural mix, and then we're gonna be proactive on some cost things.
Can you dive in a little bit further on Elanco Ascend and what we can expect from it?
Yeah, so we're gonna share a lot of color next week in our investor day. But think of Elanco Ascend as we're in the early stages of a company-wide initiative. So this is covering really all four quadrants of our business and every corporate function really supporting the program. But this is gonna allow us to grow EBITDA in 2026 with again some of the cost measures and some automation opportunities. So we're gonna be able to grow EBITDA with leveraging some of these opportunities, but then investing in R&D and really marketing to support Bobby's world. But early stages, again, more color next week. But again, this is gonna cover the entire business.
Gotcha. And, Bobby, I wanna switch to you. The U.S. pet health business has been transforming into a growth business. How, how has that happened?
Yeah, thanks, Dave, and good morning, everyone. You know, I would say what transformed the U.S. pet health business has been a lot of things, but anchored in what's driving the change is innovation and really launching differentiated assets in growing spaces. And then secondarily, launching those assets really well. And there's really two areas where we focused on in terms of launching those assets well. One is share of voice, and we've drastically increased our share of voice. So how much we're talking to our end customers.
Mm-hmm.
And how much we're talking to our end consumers with direct-to-consumer advertising, with breakthrough creative. And then the second sort of strategy is physical availability. And our purpose is to have our product everywhere a consumer wants to buy our products. And we've been steadily increasing the points of distribution either in clinics, whether that be independent or corporate, or retail stores for our OTC portfolio.
Got it. Can you talk about some of the products? I'm gonna start with Zenrelia. What's the market potential for Zenrelia in the U.S.? And can you talk, contrast that a little bit with outside the US?
Yeah, I look, the derm market in the US is at $1.3 billion, growing double digits. The derm market globally is about $2 billion. I would say we've got about a year of experience under our belts, both OUS and certain markets like Brazil, Japan, and Canada. In those markets, we've already seen double-digit share gains. And then we've got a year of experience in the US with what I would say is a more restrictive label that's getting a little bit better. But the momentum on Zenrelia has been really positive in the US in the last couple of quarters. In Q3 to Q2, our total sales for Zenrelia doubled for the company. We're seeing clinic penetration at close to 45%. We're adding about 2,000 clinics every quarter.
We're seeing more first-line usage of the product as people get more comfortable with the safety and efficacy of the product and see its real-world benefits.
Gotcha. I wanna switch back to Bob. Can you—which specific innovation products beyond Quattro Zenrelia Experior are expected to be the highest contributors to innovation revenue growth in 2026?
Yeah, so David, we really think about innovation as the entire basket of products. You did mention really kind of the big three that we've seen perform well in 2025. I'd also highlight AdTab in Europe, performed well in the first half of the year, certainly a first half of the year product, and we expect growth in 2026. But maybe I'll just give you a little bit of color on the three that you highlighted. So, Quattro, this medicine is not acting like a third to the market. I mean, the acceleration in growth has been well beyond what we've expected, and that's why we've been heavily investing in marketing to continue to grow that top line.
But more importantly, to think about what Quattro is, what it does for us is with the rest of the portfolio we have with Ecto, Endo, and Endecto, and just a wide variety of solutions for parasiticides. It's helping us really get in front of corporates at a different level. And that's an area where we've been under-indexed. I think about Experior on the farm animal side. This is we see continued runway for this blockbuster. Just in Canada and U.S. alone, it's a $350 million market. And so we expect growth there in 2026 and beyond. And then Bobby just talked about Zenrelia. I'd say the one big opportunity for us is the globalization of all of these products as we think about going into 2026.
As we said in the past, we have IL-31, most likely gonna be a first-half launch next year. That'll be a contributor, but not as big as the other three that we just highlighted.
Got it. You know, maybe we can dive in a little bit more on the farm side. It's been performing really well, the macro in farm, despite the fact that, of course, the herd size has been smaller. It's been really, really good. What are some of the things that investors might be overlooking about on the farm business? 'Cause, you know, traditionally, you know, investors do look at the pet health business a lot more.
Yeah, and so this is one of my most exciting things to talk about. So when I first joined the company, it was probably within a week. You know, I went to Jeff and said, "Hey, Jeff, why, why aren't we spending any time really talking about the farm business externally?" 'Cause it's half of our business.
Mm-hmm.
The EBITDA margins is what I think people are losing sight of. The EBITDA margins in the business are on par with the pet side.
Mm-hmm.
And what that means is you think about the U.S., for instance, on the farm business, OpEx is 10% of sales.
Yeah.
And so the pull-through to the bottom line is equal, much stronger. So our EBITDA margins are equal with the pet side. But it just shows our strategy of innovation, having the right innovative products, having the right portfolio, providing the right solutions to the end customer's works. And so what I'm trying to do is make sure people understand the stability of the farm animal business, the profitability of it. We're gonna continue to grow there. We see this market growing in a $25 billion market already. So I think about Experior, as I mentioned, it's a blockbuster. We expect that to continue to grow in U.S. and Canada, and then certainly with the international opportunities as well.
As I think about Bovaer, the growth's been a little bit muted from what we'd anticipated, originally, just because of the lack of government incentives.
Mm-hmm.
But I'd say there's multiple levers we're working to really get this the growth within the product. And we still believe this to be a blockbuster. I'd say adoption rates for Bovaer have been great. It's sticky. We have over 95% of customer retention on Bovaer. So we know the market's there. The end customer sees about $20 ahead of additional profitability from Bovaer. So there's just a lot of great exciting opportunities there that I think there's really just not a lot of visibility to. And we're gonna try to bring that out a little bit more next week as well in investor day.
Gotcha. And hopefully, I'm not jumping in front of investor day, when I ask. So I, you know, the margins is, I think kinda actually unique to you. You know, when I look at competitor portfolios in that farm animal business, I don't see necessarily that same kinda good margin, you know, relatively. And you have a portfolio that has, you know, MFAs and some of the others. So what's some of the efficiency that you have in the portfolio that you're able to actually drive that kinda EBITDA or operating margin in that portfolio?
Yeah, I mean, I think of just how we go to the market. That we have less of a sales force, right? So the middle of the P&L, we have a lot less cost associated with dispersing across really across the nation and even the globe. So it's like the middle of the P&L is just more efficient naturally just with how we go to the market. And again, the customer stickiness is very high, really across all the products.
Gotcha. Bobby, I wanna move to you on the potential Quattro. Why has the ramp been so good? What strategy do you have to drive broad-spectrum parasiticide market in 2026? Obviously, this is still a pretty good growth market. And, you know, we're seeing very good transition from single product.
Yeah, I'll start with where Bob sort of left off. It's certainly not behaving like a third-to-market sort of archetype. It's behaving much, much better and, frankly, much faster, as you alluded to, Dave. And we think there's really a couple reasons for that. And the main reason is the four degrees of differentiation, right? So think about broadest coverage. Think about speed of kill on ticks. Think about heartworm coverage in one month. And then what the market has told us is it's got great palatability. And if anybody's tried to pill their dog and they reject the medicine, you know how difficult that is. And that's a barrier for vets when they are ultimately trying to sort of transition people to new medicine. Why do we think there's still a lot of potential? I think it's simple.
The first thing is the endectocide market's $1.6 billion, it's growing double digits. We're gonna get our share of that growth, and we're gonna also contribute to that growth. And we expect that to continue because, frankly, it's more convenient for a pet owner to give one pill versus two pills. Second, we're still only in about a third of clinics in the U.S. today. So every month, we are adding clinics, and we expect that to continue sort of going forward. And the third reason is our market share from endectocide perspective in the clinics where we have Quattro is still fairly low. And that share will continue to grow, really driven by two factors. One, as more puppies come on board, which we over-index in our puppy share index, you'll see our share start to grow.
And two, as we continue our dispensing programs, like our direct-to-consumer advertising, you would expect share to continue to grow in those clinics. So, you know, I would end with all things being equal in the Endecto space, why wouldn't a vet or a consumer choose Quattro versus the alternatives?
Gotcha. That's really helpful. So, and Bobby, continuing with you, you know, we talked about the retail business in the hall and how traditionally, I've not necessarily been a big fan of retail business. However, you know, yours might be kinda unique and particularly around this time of low veterinary visits. So how should we think about that retail business as kind of a differentiation in your portfolio versus kinda your competitors?
Yeah, so I'd say a couple of things. One, we know a third of pet parents don't visit the vet regularly. That's a little bit higher with cat owners versus dog owners, but that's sort of generally standard. Two, we have market share leadership in a $1.1 billion category, and we've continued to expand that market share picture. Three, we still believe there's ample white space for growth in that segment. We've predominantly played in the premium space of the OTC flea and tick category, and we have now recently started to play in the value space, and we are very underrepresented from a share perspective in the value space, which is still roughly 40% of the dollars in the category.
Mm-hmm. That's great. Maybe I can switch to both of you in terms of, you know, it's sort of sticking with that same theme. I mean, all of us can see what the kind of the macro visits have been looking like. Can you talk about leveraging your diverse portfolio plus pet and farm animal to mitigate the slow visit trends in vet?
Yeah, I maybe I'll start. First, one, I still think this is a great industry. And here's a couple reasons. One, dogs and pets are living longer than they ever have before. And if you think about dogs and cats, sorry, are living longer than they ever have before. And if you think about when pets need the most medical care, it's when they're very young, sort of the puppy stage, and it's when they're older and they have chronic ailments. I think the second thing we would say is the humanization of pets continues, aka people's willingness to spend on their pets is still very high and very strong and continues to grow it.
I think a stat I use frequently is 50% of people would rather spend Valentine's Day with their pets than their significant other, which tells you how they feel about it. And then as I think about Elanco's sort of role in, you know, how we think about the industry, we've got two things helping us. One, we have the OTC portfolio for those folks that don't go to the vet regularly and still want medical care and maybe want a more affordable price point. Two, our strategy in the RX space has been to innovate in growing segments. And so we don't necessarily need vet visits to grow 'cause we're innovating in the spaces that are already growing and are able to take market share where we don't have a large market share today.
Yeah, and then on the farm side, again, half of our business is farm. And that market is very stable. It's a growing market, when you think about just the components of it. With a relatively low herd size, products like Experior are more important for the farmer. And so that's why we've seen such success there. But obviously, as that herd continues to rebound over the next several years, you know, we'll see growth there. Proteins is just a macro demand where we're seeing growth and poultry really globally. So that stability, the cash flows from the farm business is, again, why I'm excited. But that prevents or mitigates some of the, I'd say, the macro of the vet business being down.
Got it. And maybe we can even stick with the same kinda concept in that the affordability in veterinary medicine. You know, we've seen since COVID a 50% cumulative inflation in veterinary. So can you talk about some of the different channels in the balance of the portfolio given that big cumulative the veterinary services inflation? Thank you.
Yeah, look, our strategy is always to go where the consumer's going. And we offer a wide portfolio of products at different sort of standards of care and price spectrums, right? So think about getting a Seresto collar with flea and tick coverage for roughly $8 a month versus you could go all the way to something like Credelio Quattro that gives you broader coverage. It's maybe more convenient 'cause it's easier for you to pill your dog than to sort of put a collar around him for $25-$28 a month. And so depending on where the consumer is in their affordability journey, it's important for us to have sort of price points that meet their need. And we do that across not just parasiticide, but other parts of our portfolio as well.
Gotcha. I wanna talk about the, and this is another one for both of you, commercialization timelines, market penetration strategy for Zenrelia, particularly in international markets where your label differs. And how does that US box warning impact the, the global, strategy for Zenrelia?
Yeah, I'll start. I mean, congratulations to Ellen and the regulatory team. It's the fastest globalization we've had of a product in Elanco's history. It's Zenrelia is now approved in 36 OUS countries, and more are coming. And what we've seen in the countries where we've had the product in the market for the longest time is we've got double-digit share and in some cases, very, very high double-digit share. We're seeing very little impact of the US label on sort of the OUS marketplace. And in fact, what we're seeing is a more positive benefit of the success OUS translating into the US in terms of confidence of the product, in terms of safety and efficacy, given all of the other countries around the world have a clean label.
Gotcha. Okay. Moving on to Bob, you after driving a deleveraging strategy, I believe you've reduced it two turns in two years. What's the timeline to get below three times?
Yeah, great. So, yeah, you're right. The company's done a fantastic job of really being disciplined and focused on deleveraging. We were at 5.6 times from 2020 to 2023. We expect to be at 3.738 by the end of this year. Then we had some one-time items in there. We had the aqua divestiture, and then we had the royalty monetization that helped. But I would also highlight the free cash flow conversion. I've been really impressed with a dedicated team we have in-house focused on the fundamentals of trade working capital. So the trade working capital component's really been a nice accelerator to free cash flow. So as I think about moving forward, we're gonna continue to have good free cash flow.
I'd also mentioned 2026. What we're gonna have behind us is gonna be the tax associated with the Aquadivestiture. So we'll have some natural tailwinds coming from that. So as you just kinda model out where we'll be, I, I would expect us to be below three in 2027. There's gonna be some M&A. I'd say smaller tuck under M&A as a part of our growth strategy. But I would tell you these are gonna be small tuck under R&D sort of related options for us that would not derail us from being below three in 2027. And then I'd say once we get there, we'll talk a little bit more next week as well. But that's gonna give us some optionality as far as returning cash to shareholders.
All right. Thank you very much. I wanna talk about IL-31, the IL-31 business. For a lot of investors that don't know, I mean, I think the category of monoclonal antibodies injectables has been growing a little bit faster than the small molecule version. So, what can you talk about expectations around IL-31 and then the timing of it, particularly in light of, you know, that we had maybe some impacts from U.S. government shutdown, maybe not, and then, and but, love to hear if there was any. I mean.
Yeah, I think we're fairly confident that our approval is imminent. Hopefully, Q4 may get delayed a little bit because of the government shutdown. But we've been in regular contact with the USDA, and we feel like the approval's tracking. As we sort of said before, the approval's actually not our critical path from a timeline perspective. Commercialization is, and more particularly how we scale up our manufacturing. And so we're still expecting a first-path approval for IL-31. As you rightly pointed out, the 90% of the U.S. derm market from a dollar perspective is either JAK inhibitor or IL-31, and it's split roughly equally between those two. And so us having an IL-31 mAb will give us access to, will be one of two players with sort of access to that space.
And as we've said previously, we're excited about the degree of differentiation we'll add with that product. And what we're also very excited about is having a portfolio effect. And we believe that IL-31 will also help drive Zenrelia and vice versa as we think about sort of the launch and the acceleration of that product.
Yeah, I just wanna clarify, the first-half launch of the product.
Yeah.
Gotcha. Thanks.
You said approval.
Oh, no, no, no. That's great.
Sorry.
So, can you tell us about your go-to-market model? And this is a follow-up on IL-31, but, you know, maybe you can talk about some of the other products in terms of go-to-market model.
Yeah, as I said, one of the key enablers for success for US Pet Health has been Share of Voice. And there's really a couple of ways we've driven Share of Voice. The first way we've driven Share of Voice is with the capabilities we've built internally. So expanded Salesforce, new capabilities from a vet engagement digital perspective, and then inside Salesforce going forward. But the other thing that we do, maybe a little more differently than some of our competitors is really leaning in with our distribution partners. And what that allows us to do is that allows us to amplify our Share of Voice, you know, by a factor of two and a half, three X in terms of the number of people talking to customers going forward.
We think that has allowed us to expand our physical availability, get into more clinics where consumers wanna buy our product. That approach has served us well for Quattro and Zenrelia, and we expect to apply something similarly to IL-31.
Gotcha. I wanna talk about maybe some of the competitor launches, Mumelvy, etc., and you know what impact they could have on Elanco's market share and pricing power in 2025 and 2026. Obviously, I think the products are gonna launch. The competitor products are gonna be more impactful next year than this year. But anyway, any ways to think about these competitive launches?
Yeah, I think the first thing I would say is we've thought about these competitive launches, and we've factored them into our sort of outlook for the business. I think the second thing I would say is we've had a great opportunity to learn from what's happening OUS, both sort of Mumelvy and some of the other products you may be thinking about like Bravecto Quantum. And we've sort of seen what those products can do in those markets and how our products stack up and ultimately compete. You know, what I would ultimately anchor back to is medicine. We believe in the differentiation that we have on the parasiticide side with Credelio Quattro, and we really believe in the differentiation that we have in Zenrelia in terms of value, convenience, and efficacy.
We think that will help those two products continue to grow in light of competitive threats.
All right. Moving back to Bob on some of the financials. You know, you had a recent refinancing. What changes ahead for capital structure, CapEx expectations?
Yeah, that's great for the question. Yeah, so we were extremely successful in refinancing our 2027 tower. So we did push out the maturity from 2027 into 2029 and 2032. We incorporated some euro debt, which helped us on the rates. We pick up about 40 basis points of improvement there. So from a debt perspective, our methodology and our allocation's gonna be consistent, you know, continue to pay down debt. Our next tower's in 2028. But we're gonna continue to be balanced and disciplined. So think about CapEx. This year in 2025, we did have a bit of spike in investment, particularly with our facilities as we ramp up for not only the launches that we've had, but also for volumes associated with IL-31.
I'd expect next year to be more balanced and our CapEx will be in line with historical averages. But ultimately, really no change to the capital allocation strategy. It's gonna be focused on paying down debt, investing in the business. M&A will be, you know, we'll take a critical eye on making sure it's got the right investments, but those won't derail us from deleveraging and, again, getting below three in 2027 so we can have some flexibility around shareholder return.
Gotcha. So, I'm sorry to get in front of this, but what can we expect to hear at Investor Day? You can give us at a high level, you know, to keep expectations.
Yeah.
Great, Dave.
Yeah, sure. Yeah, so we're extremely excited. So we did talk to some investors about what was important for us to talk about. And so, you know, we're gonna have the ability to have every leader speak about their ownership. So Bobby and the presidents will talk about their strategy and growth profile. We're gonna have Grace speak a bit about the manufacturing capabilities, the success that she's had, and also how she's gonna be supporting Ascend with opportunities there. Ellen is gonna give a nice perspective on innovation and how, you know, what she sees the next several years, but also how we've continued to fund her with more capital to continue to go down that path.
And then, you know, I'm gonna finish the day off with some discussion on Ascend and give some more granularity there. Then we'll end with an outlook of the next three years that'll give some an outline of growth and EBITDA and cash projections.
All right. We're out of time. Thank you very much.
Yeah, thanks, Dave. Thank you.