Elanco Animal Health Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Michael Ryskin - BofA Global Research - Analyst : Congrats on the quarter and the update. Jeff, maybe one for you to start. You talked about Zenrelia. Obviously, a lot of focus there. You mentioned a couple of times hitting key internal metrics. Specifically, I think you outlined clinic penetration as something to really watch. Any early indications of what those metrics are exactly? Just give us some specifics in terms of whether -- where you are now, where you hope to be at the start of the year or middle of next year, just anything you can point to so that we can track progress. Obviously, revenue contribution is expected to be small in the first couple of months. But what should we be looking for? Anything you can quantify to give us a sense of that early progress?

Question: Michael Ryskin - BofA Global Research - Analyst : Okay. Okay. That's helpful. And then maybe for my follow-up, a little bit more of a big picture question. Somebody touched on it at the end of the prepared remarks in terms of the 2025 framework. As you indicated before, not expecting a ton of operating leverage in '25 because of the investments to drive those new brands. So hence, the mid-single-digit top-line growth, but then EBITDA is sort of mid-single, low-single, depending on what you're looking at. But I think what we're focused on is sort of that underlying operating leverage or what the operating leverage could be in '26, '27. I'm not going to ask you to guide to 2026 just now. But just could you sort of walk us through that bridge of what's holding back 2025 operating leverage and how much? So how much from the gross margin pressures? How much from the incremental investments? How much from sort of these are going to be Quattro and Zenrelia that are going to be low-volume products, so not as much contribution to margins? And that will help us get a sense REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 1:00PM, ELAN.N - Q3 2024 Elanco Animal Health Inc Earnings Call of sort of, let's say, you do mid-single-digit growth going forward, what kind of operating leverage we could expect in the out years? Hopefully, that makes sense. Thanks.

Question: Jon Block - Stifel, Nicolaus & Company, Inc. - Analyst : Todd, thanks for the 2025 preliminary guidance. I certainly think it's helpful. I guess, you gave 2025 preliminary and then we'll all sort of noodle and see what else we can get. So going down that road, I just think the EBITDA, low single-digit growth adjusted for aqua, I'm just trying to, again, a high-level thinking about the cadence. Do we view that as somewhat back-end weighted because it's suppressed because of the investments? And so should we think about the investments more prominent? Or at least it's all cash out, call it, in the early part of the year? So revenues will follow for both Zenrelia and Quattro, maybe even IL-31. But when we think about the low single digit, again, anything on the cadence and sort of where I went with the question? Is that the right way to maybe work it through the model in '25?

Question: Jon Block - Stifel, Nicolaus & Company, Inc. - Analyst : Got it. Very helpful. And then I'll just shift gears and go back to Zenrelia. And Jeff, is there a percent of practices that are saying the label is a nonstarter for me? Hey, look, I just can't get my arms around this and even with your additional data around dosing, this is a nonstarter. Is it 10% of practices that you reached out to? Was it 40%? If you don't want to give that, maybe if you can help us out if it's been in line with expectations. I mean, clearly, we'll have to see where practice penetration falls. And I'm guessing that takes several visits from an Elanco rep to eventually get there. But I'm just curious in the early days of that noise around the label and the nonstarter and how that compares to company expectations. Thank you.

Question: Erin Wright - Morgan Stanley & Co. LLC - Analyst : So on IL-31, can you give us an update on your conversations with the USDA on that product and how we think about the timing of the launch first half, second half? And just the opportunity with the long-acting in light of Zenrelia, and it sounds like you're scaling up the manufacturing in mAbs? And just how you think about the competitive landscape, I guess, evolving in derm? Thanks.

Question: Erin Wright - Morgan Stanley & Co. LLC - Analyst : Okay, thanks. And on Credelio and Credelio Quattro, I guess how are you thinking about pricing here? And when you launched, I guess, legacy Credelio, you were at a premium. Do you expect to take a similar approach, just given the differentiation of the product? And on Zenrelia and pricing, so two pricing questions here. Just given the dosing for larger dogs, is the pricing still shaking out to about a 20% discount relative to the competitor? Or is that playing out according to plan? Thanks.

Question: Brandon Vazquez - William Blair & Company, L.L.C. - Analyst : As we go into 2025, can you talk a little bit about -- I think there was a comment about this earlier with your sales force. Are there going to be any changes in comp? You obviously have a lot of new good products that the sales force is going to want to push. Any changes to the comp works to make sure that the entire portfolio is kind of moving forward? Just curious if there's anything notable there to talk about. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 1:00PM, ELAN.N - Q3 2024 Elanco Animal Health Inc Earnings Call

Question: Brandon Vazquez - William Blair & Company, L.L.C. - Analyst : Okay. Great. And as a follow-up, Seresto and Advantage, if I collectively do those revenues year to date, up about 7% reported, probably up a little higher even on an organic basis, which is encouraging. So I'm just curious if you could talk to -- this is almost, I think, 40% of your pet health sales at this point. How durable is kind of like a 7% level? Is this -- do you guys feel like this might be a new level here where you can maintain or grow off of into '25? Thank you.

Question: Balaji Prasad - Barclays Capital Inc. - Analyst : Thanks for the questions. So firstly, I can't help feel that the expanded portfolio should give you a significant portfolio advantage that you haven't had much with the veterinary clinics. So with that, I'm surprised to see competition in US pet health vet clinics still being called out as headwind -- as a material headwind for 2025. So which are the areas where you expect to be at a competitive disadvantage, and where you are in the cycle too? Secondly, congratulations on reaching Experior blockbuster status. So what does it mean for long-term direction of growth? How would you quantify the current level of market penetration or market saturation? Thank you.

Question: Chris Schott - JPMorgan - Analyst : Just two questions for me. Maybe first, just talk about kind of bigger picture pricing outlook as we head into next year. It's been maybe a healthier environment for pricing the last few years. I was wondering if you expect that to be able to continue into 2025 or normalize a bit. My second question was just on Quattro and just -- can you just elaborate a little bit on how you see the product ramping next year as you come to market? I guess my question here is should we initially expect that a lot of the use here are prior Credelio users, I guess, initially in 2025? Or do you think you can kind of right off the bat target maybe a broader swath of vets to adopt the product? I'm just trying to say, is that more of a '25 event? Or is that something that plays out more over time? Thank you.

Question: Mike DiFiore - Evercore ISI - Analyst : This is Mike DiFiore in for Umer. Three quick ones for me. First, regarding the Zenrelia vaccination booster study. I noticed in that trial that except for canine distemper virus, 100% of dogs remained above the prespecified protective thresholds at the 1x and 3x dose levels. Just kind of curious as to what explains the canine distemper component not hitting these levels and is that a sticking point among vets who may be on the line? I also have two follow-ups. Thank you.

Question: Mike DiFiore - Evercore ISI - Analyst : Got it. Okay. Next, moving on to Quattro. Obviously, tapeworm is surely more endemic to certain geographic regions in the US. But in geographic areas that it isn't endemic, can you speak to the level of enthusiasm and receptiveness for this product? And would you expect more seasonality for Quattro in these non-endemic regions? And lastly and separately, I noticed that your expected innovation sales in 2024 has crept up $10 million at the midpoint, from $400 million to $450 million now to $420 million to $450 million. I may have missed this, but what's expected to drive this incremental increase in innovation revenue? Thank you.

Question: David Westenberg - Piper Sandler & Co. - Analyst : It's going to sound like I'm jumping around. But in all actuality, I'm just trying to get to kind of contribution margins as we're moving into '25 and 2026. So on the farm animal side, nice update on Bovaer. Are there any other states or countries in the pipeline that could be active and staying on farm animal? Heifer -- Experior and the heifer update, that's great. Can you give us a little bit of flavor in terms of the size of this opportunity? And is Experior have more of a pet op margin or more of a farm animal margin? And maybe it's going to change as we get more volume? And then if we are going to see Quattro replacing Credelio, how should we think about like Credelio becoming a blockbuster? Because I would imagine that maybe it's at the $50 million point, it's dilutive to accretive or something like that. Okay, thank you.

Question: Navann Ty - BNP Paribas Securities Corp. - Analyst : I have two on Zenrelia and one on the CMO. So maybe if you can share early vet feedback on the vaccine booster study, does it already or has the potential to influence vets regarding the withholding period before natural label change? And also, we have heard from vets the 20% to 30% range of Apoquel non-responders, which is higher than we expected. Is that in line with your expectation and vet feedback? And then on the CMO, how long does it take to transition supply? And how much visibility do you have on the court proceeding to estimate the 2025 EBITDA headwind? Thank you.