Good morning, everybody. I'm Chris Schott at JP Morgan, It's my plea sure to be introducing Elanco this morning. From the company, we have Jeff Simmons, the company's President and CEO, We're gonna have the company's CFO, Todd Young, joining for Q&A. Before I turn it over to Jeff, I just wanna remind people that if you have a question, you can ask that through the portal, I'll work those into the Q&A post the presentation. With that, Jeff, happy New Year. Thanks for joining us, and we'll
turn it over to you.
Well, good morning, and thanks, Chris. Thanks for JPMorgan in covering the animal health space and have been a long history of doing that. Thank you, and we appreciate the opportunity to engage with investors today. As always, look at slide two for our disclaimers on our forward-looking statements. What I'm gonna do here is just to cover really here on slide three, the following. I'd like to share a little bit about animal health. There's a lot of non-industry people maybe looking at this space for the first time. Given the current economic times, how is the industry? How does it fare? Look, specifically at Elanco.
We're almost a 70-year-old company, the longest standing brand in animal health, a little bit of our history and where we are, as well as our strategy that we've had over 4 years and the 3 pillars to our strategy. Looking at 2023. We'll give our guidance in February, but a little bit of the pushes and pulls on 2023. I'll highlight a few of what we think are 3 major trends to consider as we go forward, and ending really with the compelling value proposition we see over the long term with Elanco. With that, with many nuances and some of the details, let me go to some of the prepared remarks starting on slide 4.
you know, with an overview on animal health, as I said, given the limited industry presence at the conference, here's just kind of a summary slide. The total addressable market for animal health, medicines and vaccines is about $37 billion globally. The industry has historically fared well, during times of economic turbulence, and while not recession resistant, it's expected to be durable on both the pet health and the farm animal sides of the business as we look to 2023. The $14 billion global pet health market is poised to continue growing in 2023, albeit at a slower pace, as the post-COVID normalization continues and a weaker economic environment is expected for at least a portion of the year.
As in recent years, growth will continue to be driven by, one, an increase in pet ownership, the increased global movement on humanization of pets, while on the other side, vet labor and capacity constraints are expected to persist in 2023. We expect, as always on the pet side, innovation, increased compliance and convenience, enabled by e-commerce, will drive growth. Shifting to the farm animal side, a bigger part of the industry. This $22 billion global industry is expected to grow in 2023, driven by the continued rise in global demand for animal protein, which is linked to GDP, also the continued popularity of high-protein diets and an important factor, efficient global trade. As the demand for protein increases, the importance of sustainable meat production has never mattered more.
The intersection of both calories and climate creates the next industry opportunity, we believe, and positions livestock well to be a major contributor to the climate solution, not the problem. We expect these growth drivers to be balanced by elevated input costs, primarily feed, that remain at historical levels, as well as some drought and disease. Ultimately, we expect more muted growth in the farm animal side compared to the pet health in 2023. Overall, we believe animal health is well-positioned to weather a wide range of macro conditions. I've seen this over the 30 years I've been in the industry with persistent positive long-term trends in both the pet and the farm animal markets. While these trends provide a beneficial backdrop, industry success has driven what's at the bottom of this slide. Absolutely essential. 1, you've got to have broad scale. 2, robust portfolios.
You've got to innovate into those portfolios continually. Got to have global reach where you're accessing vets and farmers at a direct level, and you've got to continue to add value-added capabilities. If we move to slide 5, we'll take a look at Elanco specifically. We are an independent, product-focused animal health leader. Over the last 4 years, we have successfully completed our stand up as a public company. Additionally and intentionally, we increased our size and scale and exposure to more pet market by acquiring Bayer Animal Health. We've taken decisive actions to capture value and deliver productivity. We're nearing the completion of the Bayer Animal Health systems integration and have a path to bring meaningful innovation over the next 18 months.
The result of this transformation is a global independent company that has the scale, portfolio diversity, an exciting pipeline, and an optimized infrastructure, enabling us to reach the world's animals and be a valuable partner, not just to our customers, but also to innovators. Over the last four years, Elanco's maintained a consistent strategy of innovation, portfolio, and productivity, or we call IPP, as shown on slide six. We have delivered company-wide productivity actions since our 2018 IPO, and through the Bayer acquisition, consistently, we've been expanding margins despite historical inflation and currency pressures. While we also have been exceeding our synergy goals. We have a broad, diverse portfolio. We're gaining share in markets that we expect and want to lead in. Finally, on the innovation side, we're filling the gaps with our pipeline, and our pipeline is progressing.
We expect 2023 and 2024 to represent a historical launch window for Elanco. We believe this flywheel is poised to optimize our ability to serve customers and create long-term value. Let's now move to slide 7 and look at innovation a little deeper. Today, more than ever, under the leadership of Dr. Ellen de Brabander, we believe Elanco's R&D organization is positioned very well to deliver consistent innovation in some of the market's biggest spaces and areas of unmet need. First, after several integrations, the one Elanco R&D organization has entered a more stable phase with a very capable organizational structure. Ellen has streamlined ways of working, placed a deeper technical expertise in right areas. We've optimized resource allocation.
We have prioritized assets that will compete in large market spaces, and we've removed lower value opportunities such as microbiome and prioritize now with much more funding and time allocation. This has paid benefits. Our focused pipeline is led by potential blockbuster products with a path to approval by the first half of 2024. Additionally, one of the key differentiators in this animal health cash market business is the importance of maximizing our existing portfolio with targeted lifecycle management. We are focused on refilling and enhancing the early-stage pipeline with a bias towards best and first-in-class opportunities to drive consistent, high-impact innovation over time. Having strong pipeline candidates now across phases of both research and development, this is essential to future success. Our track record as partner of choice differentiates Elanco in the industry.
We have a strong history of both internal and external innovation, and both remain important to our R&D strategy. Numerous examples, including licensing of Bexacat, Bovaer, other early-stage collaborations, as well as the addition of KindredBio, which expanded our monoclonal antibody platform and enhanced our existing dermatology pipeline. We will continue to look for additional bolt-on opportunities to leverage our expertise, scale, and relationships to enhance efforts across various platforms. On slide 8, we share this in our third quarter earnings call. You can see that we have an exciting late-stage pipeline that's expected to make 2023 and 2024 a historical launch window for Elanco's pet health business. We've noted 2 milestones since our November call.
The approval of Bexacat, a novel oral, actually first SGLT2 into the United States market, that will be for a treatment for feline diabetes, also an initial submission for our JAK inhibitor for dermatology, achieving our goal for submission of up to 2 pet health blockbusters in 2022. Our 3 late-stage development projects in parasiticides and dermatology are progressing nicely and aligned with our expectations. As we shared in November, we completed the initial submission for our differentiated broad-spectrum parasiticide product and today shared the update on our differentiated JAK inhibitor. We're pleased with the progression of our IL-31 short-acting dermatology asset. This will be our second monoclonal antibody, and we continue to expect to initiate its submission to the USDA in the first half of 2023.
We believe all 3 of these assets are blockbuster potential innovations with a path towards approval in the U.S. by the first half of 2024. We expect Bexacat, along with Zorbium, Advantage XD, and our parvovirus monoclonal antibodies and some OTC innovations to contribute to innovation growth in 2023. Ellen and her team are focused. It is working. She is optimizing. We are demonstrating it here in 2022 with proof points. We're setting Elanco up to deliver consistent, high-impact innovation. We move now to the second pillar of our strategy around portfolio. Elanco sells products in more than 90 countries. We've got over 200 brands. Of those, 10 of those brands were blockbusters in 2021. Our diverse global portfolio really allows us to be well-positioned to reach the world's animals.
We look at our business really in these four quadrants: U.S., international, pet, and farm animal. Let's cover each one of them, starting with our highest margin business, the U.S. pet health business. We remain the industry leader in the over-the-counter parasiticides with Seresto and the Advantage family brands. As this segment and industry navigates the impact of pressured economic conditions, we do expect stabilization in the retail space from price innovation, both new product and lifecycle management, more consistent supply, and channel expansion. We will continue to face competition in the vet parasiticides from competitive innovations launched in the last few years, and the Elanco team is focused on executing on areas within our control, like maximizing our therapeutics portfolio, including pain, where we are the U.S. market leader, and advancing our late-stage pipeline.
On the international pet side, it's primarily concentrated in parasiticides where we're market leaders in topicals and collars. We also are able to leverage these strong brands with our oral broad-spectrum parasiticide we have internationally, Credelio Plus. As pet ownership increases around the world, especially in emerging markets, we see this as a robust segment. Despite the expected near-term headwinds, though, resulting from the economic climate in Europe, we remain committed to geographic and channel expansion, including in e-commerce or retail in certain markets. Shifting now to the farm animal side in the U.S., where we're market leaders in swine and poultry, and top 2 in cattle. Our broad portfolio has proven to be resilient in a variety of markets, including the introduction of generics, where we have been able to leverage our diversity, our scale, and our innovations to protect the base.
While we have navigated generic entrants across species, this has limited some opportunity to grow price. Although we lack scale in farm animal vaccines, we see great opportunity, as I mentioned, in livestock sustainability. This emerging part of our cattle portfolio with products like Experior and, in time, Bovaer, are expected to position Elanco as our customer's leading partner on sustainability, one of their top needs at this time. Finally, we'll look for ways to expand our portfolio and deliver differentiated benefit to our customers through a value beyond product offering. Lastly, our international farm animal business, it generated about 1/3 of our 2021 revenue. It's the highest contribution of these four quadrants, but typically the lowest margin area. Excluding vaccines, we are the market leader in poultry and swine, and a top two player in aqua across cold and warm water markets.
Aside from poultry salmonella vaccines, the farm animal vaccine gap persists here in international, as in the U.S., and we see market access shifts away from certain medicated feed additives, especially in Europe. Continued portfolio expansion through lifecycle management and geo-expansion will contribute to our success in this international segment. Our history of farm animal leadership, our intentional shift to pet health, and our late stage pipeline is expected to result in a more stable portfolio, a better mix, and higher margins. On slide 10, I'll elaborate on our productivity delivery over the past 4 years. We've reported year-over-year adjusted EBITDA margin expansion in our last 7 quarters, despite record levels of inflation and a decline in U.S. pet health, our highest margin business.
Over the last several years, we have taken decisive actions to rightsize our physical footprint and corporate structure, allowing us to deliver cumulative adjusted EBITDA synergies above initial expectations. Our final integration activity, bringing the ERP systems together in the second quarter of this year, represents the largest expected major one-time use of cash, setting us up for future improvements in free cash flow conversion. Finally, these intentional productivity actions are complemented by an enhanced ownership mentality, thanks to our shift to an EVA-like Elanco cash earnings compensation metric for most all employees. We believe our established IPP strategy that I've just gone through is a flywheel. It's working. It's necessary to optimize serving customers and creating value over the long term. While we're excited about the pipeline opportunity over the next several years, I wanna address some of the key considerations as we look at 2023.
Slide 11 is a slide we used in our November call. As we've shared in our Q3 earnings call, the global macro environment continues to be uncertain with pressure likely expected to continue in the European and in the U.S. pet retail markets. Given the lack of pipeline disclosure in animal health, there's also uncertainty around competitive launches that may occur this year. Finally, from a financial perspective, we expect headwinds from increasing interest rates and continued volatile foreign currency markets. Offsetting these headwinds, Elanco's ability to reach the world's animals and our competitive portfolio are well-positioned outside of certain known portfolio gaps. We've highlighted a number of new products we expect to bring to the market in 2023. We expect to continue holding share in line with our expectations. We see stabilization as we continue to capture value from pricing and deliver more consistent supply.
The recent easing of COVID restrictions in China are a step in the right direction, a return to normalcy will take time. As this gradual recovery occurs, we believe we're well-positioned as we've held share that will recover with the market in China. Our continued productivity efforts and our systems integration will be important from our continued margin expansion efforts, but benefit from the expected decrease in inflationary pressures on manufacturing costs. They will lag some, as inventory usually takes about 9 months to move off from our balance sheet. This year, we'll prepare for the expected launches of our late-stage pet health blockbusters in the industry's largest markets, the U.S. parasitic and dermatology. We will make the right investments in R&D, manufacturing, and our systems to launch these capabilities, really reflecting a change in the trajectory from our 2022 operating cost reductions.
While we plan to provide 2023 guidance during our fourth quarter 2022 earnings call in February, on balance, we believe this year will present meaningful opportunity for Elanco's business while executing against the continued environmental and competitive challenges. Before I close, just briefly touch on what I believe are some unique trends to watch in animal health, emerging this year and going forward here on slide 12. First, differentiated innovation. It has consistently been rewarded in animal health. We have seen in recent years, and Elanco, we believe, is well-positioned to benefit from this dynamic in coming years. The emergence of generic models, especially in farm animal, increases the importance of bringing innovation and a valuable portfolio to solutions in farm animals. We expect companies with portfolio breadth, reach, and differentiation will be rewarded. The other trend is globalization.
We don't talk enough about this, I believe, and we're seeing increasing pet ownership and humanization of pets, and this is driving expansion in pet markets outside of the U.S. Additionally, as an example, we see opportunity in feline globally in that market broadly as that market matures. On the farm animal side, trade access of for meat globally is essential to enable sustainable demand, reduce volatility, and support producer profitability, a key metric on the farm animal side. Finally, farm animal sustainability. This is an emerging trend that we expect to become the next era of opportunity in animal health. Historically, our industry has been focused on animal health and its connection to human health. Now, the connection of animal health, human health, and environmental health is becoming a reality.
We believe livestock can play a positive role in sustainability, especially here in the short term with methane reduction, with animal health products, with tools and analytics, and with the evolution of the carbon market essential to drive this change. In summary, we believe Elanco is well-positioned to capitalize and benefit from some of these emerging trends. I'll close on slide 13. Elanco, as a leader in a durable animal health industry, we believe offers a compelling long-term value proposition. Our innovation portfolio and productivity strategy positions us well to navigate near-term economic and competitive pressures as we execute delivering on cost savings through operational efficiency, obtaining regulatory approvals for our pipeline, launching with excellence, especially here over the next 2 years, and remaining focused on debt paydown. We have made the difficult decisions that provide us with the optimized infrastructure to support future growth for innovation.
Ultimately, we believe this strategy will drive meaningful long-term value for our investors. With that, Chris, thank you for the opportunity. I look forward to having Todd join me, our CFO, to field some questions.
Thanks for those comments. I thought just maybe to kick off the Q&A here, Jeff, can you just reflect back on 2022? It was obviously a very dynamic year for Elanco and for the industry. I guess, what went well and what were some of the surprises as you kind of reflect back on the year?
Yeah. I think, you know, in summary, what went well are the two Ps. I think productivity and pipeline, we made some major advancements. I think as we mentioned, even in the face of all this inflation and FX and all the challenges in our largest business or the highest margin business being down U.S. pet health, we were able to continue to expand margins. This has come from the infrastructure, the restructuring, the manufacturing partnerships that we put in place. All of that, I think, has put us in a very competitive position, we're getting our cost base right. I think the other side... The advancement, we're moving to this one last move, which is the integration of the Bayer system. I think on pipeline, look, Ellen has come in.
She's taken a great R&D organization, a lot of matter in our pipeline. We said last year at this conference, a heavy focus on late-stage pet blockbuster products where there's high margin, big products, opportunity, unmet needs. We've leaned in. That's happened. We've integrated Kindred, Bayer, and Elanco together. Really, you know, without increasing resources in R&D, actually trimming them, we've actually increased our ability to drive the pipeline. We've, you know, moved microbiome out, et cetera. We believe we've got a team, a structure, a pipeline. We don't talk a lot about it. We had some good additions into the pipeline and some good movement from research to development as well. I think those are the positives, and that's what's gonna drive our company long term. I think on the other side, it's environment.
If I had to summarize in two points, it'd be environment and competitive innovation. I think on the environment, Todd can share, when we guided, we would have never assumed, you know, Ukraine war, China lockdowns, you know, the strengthening dollar with a big international business, interest rates. These things were challenging. Then I think on the competitive innovation side, again, that had some impact. It was, you know, most of it aligned with our expectations, but there was some negative impact. Those would be the two factors.
Great. Great. I think the slide, you had the swing factors for 2023.
Yeah.
Since you provided, I think, those, that outlook in, on 3Q, anything within there that's kind of shifted either on the positive or negative side? Are you feeling either more or less confident, or do you feel like those are still kind of pretty consistent kind of view of the world versus where we were a few months ago?
Yeah. We shared with some investors over the last few days. We think the categories are right on that slide that we shared in 2020, you know, or in November in our earnings call, the pushes and the pulls. And I would just highlight that I think between now and February, as we come for the guidance, we're gonna be taking a close look at those in terms of the magnitude. We do think that, you know, on the positive side, innovation, pricing, we do think China versus last year, there's some green shoots. We don't think there's a V-shaped recovery, probably more of a slower U-shaped recovery. I think these factors, you know, the dollar with its weakening with the bigger international business.
On the same side, you know, I think that we continue to see the competitive pressures. We continue to see, you know, the challenges in the marketplace. We think China is still, you know, got some challenges. I think the two economic areas we got our eyes on are pet retail and Europe. I mean, those are the factors. The level and extreme of those pushes and pulls, we'll highlight more in the February earnings call.
Okay. Maybe you mentioned pet retail. Can you just elaborate a bit more, I think, with Seresto and Advantage? We saw some headwinds in 2022. You know, driven by macro, how much of that is kind of reflected at this point, and how much more headwind do you kind of think about as you go into next year or is this year now?
You know, pet retail kind of had a little bit of a, you know, perfect storm. I step back and say, you know, we did the Bayer deal saying, hey, really, really important in the pet business globally, omni-channel matters. Meeting pet owners where they wanna shop. We still have over a third of pet owners that don't go to the veterinarian, maybe this economic pressure that even increases. Being able to say, "Hey, many price points, many SKUs, scripted product, unscripted product, topical, oral, and collar," all of that matters. As we bring our pipeline, that will matter. I would say we don't see any change in that globally. Actually, you know, we've seen pushes and pulls around the world, but all of our diligence has found that to play out. We don't see any change in that.
There's some bleeding across. What happened in 2022, we think is, you know, a little bit, you know, specific to 22 and maybe 23 is, 1, we saw, you know, major retailers take down inventory. We saw some pet owners that say, "Hey, on the off-season, tick/flea," we have a lot of this sales are in the first half during the spring and the early summer. In the off-season, people either went away or traded down or went to topical, say, "I'm not gonna use a preventative, I'm gonna use a treatment." Or, "I'm gonna trade down to a lower cost collar or topical." We saw some bleeding over of a lot of DTC and a lot of scripting of new products. We saw some bleeding over of that. Those are the factors.
What I would say as we look at 2023, we think that there is some, you know, stabilizing. We're gonna come into the season. We've got a lot of loyalty from the retailers, a lot of loyalty from e-commerce on these brands. We're gonna see a pricing effect, better supply, and we got more physical availability today than we've ever had it since we acquired the products, and we're innovating in the space. All of those are factors that we think are gonna drive a more stabilizing pet retail business in 2023.
Great. Maybe in a bigger picture one on just the health of the companion market. I think that's one of the big debates for the sector over this past year.
Yeah.
Is going into a recession. Like, is industry generally insulated from those pressures, or is there something to worry about here? Just your perspective on?
Yeah.
on the, you know, kind of maybe beyond retail, just the whole overall business.
Seen a lot of seasons, 33 years in this industry. In 2008, we've seen, you know, a lot of change. I think on the positive side and why we believe it's durable and it's resilient, it's not recession-proof, but on the pet side, I think today the pet owner has, you know, it's easier to be compliant. There's, you know, drop shipping, delivery to the door, much easier even at the vet clinic. All of these things drive convenience. Pet ownership is up, continues to climb. The humanization of pets even globally. International matters a lot more than it did in 2008. That's gonna be a factor. There's more price points and more channels. I think that's a factor in a positive way.
On the other side, though, I don't think we can sit here and say that we're totally insulated from it.
Mm-hmm.
I do think that we saw, and I'm gonna point to one example in Europe in Q3 that we noted in our results, we saw sellout data on pet products where, you know, the European pet owner was concerned about what was gonna come, energy cost in the recession. We saw a pullback by most every competitive category and every competitor as well as ourselves in a pretty extreme manner, which says, "Hey, there is some elasticity, there is some price sensitivity. Not every market is the same." We're better than we have. It's durable, but there's still pockets, and today I would point to Europe as an example and pet retail as an example as well.
Great. Maybe just one other one on the product side. Seresto, next steps from an EPA perspective? I know it's been a topic discussion in the story, and would love to hear your latest thoughts there.
Yeah. A great product. Seresto continues to be a brand that we stand with and as confident today as ever in the registration and the long-term need. I stop and say in the U.S., there were 500,000 tick-borne illnesses between Lyme disease and Rocky Mountain spotted fever, and Seresto is a key part of a total health solution that is needed and offers something very unique in the marketplace. It's a strong brand, a lot of loyalty to the brand. We did have some PR issues. We have engaged directly with the EPA. Chris, to your question specifically, the next step is we're engaging in a collaborative way with the EPA. Remember, you know, OTC products, anything that's topical or collar or on the pet goes through the EPA, not the FDA.
EPA spends, you know, primarily a lot of time on the environmental side, the plant side, and we are working with them on a brand stewardship and oversight approach and initiatives that would actually create, you know, a better data and better opportunity to, you know, not be prone to PR issues, but to let pet owners, veterinarians, all of us know and understand the product. We're hoping for early here in 2023.
Great.
-to have a collaborative agreement with the EPA, which is actually good for Seresto in the long term.
Okay. Something in the near term, hopefully we'll get some sort of update.
That's correct.
Okay, great. One of the questions or topics I've been having is operating costs. You've obviously managed the P&L, you know, pretty aggressively in response to some of the dynamics of the industry. Is this a sustainable level of spend, what we're seeing right now? I guess I'm thinking of this in the context of you setting up some very important launches as we look out to 2023, and more importantly, 2024. How do we think about expenses playing through these next few years?
Sure. Let me start with R&D. We made a lot of structural changes and prioritization decisions at the end of 2021 going into 2022. You've seen the reduction to about $80 million a quarter or $320 million a year in R&D investments. We feel like that allows us to be very competitive to do the new
-development blockbusters, the life cycle management, and to continue to refill the pipeline because of the structural changes Ellen's implemented and the productivity she's getting from the team. We don't expect that to go down dramatically like it did in 2022, but it is an investment. As Jeff mentioned, we do have a, you know, compensation method that capitalizes R&D, so that R&D is not something we make choices on to drive a bonus, but rather understand it's a long-term investment decision. As we look at the OpEx side, you know, we've dropped OpEx substantially in 2022. That was from the restructuring we announced at the end of 2021. We don't expect that to continue to drop at that level. We're going to invest behind the launches. The new innovation will drive our margin expansion. It will drive positive cash flow.
We know we need to launch our innovation well as it comes out.
Mm.
That being said, we continue to find ways to add to our productivity. As Jeff mentioned, the final step in our one-off cost and cash investments is the integration of the Bayer systems into Elanco, into our shared service center networks. We continue to push more jobs to our lower cost jurisdictions in Poland and India and Guadalajara to do work. We're optimized. We think that'll drive about $50 million-$60 million of synergy value, a lot of that in 2024 as we get through this in 2023. That allows us to both continue to invest to drive products while not having a significant jump up in the operating costs.
Okay, great. While we're on the cost side, one that did come in through the portal I think you mentioned before, how do we think about interest expense for the company given the rising rate environment?
Certainly we'll expect to have significantly higher interest expense through the P&L in 2023. We've got just under $6 billion of gross debt. $1.8 billion of that is currently floating. As we look at, you know, the Fed rate rises and that being about 300 basis point increase year-over-year, interest expense will be up. We have another $1 billion of swaps on our floating rate portfolio that roll off in Q4 of this year. From our perspective, we've got very durable cash flows. The one-time costs are getting behind us. That's going to lead to free cash flow conversion improving in 2024. From a refinancing risk standpoint, our main debt tower is in 2027. There's a lot of time between now when we have a significant refinancing.
Yes, P&L interest expense will be up in 2023, but we feel very good about the ability to manage the debt, and we'll continue to bring down leverage over time.
Okay. We think about that debt, there'll be some component this year and then another step up as we go into 4Q.
With more going floating. Depending on how the Fed plays out over the course of the next 18 months, there'll certainly be an impact.
Okay. Kinda headwind to watch, I guess, in the earnings side there.
Yep.
Can I discuss on the new product side?
Yeah.
You've got a couple large product opportunities on the companion side as we look out to 2024. How do I think about the ramp of when those can start to really, I guess, impact top-line growth? I think that it seems like
Yeah.
-pivot to healthy growth, the old organization, those products need some traction. As, you know. Are these things that on, you know, very quickly post-launch can become contributors, or do we need to give these... You know, if we're thinking about more like 2025 before we're really seeing the merits of those opportunities.
Maybe I start with derm.
Sure.
Derm is a market that's a large market, few products in that market. We are not in that market outside of otitis and a few smaller segments. This will be accreted. Every, you know, dollar will be accreted. We, with the noting of our submission on the JAK and early this year, first half of this year, submission on the IL-31, a USDA approval is a little faster than FDA. A few things. I think one is we do see that we're gonna come with a portfolio on Derm. We believe we have the organization, the size, the distribution, the capabilities today to actually go in and compete and create share voice.
We believe that we've got some differentiation, as we've noted, with the JAK inhibitor that would be on the label, that type of differentiation.
Mm-hmm.
We believe that this market is very prone and veterinarians are very prone to an interest in having more options. I think that we would look at, you know, getting manufacturing in play, being ready to, and intent to ramp and launch very competitively. Again, first half of 2024 is tied to some of the ADUFA timelines. Chris, I think we can be competitive. It isn't gonna take a large increase in sales force.
Mm-hmm.
given the size we got with Bayer plus Elanco. On the parasiticides, we're leaders. We've got large portfolios here. We've been in this space a long time, and we believe we've got, again, positive differentiation. Coming into that marketplace, you know, yes, it's competitive, but I think with differentiation, one, we always gotta look at are you second or third to class? That's another factor to consider, how big that differentiation is, and then, you know, the size of the launch activities that we'll lean in and the partners maybe that we use in doing that. All those factors.
Can I go back to derm?
Partners being distributors.
Okay. Yeah. I go back to derm. If I think about the two opportunities, on one hand, we've got-
Yeah.
I mean, JAK's kind of a bigger, maybe more established market, but one where the competitor's been around for a while and is pretty well entrenched. On the other hand, you got the IL-31s growing nicely but a smaller market. Which of those do you view as more attractive?
Well, I think as I mentioned earlier, portfolio matters most. I think when you go in and it's a little bit of even a formulary approach to say, "Hey, we've got both," I think that's one. Differentiation matters the most to veterinarians, so they can pick and choose. You know, vet clinic placement matters. When you get into vet clinics, they let you in and get on the shelves if, hey, there's a value contribution, either through differentiation or your existing portfolio. I think those are the factors that matter. I wouldn't pick either one. I think it's the size of the differentiation.
Mm-hmm.
The ability actually to be able to, you know, put it into a portfolio and take that to a clinic. More to come. I would say just on the monoclonal antibodies, we're making the parvovirus monoclonal antibody now in our Kindred plant. That'll be the same plant that'll manufacture the IL-31. I think, look, monoclonal antibodies are new to animal health. There's not many in the marketplace. We've built that capability. Kindred's helped us with that capability. I think the other factor is having the supply and having the ability to be competitive and ramp. As you ramp volume, you pick up margin.
Great. China reopening, I guess talk a little bit where we're starting off from 2022 and, you know, how much of an opportunity or, you know, is that as we think of to 2023 for the business?
Yeah. I think we all see, you know, some improvement. I think we're a little more tempered on that improvement just from the standpoint of, you know, when lockdowns, you know, came down, then COVID cases went up. I think that from a pet standpoint, we wanna by spring start to see the lockdowns become something that the opening of the marketplace and pet owners having more freedom and more access. That's something to monitor and watch, something we're gonna monitor and watch a lot before our February guide.
Sure.
That's one. I think the other is pork prices, Chris. Pork is still the biggest segment in animal health for us as we look at the overall business. Pork prices have improved, but the large companies, corporates that are mainly our customers, they put a lot more cost into biosecurity with African swine fever, so their break evens are a little higher. We've gotta see a sustained demand for poultry and pork holding up prices so that the large companies will come back to multinational products. Those are the two, I think, indicators to watch. Again, we see China being favorable to 2022 for us. How favorable and the size, I think, will be driven by those two factors.
Great. I think we're just about out of time. Thank you so much for the comments, and, thanks for joining us.
Thank you.
Thanks, Chris.
Thanks, Chris