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    Elanco Animal Health Inc (ELAN)

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    Business Description

    Elanco Animal Health Incorporated (ELAN) is a global leader in the animal health industry, dedicated to innovating and delivering products and services to prevent and treat diseases in both farm animals and pets. The company offers a diverse portfolio of approximately 200 brands, marketed globally to enhance the health and wellbeing of animals. Elanco's operations focus on providing solutions for pet health and farm animal health, with a strong emphasis on sustainability and food safety .

    1. Pet Health - Offers parasiticides, vaccines, and therapeutics for pets, including products like the Advantage Family, Seresto, and Credelio Family, aimed at protecting pets from parasites and treating various health conditions .

      • Advantage Family - Provides flea and tick prevention solutions for pets.
      • Seresto - Delivers long-lasting flea and tick protection through a collar format.
      • Credelio Family - Offers oral treatments for flea and tick infestations.

    2. Farm Animal - Focuses on products for cattle, swine, poultry, and aquaculture, enhancing efficiency, disease prevention, and sustainability with key products like Rumensin and Baytril .

      • Rumensin - Improves feed efficiency and growth in cattle.
      • Baytril - Provides antimicrobial solutions for various farm animals.

    3. Contract Manufacturing - Manufactures products on behalf of third parties, supporting the production needs of other companies within the animal health industry .

    Q3 2024 Summary

    Initial Price$14.46July 1, 2024
    Final Price$14.50October 1, 2024
    Price Change$0.04
    % Change+0.28%

    What went well

    • Elanco's launch of Credelio Quattro in Q1 2025 into the $3.8 billion U.S. parasiticides market, with differentiated features and strong sales capabilities, positions the company for significant market share gains.
    • Successful early launch of Zenrelia, with several hundred new clinics adopting the product each week and increasing reorder rates, demonstrating strong efficacy and supporting Elanco's growth in the dermatology market.
    • Elanco's strategic investments in innovative products and robust pipeline, including Zenrelia, Credelio Quattro, Experior, and IL-31 expected in 2025, are expected to drive growth across global markets and strengthen their competitive position.

    What went wrong

    • Potential Pricing Headwinds in 2025: The company expects pricing to return to historical levels over time, which may impact revenue growth as prior pricing benefits might not continue.
    • Front-Loaded Investments Affecting Margins in 2025: Planned investments in new product launches, such as Credelio Quattro and Zenrelia, are expected to be front-loaded, potentially suppressing EBITDA growth, especially in the early part of 2025.
    • Slower Growth Expected for Key Products: Growth rates for key products like Seresto and Advantage are anticipated to decelerate to low single digits in 2025, down from the approximate 7% growth observed year-to-date.

    Q&A Summary

    1. Operating Leverage Outlook
      Q: How will operating leverage develop in 2025 and beyond?
      A: Management expects limited operating leverage in 2025 due to investments in new products like Zenrelia and Credelio Quattro, which are potential blockbusters. EBITDA growth will lag mid-single-digit top-line growth as they invest to drive these brands. Operating leverage is expected to improve in 2026 and beyond as sales from innovation start driving profitability faster than revenue growth.

    2. Zenrelia Launch Metrics
      Q: What are early indicators from the Zenrelia launch?
      A: The Zenrelia launch is progressing well, with several hundred new clinics adopting the product each week. Clinic reorder rates have increased every week for the six weeks since launch. Efficacy has been strong, even in tough cases where other products didn't work, and the product is performing exceptionally well across chronic, seasonal, and acute segments.

    3. 2025 EBITDA Guidance
      Q: Is 2025 EBITDA growth expected to be back-end weighted?
      A: Yes, investments in new products will be more prominent in the early part of 2025, while revenues from Zenrelia and Credelio Quattro ramp up over the year. This results in back-end weighted EBITDA growth, with more investments occurring upfront and sales building momentum throughout the year.

    4. IL-31 Product Update
      Q: What's the status of the IL-31 product development?
      A: Engagement with the USDA on the IL-31 product is progressing well, with approval expected in 2025. Management views it as a blockbuster product differentiated from current options, and it will be a complementary addition to Zenrelia in the global dermatology market.

    5. Pricing Strategy for Key Products
      Q: What's the pricing approach for Credelio Quattro and Zenrelia?
      A: For Credelio Quattro, a value-based approach will be taken, leveraging its differentiation but aiming to capture market share without necessarily pricing at a premium. Zenrelia is priced at an average 20% discount to competitors, with larger discounts for larger dogs to offer great value to consumers.

    6. Competition in U.S. Pet Health
      Q: How is competition affecting U.S. pet health?
      A: Competition in U.S. pet health, particularly in the parasiticide segments within vet clinics, remains a headwind. However, new product launches like Credelio Quattro are expected to drive growth, mitigate competitive pressures, and help regain market share in the U.S. pet health market.

    7. Experior's Blockbuster Status
      Q: What does Experior's blockbuster status mean for growth?
      A: Experior is expected to exceed $100 million globally in 2024, achieving blockbuster status. Recent heifer clearances open access to about 40% more feedlot animals, supporting continued growth and contributing significantly to mid-single-digit growth in 2025.

    8. Impact of U.K. CMO Situation
      Q: How is the U.K. CMO bankruptcy affecting operations?
      A: Elanco is working closely with bankruptcy administrators to maintain supply of products in 2024 and is confident in understanding the 2025 EBITDA impact. There is ongoing work to transition supply, and the situation is being managed proactively.

    9. Innovation Sales Increase
      Q: What's driving the increase in innovation sales for 2024?
      A: The expected innovation sales have increased to $420 million - $450 million, driven by Experior ramping faster than expected and growth from AdTab and Credelio Plus outside the U.S. This reflects strong performance from key innovative products.

    10. Farm Animal Growth Opportunities
      Q: What are the growth prospects in farm animal products?
      A: The U.S. clearance of Bovaer for dairy offers significant market potential, targeting a substantial market with efficient operational reach. Additionally, Experior's expansion into heifers provides further growth opportunities in the farm animal segment.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Jeffrey SimmonsPresident and Chief Executive Officer2018Jeffrey Simmons has been serving as the President and Chief Executive Officer of Elanco Animal Health Incorporated since 2018. He previously worked at Eli Lilly and Company from 1989 to 2018, holding various leadership roles, including Senior Vice President and President of the Elanco Animal Health division from 2008 to 2018 .
    David KinardExecutive Vice President, Human Resources, Corporate Communications and AdministrationAugust 2020David Kinard serves as the Executive Vice President, Human Resources, Corporate Communications and Administration at Elanco. He has led the Human Resources function since Elanco's spin-off from Lilly in 2018. He joined Lilly in 1997 and served in various positions, including Vice President of Human Resources of Lilly International .
    James MeerSenior Vice President, Chief Accounting OfficerSeptember 2018James Meer serves as the Senior Vice President, Chief Accounting Officer at Elanco. Prior to this, he was the Chief Financial Officer of Healthx, Inc. and held various financial roles at Appirio, Salesforce, and other companies. He holds a bachelor's degree in accounting and business and an MBA from Xavier University .
    Grace McArdleExecutive Vice President, Manufacturing and QualityJuly 2023Grace McArdle serves as the Executive Vice President, Manufacturing and Quality at Elanco. She has held various positions at Elanco, including Vice President of Supply Chain Operations and Executive Director of Manufacturing Strategy and Operational Excellence. She joined Eli Lilly in 2000 .
    Rajeev (Bobby) ModiExecutive Vice President, U.S. Pet Health and Global Digital TransformationMarch 2022Rajeev (Bobby) Modi serves as the Executive Vice President, U.S. Pet Health and Global Digital Transformation at Elanco. Before joining Elanco, he was the Vice President and General Manager at Conagra Brands and held various roles at J.M. Smucker Co. He holds degrees in Chemical Engineering and Marketing, Management Strategy, and Finance .
    Shiv O'NeillExecutive Vice President, General Counsel, and Corporate SecretaryMarch 2024Shiv O'Neill serves as the Executive Vice President, General Counsel, and Corporate Secretary at Elanco. She oversees the global legal team and ethics and compliance matters. Previously, she was Senior Counsel at Cummins Inc. and began her career at The Procter & Gamble Company . (Expected start date)
    José Manuel Correia de SimasExecutive Vice President, U.S. Farm Animal BusinessApril 2020Dr. José Manuel Correia de Simas serves as the Executive Vice President, U.S. Farm Animal Business at Elanco. He rejoined Elanco in this role in April 2020 after serving as President of Trouw Nutrition USA. He originally joined Elanco in 2000 and has held various key roles .
    Timothy BettingtonExecutive Vice President, Corporate Strategy and Market DevelopmentMarch 2023Timothy Bettington serves as the Executive Vice President, Corporate Strategy and Market Development at Elanco. He has over 25 years of experience in the animal health industry, previously working at Zoetis and Boehringer Ingelheim Animal Health .
    Ramiro CabralExecutive Vice President and President of Elanco InternationalJuly 2018Ramiro Cabral serves as the Executive Vice President and President of Elanco International. He joined Eli Lilly in 1998 and has held various positions, including Vice President and Head of Operations for Elanco EMEA and Chief Marketing Officer of Elanco .
    Ellen de BrabanderExecutive Vice President, Innovation and Regulatory AffairsOctober 2021Ellen de Brabander, Ph.D., serves as the Executive Vice President, Innovation and Regulatory Affairs at Elanco. She oversees global research and development, business development, and regulatory affairs. She previously held R&D leadership roles at PepsiCo, Merial, Intervet, and DSM .

    Questions to Ask Management

    1. Despite your expanded portfolio with products like Zenrelia and Credelio Quattro, competitive pressures in U.S. pet health vet clinics remain a significant headwind. Can you specify which areas you're still at a competitive disadvantage and how you plan to address these challenges?

    2. With Zenrelia's launch, have you identified a percentage of veterinary practices that consider the product label a "nonstarter"? How are you mitigating concerns among these practices to drive adoption in line with your expectations?

    3. Experior is expected to surpass $100 million in global sales this year. Can you quantify its current market penetration and elaborate on its long-term growth potential, especially with the recent Heifer clearances?

    4. As you introduce Credelio Quattro, how do you anticipate managing potential cannibalization of your existing Credelio user base versus capturing new market share? At what point do you expect Credelio Quattro to become accretive?

    5. Given your projection of mid-single-digit revenue growth but only low single-digit adjusted EBITDA growth in 2025, can you elaborate on the factors hindering operating leverage next year and your strategy for driving margin expansion in 2026 and beyond?