Well, well, good afternoon. Welcome back to TD Cowen's 46th Annual Healthcare Conference. We're delighted to be hosting Elanco Animal Health. From the company, we have Corporate CFO, Bob VanHimbergen, CFO of the U.S. Pet Health and U.S. Farm Animal Business, Luke Smith, and from Investor Relations and IR, we have Tiffany Kanaga. To start off, Bob, what are the most important takeaways from Q4 results and how should investors think about 2026 in the context of the midterm outlook laid out at Elanco's December 2026 Investor Day?
Thanks, Chris. Thanks for the question. Listen, Elanco's really started off on a great foot in 2026, really leveraging the momentum that we came out of Q4 2025. We did have 9% growth in the quarter. Our basket of innovation continues to outperform from our expectations, landing at $892 million in the year. We saw all four quadrants of our business perform well. We saw the basket of innovation perform well. Cash came in better than we had expected as well on just good fundamentals of the business. We're able to pay down debt, I believe, even a little bit more than we had projected, and so we landed leverage at 3.6 times. We ended end of the year with a lot of momentum and then kicking off 2026 with that continued momentum.
We did give guidance for the year last week, and really right in line with our Investor Day targets that we gave out back in December, where we expect mid-single-digit top line growth, high-single-digit EBITDA growth, and low-double-digit EPS growth, and a plan to continue to de-lever and bring leverage down into the low 3s. Like, we're really pleased with the performance and the momentum we're seeing across all four quadrants.
Maybe just going back to 2026 guidance, what are the biggest areas of uncertainty, and what scenarios or outcomes could allow Elanco to exceed the top end of guidance?
Listen, like, you know, we do give a wide range of guidance, reflecting, you know, a couple different things. If I think about the momentum of the business, you know, obviously, that's certainly some upside and the globalization of our products. We've got some fantastic products with Zenrelia and Quattro, the continued globalization of those products. If we see the macro improve, if we see those products and the ramp of that basket of innovation, improve, you know, certainly that's gonna help us get to that top end of guide. listen, like, we're also, you know, cognizant of the competitive environment, and, you know, there's the industry's growing great, but competition certainly is bringing products to the market as well.
We think we're balanced with our guide, but certainly pleased with the momentum we're seeing and certainly the high end of the guide could get there just with continued success in the products that we've launched.
Are there any specific data points you'll be watching for near term that we could have updates on by Q1 results?
Yeah, I mean, maybe not so much on Q1 results, and I probably won't put a timeline on this. Listen, with our Zenrelia label, certainly, you know, that's something that's what's baked into our guidance is the label as is. With that being said, the FDA has asked for data from us back in October. We have provided data at their request on our label. Listen, like, we're in active conversations with them and good, robust discussions on really what the label could and in our view, what should be. Listen, we've got 1 million dogs that have been on Zenrelia. We're in 40 countries with a clean label, and it's been on the market for close to a year and a half now. Those are some data points that could get us to a clean label.
Listen, we're not putting a timeline on that. It's our hope and expectation we'll get that eventually. Listen, when we hear from the FDA, you know, obviously we'll assess where we are and continue our no regrets approach to continued success with Zenrelia.
One area that was updated in Elanco's 10-K guidance was an update on U.S. Seresto generic. Can you update us on what % of Seresto sales are in the U.S. and your expected timelines for generic impact in the U.S. and ex-U.S.?
Seresto's a global brand with sales composition roughly 50% US, 50% OUS. As you mentioned, we've seen some recent competitive entrants into the market, but would share that we've been planning for this for some time now and feel like the brand is well positioned to perform going forward. I'd maybe just begin by first acknowledging that we believe strongly in our intellectual property and will continue to defend through the duration of the patent, which extends here in the U.S. through Q3 of 2027. With that stated, we feel like the brand's well-positioned to compete given a variety of factors. You know, we have a leadership position in the retail channel. We have broad points of distribution, which gets us access to customers. We also have incredibly high brand awareness and loyalty with Seresto.
At this point in time, we expect limited impact from the generic. We factor that into our guidance for the year. We perhaps point to our experience with the topical category, as a helpful analog, where the Advantage family of products remains the market leader despite being off patent now for a number of years. Maybe I'd also just offer that we continue to bring innovation and lifecycle management to the category, including our recently approved four-month collar that we'll be selling under the Advantage family brand name. Again, feel like Seresto's in a great position to compete and excited about the performance that the brand has going forward.
Maybe longer term, kind of where do you see this brand in 2030?
I mean, we think that the OTC business will continue to be relatively stable, kind of plus or minus low single digits, and we think Seresto will continue to perform. You know, we'll have the basket of innovation-- or not basket of innovation, but the basket of the portfolio that we have here to really sustain that performance.
Maybe going back to some of the potential headwinds, tailwinds in 2026, can you maybe talk about the U.S. vet landscape? How are vet visits and consumer spending on pets trending? Are there any specific factors like tariffs that might be driving this pressure?
We've been really pleased with the robust consumer response to our portfolio, both on the pet side of the business and on the farm side of the business. As Bob mentioned, we saw 9% constant currency growth here in Q4, 7% for the full year, with great fundamentals across the business. Price and volume, all four business of the business or quadrants of the business growing and continued accelerating contribution from our innovation portfolio. We also remain very bullish on the animal health industry in general and see continued runway for expansion here, as well as an opportunity for Elanco to play a leadership role going forward.
Maybe specifically on the pet side of the business, we believe that vet visits continue to be an important metric to track, but would also point to the shift in consumer behavior where access, convenience, and willingness to spend are becoming more and more meaningful. Today, roughly 40% of sales in the pet market are subscription-based, and omnichannel shoppers on average are spending 30% more annually than we see from single-channel shoppers. Our focus on the pet side of the business will continue to be meeting that modern pet owner where, when, and how they choose to engage. On the farm side of the business, we continued to capitalize on the accelerating global animal protein consumption trends, which in the U.S. is now projected to grow annually at about a 5% clip.
This is driven by a variety of factors. 70% of U.S. consumers have indicated that they plan to increase their protein intake given changing dietary guidelines, given the aging population where protein will become more important due to muscle retention, as well as the emerging trends of GLP use. We remain very bullish on the animal health industry in general and believe that our strategy and our portfolio is well-positioned to capitalize on some of this evolving macro backdrop.
In amidst these macro pressures, have you made any changes to your business pricing strategy to be at this point?
Yeah, I mean, on pricing, I mean, we continue to price to value. Listen, we believe we've got the best medicine and we'll price accordingly. You know, think about pricing overall to the company. We did have 2% pricing in 2025. We expect that to accelerate in 2026. In Luke's business in the U.S., we did take the highest pricing out to the vet clinics. It's the highest we've had in five years. Listen, we'll continue to price to value. We expect in 2026 an acceleration not only from 2025, but also accelerating throughout the year. I'd remind you that we're lapping key launches we had in 2025 with Zenrelia and Quattro. It'll be, It'll be a good driver to margin improvement.
You mentioned some potential competitive headwinds to be aware of. How do you approach modeling competition as you think about midterm and full year guidance?
Yeah, I mean, listen, we do consider, you know, competition in our guide. I mean, you take a step back and just look at the industry. You know, we expect the industry, the animal health industry, to grow by $20 billion over the next decade or so. Listen, it's a robust industry. Listen, competition is here as well. Listen, right now we feel like we've got a lot of momentum with the best medicine and the best products. We've got an omnichannel approach that helps us reach, you know, customers where they wanna shop. We have a full portfolio now with Zenrelia, and Befrena will certainly just continue to enable that. You know, that's helping us make inroads with corporate accounts.
In 2025 specifically, you know, we grew 90% of our corporates, and that's compared to 13% last year. That's just showing the value of the broader portfolio. Listen, like, we saw obviously Merck launch their or had approval of their derm product last week. You know, our view is with Zenrelia, we've got best medicine, and, you know, we'll continue to lean into a no regrets approach to launching that product. You think overseas, you know, we've highlighted some key market share profiles last week at earnings call. Listen, in Brazil, we've got a 40% share. In Japan, it's 30%. In several countries across Europe, we have low double digits. In the U.S., low double digits.
Listen, we believe that the efficacy of the product is important and we're running right now based on the efficacy of the product and not price. Listen, we know competition's gonna be there, and that's embedded into our guide. Listen, we're gonna lean into to what we have.
Since you mentioned the Merck product, I think their label lacked a claim for treatment of chronic dermatitis. Any thoughts on that label? Any thoughts about positioning in the U.S. versus expectations?
I mean, yeah, obviously we saw the label last week. Not a surprise to us with the announcement. That was embedded into our guidance that we expected Merck's product to come to the market. You know, our view is, listen, we believe Zenrelia to be best in the market. We've done a head-to-head study with the incumbent, and that's a great tool for our commercial teams as we go out to the market. Then I'd highlight-- Listen, we've launched Zenrelia overseas around the same time that Merck had their product come to the market and we've seen extreme success because of the efficacy. Again, I'd point to those margins that or that those market shares that I just referenced.
Maybe taking a step back, you have six big products launching over the next couple years. What % of innovation revenue was from the big six in 2025, and where do you see that going over the next two to three years?
Yeah. We, you know, we don't talk about each individual product within the basket of innovation. You know, we did have $892 million of revenue from that basket in 2025. We saw continued momentum near the end of the year, on Investor Day, we did say we'd expect about $1.1 billion of revenue coming from that basket in 2026. Because of the momentum that we saw here at the end of the year, we raised that to $1.15 billion for 2026. You know, no surprise, that basket's led by Quattro, Zenrelia, Experior on the farm side, AdTab in Europe. Listen, like, we're gonna continue to see the globalization of these products as we move forward in 2026 and beyond.
Which is important for us because the margin profile of this basket of innovation is higher than our corporate average, right? We'll see a higher degree of profitability flow through with growth.
From a growth contribution standpoint, is it fair to view Quattro as kind of the leading contributor to growth, to your midterm outlook? Or how should we think about that composition?
I mean, so think about I mean, so Quattro was the, it acted like the first to market, right? It was third to the market, hit blockbuster status, you know, in late summer for us. We continue to see strength there. We see the value of Quattro and Zenrelia really stabilizing our base portfolio with a halo effect of getting into clinics and the broader portfolio really bringing up our base business. You go back to Q1 last year, our base was down a little bit more than you saw in Q2, Q3 and Q4 of 2025. Again, it's because of the halo effect of these new products coming in. As we look forward, you know, we expect the base to continue to be stable, and we view stable as up or down low single digits.
I'd tell you that could shift by quarter and by region, but certainly see the benefit of these products coming through.
You touched on the gross profit margin profile of the big six. Is 60% gross profit margin a good way of thinking about this? How should we think about this in modeling out the company?
Listen, like, so I know historically we've, you know, we've put out a 60% gross margin target. Is that achievable? Yes. Right? We're not putting a timeframe on that, but I'd give you just a couple points of interest for modeling purposes. Our basket innovation does carry a higher margin profile than our corporate average. We've also have Elanco Ascend that's coming in and, you know, we've started to execute that program. Elanco Ascend is about not only really addressing costs within our P&L, and I'd say that's really across all levels of the P&L, but it's also about enabling and leveraging some new capabilities with automation and AI. We expect $200 million-$250 million of EBITDA improvement from Ascend by 2030. 75% of that we expect to get in gross margin and 25% on OpEx.
We'll see not only the natural gross margin benefits from the basket of innovation in that mix profile, the natural benefits of just volume leverage, but also Elanco Ascend, you know, really improving margin. Is 60% achievable? Absolutely, yes. We're just not putting a timeframe on that.
Makes total sense. Maybe diving into some of these specific products, what % of U.S. dogs today are on broad-spectrum products? What do you see as the biggest contributor to Quattro growth in 2026 and over the next three years? Is it price, share gains, growth of the class overall or ex-U.S. launches?
Yeah. The U.S. parasitic market is roughly $4 billion in size. Broad-spectrum constitutes roughly $1.4 billion of this, and perhaps equally important, has been growing at a 30% annual clip here recently. You know, as we think about our performance with Credelio Quattro in the first year, we've been incredibly pleased. As Bob mentioned, you know, we've seen the product reach blockbuster status in just eight months on the market, which is the fastest pet health product to achieve that status in the history of Elanco. It's been, you know, really defying the typical third market archetype that we see with products. We believe that's because it's best medicine that offers four separate degrees of differentiation.
Its broadest coverage, its speedy kill of ticks, its heartworm efficacy in just the first month, and its also exceptional palatability, which has really been a pleasant surprise as we've seen how the product has performed in the market. As we think about vectors of growth going forward, I'd perhaps point to three separate areas. The first is share. We're in roughly 1/3 of the vet clinics here in the U.S. today. We continue to see that number steadily increasing each and every month. You know, we've are growing our partnership with corporate accounts, we've also been leveraging that key relationship with distribution, which we feel is really critical to launching the product with success.
Furthermore, we see an opportunity to grow share in the clinics that we're already have penetrated in as our portion of the business here is still relatively low. Our confidence here is driven by the recent Kynetec Puppy Index metric, which Quattro was ranked highest in Q4 relative to all other broad-spectrum products and grew sequentially relative to Q3 2025. Share will continue to be one of the key vectors for growth. The second will be price. We believe that this is best medicine and we'll continue to price to value and wanna ensure that that value is reflected in how the product is positioned in the market. Third is globalization.
The international broad-spectrum market is roughly $700 million in size, and we've already initiated our global rollout, including the recent approval in Australia, as well as submissions in Canada, the EU, the U.K. and Japan. Again, multiple vectors of growth for us going forward, really pleased with the performance in its first year and excited about the runway that's in front of us.
Could you maybe talk a little bit more about your ambitions long term? It seems like Quattro has a best in class or potentially best in class profile. Why wouldn't it have the largest market share of the broad-spectrum class in 2030?
Yeah. I think we've been very intentional about balancing our ambition for the product with the current market reality. We anticipate that this will continue to be a highly competitive space and one that will continue to breed innovation. Again, we feel that Quattro is well-positioned to compete in this space. We were the only animal health manufacturer to grow share in the U.S. vet clinic parasitic prescription market in 2025. We think that this is largely due to Credelio Quattro, not only because of the individual performance of the brand itself, but also for the positive halo effect it has on the rest of our portfolio.
Are there any risk factors investors should be aware of thinking about the outlook for Quattro? Do you expect a generic isoxazoline before 2031 and anything else to be aware of?
No, I mean, nothing specific to call out here. I would just kind of acknowledge that we continue to take a very analytical, data-driven approach to how we're launching the brand and investing behind it. Bob and I meet regularly with our commercial leaders to measure the ROI of the media investments that we have, and we will continue to follow this approach as long as we're on the positive slope of the curve. Again, we feel like we're in early innings here, and while we expect that this will remain a competitive space, we're pleased with how the product has been performing in its first year.
Maybe moving to Zenrelia. What's the likelihood of the vaccine washout period being removed from the U.S. label within the next 12 months?
We're not gonna outline a specific timeframe, but we just would acknowledge that we continue to expect that Zenrelia will reach blockbuster status in both the U.S. and international markets respectively. You know, I'll just acknowledge that we think we have a really special product here, one that offers differentiation across the dimensions of efficacy, of convenience and of value, and we've already seen some really exciting proof points. We're in roughly half of the U.S. vet clinics currently and are seeing reorder rates north of 80%. Then in the international cohorts of launches that we've had, specifically Canada, Brazil and Japan, we're already seeing year three or year four analog share gained in the first year on the market. Regarding the label update, we remain committed to making the U.S. label consistent with the.
We see in the 40 other markets that we've launched where we've received approval without restriction. We have a multipronged strategy for accomplishing this goal. I'll just offer a quick reminder that the first step here was submitting existing data to the regulators, which resulted in the fatally induced disease language being removed from the label back in September of last year. Since that point in time, we've already seen 2,500 new clinics purchasing the product. We've also submitted additional booster study to the FDA and continue to have very constructive dialogue with the agency. We remain steadfast in our belief that this data, combined with the evidence at hand, as Bob mentioned, 40 markets using the product, over a million dogs worldwide, a strong pharmacovigilance profile, continues to support label enhancements.
I'll just remind you that our guidance for 2026 assumes the label as is, so any improvement to this profile just creates a tailwind for the business.
What has your market research shown on vet willingness to use Zenrelia with versus without the vaccine washout period?
You know, I don't think we have anything specific to add at this point in time. Again, really pleased with the performance. You know, we've seen it being used, you know, moving more towards that first line treatment, and we continue to expect that as we, you know, see label enhancements that will only improve going forward.
Just to clarify on Zenrelia reaching blockbuster status, did you have a timeline or?
No specific timeline at this point.
Great. Maybe moving to Elanco's P&L. Can you quantify the impact of inflation on the P&L, both gross profit margin and OpEx?
I mean, it's. Think of inflation for us in our guide. It's largely aligned with CPI. I mean, as I mentioned last week, you know, prepared remarks for our 2026 guide, you know, we do have some higher cost inventory flowing through the P&L. We saw some of that in Q4 and expect a little bit more in Q1, Q2. But with, you know, that flowing through, we'll expect pricing and margins to improve certainly 40 basis points in the year and probably a little bit more heavier weighted in the second half of the year.
You touched upon Elanco Ascend. How is that implementation progressing, and are there any opportunities to accelerate those cost savings ahead of?
Yeah. listen, like I'm extremely excited for Elanco Ascend. Really Elanco Ascend for us is again, taking a proactive approach to the P&L and cost save on top of just the natural benefits we'll get through mix and volume. also leaning into the benefits of AI. listen, our procurement team's already done a nice job of locking in some favorable pricing compared to what we've had in the past. We'll see those benefits flow through. Our manufacturing and quality teams have identified several opportunities and continuing to improve what they're doing within the four walls in their manufacturing facilities every day. On the restructuring charge that we took in December, very quick action from the global teams to initiate those activities.
We're well on our way to achieve the $25 million of restructuring save this year. Those will all be completed this year. We do expect about $60 million of benefit from that on a run rate basis starting in 2027. Listen, the team's done a nice job of executing. We've got a great governance model in place that's tracking these initiatives at a detailed level and, listen, high degree of confidence for execution there.
You've laid out a long-term leverage target of 2.0 to 2.5x. How should we think about capital allocation as Elanco moves beyond that or toward that target?
Yeah. Really no change in what we've communicated in the past. Listen, we're gonna continue to invest organically and paying down debt as a first priority, and we do expect to get leverage in the low threes by the end of this year and get below three in 2027. You know, I've been clear that we do expect M&A to be a part of our growth strategy, and I would tell you know, in the near term here, those are gonna be smaller tuck under opportunities, primarily around R&D. With that being said, it's, you know, it's not gonna derail us from our deleveraging timeline. Y ou know, with the, with the financial algorithm that we gave at Investor Day, you know, I expect our acquisitions are gonna be accretive to that model, right?
If we laid out mid-single digit, high single digit, low double digit growth on revenue, EBITDA and EPS, these acquisitions will be accretive to that model. In 2026, you know, we did announce a smaller acquisition last week. You know, 2026, you know, we're not gonna see a significant opportunity. As we get into 2027 and 2028, it's gonna check those boxes. The other thing I personally look at is ROIC and how quickly are we gonna exceed our WACC. You know, generally speaking, I want to see that in three-five years and, reflecting that, you know, could be closer to that five years based on the nature of the launch of a product.
With the AHV acquisition and the, you know, announcement last week, you know, we expect that ROIC to achieve WACC on the shorter timeframe of that time horizon. We'll continue to focus on paying down debt. We're gonna get to that 2-2.5 times. You know, I'd say once we get below 3 in that 2027 timeframe, that unlocks the opportunity for return to shareholders. So that'll be the plan and certainly more to come as we work through the timing of that deleveraging.
Is it fair to say most of your potential acquisitions would focus on therapeutics? Some of your peers have looked at diagnostics a little bit further afield or too early to say?
I think it's probably early to say. I'd tell you though, it's gonna be across both of our businesses, when I say both of our businesses, that means it's gonna be both on the pet side and the farm animal side and to make sure it's, you know, it's gonna be something that's within our longer-term strategy.
You also touched upon AI. What areas of the P&L might see the most tangible benefit from AI over the next five and the next 10 years?
Great question. If I think about just the near term, I mean, where you'll see the benefits of AI for Elanco in the near term is really gonna be on the cost side, and specifically G&A. I could give you several examples where we've already launched AI within the organization in our shared service center, we're seeing benefits, hard savings of benefits already through procurement and finance. As you kinda think about the next several years, you know, we're gonna use AI for manufacturing as we think about predictive maintenance and supply chain and how do we get more effective with supply chain. On the commercial side, you know, getting real-time data to our frontline sales team so we understand the, you know, the impacts of marketing and promotional discounts and, you know, touchpoints with customers.
As I think more, you know, more midterm, we also expect AI to enhance our R&D capabilities, and so that's gonna include not only regulatory filings and accelerating some of that, but also how do we use AI to test the molecular capabilities and how do molecules work together. We can think about failing faster, which will enable us to bring products to the market a little bit quicker.
Before we move to our final question, did we have any questions in the room or from Steve?
Yeah. Actually, I did wanna follow up on one. On Zenrelia, you said the reorder rate was north of 80%. It's hard for us, for at least me, to put that into context. Tell us why that's a great number. Like, what? Compare it to something else.
Yeah. You know, we think it shows just the vet's willingness to continue to use the product. You know, as Bob mentioned, you know, we're more so in secondary line treatment right now, but we see that continuing to move into first line treatment. Really pleased with the responsiveness that we're seeing there.
Right. Yep, I got that, but I'm wondering, compare it to another product. What's the reorder rate for another product? You know, What is it for another recent launch from Elanco?
I don't think we've shared that information in the past. I don't know if we're in a position to do that right now.
Okay. suffice it to say, this is above whatever those are?
Yes. Pleased with the performance. Correct.
Last question is, what could be the biggest surprise or change at Elanco over the next ten years?
Yeah, I mean, as I think about just Elanco, I mean, we're a different company today than we were a couple years ago, right? You just think about the profile of Elanco. We spun out from Lilly in 2018. So the first couple years were about separation and standing up ourselves. You know, then we acquired Bayer, so there was a lot of integration work to be had. Now we're really entering this next era of growth. We're seeing now the fruits of the investments on the innovation front. So as we sit here today, like, listen, we're entering this next era of growth. You know, we have a strong growth company today with a lot of short-term potential with our basket of innovation.
We continue to fund the pipeline, and that is a high priority for us to continue to fund that pipeline. We do expect another five to six potential blockbusters to hit the market by 2031. The last thing I would tell you is just the balance sheet and continued strengthening of the balance sheet, paying down debt and providing the opportunity to return cash to shareholders, right? I think we're really entering a fun area for Elanco and investors.
Great. With that, I think we're out of time, but thank you for joining us today.
Yeah. Thank you.
Thank you.
Thanks, guys.