Elanco's Q3 2025 Earnings Call: Contradictions on Macroeconomic Impact, Zenrelia's Market Traction, and Quattro's Growth Potential

Business Commentary:

* Strong Revenue and Growth: - Elanco Animal Health reported 9% organic constant currency revenue growth in Q3, exceeding high-end guidance. - This growth was driven by strong performance in U.S. Farm up 20% and U.S. Pet Health up 9%.

• Innovation Product Success:
• Innovation revenue year-to-date reached $655 million, with a raise in full-year expectations to $840 million-$880 million.

• The success was driven by products like Credelio Quattro, Experior, AdTab, and Zenrelia gaining traction in various markets.

• Fiscal Management and Debt Reduction:

• Elanco improved its net leverage ratio to 3.7 times at quarter end and refinanced its $2.1 billion term loan B facility.

• These moves were part of a strategy to strengthen the balance sheet and improve operational efficiency.

• Challenges and Market Dynamics:

• The company anticipated a $10-$14 million net impact from tariffs in 2025 but mitigated risks through intervention actions.
• Despite macroeconomic challenges, Elanco's stable base business and innovation portfolio supported consistent performance.

Contradiction Point 1

Macroeconomic Impact on Business

It involves differing perspectives on the impact of macroeconomic factors on the company's performance, which are crucial for investor expectations.

Are macroeconomic pressures and U.S. vet visit declines in 2026 affecting your outlook? - Andrea Alfonso (UBS)

2025Q3: We're insulated from vet visit declines due to strong market positions and differentiated innovation. The company's focus on strong markets and broad product offerings mitigates macroeconomic pressures. - Jeffrey Simmons(CEO)

How much of the Q2 6% volume growth was from delayed visits? What should we expect in the second half? - Andrea Zayco Narvaez Alfonso (UBS)

2025Q2: The active ingredients remain stable. The impact from a macroeconomic perspective has been minimal, which we've talked about. And we don't see that changing anytime soon. - Jeffrey Simmons(CEO)

Contradiction Point 2

Zenrelia's Market Traction and Distribution Strategy

It involves differing interpretations of Zenrelia's market traction and distribution strategy, which are critical for understanding the company's growth trajectory and competitive positioning.

Can you clarify the U.S. and international plans for Zenrelia's cleaner label and the timeline for this initiative? - John Block (Stifel)

2025Q3: Zenrelia has seen high market share in international markets like Japan, Canada, and Brazil. Data and testimonials support label updates. The U.S. label removed a vaccine-induced disease warning. New data could further update the U.S. label. The launch is expanding, with global rollout planned for 2026. - Jeff Simmons(CEO)

How do you expect Zenrelia's U.S. market penetration to trend by year-end 2025 and its impact on market share, and are there differences in international markets due to varying product labels? - Jonathan Block (Stifel)

2024Q4: We are excited about Zenrelia's U.S. penetration, with 8,000 clinics adopting, and 6,000 fully adopting. By year-end 2025, we see Zenrelia as part of a $2 billion growing derm market. The strategy includes aggressive sampling programs and DTC, aiming to increase use in clinics during peak derm season. The international market approvals, especially Canada, U.K., and Europe, will drive positive trends. - Jeffrey Simmons(CEO)

Contradiction Point 3

Zenrelia's Market Share and Order Trends

It involves the market share and order trends of Zenrelia, which are key indicators of product performance and demand.

Could you clarify the U.S. and international plans for Zenrelia's cleaner label and the timeline for this initiative? - John Block (Stifel)

2025Q3: Zenrelia has seen high market share in international markets like Japan, Canada, and Brazil. - Jeff Simmons(CEO)

What drove Zenrelia's quarter-over-quarter growth—initial orders or reorder activity—and are specialists or general veterinarians more receptive to the product? - Andrea Alfonso (UBS)

2025Q1: The derm season will help drive use and we continue to be very pleased with the market's receptivity to Zenrelia and we expect that to gain momentum and as we go through the spring and summer seasons. - Jeffrey Simmons(CEO)

Contradiction Point 4

Investment in Innovation and R&D

It involves an apparent contradiction in the company's approach and strategy regarding investments in innovation and R&D, which are critical for maintaining competitive advantage.

What's the outlook for OpEx growth and top-line acceleration by 2026? - Brandon Vasquez (William Blair)

2025Q3: Elanco's investments are primarily around DTC, particularly for Credelio Quattro, and some additional R&D expenses. - Jeffrey Simmons(CEO)

What drove the $60 million increase in the innovation sales target? - Daniel Christopher Clark (Leerink Partners)

2025Q2: The increase in innovation sales is driven by strong performance in all launches, particularly Credelio Quattro. There's a seasonal aspect, but the growth is broad, especially in Quattro. The company is leaning into DTC spend as it supports top-line growth. - Robert VanHimbergen(CFO)

Contradiction Point 5

Quattro's Impact on Market Share and Competitive Positioning

It involves differing assessments of Quattro's impact on market share and competitive positioning, which are crucial for understanding Elanco's strategic direction and market success.

Did Quattro generate $100 million in Q3? What is the year-over-year impact of Innovation Basket x Quattro? What is Quattro's peak sales potential? - Umar Ravat (Evercore)

2025Q3: Quattro was announced to have reached $100 million in September. It's been faster than any other Elanco blockbuster. The growth is driven by differentiated product features and expanding the market. The company plans to globalize Quattro with international approvals next year. The product has significant runway for growth, and its fast growth could potentially reach $1 billion at peak. - Jeff Simmons(CEO)

Can you discuss the early launch of Credelio Quattro, its competitive strategy, and retailer partnership plans? - Michael Ryskin (Bank of America)

2024Q4: Quattro's early launch is positive, with orders placed and soon to be at Western Veterinary. Key differentiators like speed of tick kill, tapeworm coverage, and heartworm protection resonate with veterinarians. We plan aggressive DTC and multimedia strategies to engage pet owners. The Bayer capabilities will support omnichannel distribution. - Jeffrey Simmons(CEO)