Elanco Animal Health Incorporated

Good morning. Thank you for joining us for Alanco Animal Health, third quarter 2024 earnings call. I'm Katie Grissom, head of investor relations and ESG. Joining us on today's call are Jeff Simmons, our president and chief executive officer, Todd Young, our chief financial officer, and Beth Haney from investor relations. The slides referenced during this call are available on the investor relations section of Alanco.com. Today's discussion will include forward looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the risk factors in today's earnings press release, as well as our latest form 10K and 10Q filed with the SEC. We do not undertake any duty to update any forward looking statement. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and it is not sufficient for prescribing decisions. Our remarks today will focus on our non-GAAP financial measures. Reconciliation of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we'll be happy to take your questions. I'll now turn the call over to Jeff.

Thanks, Katie. Good morning, everyone. Alanco reported a strong third quarter, delivering constant currency, organic, top line growth with adjusted EBITDA and adjusted EPS above the midpoint of our guidance ranges. Organic, constant currency revenue growth of 1% was driven by the contribution from new products led by Xperior, AdTab, Credelio Plus, and Zanrelia. This marks our fifth consecutive quarter of growth in our underlying business, and we continue to expect to deliver constant currency organic revenue growth of about 3% in 2024. Our consistent strategy focused on growth, innovation, and cash is paying off with innovative new products driving growth, enabling improved cash flow. Beginning on slide four, we achieved key milestones advancing our innovation portfolio and productivity strategy. Third quarter revenue growth, excluding the impact of our aqua divestiture, was led by our U.S. farm and international pet health businesses. For Alanco overall, we expect organic growth to accelerate sequentially in the fourth quarter and into next year. Since our last earnings call, we achieved several milestones for key potential blockbuster products as we now shift from regulatory into commercial launch mode. On the pet health side, we received U.S. FDA approval for both Zanrelia and Credelio Quattro, positively differentiated products expected to be meaningful competitors in the two largest markets in pet health. On the farm side, Bovair saw the first on-farm feeding into dairy cows. The flywheel is beginning to move as multiple consumer packaged good companies have signed contracts to purchase inset carbon credits from Appian, derived from the use of Bovair to reduce methane emission from dairy cows. As we shared in August, we paid down $1.3 billion of debt in the third quarter, enabled by the divestiture of our aqua business. Debt paydown remains our top capital allocation priority and net leverage down from the mid-five times at the start of the year, now expected to be in the mid-four times range at the end of this year. Finally, today we're introducing a framework around our 2025 expectations. With continued confidence in our expected $600-700 million of revenue from new products, we expect 2025 organic constant currency revenue growth to accelerate to mid-single digits in 2025. We expect the underlying business to drive -single-digit adjusted EBITDA growth, excluding the aqua divestiture, as we invest strategically in our new pet health launches. Ultimately, we expect organic adjusted EBITDA to grow low single digits driven by an expected headwind from the court-supervised insolvency of one of our key CMOs located in the UK. We continue to expect year-end net leverage to be in the low four to high three times range. Todd will further address our outlook towards the end of our prepared remarks. Moving to slide five, we provide third quarter -over-year revenue growth by our four business areas. We've separated out the impact of the aqua divestiture to show the underlying organic constant currency growth of 1%. First, starting with the U.S. pet health revenue, which declined 4% in the quarter, as strong retail performance was more than offset by competitive pressure and vaccine supply volatility in the vet clinic. On the retail side, the business returned to growth as the positive dispensing trends we saw starting in May continued in the third quarter. U.S. seresto sales grew over 20% in the third quarter, driven all by volume. On the vet side, we're excited about the launch of Zanrelia late in the third quarter and the expected first quarter 2025 launch of Cordelia Quattro. These products will be key contributors to the U.S. pet business expected return to growth in the fourth quarter of this year and into 2025. Outside the U.S., pet health delivered constant currency revenue growth of 2%, driven by the continued strength of AdTap, Cordelia Plus, and seresto. AdTap has exceeded our expectations each quarter this year, as our source of volume analysis points to less cannibalization of our existing portfolio in both vet and retail channels. Our strategic investment in the brand is driving AdTap to lead category growth for both dogs and cats, recruiting more new users into the fast-growing oral -the-counter market than competitors. Across markets in Europe, we are seeing significant penetration in key channels and very high reorder rates, while positive consumer preference survey data supports continued brand-building investment. We expect AdTap to be a key growth driver in 2025 as well. Now moving to farm animal, which grew revenue 3% globally. The U.S. business grew 11% led by cattle. Despite the declining U.S. cattle numbers, Elanco's cattle business remains strong, led by Exterior. With continued strong performance, we now expect Exterior to reach blockbuster status, with sales expected to exceed $100 million globally this year. Recent combination clearance approvals for Exterior are expected to allow for broader expansion into heifers, which represents nearly 40% of the U.S. feedlot population, a key growth driver in 2025. Additionally, we continue to see very strong demand for Riemenson, as the strength of our integrated portfolio continues to deliver. Cattle vaccines benefited from favorable comparisons to the third quarter last year, but to a lesser extent than in the prior three quarters. In swine, difficult producer economics in the U.S. are impacting the industry, as producers are reducing investment in productivity and certain other products. We expect this dynamic to continue in 2025. Finally, our portfolio benefited from poultry rotations again in the third quarter. Given the variability in purchasing patterns driven by rotations in this business, and our positive performance in late 2023, we expect a headwind of growth in the fourth quarter and into the first half of 2025. Finally, in international farm animal, the 3% organic constant currency revenue decline was driven by two discrete factors. The intentional due different commercial model changes we introduced with the initial 24 guidance, as well as the impact from the Keckstone product recall. Overall, we're encouraged by the performance of the business, with growth led by price and the new products, along with a stabilizing base, allowing us to report our fifth consecutive quarter of underlying revenue growth. Moving to slide six, we continue to advance our innovation portfolio and productivity strategy. To hit the highlights, our net leverage ratio was 4.3 times at the end of the third quarter, and price growth is 3% on a -to-date basis. Now on to innovation, which delivered $112 million of sales in the third quarter and $321 million on a -to-date basis, as shown on slide seven. Today, we are tightening our expectations for 2024 innovation sales, bringing up the bottom end of the range by $20 million, with $420 to $450 million now expected for the full year of 2024 and $600 to $700 million next year. Third quarter growth was driven by continued momentum from Xperia, AdTab, and Crudelio Plus, as well as the U.S. and Brazil launch of Zenrelia late in September. Now let's talk about our three key innovation products in more detail on slide eight. We are thrilled to be the second animal health company to enter the $1.7 billion global dermatology market. Since our U.S. approval in late September, the launch is progressing very well. We are pleased to be hitting all our key internal metrics, as we've now been executing the strategy we laid out in our conference call on September 20th, focusing first on vet education, driving positive experience, and accelerating the incentive to buy. Our vet education strategy starts with our field sales team, who bring the product benefits and considerations to life in the clinic utilizing the U.S. product label and the -to-head study data results. Additionally, over the past several weeks, we have hosted numerous medical education meetings, advisory boards, weekly webinars, and regional dinner meetings, where board-certified dermatologists and well-respected veterinary thought leaders have shared their positive experiences. These discussions include clinical data outcomes and successful case studies from trial participants. Our survey data shows the intent to buy increases significantly after these educational touch points with KOLs and veterinarian peers. Additionally, in mid-October, a Zandrelia vaccine booster study was presented at the ISCAGE symposium. The promising results concluded that when dogs were administered -sitin-ed for 56 days at one time or three times the labeled dose, the number of dogs with protective titers on days 43 and 56 following administration of canine core booster vaccinations, including rabies, were similar among all treated and control groups. No serious adverse events were observed. The data is accessible to interested veterinarians and our Elanco regional consulting veterinarians continue to provide support on questions and individual treatment decisions. The second pillar of our strategy is driving a positive experience. We continue to execute a targeted sample strategy. We have a number of early adopters enrolled in our early experience program, allowing us to gain valuable success data around real-world outcomes of Zandrelia and a variety of different case types. We see a clear opportunity for Zandrelia to be used in all types of allergic itch cases and believe it has the profile to be a first-line treatment. It is very clear Zandrelia works and it works really well. Both veterinarians and pet owners that have experienced the product have been very pleased with the speed and the level of improvements of their dogs. With only a few weeks passed since the booster vaccine data was presented, key launch metrics, including clinic penetration, reorder rates and average order size are all progressing in line with our expectations. We are tracking reorder rates for many clinics, demonstrating the product is being used and replenished. The key leading indicator we are tracking is clinic penetration. We are seeing the product placed in hundreds of new clinics each week. We plan to update the market quarterly on this metric beginning early next year. Our global launch is in full motion and we continue to invest in and execute a no-regrets approach. Overall, we are pleased with the launch of Zandrelia and encouraged by the adoption we are seeing in both the U.S. and Brazil. We look forward to the fastest ever globalization of a launch for Elanco, with Canada and Japan now approved, both with less restrictive labels than the U.S. and launching over the coming months. We are thrilled to be just the second company to offer an innovative new treatment in canine dermatology space and strongly believe in the efficacy benefits Zandrelia has to offer. We see relevance for all cases of atopic dermatitis for this product and believe Zandrelia has the potential to grow the market while unleashing a significant growth lever for Elanco. We are focused on building a sustainable leadership position in dermatology and Zandrelia is just the beginning. Additionally, as expected, less than a month after the approval of Zandrelia, we received U.S. FDA approval for Cordelia Quattro. The newest addition to the Cordelia franchise, which includes Cordelia dog, Cordelia cat, and Cordelia plus. Cordelia Quattro is the first and only canine oral parasiticide to protect against fleas, ticks, heartworms, roundworms, hookworms, and three different species of tapeworm in a single monthly dose. We are thrilled to bring this differentiated product to the U.S. market. Indecticides or flea, tick, and intestinal parasite combination products are the fastest growing category in the $3.8 billion U.S. parasiticide market with these broad spectrum products now making up nearly 25% of the market. And Quattro is positioned also to strengthen Elanco's value proposition in the prescription parasiticide market. We are progressing nicely through the final stages of manufacturing scale up to optimize the launch, which remains on track for the first quarter of 2025 prior to the major parasiticide season. We expect Cordelia Quattro to be a major consumer focused launch, contributing to the growth of the overall parasiticide market, driving share growth for Elanco. Shifting to farm animal innovation, we are encouraged by the progress of Bovair. In the third quarter, we achieved several key milestones. Notably, permission was granted for the sale and use of Bovair in California, a key dairy production state, and the first cows were also fed Bovair. We continue to expand the reach of our Uplift database with approximately 800,000 dairy cows enrolled and activated, expected to trend towards 1 million cows by the end of the year. Overall, farmer demand is very robust. And finally, multiple large CPG companies have signed contracts with Athen to purchase inset carbon credits. We've updated our pipeline chart on slide nine, and as you can see, we are now in or entering the commercial execution phase for the majority of these products. We're excited to share more information on the progress of these launches in the coming quarters, but early indicators are positive. As you can see, we are focused on investing appropriately to ramp adoption, take share, expand markets, and build strong brands. With that, I'll hand it over to Todd to discuss our third quarter results and outlook in more detail.

Todd Johnson Thank you, Jeff, and good morning, everyone. Today, I'll focus my comments on our third quarter adjusted measures, so please refer to today's earnings press release for a detailed description of the -over-year changes and our reported results. Starting on slide 11, we delivered $1.03 billion in revenue, representing a 4% reported decline. Excluding the impact of foreign exchange rates and the divestiture of our aqua business, organic cost and currency growth was 1%. Price contributed 2%, while volume declined 1% when excluding the aqua divestiture impact. Slide 12 provides revenue by the four quadrants of our business in the quarter. Total pet health revenue declined 2% in the third quarter, with price growth of 2%. Our U.S. business declined 4%, with supply volatility for vaccines and competitive pressure in the veterinarian clinic contributing an estimated 12 percentage points of decline in the quarter. We are pleased by the volume growth from our OTC retail parasiticide business, which saw the normalization of retail or purchasing patterns more in line with demand in the third quarter, and by the contribution of increased sales of new products, which together contributed 8 percentage points of growth. Importantly, next year, as supply headwinds are expected to subside and innovation contribution continues to ramp, we expect a return to growth in U.S. pet health. Outside the U.S., constant currency pet health revenue growth of 2% was driven by Europe, led by ABTAB and Ceresco as our retail investment strategy and execution continues to drive demand growth throughout the region. This was partially offset by competitive pressure in Australia. Moving to farm animal, globally, third quarter revenue growth was 3%, excluding the unfavorable impact of foreign exchange rates and the impact of the aqua divestiture. In the U.S., revenue growth was 11%, primarily driven by strength in cattle across both new and legacy products. Experian and Riemenson continue to be key contributors to growth, along with poultry in the third quarter, partially offset by the profitability challenges for swine customers. We are very pleased with the 18% growth in U.S. farm animal over the trailing 12 months, as our innovation has driven greater benefit across the portfolio. In 2025, we expect growth will decelerate from this elevated level, but remain above average industry growth rates, driven by Exterior and Bover. Outside the U.S., farm animal revenue declined 3%, excluding the impact of the aqua divestiture and the unfavorable impact of foreign exchange rates. Aligned with our expectations, the decline was driven by our strategic decision to change our -to-market model in certain geographies, including Argentina, and exit low-margin distribution agreements. We estimate this do-different approach, and the kextone recall in Europe drove 3% points of decline year over year. Excluding these discrete impacts, increased demand for our poultry products in Europe was offset by declines in Australia, driven by drier weather and generic pressure. Continuing down the income statement on slide 13, gross margin declined 230 basis points to .2% of revenue. The decline was driven by the impact of the aqua divestiture on product mix, inflation, and unfavorable manufacturing performance. The impact from slowing down the plan so the last four quarters was largely neutral in the quarter. Operating expense increased by 3% in the third quarter, driven by higher employee-related expenses and increased expenses supporting the U.S. pet health business, partially offset by savings related to our first quarter restructuring announcement. Strategic investment in the key launches is critical to the long-term success and profitability of the brands, despite being a temporary, near-term EBITDA headwind. Interest expense was $46 million, a decrease of $26 million year over year as the proceeds from the aqua divestiture enabled significant debt paydown at the beginning of the third quarter. Adjusted EBITDA was $163 million in the quarter, a decrease of $51 million on a reported basis, or $27 million excluding the impact of the aqua divestiture. Adjusted EPS was $0.13, a decrease of $0.05 in the quarter. On slide 14, we include a bridge for the third quarter results compared to the prior year. Additionally, in the quarter, we recorded a gain on the sale of our aqua business, which impacted reported EPS by $0.94. Now, let me offer a few words on our cash, working capital, and debt on slide 15. Cash provided by operations was $162 million in the quarter. On a -to-date basis, operating cash improved by $250 million, driven by improved inventory performance, strong collections, and lower project expenses. We ended the quarter with net debt of $3.897 billion, inclusive of the $1.3 billion of debt paydown from the proceeds of our aqua sale. The net debt to adjusted EBITDA ratio was 4.3 times at the end of the quarter, down from 5.7 times at the end of the third quarter in 2023. We remain confident in our year-end net leverage in the mid-four times range. We've updated slides 25 and 26 in the appendix to reflect updates to our key debt information. Based on our third quarter debt paydown, we now expect that income statement interest expense of approximately $225 million and cash interest of approximately $295 million in 2024. We expect 2025 income statement interest expense to improve by $5 to $15 million and cash interest to be lowered by $20 to $30 million. Additionally, we expect an incremental $150 million of cash taxes next year for deferred tax payments related to the aqua transaction. Next, I'll provide an update to the September 13 press release regarding the UK Contract Manufacturing Organization that entered court-supervised insolvency in September. This CMO is a critical supplier for Olenco, representing approximately $160 million to $180 million in annual farm animal revenue across species and countries. The entity remains in court-supervised insolvency, and we are working closely with the parties involved to maintain continued product supply. For 2024, we continue to expect an adjusted EBITDA headwind of approximately $5 to $10 million, primarily in the fourth quarter. For 2025, we believe there are a variety of scenarios, all with an expected -over-year adjusted EBITDA headwind between $25 million and $35 million, primarily on gross profit. We expect to reach a resolution in the coming weeks that have reflected this expected outcome in our 2025 growth outlook. Finally, let's move to guidance on slide 17. For the full year, the outlook for our underlying business remains positive. We are narrowing the range for revenue to be between $4.42 billion and $4.45 billion, representing 3% growth when excluding headwinds from foreign exchange rates and the impact of the awkward divestiture. There is no change to the midpoint of the sales guidance range, as increased expectation for innovation sales is offset by lower expectations for U.S. pet health parasiticide revenue. We expect adjusted EBITDA of $900 million to $930 million, reflecting expected gross margin headwinds from product mix and manufacturing performance. And finally, adjusted EPS is expected to be between $0.89 and $0.95, with improved expectations for interest expense and tax offsetting the items impacting adjusted EBITDA to result in no change to the midpoint compared to August. Our fourth quarter guidance is detailed in slide 18, with organic constant currency revenue growth expected to be between 1% and 4%. Despite the headwind from ACWA, adjusted EBITDA and adjusted EPS are expected to grow primarily based on the comparison of the fourth quarter of 2023, which included meaningful headwinds related to Argentina as detailed on slide 19. Finally, we wanted to provide some additional context on our expectations for 2025 on slide 20. On the top line, we remain confident in our trajectory towards innovation sales of $600 to $700 million, with expected organic revenue growth to accelerate to mid-single digits compared to our expected 3% growth in 2024, with growth expected in both pet health and farm animal. In pet health, growth is expected to be enabled by increased contributions from new products and strength in our pet health OTC business. We expect continued headwinds on our legacy U.S. pet health vet clinic business, although lessening as Cordelia Quattro and Zinrelia are expected to contribute to returning this business area to growth. On the farm animal side, we continue to expect above market average growth led by new products and cattle, but anticipate headwinds resulting from poor swine producer economics, generics, and unfavorable comparisons related to strong poultry rotations in 2024. Based on our updated guidance for 2024, the jump off point, excluding the estimated aqua contribution for the full year, should be approximately $875 million of adjusted EVTA. This reflects our 2024 guidance midpoint of $915 million, less approximately $40 million of estimated aqua EVTA contribution in the first half of 2024. Looking forward to next year, we expect the underlying business to drive mid single digit organic adjusted EVTA growth, inclusive of meaningful strategic investments in our key blockbuster potential launches. As I shared earlier, the anticipated $25 to $35 million headwind from the UK CMO situation ultimately puts our organic adjusted EVTA growth expectations in the low single digits range. From a cash perspective, we expect a few headwinds to our cash available for debt pay down, including deferred tax payments from the 2024 aqua proceeds and increased capital expenditures to support capacity expansion at our monoclonal manufacturing facility. With all this in consideration, we continue to expect net leverage to be in the high threes to low fours range, continuing us on our deleveraging path. We will continue to keep our eyes on the foreign exchange markets over the coming months and look forward to providing our detailed 2025 guidance next February. Now, I'll hand it back to Jeff for closing comments.

Thanks, Todd. Elanco is delivering on our expectation of an improved portfolio, with our fifth consecutive quarter of underlying top line growth in the third quarter and six projected in our fourth quarter guidance this year. We expect full year organic constant currency revenue growth of 3% and acceleration from 1% growth in 2023. We are continuing to outperform where we have leadership like pet retail and farm animal and are launching into big market spaces where we've had previously portfolio gaps and competitive pressure. Gaining regulatory approval for two differentiated blockbuster products in the two largest spaces in pet health within a month is unprecedented. The determination resolve and unwavering commitment of the one Elanco team was on full display, not just recently, but over many years leading up to this point of delivery. We have officially moved from R&D and regulatory to commercial launch mode for all three big products, Bovair, Zanrelia and Crudelio Quattro with growing tailwinds from Xperior, AdTab and Crudelio Plus. 2025 presents an invigorating opportunity to strengthen our position in pet health globally and see the market come to life for livestock sustainability. Building on our momentum this year, we expect revenue growth to accelerate next year to mid single digits. We expect to grow adjusted EBITDA low single digits in 2025, excluding ACWA as we make intentional investments with expected multi-year benefits aimed at building our brands and maximizing the returns on our innovation investments. This sets us up for continued top line momentum coupled with anticipated margin expansion in 2026 and beyond, shifting our focus towards the bottom line growing faster than the top line. We think this creates an exciting value proposition and look forward to updating you more formally on our 2025 guidance in February next year. With that, I'll turn it over to Katie to moderate the Q&A.

Thanks, Jeff. We'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow up. Operator, please provide the instructions for the Q&A session and then we'll take the first caller.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Michael Riskin from Bank of America. Your line is open.

Great. Thanks for taking the question, guys, and congrats on the quarter and the update. Jeff, maybe one for you to start. You talked about Zinrelli and 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 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 contributions expect 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?

Great. Thank you, Michael. Great question. Yeah, let me just step back. The launch is going well. Rapid, evolving, dynamic launch. We are six weeks in. And the metrics that we are focusing on and that we will communicate more about, we're not going to do that today in great detail, but we will as we get towards the next earnings call and we get into 2025. And those metrics being clinic penetration and reorder rates. So placing the product into clinics and then seeing it being used and replenished. Those are the two key things. I think a couple things I would focus on that I think are really important at this stage. The first is it's all about efficacy. And let me share that as I've said, Zinrelli works. It works really well. That's what we saw in the -to-head studies and the studies as we move forward with the registration. And what I can say is yes, Alunosidnev is a different active ingredient and it is delivering great efficacy. And again, as I said, we saw in the -to-head, we're now seeing it in the field. Of course, it's been given the tough cases where other products did not work. That's been obvious in the early stages. And what I can share, Michael, is it's performed exceptionally well. Some of these have become case studies that are being used with other veterinarians. I think a couple things I would say is we do see several hundred new clinics are taking on Zinrelli each week. The ramp is tracking nicely to our expectations. Clinic reorder rates have stepped up every week for the six weeks since the launch. And the early signs is our strategy is working. And just a reminder on the strategy, it's around vet education, experience, and high share of voice. And our first kind of round of incentives for our reps are targeted for the end of the year. And again, we'll be reporting those results as we get into Q1 with you. And I think it's just a couple other, just real quick, it's been asked about where this product is being used. We will say in the early stages it is being used in all three segments of chronic, seasonal, and acute. It's being used in general practices. And we continue to make good progress with strategic accounts. We've actually secured agreements a little faster than we originally thought with strategic, and it's being placed online. And look, I will point to the segment of there are veterinarians that actually desire more information before full adoption. And this is where we've taken a very tech to tech approach where the booster date has been helpful. And what we're seeing there is that there's a longer selling cycle or maybe a lower first order rate initially. So that's where we are and we'll continue to give you more specifics as we head into 2025.

Okay, that's helpful. And then maybe for my follow up, a little bit more of a big picture question. Something you touched on 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 2025 because of the investment to drive those new brands. Hence the -single-digit top line growth, but then EBITDA's -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, you know, how much from the gross margin pressures, how much from the incremental investments, how much from sort of, you know, these are going to be quattros and are going to be low volume products. So not as much contribution to margins. And that'll help us get a sense of sort of, you know, let's say you do -single-digit growth going forward. What kind of operating leverage we could expect in the out years. Hopefully that made sense.

Thanks. Yes, Michael. Todd, you know, thanks for the question. We obviously wanted to give some framework here for 2025 a little earlier than we normally would. We're excited to have these products approved in the marketplace. The sales growth from innovation is what's going to drive the bottom line. As you rightly point out, in 2025, you know, it won't be as fast as the top line growth. The UK CMO situation is clearly pulling us down at the gross margin level. And then, you know, we're going to work really hard to keep our G and A functions flat and declining so we can take incremental savings from there and really induct it behind these potential blockbusters. The Cronell and Quattro and Zanrelli that we're really excited to have in the field and want to get understanding of consumers and that's about how efficacious and good these products are. So, you know, we'll be growing those sorts of investments in line or faster than the sales growth that comes from that. All with an expectation of building, you know, momentum for the next, you know, three, five, ten years where we'll start to get that leverage you spoke of and start driving our profitability, you know, faster on the go. So, I think that's on the bottom line than on the top line in 26 as Jeff mentioned in the prepared remarks.

Thanks. We'll take the next caller.

Your next question comes from the line of John Block from Stiefel. Your line is open.

Thanks, guys. Good morning. Yeah, thanks for the 2025 preliminary, guys. I certainly think it's helpful. I guess, you know, you have 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, you know, the EBITDA low single digit growth adjusted for ACWA. I'm just trying that, again, a high level thing about the cadence. You know, do we view that as somewhat back and weighted because it's suppressed because of the investments? And so, should we think about the investments, you know, more prominent or at least it's all cash out call in the early part of the year? So, revenues will follow for both Zanrelia and Quattro, maybe even Isle 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?

And John, you know, I don't even want to give guidance for 25 this early and now you want me to give quarterlies. Now, appreciate the question and yes, I think you're thinking about it correctly. We're going to make the investments. You see it even here in the Q3 numbers where most of the investments are really driven by the expanded health sales force that we brought in the start of the year. You know, they know their customers, the customers know them well. And so, that's really set up here as we launch Zanrelia and then close on the heels will be coming Quattro. And those investments will be in front of the sales ramp. And so, yes, we generally think the cadence you're thinking about being a little more front end loaded on investment with sales growth over the course of the year. At the same time, you know, Xperior and the HEPA clearances we got here in the last couple of weeks will keep it ramping up and growing. And then ADTAB, which is that paracetamide season first half continues to grow really nicely as well. So, we're excited by all the innovation we have, especially on a global footprint, not just what Zanrelia and Quattro will do for our U.S. business.

Got it. Very helpful. And then I'll just shift gears and go back to Zanrelia. And Jeff, is there a percent of practices that are saying the label is a non-starter for me? You know, hey, look, I just can't get my arms around this. And even with your additional data around dosing, this is a non-starter. You know, is it 10% of practices that you reached out to? Is it 40? If you don't want to give that, maybe 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 analytical rep to eventually get there. But I'm just curious in the early days if that noise around the label and the non-starter and how that compares to company expectations. Thank you.

Yeah, great question, John. I would say if I look at the segments that are occupying our time right now and really provide the great opportunity is the early adopters and they're ramping and we're servicing them. And that's expanding. So, as you get into more and more clinics, then you're starting to see the size of orders and the replenishing grow. And so we continue to see that segment being quite material and significant and will lead our ramping of clinics, as I said, to several hundred or so per week. And then I think the second one is what you're highlighting is we don't see any stopping. What we're seeing is the vets that we expected that really want to just be able to have that scientific discussion, tech to tech, review the booster data has been extremely helpful and alleviated a lot of questions and concerns. And then what does that lead to? It leads to two metrics, John, that we're seeing. One is more call frequency needed when you may have needed one or two calls. That may go up a little more. So we're increasing, you know, whether it's tele approaches to make it more efficient, more dinners so we can have more touch points more efficiently and a more accelerated way. And then second is the orders tend to be a little smaller. So they on that segment, which is, hey, we want to get it in. We want to try it. We want to try to maybe our trouble cases and and then that that ramp. So actually, we like the trajectory of these metrics and these segments and the approaches. We haven't had to adjust our strategy. We have shifted some resources. But again, we're very pleased where we are. And, you know, I would back up, John, you know, this is we continue to be very excited about the size of the Derm market. It continues to grow. I believe in the U.S. it's growing, you know, 15 percent the last 12 months and we're making nice progress. We also have our regulatory team has the meeting with the FDA this month and the submission of that additional data to the FDA has already happened prior to that meeting. So so great progress.

Thanks, Jeff. Appreciate it.

Your next question comes from a line of Aaron right from Morgan Stanley. Your line is open. Hi,

thanks so much. So on I'll 31. Can you give us an update on your conversations with the USDA on that that product and and how we think about the timing of the launch for a second half and in just the opportunity with the long acting in light of in light of Zimbabwe? And it sounds like you're scaling up the manufacturing and maps and just how you think about the competitive landscape, I guess, evolving in terms. Thanks.

Yeah, thank you, Aaron. There's no question. I'll start with the overall Derm market. We have numerous assets, as you know, we're starting with Zanrelia. We've got short acting and log acting coming short acting, expecting an approval in 25, as you know. And then this is a key area of focus for Ellen. And we really are excited about what is in our pipeline in Derm. And again, next generation first and best in class overall, specific to the I'll 31. The engagement is going well, not really anything new to report other than it's progressing well. We continue to see it as a blockbuster product differentiated from the incumbent in the market today. And it will be a nice compliment to Zanrelia and will globalize the launch as we are with Zanrelia. But again, things are things are progressing and all we'll say at this point in time is approval expected in twenty five.

OK, thanks. And and and on Cordelia and Delia Quattro, I guess, how are you thinking about pricing here? And when you launched, I guess, Legacy Cordelia, you were at a premium. Do you expect to take a similar approach just given the differentiation of the product and on Zanrelia and pricing? So two pricing questions here. Just given the dosing for larger dogs, is the pricing still shaking out to about a 20 percent discount relative to the competitor or is that playing out according to plan? Thanks.

I think the first one I'll give Todd to Zanrelia here. But on Quattro, you know, we're looking at this as overall, I think, Aaron, most importantly is, you know, the biggest trend I see right now in animal health is this broad spectrum parasiticide market, especially here in the U.S. is growing and now accounts for about 25 percent of the three point eight billion dollar market in the U.S. And it's taken share really from legacy products inside the vet clinic. And so we look forward to entering with Quattro. This will be a very heavy consumer component type launch. It's more of an uninvolved category. So to Todd's earlier point, we do expect, you know, launching this product ahead of the parasiticide season in Q1 and taking a DTC and a heavy investment approach as it's a little bit more of an uninvolved category as a whole. When it comes to pricing, we'll take a value based approach. We believe we got, as you know, a differentiated asset here, but also again, back to the no regrets approach. We want to take share. We want to gain experience. We believe notionally our core portfolio is still smaller. So we see, you know, this is without question will grow our share in parasiticides in the U.S. and be a key accelerator to returning U.S. pet back to growth as we go into 2025.

With respect to the pricing question on Zinrelia, Aaron, it is on average about a 20% discount with this introductory pricing that we started with with Zinrelia to really give a great value for consumers as they think about how to treat their itchy dogs. Given the way we've structured the pricing for larger dogs, it's a bigger discount for the 20%, which is really valuable given the nature of the dosing they need to get the animal under control. You can see the pricing deltas on the online retailers that both us and our competitors uses. But overall, we're pleased with the pricing strategy that Bobby and his team have launched and are thrilled to be allowing pet owners to have a more reasonable price to offer to really solve their itchy dog problems.

Your next question comes from a line up Brandon Vasquez from William Blair. Your line is open.

Hey everyone, thanks for taking the question. 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 to make sure that the entire portfolio is kind of moving forward? Just curious if there's anything notable there to talk about.

It's a great question, Brandon. It's something we've put a lot of attention on the last couple years. Bobby's team, some of Todd's team brought in some outside expertise. We believe our incentives for sales reps are key to sell and prioritize the portfolio. What I would say is, you know, we will have incentives that will be geared definitely with a little bias to the new products and the ability to sell that broader portfolio. At the same time, they're going to be more enabled where another investment has come is really just around next generation commercial. Where we've got the digital ability to actually know what we need to detail. What wasn't detailed is being followed up with sales or with electronic engagement. We've really proven that out with some of the new products like Zorbium and the Parvovirus monoclonal antibody. Those are the two areas of investment. We again, as I said, have our reps very incented on Zeneralia now to the end of the year. And we'll be updating that as we bring Quattro to the marketplace.

Okay, great. And as a follow up, you know, it's a rest of an 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 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. Thanks for the question, Brandon. On the portfolio, yes, the rest has had a nice year. You know, some of that is influenced by the bounce back in Spain that put that growth rate a little higher than what we'd say the normalized level is. In the US, we continue to make nice progress with our physical availability, more points of distribution, more different price points by bringing back the A Family originals with classic. You know, I wouldn't say we expect 7% and probably closer to a low single digit expectations for the portfolio. As a reminder, we've added AdTab in given it uses the A Family name. And so that's a real positive. The drag on A Family is with Advocate inside the Vet Clinic, where, you know, like the legacy portfolio of parasiticide is getting impacted and why we're so excited to bring Crudella Quattro to the US, like we already have Crudella Plus outside the US. And then on the A Family, we're also, we've relaunched our supplements inside our retailers under the Advantage family name. Don't expect that to be a massive product category for us, but it continues to build out our relationships as a key supplier to the Walmarts, the Pedcos, the tractor supply stores that are so important for this business to help customers get our

products wherever they want to shop. And I would link it to, there's a common question in our industries about vet visits, and this has really been part of our strategy as the Omni-Channel approach in and outside the Vet Clinic has actually helped us insulate. We're seeing that now with that trend, as well as with the economic pressures. As some pet owner segments trade down, as Todd mentioned, we've been able to actually, you know, capture that share with the Advantage Classic and others. So those are two trends externally that actually we think Elanco is actually competitively well positioned for. Thanks. We'll take the next caller.

Your next question comes from a line of Balaji Prasad from Berkeley. Your line is open.

Hi, good morning everyone and thanks for the questions. So firstly, I can't help feeling that the expanded portfolio should give you a significant portfolio advantage that you haven't had much of the Vet Clinic. So with that, I'm surprised to see competition in US pet health, vet clinics still being called out as material advent for 2025. So which are the areas where you expect to be at a competitive disadvantage and where you are? Secondly, congratulations on reaching Expedia's 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.

Sure. Sorry, Katie. Sure, Balaji. We feel good about that portfolio, but there's a reality of the pair of business inside the vet clinic where we expect Crudell and Quattro to cannibalize some of our own brands but also continue that competitive pressure. So we're going to grow in US pet health here in Q4 and next year because of the innovation we're bringing to the marketplace. With respect to Expedia, we're thrilled with respect to the launch, the ramp, as we said, calling out that it will exceed $100 million globally in 2024. And now with these heifer clearances, we're accessing about 40% of the feedlot animals that we couldn't access before. So that allows this growth to continue and it will be a big driver of our -single-digit growth in 2025.

Your next question comes from a line of Chris Cutt from JP Morgan. Your line is open.

Great. Thanks very much. 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. Can you elaborate a little bit on how you see the product ramping next year as you come to market? My question here is, should we initially expect that a lot of the use here are prior Cordelia 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? Is that more of a 2025 event or is that something that plays out more over time? Thank you.

Yeah, thanks Chris. You know, in pricing we've seen as an industry, as you know, for a lot of years, 2% is an average, higher in pet, higher in the new innovation areas, lower in farm animal in the generic categories. We saw that rise up a little higher coming out of inflation the last couple years. You know, I believe that it's probably headed back more to historical levels over time, but no question innovation coming into a portfolio gives you the ability to leverage price. And that's what we're doing. The portfolios that have a significant innovation in them were able to actually raise the price for the portfolio. So I think it's going to fall somewhere in between for us as we head into 2025. As you look at Quattro Look, as I mentioned, you know, how do we see this ramping? There's no question. I'll reiterate, we believe that we're bringing this product and made a lot of good progress to prepare for the launch to be in the market in Q1 ahead of the season. We will, you know, be investing accordingly because we do believe the season matters. And but I also would say that this broad spectrum parasiticide segment is shown less seasonality and much more, you know, focus on launching, penetrating in the markets that you're going to target. So we expect it to ramp, but we do expect that that will occur over the course of the full year.

Your next question comes from a line of Umar Rafat from Evercore ISI. Your line is open.

Hey, guys, this is Mike DeFiore in for Umar. Thanks so much for taking my question. Three quick ones for me. First, regarding the Zanrelliya vaccination booster study, noticing that trial that except for canine distemper virus, 100% of dogs remained above the pre-specified protective thresholds at the 1X and 3X dose levels. I'm just kind of curious as to what explains the canine distemper component not hitting these levels. And is that a sticking point among that who may be on the line? I'll have two follow ups. Thank you.

Yeah, Michael, the booster study again was, you know, run very well, 1, 3 times the Zanrelliya dose, number of dogs achieving, as I said, appropriate titers above the vaccine. And this has been received very well and very consistent results. And again, no serious adverse events were observed. And this has been extremely helpful in the vet to vet conversations.

Got it. Okay. Next, moving on to Quattro. Obviously, tapeworm is surely more endemic to certain geographic regions in the U.S. 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 to 450 now to 420 to 450. I may have missed this, but what's expected to drive this incremental increase in innovation revenue? Thank you.

Yeah, I'll let Todd take the second one. On the first one, look, the first thing, Mike, that's going to drive is what you're seeing is this trend. You've got 3.8 billion in the U.S. of parasiticides. A little over a billion now is these broad spectrum endectos. We're coming into that market. We see the natural growth of taking share across that larger market is probably one of the best tailwinds that we see overall. Broadest coverage always is there. Broad coverage always is a benefit. We also would add not just the tapeworm element, but we put out recent data around tick efficacy, which I think is a real positive. And we've got heartworm first month control and prevention. So a few layers of differentiation, a big, fast growing market. And we've got a lot of expertise and one of the largest sales forces in the U.S. and a good distribution relationship as well. All of these are components that give us great advantage going into 2025 with the Crudelio Quattro.

And then Mike, on the innovation increase, it's really the Xperia continuing to ramp a little faster than we expected last quarter, as well as AddTab and Crudelio Plus outside the U.S.

We'll take the next question.

Your next question comes from a line of David Westenberg from Piper Sandler. Your line is open.

Hi, thank you for taking the question. So 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 2025 and 2026. So on the farm animal side, nice update on Bovair. Are there any other states or countries in the pipeline that could be active and staying on farm animal? So, I think that's a great question. I think that's a great question. I think that's a great question. I think that's a great question. I think that's a great question. I think that's a great question. I think that's a great question. It's dilutive to accretive or something like that. Okay, thank you.

Yeah, David, real quick on Bovair. We have rights for North America, including Canada and Mexico, but our focus is on dairy, even over beef. The clearance is for dairy here in the U.S. And the size of the market is significant and the efficiency to reach that market and the inset market chain that we've set up. So that will be our focus, and that has great opportunity. Again, as Todd just mentioned, we've got about 40% of heifers with experience with this exterior clearance. So, and still a lot of steers. There's still a lot of feed yards out there that maybe we're holding to feed their steers with also heifers. So, and it's a strong good margin profile with an efficient OPEC's reach because it's more of a B2B model in U.S. beef and Canada where exterior is sold. And then as we've mentioned, our overall parasiticide business is notionally smaller with Crudelio Interceptor Plus. So we see cannibalization being less, and we do see Quattro being a catalyst to drive our U.S. parasiticide business back to growth and to take share as well.

And our next question comes from a line of Navantai from BMP Paribas. Your line is open.

Thanks for taking my question. I have two on Zedella 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 a 20 to 30 percent range of apoc. Well, non-responders, which is higher than we expected. Is that in line with your expectation and that feedback? And then on the CMO, how long does it take to transition supply and how much visibility do you have on the proceeding to estimate the 2025 EBITDA headwind? Thank you.

Yes, Navina, I would just say overall, the booster study has been very effective at being able to give vets comfort of how this actually worked again in more what I would say is real conditions for them in the field. And then that that leads to whether it's cases or a protocol for them to use it. And again, there's a lot of market available as we continue to focus on with the label that we have today. A lot of opportunity here. I won't speak specific to the number of non-responders that varies. It varies by time of year and by segment. But overall, what we like is we've been thrown into those cases and then Relia has performed extremely well. Todd on the CMO. We're working

very closely with the bankruptcy administrator in the UK to maintain supply of our products to continue to serve customers here in 2024. There's a lot of ongoing discussions regarding the future, but I'm very confident that we've got a very good feel of the 2025 EBITDA impact given how well we're working with those administrators and understanding the overall operations at that CMO.

Thanks. With that, we'll hand it back to Jeff to close this out.

Thank you for the time today and the interesting Elanco. Just a couple of comments as I close because I think it's important. First of all, just a real focus on Elanco is growing again. We're guiding at this earnings call for six consecutive quarters as we close the year. And we've shifted really truly as a company from regulatory to commercial mode, and that's all built on a stabilizing base. I think when we step back inside this company, we're looking at a portfolio of products that are either ramping, launching or entering launch. As we look at AdTab, CPMA, Crudelio Plus, Xperior, and now the big three, Bovers and Crudelio Quattro, these are differentiated assets that are entering major markets that will be the driver to accelerate in our growth. The Elanco team is firmly focused and on our course, engagement and execution are ramping. We have this no regrets disciplined approach when it comes to trade offs, our focus and our resourcing. And I'm already seeing that payoff in the company. All of this is really intended to drive sequential accelerated revenue growth in Q4 and into 2025, expand our innovation sales, and ultimately increase shareholder value. Thanks for your time. Special thank you to the Global Elanco team that's achieved a lot this past quarter, but mostly a lot the last few years to get us to this point of opportunity on our 70th year as a company. Look forward to engaging with all of you here in the coming months.

This concludes today's conference call. Thank you for your participation. You may now disconnect.