Elanco Animal Health, Inc. Aktie

Good day, and welcome to Elanco Animal Health Reports Third Quarter 2026 results. [Operator Instructions] Please note, this call may be recorded. I would now like to turn the call over to Tiffany Kanaga, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Elanco Animal Health's Third Quarter 2026 Earnings Call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Bob VanHimbergen, our Chief Financial Officer; and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.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 and that could cause actual results to differ materially from our forecast.

For more information, see the risk factors discussed in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements. Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. References to organic performance represent revenue growth excluding the impacts from royalty revenue and sales-based milestones that were sold to a third party, foreign exchange rates and acquisitions and divestitures. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. Elanco delivered an outstanding third quarter, outperforming our commitments and growing revenue 11% on a reported basis or 9% in organic constant currency. We are growing the right way, with accelerating price up 4% and volume up 5%, reflecting the value created by our basket of innovation and our diverse portfolio. This translated to significant gross margin expansion, up 300 basis points and greater free cash flow, moving our net leverage ratio under the 3x milestone. Growth, innovation, cash, we are consistently executing along these 3 priorities, powered by our balanced business profile strategically built to produce results as industry and competition evolves, and we're just getting started with significant runway for share gains off a small base and large growing global markets. .

As highlighted on Slide 4, Elanco exceeded the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was led by international pet health, up 17% and U.S. pet health, up 13%, with positive contributions from global farm animal. In the third quarter, we saw strong veterinarian and pet owner demand for what we believe is best medicine innovation that we're bringing to the table. Synrelia once again led total Elanco growth with Credelio Quattro also a major contributor. Both brands achieved record market share in the U.S. in September. Our Big 6, led by Zenreli and Quattro helped drive $328 million of third quarter revenue from innovation, up 40% year-over-year. We are raising our full year innovation revenue target to $1.275 billion to reflect continued momentum for our basket of innovation on a stable base.

Looking ahead, Elanco's entered into the final quarter of the year with continued momentum from a position of strength. We are meaningfully raising full year guidance by fully passing through the third quarter B. Moving into 2027, we anticipate building on this year's expected outperformance. We are recommitting to deliver our annual algorithm of mid-single-digit revenue growth, high-single-digit adjusted EBITDA growth and low-double-digit adjusted EPS growth, creating sustainable value for our customers and our shareholders.

Turning to Slide 5. We break down the third quarter's 9% underlying organic constant currency revenue growth. AHV International, our acquisition, which closed April 30, contributed about 1 point of growth not included in the organic rate, and it further strengthens our global ruminant position. U.S. Pet Health 13% increase was led by our vet clinic sales of Quattro and Zenrelia with good growth in vaccines and pain and a strong overall price contribution. We are creating value for pet owners in the industry through our truly differentiated portfolio of innovation, driving market share and accelerating price gains and what we see as a responsible marketplace and competitive backdrop. We have observed some pockets of time-bound investments from competitors, which happens periodically in the animal health industry, consistent with past behavior.

While these tactics may temporarily shift sales timing, our strength in the quarter and especially in September, is evidence of the attractiveness of our portfolio and there being no fundamental impact on the trajectory of our share gains and revenue from our innovative products. In U.S. retail year-to-date, we continue to see stable consumer demand for Seresto and the Advantage family. Third quarter Seresto sales were partially impacted by retailer inventory drawdown, while year-to-date consumption trends for the brand are slightly positive, smoothing out that dynamic. San rely and Quattro continue to achieve very robust growth outside the vet clinic. Putting it all together, U.S. Pet Health achieved 13% growth despite retail sales being slightly negative in the quarter.

We expect our omnichannel leadership, new distribution points and OTC innovation to provide durable growth next year and beyond, allowing us to reach the 1/3 of pet owners that don't regularly visit the veterinarian.

Moving to international pet health. We delivered 17% organic constant currency revenue growth, driven by Zenrelia and AD TAP. Synrelia is rapidly approaching blockbuster status in international pet health alone with ample room to grow into key category leadership in $850 million international derm market. U.S. farm animal increased 7% in the quarter or 10%, including HV. Growth was led by cattle with good contributions from beef and dairy. And for the rest of the portfolio, swine was positive, more than offsetting a decline in poultry vaccines. International farm animal grew 1% in organic constant currency or 4%, including HV and FX, also reflecting strength in ruminants with notable demand in LatAm. Poultry and swine were negative in the quarter, but combined for positive year-to-date growth. Regional farm cycles may create incremental quarter-on-quarter volatility ahead. but our expectations for accelerating global protein consumption underpin long-term value for the business.

Turning to Slide 6. We delivered $328 million of innovation revenue in the third quarter, led by continued momentum for our big 6 in aggregate. We are raising our anticipated innovation contribution for 2026, and we are running ahead of our ambition to double the big between 2025 and 2028. I -- this accelerated pace of innovation sales reflects a competitive advantage in the marketplace that we expect to sustain. It's built on rapid globalization, medically differentiated products with low market share in large categories, our growing commercial strength, data-driven brand investments that are driving increasing brand loyalty and differentiated distribution partnerships.

Let's further discuss the progress of our major innovation products on Slide 7, starting with Zenrelia. It's an accelerating success story, well exceeding our expectations across geographies even as competition increases. The third quarter was Zenrelia's biggest yet in both the U.S. and international with this special product providing its largest ever contribution to total Elanco revenue dollar growth. Efficacy is the clear driver behind ZynRELIA's momentum, creating substantial value for veterinarians and pet owners and translating into strong growth and share gains. Market demand drove U.S. sales to more than double in the quarter versus last year. That clinic penetration climbed to approximately 19,000 or 2/3 of the total clinic base with steady month-to-month gains even as new competition entered.

U.S. JAK market share improved 7 points year-on-year, ending on a record high in September, driven by new users and sticky repeat orders and increased penetration in existing clinics. The average U.S. sales per clinic increased 8% from Q2 to Q3, even with new clinics and a competitive entrant. Summing up the performance in the U.S., yes, this quarter was increasingly competitive, but Zenrelia's momentum is stronger than ever. Our expanded sales team is seeing interest in our differentiated medicines, superseding marketplace noise. Our strategy is working, and we don't see that changing. Zenrelia grew even faster internationally than in the U.S. in the third quarter and year-to-date. Growth has accelerated in Europe the market with 3 JAK1 products for the longest period.

Notably, Zenrelia gained 10 share points in Europe in the first half of 2026, the latest available data. This is 5x the competitive entrant driven by higher customer satisfaction with the product. Zenrellia is now in 48 countries outside the U.S., all without label restrictions. We continue to drive significant share gains across key geographies. For example, Zenrelia has continued to build on its market-leading position in Brazil and has also achieved over 40% share in Japan. Globally, efficacy remains the differentiator, creating this remarkable performance and long-term growth potential.

On to our second derm innovation, befrena. Demand continues to build. We have just opened up access to befrena to all customers. So our sales team can sell to every clinic, including large corporate accounts. we expect to fill all outstanding orders by next week and to move befrena from a phased launch to a full-scale national launch in the first quarter. Befrena is already showing what our derm portfolio can do together. About 20% of clinics, which have purchased Befrena have never used Zenrelia, unlocking a new door for Zenrelia. On supply, we're now making befrena continually with more than 30 commercial batches produced. We have finished the manufacturing expansion and process scale-up and our larger scale test runs have gone well. Although befrena did not materially contribute to Q3's 13% growth in U.S. pet health, we expect it to be a major revenue growth driver in 2027 with the potential to be the single largest contributor to U.S. pet health growth next year.

Next, on Credelio Quattro, we are very pleased with another good quarter of dollar share gains and broad spectrum dispensing sales from the U.S. clinics. Quattro's market share increased 9 points in Q3 year-over-year. We have continued aggressive clinic expansion, reaching about 55% of the U.S. base today, up 15 points since Q1. That's an increase of approximately 4,500 clinics in just 2 quarters. reflecting strong veterinarian and pet owner demand for the 4 dimensions of differentiation that make Quattro what we believe is best medicine. Like Zenrelia, Quattro exited the quarter with strength as September was the largest month of Q3, reaching its highest market share ever. Strategic DTC efforts activated demand into the later months of what we see as becoming a prolonged season. Remember that ticks remain active as long as temperatures are above freezing.

Speed of tick kill isn't just a clinical metric. It's a household safety requirement, and Quattro's exceptional speed is resonating strongly with pet owners. Quattros momentum is carried through the typical seasonality to make this Elanco's largest U.S. pet health product, surpassing Seresto on a trailing 4-quarter basis, and we're just getting started. -- with very limited global share compared to the 2 incumbent franchises exceeding $1 billion each. There is ample room for many years of Credelio Quattro growth through market expansion, deeper clinic penetration, market share gains within the clinic, research demonstrating differentiation and global expansion. There is a significant upside outside the U.S., which we expect to help Credelio family become our largest global product family ever. So far this year, Quattro was launched in Australia, Canada and Japan.

Yesterday, we received a positive opinion for expansion into the EU, the largest geography in the $800 million international broad-spectrum market, which is growing double digits. We expect to launch Credelio Quattro in Europe in Q1 2027 in time for the season.

Turning to AdTab. This market-leading international OTC parasiticide is positioned to be Elanco's next blockbuster. Sales grew more than 40% in the third quarter. AdTab continues to be the fastest-growing major brand in the nearly $600 million OTC Acto category in Europe. Moving to farm animal, Experior has driven strong cattle portfolio synergies year-to-date. We anticipate Experior to continue to grow and lift the broader portfolio with multiple levers from extending days of use, continued adoption and price. At the same time, we do expect moderating growth rates against challenging comparisons.

Lastly, on Bovaer, our expectations and trajectory are unchanged from our last update. Year-to-date growth is good, but off a small base, with continued demand from CPG companies that supports relatively consistent cattle numbers. we are investing in long-term initiatives to enhance the product value and demonstrate user flexibility.

Moving to Slide 8. We provide recent highlights across the 3 parts of our IPP strategy, innovation, portfolio and productivity. Let's start with innovation. The commercial success of the Big 6 proves that innovation is what drives value and growth in the animal health industry and we are progressing our next wave portfolio without attrition from the 15-plus projects outlined last December. Our pipeline is significantly greater probability, speed and value since our December 2025 Investor Day, driving our increased confidence behind the 5 to 6 blockbuster potential innovations expected through 2031.

Next, portfolio, which provides Elanco's diverse broad-based growth. Global ruminants is a clear example as our fastest-growing species year-to-date, up 12% on an organic constant currency basis or 17%, including HV and FX. Global pet health portfolios also have benefited from recent innovation launches, lifting U.S. pain, vaccines and therapeutics, up double digits and driving the EU, Asia and LatAm each up double digits.

Finally, productivity. Through price mix in Elanco Ascend, we achieved significant gross margin expansion in the third quarter, up 300 basis points. Our strong results and working capital discipline have generated free cash flow, tracking ahead of pace in our 3-year algorithm for $1 billion through 2028. It has also allowed us to pay down debt faster than planned with another $216 million in the quarter. At 2.9x net leverage at the end of Q3, we've accelerated capital allocation flexibility. This is an important milestone representing years of consistent execution along our priorities of growth, innovation and cash, and it opens up new opportunities to drive meaningful long-term value. With that, I'll pass it to Bob to provide more on our third quarter results, financial guidance and early considerations for 2027.

Thank you, Jeff, and good morning, everyone. My comments today will focus on our adjusted results for the third quarter. Please refer to today's earnings press release for details of our reported year-over-year results. Starting on Slide 10. We delivered $1.265 billion in revenue, representing an increase of 11% on a reported basis. Organic constant currency revenue growth was 9% with 5% from volume and 4% from price. Slide 11 provides revenue from the 4 quadrants of our business. Total pet health revenue increased 14% in organic constant currency. Our U.S. business achieved 13% growth, driven by strong momentum in the vet channel and continued demand for ZONRElIa and Credelio Cuatro. .

Internationally, Pet Health revenue grew 17% in constant currency, driven by the strong demand for ZONRELIA across multiple geographies with strength in Europe, Japan, Brazil and Canada. Globally, our farm animal business grew 4% in organic constant currency, led by the U.S. business at 7%. Results were driven by strong growth in the ruminant portfolio.

Turning to Slide 12. We adjusted gross margin expanded to 56.1% this quarter, representing a 300 basis point increase over the prior year. The outperformance was driven by pricing and favorable product mix, specifically in U.S. pet health and global ruminants. These factors and our intensified productivity efforts more than offset the impact of inflation related inventory costs. Operating expenses increased 12% in constant currency, in line with our expectations. Consistent with our long-term strategic objectives, the increased investment in marketing, up 18%, is focused on targeted DTC support for our new product launches. We are also progressing our innovation pipeline while Lanco Ascent is resulting in discipline around G&A expenses, up only 2%. These investments are showing strong returns in share and long-term brand loyalty. Interest expense for the quarter totaled $41 million, consistent with our expectations.

On Slide 13, we show an adjusted EBITDA year-over-year comparison for the quarter. Adjusted EBITDA was $243 million an increase of $45 million or 23%. Adjusted EPS was $0.27, a 42% increase year-over-year. Slides 14 and 15 highlight our strengthening balance sheet. During the quarter, we lowered gross debt by $216 million, bringing our year-to-date total reduction to $317 million. This execution reflects our strong operational performance and improved working capital management. Additionally, we are tracking ahead of schedule toward our cumulative free cash flow target of $1 billion by 2028, with free cash flow reaching $362 million as of the end of the third quarter. Quarter-end net leverage was 2.9x, outperforming our previous guidance. Achieving the sub-3x milestone accelerates our capital allocation flexibility as we advance toward our target of 2 to 2.5x.

Turning to our financial guidance on Slide 17. Driven by our strong third quarter performance and confidence in our momentum for the remainder of the year, we are fully flowing through our third quarter beat into our updated full year outlook. We now expect organic constant currency revenue growth of approximately 8%, up from the previous range of 6% to 7%. This translates to reported revenue of $5.15 billion to $5.18 billion, with our assumption for foreign exchange tailwinds and AHV international contributions remaining unchanged. Our adjusted EBITDA outlook increases by approximately $35 million or 17% growth at the midpoint. For adjusted EPS, we are raising our guidance by $0.06 at the midpoint, bringing the new range to $1.17 to $1.20, representing 26% growth at the midpoint.

With our updated year-end cash and balance sheet expectations, we expect a net leverage ratio of approximately 2.9x. We continue to advance our Lanco Ascent productivity initiatives, targeting $200 million to $250 million and total adjusted EBITDA savings by 2030. In the third quarter, we launched a proprietary AI-driven regulatory submission tool in R&D. By utilizing a human in the loop framework, this system accelerates our speed to market and unlocks resource capacity. AI is also now integrated into our discovery activities and is expected to improve lead quality and refill rates for our innovation pipeline. Productivity initiatives like these combined with the growth of our innovation portfolio, position us to deliver substantial margin improvement and ultimately, long-term shareholder value.

Moving to our fourth quarter guidance on Slide 19. On a reported basis, we expect revenue between $1.19 billion and $1.215 billion, representing organic constant currency growth of 4% to 6%. Operating expenses are expected to increase approximately 11% in constant currency to support our innovation launches and R&D investments. As a result, we anticipate adjusted EBITDA of $185 million to $200 million and adjusted EPS between $0.16 and $0.19. On Slide 20, we highlight the momentum across our U.S. pet health business. We remain confident in delivering high-single-digit to low-double-digit growth in the fourth quarter despite challenging comparisons. Growth was driven by continued uptake of Zenrelia and Credelio Quattro, contributions from Befrena and significant corporate account growth. For the full year, we continue to expect the U.S. Pet Health business to achieve at least high-single-digit revenue growth.

Slide 21 offers an early perspective on the key headwinds and tailwinds we anticipate for 2027. We remain committed to the annual algorithm that we introduced at our December 2025 Investor Day, which spans through 2028, aiming to deliver mid-single-digit organic constant currency revenue growth, high-single-digit adjusted EBITDA growth and low double-digit adjusted EPS growth. Broadly across our business, we expect continued sustainable growth as our innovative products scale globally on top of a stable base with ample room for pricing contributions. Our increasingly competitive portfolio positions us well to capture and defend market share while we navigate competitive dynamics.

In pet health, we expect our befrena launch to be a meaningful driver of top line growth. Andy's NREL label improvement represents upside to our annual algorithm, but is less important given the product's momentum. We also see sustained demand across our leading OTC brands, partly offset primarily in the first quarter by Costco's nonrenewal. In Farm Animal, we expect to extend our leadership position across cattle and poultry. We expect accelerating global annual protein consumption to serve as a consistent tailwind for our farm portfolio balanced against regional farm animal cycles. Remember that Q1 2027 will lap a benefit from customer-driven accelerated shipments primarily to the Middle East. These accelerated shipments contributed 1 percentage point of growth for total Lanco in Q1 2026.

Turning to margin. We expect accelerating contributions from Elanco Ascend as automation and productivity initiatives drive structural gains throughout our global footprint. Ascend benefits plus those naturally captured from increased scale are expected to provide overall margin tailwinds. As a partial offset, we do anticipate a gross margin headwind from significant but dilutive befrena volume growth as well as persistent inflation pressures. Overall, we expect nice improvements in both adjusted gross margin and adjusted EBITDA in 2027 that track to our algorithm commitments. Lastly, we expect our strengthening financial profile and accelerating cash flow to unlock accretive capital deployment opportunities, enhancing shareholder value. Now I'll hand it back to Jeff for closing comments.

Thanks, Bob. Our third quarter reaffirms our IPP strategy with Elanco well positioned to deliver an algorithm in 2027 and beyond. As I close on Slide 23, let me address how Elanco is deliberately built to not just execute but thrive across market cycles and competitive environments. First, pricing. Innovation creates clear value for pet owners and our basket of innovation drove Elanco global pet health price up 5% in Q3, above expectations. At the same time, volume was robust at 9%. There can be no doubt we are winning through medical differentiation, not discounting. While we've observed some pockets of time-bound activity in the industry, it is a typical dynamic with an overall responsible competitive backdrop. Best medicine drives loyalty for pet owners, not price. .

So regardless of any short-term and shortsighted competitor conduct, let me be clear that Elanco has not, will not and does not expect a need for our participation and aggressive price competition to grow and gain share. Our consistent quarterly delivery the last 2 years has proven this point. what will win share is clear, best medicine and big growing markets, growing share of voice and a globalizing basket of innovation.

Second, channel shift and pet ownership. Elanco has consistently shown that innovation drives strong growth in the overall U.S. pet health market. At the same time, changing pet owner buying behaviors as consumers prioritize convenience underscore the importance of omnichannel leadership. Elanco's results have decoupled from vet visit volumes or Puppy cohorts as we bring our comprehensive portfolio of differentiated products and strong share of voice with an omnichannel advantage to drive our industry-leading pet health growth with a long runway ahead.

Third, pet owner spend, which remains resilient as a protected budget item with pets at the center of the family. Our latest survey work across over 1,500 U.S. pet owners detailed in our press release issued this morning, reinforces the thesis of durable growing pet health spend today and expected into the future. Industry vet channel revenue is up low-single digits year-to-date, reinforcing our proprietary research. Moreover, the U.S. consumer has shown resilience, evidenced by solid trends in monthly retail sales and credit card data, even as gas prices and interest rates have risen.

Finally, U.S. pet health is just 1/3 of the diverse animal health industry expected to grow at mid-single-digit CAGR to $60 billion in the next decade. The durability is clear in 2026 as 9 out of 10 top animal health companies grew global revenue in the first half, with trends extending into the third quarter. and we believe no one is more central to society's needs for pets and protein than Elanco, with our balanced profile and all 4 businesses growing in Q3 and year-to-date. Our October pet owner survey on Slide 24 underscores what we're seeing in the marketplace and is remarkable in the consistency of the results throughout 2026. Pet Health is fundamentally protected from economic pressure. 93% of pet owners maintained or increased spending in the past 3 months and plan to keep doing so. Yet where they're spending is clearly shifting towards more convenient options. Pet owners prioritize their pet health, and that gives our business exceptional resilience.

Turning to Slide 25. We expect Elanco's innovation to drive many years of material share gains in large growing global markets. We have made rapid progress to gain a foothold in the broad spectrum endecto and derm with each market over $2 billion in size. This is just beginning as these charts are representative of our limited market position, significant white space provides a multiyear path for continued high-quality growth through medical differentiation, share of voice, clinical penetration, preference within those clinics and globalization.

Wrapping up on Slide 26. I believe no other animal health company is as well positioned as Elanco. We believe our differentiated innovation and durable business model provide a compelling investment opportunity. We have a long runway to win share, while the markets continue to grow. Consistent, reliable growth is already fueling margin expansion and accelerating cash flow as demonstrated in the third quarter. with a clear path to significant value creation throughout the rest of the decade. With that, I'll turn it over to Tiffany 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 1 question and 1 follow-up. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller. .

[Operator Instructions] Our first question comes from John Block with Stifel.

Gross margin was up 300 bps year-over-year. So a really big step up. Maybe, Bob, if you can provide some color on the traction with gross margin, if you can. I don't know if you gave an implied 4Q. And then maybe more importantly, Jeff, any timing behind that 60% goal that you've thrown out there, less than 5 years, less than 3 years, but maybe some framing would be helpful. And then I'll just ask a quicker follow-up. .

Thanks for the question. Yes. So I'll give some color on margins. So Q3, as we highlighted, increased 300 basis points over the prior year, really read led by a couple of things. One, strong price number two, favorable mix with U.S. Pet Health and international Pet. And then number 3 are manufacturing improvements really with Elanco Ascend and that team focused on conversion cost. We are seeing productivity gains across the company with Elanco Ascend. The thing I'd highlight is we did flow through those higher inventory costs that I've highlighted in the past couple of quarters, that's now fully behind us. Now with that being said, we are not taking a victory lap. Opportunity exists to do more. And as we think about Elanco Ascend, not only through procurement and the 4 walls of our manufacturing facilities, but also through G&A. We'll see continued absorption benefits as we see volume improve and the natural mix benefits with our basket innovation growing as, again, those margins are accretive to our overall corporate average.

Now as you think about really moving forward, let me just give you an update on Elanco Ascend. So I'm really, really pleased with the progress we've achieved so far in 2026. And you've seen the benefits come through in Q2 and Q3 as we've accelerated some of those projects. I've shared a couple of examples over the last few quarters about process improvements how we're leveraging AI and automation, not only within our shared service center, but also within R&D. And now we'll continue to focus on building stronger relationships with our strategic partners, particularly on the procurement side, and that has been a key priority. And so even this week, we've hosted our first ever supplier day. We've brought in over 70 of our key suppliers and strategic partners to discuss how we can better collaborate.

I've personally sat in several of those meetings this week. And we know we're in an inflationary environment, but we are working together to collaborate and grow together and then push to offset some of that inflation. And I would highlight we're going to see margin enhancement over the next several years, both gross margin and EBITDA improvement because it is a total global Ascend program. We're seeing benefits not only from our procurement team, but we're seeing it in our manufacturing capabilities. We're seeing it in our R&D team who is more and more efficient and getting more throughput through their processes. We're seeing G&A effectiveness. And then even on cash flows, we don't talk a lot about cash flows with Ascend. But look at our trade working capital improvement in Q3 versus prior quarters and last year. So the key takeaway here, John, is that we're going to have several continued years of improvement in both gross margins, EBITDA margins and cash flows.

Your follow-up, Jon? .

Yes. I guess I'll be the 1 to ask is, can you just briefly touch on the cost going on renewal, maybe if you want to address why I don't think there's much revenue exposure there. If I've got this right, you just entered into that in 1Q '26. And I do think you called out you're still expecting retail growth '27 versus '26, but maybe just clean that up or frame that for us.

Yes. I'd just back up. Our retail business continues. Good strong underlying demand globally. You see the AdTab success. That's very close to becoming our next blockbuster. And our strategy that Bobby and the team have put together and Ramiro, adding distribution points, adding innovation, globalizing, it's continuing to be a really competitive advantage for us. We can meet and reach more pet owners where they want to shop than any other company. But Jon, as you can see, I mean, we're constantly adding distribution points, some stick. The majority have stuck with us and some will ebb and flow year-to-year. We expect a long-term relationship with Costco, but we do expect them to pull back next year. That impact is mostly going to be in Q1, going to be offset by other distribution partners that we picked up. So again, I feel real good about the overall retail business. .

Our next question comes from Glen Santangelo with Barclays.

Yes, I just wanted to sort of talk about 2 areas of pushback that we sort of get Jeff. And I just want to get your quick take on it. It feels like a lot of people are concerned that maybe a long coil doing well today, maybe in the midst of sort of the peak share shift. And I know in your prepared remarks, you talked about some of the improvements you made in your commercial infrastructure. Maybe could you just talk about how that could continue to benefit you in 2027?

And then secondly, everyone is concerned about the macro. There's always conversations around the decline in vet visits since coved really. So the question is, is anything getting worse in your mind? And I'm just trying to contextualize those 2 areas of pushback relative to the initial 2027 revenue stake that you sort of put in the ground. So any comments around those will be helpful, and I'll stop there.

Yes. Thanks, Glen. Look, at a high level, and we put out this market research this morning, I think that -- I'll take your second question first. I mean, we believe that visits are not the lead economic indicator of pet health. We believe it is all about the willingness to spend and convenience. And the market research was very clear today that we shared that's been consistent in our February, May surveys and now the October survey is that we've got over 90% of pet owners, and it's been consistent all year that are protecting are going to spend the same amount or spend more going forward. And that's represented in the 9 out of 10 companies that have actually been there.

So we say that's the lead economic indicator. It's not vet visits. That visits, we believe, is more a result of a changing buying behavior of people going more outside the clinic. That's the answer. Look, we put in Slide 25. We continue to try to be very transparent. That's representative of scale of the 2 major markets that I really got to call out, Glen, on the marketplace. And I'll just make a couple of comments because I think these details really matter. Animal Health continues to be extremely durable and here's the data very quickly.

Animal Health markets growing mid-single digit, farms up 8%, pets up 2, internationals faster than the U.S. the 9 out of 10 companies that I mentioned in innovation is the differentiator between those companies. specifically, yes, the U.S. pet health market has slowed, but let's double-click on the 2 major markets that we're playing in that are represented on Slide 25, broad spectrum endecto and derm. And broad-spectrum anddecto, some interesting dynamics and data here. One, broad spectrum endecto parasiticide is growing mid-single digit in the U.S., double-digit outside the U.S. Interesting dynamic in this market is really there's been a shift. There's kind of a changing of the guard. The top 3 products, Trio, NexGard Plus and Bravecto, trailing 12 months have lost 10 points of share Meanwhile, new innovation, over 70% of that new innovation is Quattro has picked up 9 points of share, all while the market is growing.

So really, we're excited that we got 3 $1 billion competitors, and we're demonstrating best medicine to these players. We've got a long runway to grow. Market is growing. We got a small share -- and this has been 1 of the most durable markets even during this downturn. Second is derm. Derm growing high single digit internationally. Thus innovation is growing the markets, both in Para and derm, it is. U.S. revenue is down or flat in derm, but more dogs in the U.S. are on for derm than they were a year ago. And recent Vetco data showed that actually U.S. derm doses are up double digit in the U.S. So the market's expanding, launch offers and onetime gross to nets maybe have made the market temporarily become flat in the U.S., but we see great share opportunities for us. So Glen, long runway. We're committing today to continue our algorithm in 2027, and we're confident in that. You saw Bob's pluses and minuses relative to the year. We feel very good going into next year.

Our next question comes from Matt Delator with Goldman Sachs. .

Congrats on all the progress. Maybe just another on the outlook for 2027. Obviously, you're seeing strong momentum across key product launches and you reiterated the long-term growth algorithm. But could you speak a little further about how we should think about the breakdown of that mid-single-digit top line between pet and farm next year? I realize you called out the harder comps for farms. So assume pet above that and maybe form a little bit below. And then maybe just on pet specifically in the context of clearly a really strong quarter. on both price and volume, but also the broader market dynamics. Is there just anything you can share in terms of how we should think about the split between price and volume next year for pet.

Yes. Thanks, Matt. So I'd love to provide some color on what we see going into 2027. And I will expect and then do expect Pet to outperform versus farm as we do get back to a mid-single-digit growth farm in 2027, especially really with some tough comps in 2026. But let me provide just a couple of comments overall in 2027. And Slide 21 in our deck really shows some of the pushes and pulls. But we have a tremendous amount of clarity going into the year. We finished our business plan. We'll be sharing that with the Board here in a couple of weeks, but a high degree of confidence, and that's why we're sticking with our algorithm that we laid out in Investor Day in December 2025 with mid-single-digit growth, high-single-digit EBITDA growth and low-double-digit EPS growth and I continue to expect net leverage to improve throughout the year. We'll see a normal spike up in Q1. That's normal with our timing of cash flows, but leverage will continue to improve throughout 2027. And our strategy is working, creating growth, innovation and cash. Jeff highlighted in his remarks at the Big 6, we're ahead of schedule, and we expect the Big 6 to double in evenues by 2028. I've provided color on Elanco Ascend, but we're just getting started with margin expansion on that front as well. So a lot of confidence going into the year and look forward to sharing more details with you all in February when we give formal guidance.

And Matt, I would just make 1 comment. I think price is a measure of value, right? So if you're discounting, you probably have a value product challenge. Our representation of 5% growth in pet is, I think, medical differentiation proven out in the marketplace. We have very really no major customer has left a Credelio Quattro and gone to a product, say, with 3 active ingredients. So we're retaining customers, we're able to take price because it represents value. And then when you jump over why we still feel good about price even in farm animal is today, our value proposition with this protein demand, they're as great as they've ever been. So it gives us some price leverage also on the farm animal side. .

Our next question comes from Erin Wright with Morgan Stanley..

Great. Outside of what you saw, I guess, at retail and some of the relationship dynamics there, I guess I'm trying to parse out how you think about the quarterly progression from a stocking destocking standpoint across the core business. Anything at distributors to call out and any sort of changes we should anticipate as you kind of enter those new distributor relationships into next year in terms of pricing promotion dynamics, any new tactics that you're kind of taking on that front as we head into next year, that would be great.

Yes, Erin, we're again, very consistent in clinic, out of clinic demand is matching days of inventories remained very steady. No changes relative to that at all. Again, there's spotty different places where there's competition, but it's nothing unusual. We see really a responsible backdrop overall in the marketplace. So as a whole, again, we're winning with best medicine. We're winning with share of voice. Our targeted media is building brand loyalty. We're starting to really see that brand loyalty grow, which is going to create a stickiness and long-term growth in some of these big products that we have. and that's really been the essence.

Today, we've got more share of voice, more stability, which you and I have talked about and our teams than we've ever had more expertise. We just finished to survey the highest engagement score since the IPO across Elanco -- and while we see some of our competitors restructuring and downsizing, our share of voice is up substantially, and that's a factor we haven't talked a lot about that I think is playing out. When you put best medicine, share of voice and brand loyalty together, we've got competitive advantage, and we see a long runway of share taking ahead here. So I hope that helps.

I guess a clarification, like was there a stocking benefit at all in the quarter and across the core business.

Yes, Erin, simple answer is no. We haven't had any stocking -- unusual stocking since I've been here, and it's been, what, 6 quarters or so. Nothing in Q3, very clean quarter. Q4, expect very clean and into '27 same thing.

Our next question comes from Umer Raffat with Evercore.

So I was looking at some of the Credelio Quattro commentary. And I recall you had mentioned a 3-point gain in market share back in 1Q and another 4-point gain back in 2Q, meaning those alone was about 7 points in gain. I'm assuming it was something comparable to last year in 4Q as well. So knowing that, that in the last 3 quarters, prior to 3Q, you had gained something like 8 to 9 points in market share. I was a little surprised to see that the Credelio Quattro market share gain year-over-year is 9 points because that's sort of the number I had in market share gain by the end of was the market share flat 3Q versus 2Q? And if you could just speak to what the sales trend was quarter-over-quarter? I realized you said it was the strongest September, but I just want to sort of put the market share in perspective.

Yes. Thank you, Umer. First of all, as we highlighted, we did see share gain there is less switching. So there's dollar share in clinic share. So what I would say, I would highlight is there's a lot less switching late Q3 into Q4 as corporates are and all clinics are switching less, getting ready for actually the next season. So where we've seen the growth is actually inside the clinics as we're continuing to grow actually use inside the clinic. So again, we see tremendous demand for the product. We see a 2027 that's going to bring not just share growth, but overall market growth, as I mentioned, in this payroll market, we've got 3 $1 billion competitors that were showing best medicine against. So again, it's common late in the year as you get into the late fall winter that you're going to see a little bit less of that and less switching overall. So -- and market share, I mean, if I emphasize it did grow sequentially quarter-to-quarter.

Our next question comes from Brandon Vasquez with William Blair. .

Congrats I wanted to start first on Zenrelia. Jeff, you had mentioned that there was you guys were executing well through what is an increasingly competitive market. I was hoping you could spend a minute on what you are seeing on the 2 other players there in the JAK market. And then I had 1 other follow-up in Derm as well. And just basically on the Zenrelia question, like how are you guys executing through that?

Yes. Thank you, Brandon. Yes, again, our single largest brand, again, contributed to total growth, a lot of momentum efficacy continues to be the differentiator. We're seeing a little bit of a prolonged season too with itching. That's been positive. We also have seen the JAK market take a little share from the incumbent MAB product just with more convenience and better economics, the market has expanded with the entry of innovation. Double-digit growth in the international market. And as I mentioned, dose is actually up in the U.S. So again, I see that. And look, we've competed very well in Europe 5:1 with a new market incumbent coming in. And here in the U.S., Bobby and the team are excited. But Freno will be additive to ZenrelIa. 1 out of 5 clinics going on befrena have not used Zenrelia so we do see a positive there as well. .

Okay. And as a follow-up here on Berana, 2 quick questions on befrena. Jeff, can you gap us a little bit or help explain -- you made 2 comments on the call about the products kind of being open to all of your sales reps to sell it, but then not going into a full launch until Q1? Like what's the delta on a full launch? And all reps being able to sell it over the next couple of months, just help bridge that gap? And then also, is Befree kind of a key lever for you guys to go after corporate accounts have corporate accounts kind of been moving forward without befrena. Just talk a little bit about whether or not that's a catalyst on the corporate side as well.

Yes. Thank you. Yes, a very big quarter progress with befrena and I'll just emphasize again, as we're kind of coming to the end of the season, the end of the year, we're ramping up. So yes, big news last week, having reps go out and start to take orders across the U.S. marketplace. Demand continues to be high. We expect to have all the back orders completed by next week. So the manufacturing process has been very successful since last quarter just in terms of the ramping. We produced over 30 commercial batches. And the remaining item is really just the larger scale test lots and validation. But we do expect with the trend we're on and seeing the demand line that we're going to be able to be in the market in a full launch. Again, we're months from that right now as we get into Q1.

So again, good, strong overall. Relative to corporates, yes, we do believe that this will be an unlock. It already has been. We're offering this to corporates now. And this is of high interest at corporates corporate sales in U.S. pet health are outpacing our total pet health year-to-date. So we've ramped up nicely, and that's been a benefit to our business.

Our next question comes from Andrea Alfonso with UBS.

I wanted to circle back on some of the questions around gross margin. You talked in the slides about the gross margin mix from impact of the printer growth. How do we think about the directional improvement there over time for that product? Is that simply just a transitory thread from early promotions? And how do we think about that trending steady state versus the company average? And then separately, I'll just squeeze my follow-up, and sorry about this. But as a follow-up to the earlier question on Costco, just a clarification. Does this nonrenewal completely nullify the agreement and 1Q completely?

Andrea, I'll take the first 1 and I'll let Jeff take the second one. yes, margin trajectory for 27. I think we've covered that, we'll see improvement there. As I think about Befreno, we're going to be ramping obviously, production and scaling there. And so it will be dilutive to margins to start off and it will accelerate throughout 2027. We expect that to be an accelerator in 2028. And overall, our basket innovation, keep in mind, that is part of our basket the basket innovation continues to carry a higher gross margin than our corporate average.

And yes, that will -- we will be out on the contract we had from this year, next year. But again, as I said, there's quite a large number of major retail buyers. We've picked up significant numbers. We've mentioned companies like Dollar General and others. We picked up some even since last quarter. And again, we don't see -- we see net-net being positive on the retail side in '27, but Costco will not be a player in that. And again, that will impact Q1 a little bit as I mentioned. .

Our next question comes from Navann Ty with BNP Paribas.

Just 1 follow-up on Zenrelia, you would have handy the U.S. reorder rate in the first-line use. And then 1 on befrena, what is your full launch strategy versus your competitor launching their long-acting Itron around the same time? And then I just have 1 more on the farm animal environment, if you can comment on your views on cattle producer profitability and the poultry supply and inventory dynamics?

Yes. Thank you. We continue to pick up first-line treatment with Zenrelia in a really nice way. I mean it's -- again, Zenrelia #1 growth driver for the company, outgrowing even in the international markets. It is making the markets get bigger and we've moved to first line more and more. I would point to the data to say we're picking up 400 to 500 clinics per month in the U.S. We're at 19,000 and I think what's more important, as Bobby highlights is the penetration in the clinic. So average sales per clinic rose 8% from Q2. And that's a key metric for us, and that will be a multiyear growth runway for us as we pick up more penetration, and that is a signal that more and more clinics are going to first-line treatment. Look, on befrena, we're excited to be in the marketplace. We have differentiation, we believe, on value, convenience, efficacy.

There's a lot of interest. Over 80% of vets have said they want to use this product. We're seeing that play out in the orders that are there, more and more use and very satisfied customers that are using it. So we're going to focus on our product and the offering that we have, we do believe that this is a nice play in terms of our derm portfolio and more to come with Allan's pipeline. But befrena will be -- we'll be focusing on that differentiation as we have. And we've seen with the other 2 products, that's what takes share, and we believe we've got a great runway with befrena on that. And then look, we've had a really strong protein demand. That's drawing poultry up single digit, dairy up single digit, and then you've got a shortage of beef which is really helping the international beef markets.

We've seen great strength in our LatAm markets and even the European beef markets because of the shortage in the U.S. So we see a nice tailwind overall to be profitability and poultry is probably the most steady. You are going to see some moderation on our farm animal business, and you're going to see quarter-to-quarter variation. That just happens with weather seasonality and some of our portfolio effects.

Our next question comes from Daniel Clark with Leerink.

I wanted to ask on the potential Zenrelia label improvement in the U.S. next year. Just where are we with that? And how are you thinking about the puts and takes to guide next year if we do get a cleaner label? And I have a follow-up as well.

Yes. The label continues. No new news. The research is being completed. We'll plan to make a submission at the end of the year. And we should hear with the time line midyear. So that's the plan. And as Bob highlighted, real simple, it's -- it is not in our guide. It is not expected. We actually see less dependency on this. The label is not being talked about really in the U.S. with 19,000 clinics on and all the penetration in the movement to first-line treatment. So it's becoming less important, although we're pursuing it, and we'll keep you updated and we have something new to report.

Got it. And then my follow-up, just curious, sitting here in November, how -- the level of competition has kind of played out relative to your initial expectations that you set kind of when you rolled out guidance last year? Obviously, you've raised the guide. But just -- just curious how that's evolved relative to your initial thoughts. And then just maybe next year, like how you're thinking about the level of competition versus what you've seen in recent months? And sort of like what's embedded kind of in the high and low end of those expectations.

Yes. Thank you for this question. I was going to actually wanted to just highlight a little bit of, I think, details matter here overall, the pet health situation. Again, we're seeing some time bound and targeted promotions, mostly in general practices. Remember, this just shifts volume from 1 month to the next, but it has not changed, and we don't see it changing the trajectory of our share gains. We also see some investments with corporate accounts, gross to net offers. Most of the corporates remember, have 2 animal health partners. We're winning to be 1 of those 2, which means we do not have to be as aggressive on price, and we haven't -- and there's -- as you look at these big corporates, there's very few and even all the practices we've had very few of really no material customer leave our new products and go back to a competitor.

So we're not seeing switching away from us. That's why our share gains grow, best medicine is being demanded as 1 of those 2 animal health options in the vet clinics, and that's where we're winning. So remember, Elanco is being selected with corporates, we're under-indexed. It's upside for us, but that's probably where the competition has been in a spotted way. And we're not going to participate in a competitive price when someone is working to really -- they're really competing to try to hold clinics. And remember, there's more than 1 player in this space beyond even us and a competitor. So best medicine continues to take share. It has for many years in this industry and best medicine and innovation is winning. So that's what we see. No change to our expectations actually. It's been a very responsible market overall, and we feel very good about that even as we go into 2027.

Our next question comes from Chris Schott with JPMorgan.

Just 2 for me. Jeff, just coming back to some of the pricing versus value comments you made earlier, I think you're at about 4% price this quarter. Is a 3% to 4% price increase, a reasonable baseline to think about for Elanco going forward just given the differentiation of the portfolio at this point? And then my second question, you're obviously in the middle of a very healthy new launch cycle. But just on the pipeline front, can you just remind us what are you most excited about as you think about the pipeline and kind of what's up next for Elanco? .

Chris, I'll take the first 1 on pricing. So obviously, a very strong Q3. We did expect and we landed exactly we expected where pricing would be accretive in the second half and especially in Q3, but I'd just remind you, pricing does fluctuate quarter-by-quarter. It's influenced by customer mix and product mix. This quarter was influenced by scaling back launch offers, which we said we're going to do, right? So I think about moving forward, Q4, we expect pricing to be closer to the 2% to 3% historical rate we've seen but we're confident in that pricing coming through as we continue to pull back launch offers, and we continue to scale innovation, which has pricing in that, as Jeff highlighted, best medicine.

And just, boy, I have to say it's probably been our best quarter, by far, our best year in R&D. It's about a year, Chris, now since the Investor Day, no attrition. Our models are working. We've got 1 of the most stable, we're adding to the team pretty significantly in R&D and the team is just -- it's humming right now. So we've got over 15 candidates in clinical right now, moving things like dog enrollment, et cetera, are ahead of schedule. So our 5 to 6 potential blockbusters through 2031, we're more confident than we were last quarter and definitely last year. and I credit Ellen and the entire team. We know we can't have an air pocket, and we're confident in that. As we double down on the algorithm, bridging ourselves to the next generation of innovation -- what am I excited about? Well, first is just the big existing markets, having the next generation of portfolio adds of better medicine.

The second is pain. There's no question pain, CKD, some of these other markets that are being created going to come in and be a formidable competitor. And then our farm animal portfolios from farms food safety to vaccines to productivity. We've got some really nice blockbuster products that are coming. So no air pockets, Ellen and the team, consistent flow of innovation. Elanco is going to bring that next generation of innovation right behind this past of 6 products.

Our next question comes from Steven Dechert with KeyBanc Capital Markets.

I just have one. On the COGS side, I guess, with procurement, I guess like what inning are you in on that? I thought from the 2025 Investor Day that was kind of more of a 22 type of. So how much more room for improvement is there?

Yes. So I'd say it's early innings still, Steve. I mean the 1 thing to keep in mind is, as contracts are negotiated, we don't get that benefit until inventory flushes through. And you saw a little bit of that in the first half of this year, we had good procurement execution, but we had to flush through that higher cost inventory. So as I think about going forward, we're going to start seeing the benefits, and we saw a little bit of it in Q3 and Q4. We see the benefits of the procurement actions throughout 2027 and beyond. But there is a great hunger within our procurement team. And as I mentioned, the supplier day here, we held 2 days the last 2 days here this week. -- with our key suppliers in-house. And there's just a lot of runway and continued partnership to continue to improve what the procurement team can bring for us.

And we're committed to that 60% runway, and we know we've got a portfolio and a plan with Bob's leadership to hit that 60% over time. .

And our last question comes from Chris LoBianco with TD Cowen.

We had 1 question on livestock. So the slides noted regional firm animal cycles as a potential headwind in 2027. And -- can you provide any color on what specific species in the countries could represent headwinds in 2027?

Yes. Thank you for the question. I think overall, again, we see protein being stable as a whole. We're seeing low single digit, mid-single-digit animal numbers that are growing -- but as you point to cycles, you're going to have them. So right now, dairy is seeing a little bit of a cycle where we had high production, and there's places where there's a little bit of an oversupply. So look for dairy to be a little cyclical. Swine also has been cyclical. We see still some challenging over breakeven, struggle to get over breakevens in swine in China overall. But as a whole, look for poultry, dairy to lead. The beef shortage will create a global opportunity. And again, it will be regional opportunity overall in swine.

But we like the business as you look at 2027, farm animal will be a really strong, durable business for us in our portfolios will add more value than they ever have.

With that, I'll close and just want to say thank you to everybody for joining us today. As I close, I just want to extend a deep appreciation of the Elanco team all my years in Elanco. This has definitely been the best year that I've seen across the company just in terms of the culture, the 1 Elanco mindset the ability to execute the level of energy and focus in this company is historical right now, and we're focused on our customers to add value and that's going to translate into value for you as a shareholder. And I want to just say that in these dynamic times right now in capital markets, I believe Elanco is a stock of choice we're uniquely positioned.

As highlighted on Slide 26, as we close, we are set up and I think the metrics that came out of and proof points of Q3 are going to be what's representative of the rest of this year and into 2027. Thanks for your interest. I know that we are available for all of you at any time and again, have a great day.

Thank you for your participation. You may now disconnect.

Good afternoon, everyone. Welcome to the day 1 of Bank of America Healthcare Conference in London. My name is [ Lu ], and I am part of the U.S. Life Science tools. And we are very fortunate to have Jeff Simmons with Elanco Animal Health, President and CEO. And I guess maybe Jeff has some opening statement to begin with, and then we do go up there.

Yes. Obviously, note the disclaimers that we normally do in a conference like this, thanks to Bank of America. It's been great to be in Europe with a lot of our customers and traveling to a lot of our operations here, and to be able to have the opportunity here with investors. So thanks for the interest. I would just make a couple of comments. I mean we noted our 8-year anniversary as an independent company coming out of Lilly on Friday. It's been a very intentional journey as we've stood up as we've acquired Bayer, so we built an omnichannel, build a pipeline. We've been very focused the last 3 years, especially on growth, innovation, cash.

We just finished a great quarter, where we delivered 10% reported growth that came from Farm, Pet for a 50-50 split. U.S. international, 50-50 price volume. So we really had high-quality growth that came from the quarter. I think the second priority is all around innovation. We've got a basket of 6 innovations, 6 blockbuster products that are in big markets where we're in early days, but we have a clear differentiation. We believe medical differentiation that's taking really great share, Zenrelia, Quattro, Experior across a lot of markets. And now as I'm out here traveling, we're just starting to globalize those innovations. So -- and then third is cash. We've delevered the company after acquiring Bayer. We were 6 to 7x levered. We will be at approximately 3x by the end of the year headed into the 2x next year. We know that will unlock even more investors.

And then in December, we had an Investor Day to talk about the next 3 years. That was kind of -- we've been a steady beat raise per quarter in the last 3 years, the next 3 years, we have an algorithm where we've committed to mid-single-digit revenue, high single-digit EBITDA, low double-digit EPS, $1 billion of cash created between now and 2028, margin expansion to occur year-on-year and the delevering that will get us into the two. So -- and then our pipeline today, we have a pipeline -- a basket of 6 innovations we're launching, but we have 15 projects in clinical development now that are blockbuster potential products. We've had no attrition since December, and we're committing to 5 to 6 coming through that pipeline of those between now and 2030. So that's a little bit of a summary, growth innovation cash, last 3 years, next 3 years, durable. We've seen good response in the market, and we're in a really good place. I think Animal Health is a $40 billion industry headed to do a $60 billion industry. So we're not only going to get market share growth, but we really like the market growth.

Great. That's a very great starting. So you put out a press release last week. Some mentioned the price gain quarter-to-date versus Q2. Maybe we can start from that here, given that the pricing has been a big topic on the quarter. Can you maybe just talk a little bit about that? And how do you think about the pricing dynamic in the market right now, where do you see in the market, especially from the competitor?

So, I think we've got to stick with facts here, right, and what's happened. So first of all, Animal Health last year grew 7%, 10% Farm, 5% Pet. First semester this year, for 6 months, we grew 2% in price and growing high single digit overall in the business driven by innovation. 10 of the 12 companies in Animal Health grew in the first semester. Most all the major markets globally grew. So Derm, Para, Pet, Farm, all grew. And so I start with just that growth overall. When you look at specifically price, price is definitely correlated to value in our business. So what we're seeing is we announced in that release that in July and August, our prices actually accelerate. And we're seeing that because of the medical differentiation we have in markets that matter to pet owners.

Pet owners today, we surveyed at the end of May, 1,400 pet owners in the U.S. and 86% said we will spend the same or more for health. There is a backing down on food supplements, hard goods, but not for health. So if you've got medical differentiation, we're proving that we can take price, we're seeing that. We see a responsible market. There's no price war going on. There's always targeted promotions. It's probably more with corporates than general practices, the differentiated innovation, you can take price and take share.

That's great. I guess when you talk about the channel between like the corporate and journal. Do you expect to change in the next like maybe few quarters given that contracts don't renew all at the same time, you're probably going to see a little bit more dynamics in the future?

Yes. I'm meeting with some corporates here in Europe. And some here as well. I think the corporate market in the U.S. and U.K. are the primary corporate markets. So today, about 1/3, a little less than 1/3 of the clinics. There's 30,000 clinics in the U.S., a little less than 1/3 are corporate or conglomerate group purchasing and the U.K. is probably a little higher than that. But what I would tell you is we are very under indexed with corporates. And so I think the big message on Elanco is corporates are an area of opportunity but it's not a market that we need to drive growth over the next few years. So I think that's -- so I think that corporates, just like other practices, they want differentiated medicine. They want the itchy dog to stop itching. They want the ticks to be taken care of, and that's where we're spending a lot of time as medical differentiation and building brands with pet owners. When pet owners want their brands. And today, they're walking into a vet clinic, they are more aware and have more information than they've ever had. That puts us in a good position.

So I would back up though, I think what's more important is we acquired Bayer 6 years ago to do something. It is now playing out really well. We bought Bayer because they had OTC products in pet health. 1/3 of pet owners don't go to the vet, and they buy OTC. That market continues to grow really nicely. Elanco is one of the only companies in that market. And so Chewy, Amazon, Walmart, have become -- we are the #1 animal health company to them. And that's probably the more price sensitive, so we can offer more pet owners, more products, have more price points than any other company. So we're able to address even parts of the market that might be a little more price sensitive.

Okay. That's very helpful. So let's move on to more of the product categories, specifically para. Quattro has been a pretty like strong performance so far. I'm wondering like what is really driving the growth? And then how do you see that going, clinical profile, DTC investment or like anything you want to highlight?

I have to stop on Quattro and just say because I know there's a lot of investors that spent a lot of time in pharma. I was an officer for Lilly, I was inside of Lilly running Animal Health, but for 10 years inside of Lilly, and so we had an opportunity to have a front row seat as the GLP-1s were being developed and everything, but to contrast human and animal health. But there is one common barrier, one common thread. And it's not only is it regulated and science-based, but medical differentiation matters and people will pay for medical differentiation, whether it's for their animals or for themselves. And that really matters. So what's happening today, I will say 30 years of growth in Animal Health, we've grown for 30 years in a row, 5% to 6%, 2% price. This is one of the most durable industries that exist today.

But I think it's really important, Lu, that to emphasize when someone enters a market with something differentiated, it takes share. And Quattro is taking share with mostly just in the U.S. business right now. We picked up more than 50% of the clinic. It was the fastest blockbuster we've ever created in 71 years, and it's because it has 4 dimensions of differentiation. That's the only pill you can give a dog for parasites that has four active ingredients. It covers the broadest coverage with tapeworm. It has the fastest tick kill compared to another competitor, it controls heartworms on month 1, not through month 6. And it's palatable. People best want the dog to be able to take it, roll it up in baloney or peanut butter. Five dimensions of differentiation that we see. We believe we've got best medicine. We've captured half the clinics in the U.S. and it's moving to first-line treatment. This will be Elanco's biggest drug we've ever created in 71 years. It's in a $6 billion para market, $2 billion oral. Now of that $2 billion, we believe that we're in early innings. We're -- we said we're over $100 million, but we're really early with what we think the investments. And there will be -- people have asked me about international today. We'll start to roll it out internationally we hope to bring it here to the U.K. and Europe next year. So it will be a growth driver 2027 as we take it internationally.

I guess just sticking to that point. There were so many different individual markets in Europe. You've recently been to Brazil as well. So maybe just talk a little bit about what is your international strategy? How do you align the tech [indiscernible].

Bayer gave us scale and R&D, gave us scale in all the affiliates. So we're in all the major countries. We would say today, we have the right, when we say SG&A, we got the right S, we've got the right sales organization. We really don't need to -- we've been building it for other innovations over the last 5 years. So we've got the right sales force in all the major countries. I think Europe, Japan, Australia, U.S., Canada are the big ones. The emerging markets like Brazil and others, East Europe are growing. So we've got the right sales. It will be the promotional activity where our spend will come will be more in marketing promotion. So -- but no, we've got the right infrastructure. We're rolling it out. Zenrelia is a great success. We have brought Zenrelia as fast as any product to the other 40-some countries, and it's doing extremely well.

That's a good way to pivot to derm. Zenrelia, so the first line usage has actually increased from like below 20% and then right now to more than 40% of the users just in 1 year. So how do you -- so what is really driving the shift to prescribing behavior? And how much runway that you expect that to continue?

So you -- let's just back up because back to the, hey, our market is growing, what's happening in animal health. This is one of the most attractive markets in all of animal health. An itching dog is the #1 reason people go to the vet. It's -- I kind of say the only way the animal can -- the one thing an animal can self-diagnose, but it is what vets have to do, if you think about an itching dog walking into a clinic and I've had it with my family. It's like get that dog to stop itching. So efficacy prevails. If the dog keeps itching, what it will say is, hey, they will change vet after the second visit, if a dog doesn't stop itching, they will try something else. So this market is $2.5 billion. Internationally, improved 9% in the first half. So it's an unsatisfied market.

And so Zenrelia has come in and very quickly taken share. And the reason so I've never seen like in drugs in Brazil, we were over 50% market share in 18 months after two incumbent products that have been there over a decade. So why? Because if you stop itch. In our press release that we put out last week, we also had shared on the news this morning, this hotter weather in Europe calling up, itching is actually -- the season has gone from 3 or 4 months to 5, 6, 7 months. So the season's expanded with the weather change. The itching dog matters and Zenrelia has become a product that has high efficacy. It started as maybe second line treatment. It is now in over half the clinics in the U.S., 40% of those are used in the first line, and we see those numbers climbing. We're picking up 400 to 500 clinics a month from usage, and that's been a big -- we're in 44 countries outside the U.S. Here in Europe, there's another competitor that's come in. We launched at the same time, and we announced in that press release, we picked up 10 points more of market share in the first half here in Europe, while the new competitors picked up two. So we like our efficacy. And now we're coming with another product, Befrena, in U.S., which will be two products at this point.

How do you expect these two to work together?

You see about a 60-40, 70-30 split of the JAK product until you take home, to the -- what we kind of say, the allergy shot that lasts 4 to 8 weeks, Befrena has some differentiation to the product that's in the market today. So it's a monoclonal antibody and the label in the U.S. is 6 to 8 weeks of control compared to the incumbent, which is 4 to 8 weeks. So surveying the U.S. veterinarians, 85% said they want that product ready. The demand has far surpassed supply. So we're ramping the monoclonal antibody supply to have full supply first half of next year. So it will be a big growth driver in the U.S. next year. So if you think about a $2.5 billion market, 30% to 40% of the market is [ mAbs. ] The other is the Zenrelia, the JAK market.

Is the manufacturing capacity, though, like slower than you expected or just in line? Or like how should we think about that? Do you worry about you're not going to have enough capacity or vice versa.

It's a good problem because right now, we're 24/7 manufacturing for Zenrelia, and we're ramping against a bigger demand line, we're a year out forecasting demand now. Because a lot of people want Befrena right now. And remember, the other two major competitors in Animal Health don't have monoclonal antibodies yet. So we're the second company that's come in. We've got them differentiated. So manufacturing is common with mAbs to scale the bioreactors. We've gone from the 200-liter to 2,000. We're scaling to the 5,000. Things are tracking nicely. It's just more of a demand problem than supply.

Back to Zenrelia. I think you have an FDA submission where there was a potential label. Maybe just talk a little bit about that and then what will become the impact?

Yes. So we're in -- we keep adding countries. We're in around 45, 46 countries today. We have a clean label in all international countries, including Canada. U.S. had a box label on it, where trials were required to be at 3x the dose with vaccine-naive dogs and a titer reaction was the question. So we ran a booster study that's been helpful to a lot of veterinarians. We've got rid of fatal vaccine-induced with PCR data. Now we're running a trial to continue to improve. We should finish that trial at the end of this year, which would put us on pace for a 6-month review, middle of '27, we could see further changes to the label potentially middle of next year. But I step back and say, we're 24/7 manufacturing. It's probably the fastest-growing product we've ever had in 7 decades as a company and it's a market that is growing. So people -- I think what's probably misunderstood about Elanco is even with all the questions about animal health is we're early innings here. We're $100 million in on a $2.5 billion market, growing at 9% with 2 differentiated assets. And the same with Quattro, a $2 billion broad spectrum endectocide market, still growing globally, and we're $150 million in with what we believe is best medicine. So we're set up well, and we'll scale the manufacturing and continue to support the products.

Maybe stepping back, I think in the U.S., there are a lot of concerns on the vet visit, utilization trends, that kind of stuff. Are you worried about dog versus cat dynamics? -- like maybe just talk about what is like the kind of long-term market growth for this market?

Yes. So Pet is 40% of the animal health market. Farm animal is still 60%. The rest of this decade, farm animal will still be bigger than Pet Health. Protein revolution that's going on with everyone wanting more animal protein that continues. I start there. Then in Pet, 1/3 of the pet market is pet retail. We play there. Most of our competitors do not. Now we're down to 20%, 25% of Animal Health, which is pet vet. We've seen flat dog numbers, we see cat numbers in the U.S. We've seen 70% of new puppies and outside the U.S. And actually, dog and cat numbers are growing outside the U.S. That vet visit, we believe, is more of a change of behavior of the pet owner. Pet owners are not going to the clinic to purchase as much as they're going online. They're still going to the vet, that's important. But growth of online ordering is 2x the growth of inside the clinic. So we see purchase visits down but nonwellness visits and itchy dog, a dog with pain, a dog needing surgery visits are actually up.

What will be your pricing strategy on different channels, like one at the vet and then the other online? Are you going to do it differently?

Yes. It's all product related. So if we have a topical product that's only for treatment or is in a dollar store in the U.S., that will be priced according to that value proposition compared to, say, a Quattro, new innovation, most differentiated inside of vet clinic. So it will all be priced relative to the product and the channel, but it's more product-driven than it is channel-driven.

Okay. Let's switch into Farm because I feel like that has really not getting the attention that it should be. I mean it's 50% of the business. I wonder, maybe just same question, high level, what is the driver? Everyone want more protein beef or like any other kind of meat that you think will become a bigger market going forward?

Yes. So look, I think that it all starts with an underlying demand for animal protein. I spoke in London 5 years ago, and all the questions were on impossible burger, Meatless Mondays, veganism, animal protein is coming to the end. It has absolutely flipped totally the other way. Why? Taste, cost, nutrition. The plant proteins didn't win in the taste category, the cost category or the nutrition. There's been a wellness movement the last 5 years. And it is attributed to the first time -- this data point is an important one, the first time in 30 years that farm animal outgrew pet health. Farm animal grew 10% last year, I'm talking the industry and Pet grew 5%. So chicken Roble bank will say chicken, numbers are up 3%. Chicken is winning. Dairy is winning. Dairy cow numbers are up 4%. I might say it's a little different in Europe, but it is. And there is a beef shortage.

Then I would say pork got some religious barriers, but I would say it's more regional, Europe, U.S. and China. There's three trends now that they want to taste, cost, nutrition and they've innovated. There's meat sticks. There's yogurts, there's milk shakes. Everyone needs 150 grams of protein a day. There's three things: wellness. Over 80% of consumers, Europe, U.S., a lot more protein than they did 3 years. Two is there's an aging population. The new disease talked about even at this conference is muscle retention. There will be 25% more people over 60 years of age after this decade's done and muscle retention is the big problem. The third is GLP use. GLP use has created 30% to 50% more animal protein consumption with a GLP user. So believe it or not, our parent company that we spun out of Eli Lilly, their big focus is, hey, working with protein companies as well to make sure that, hey, the diet is right for the muscle retention. Those 3 trends are driving animal numbers to be up. And so to animal health, the healthy animal is a more productive animal. We want to give consumers what they want, animals more health. Right now, there's a 20% mortality morbidity challenge with farm animal so that people want to solve that so they can create more protein. The beef shortage is something a little different. There's a cattle problem in the U.S., but Brazil, Argentina, grass fed cattle in Australia will make up some of that shortage gap.

So you have somewhat double-digit growth number in the quarter, like how sustainable is that?

I don't -- we're not predicting -- let me go back to my algorithm of mid-single-digit revenue growth. Probably when we put that in December, we didn't think farm would hold its own. We thought Pet would be a little bit higher and Farm today, we're seeing -- we see the rest of the decade, the ability for #1 farm animal business in the U.S. We're leaders in poultry and cattle. We think we're positioned well to say we see farm animal being really strong mid-single-digit revenue. We run it on very low OpEx. So it's got just as good an EBITDA as Pet. Pet has higher operating expenses, bigger sales forces, better gross margin, but the EBITDA is going to come together at the end.

That's helpful. I guess have you seen any gaps within your farm portfolio where you think you need to put more investment into pipeline aspect of it.

Yes. So look, we've done a nice job of moving out of antibiotics, focusing heavily on giving consumers what they want, proteins, vaccines, enzymes, and then big part of that movement, and that's helped us grow. Tomorrow, I'm going to see a new acquisition we made up in Holland, AHV. It's a nutritional health company for cattle. Cattle grew 17% last quarter, and we'll continue to have tuck-ins that will help our portfolio. Our gap, though, alluding to your question, is vaccines. Vaccines are about 60% of farm animal. People want to vaccinate and prevent disease, and use genetics, vaccinations, we are under-indexed. Lilly didn't have a vaccine at the time, infectious disease, Novartis, Bayer. So we've had to acquire and do R&D and build that. So we're a little behind the industry on vaccines, which to us is a good runway of opportunity.

Okay. Is that your acquisition in that interest area that will be kind of like a priority at this point? Or like you think compared to the U.S. pet health...

Yes, we'll be opportunistic. I mean farm's probably got a few more opportunities. I think our top acquisition opportunities are actually molecules that we bring into the pipeline, which are embedded in our R&D budget. But let me be clear on our capital deployment. It is -- we're going to continue to be debt-focused and get it down to 2, 2.5x. We've taken half a turn out in the first 6 months. Had our best first 6 months since the IPO. And so -- and we will -- we're generating more cash today than we have since being an IPO and independent company. But we'll look at shareholder return avenues. We'll look at CapEx should be pretty consistent, not really a step-up, debt paydown, and we'll be opportunistic, but no big M&A. We don't see that in our future.

Okay. That's helpful. I guess another aspect of that, like farmers are cost cautious, right? People worried about rising costs from freight, transportation, anything? Like how do you think that dynamic will change demand for farm products?

Yes. The healthy animal converts energy into protein better than an unhealthy animal. And as the cost of the inputs goes up, the return on that conversion is greater. So right now, for most of the farm animal species, our return on investment value proposition is as strong as it's been in a long time. Every kilogram of protein matters. And so that's the focus right now. So what I would say is we work to prevent disease and we work to convert protein from feed and we take care of food safety, Salmonella and E. coli. Those are our 3 big solution sets. And so today, I would say our farm animal customers, our ROI is as strong as it's been, which has given us a little pricing power as well. I think the new opportunity is the environment.

And so Elanco is the first and only company that has the 2 only FDA-approved products with environmental claims. And what we're doing is we're reducing ammonia and methane out of cattle and converting that also to more productivity and that's giving consumers what they want, which is less environmental footprint, with also more productivity. Yes. That's the next $2 billion to $4 billion market in Farm.

That's very helpful. I guess one last one, a little bit more operational aspect, the channel investments. So the channel that you operate right now. Maybe just talk a little bit about strategy just in general. Any additional investment that you want to make, like where do you see like a gap? How do you improve that?

Yes. I think break it down. I think on the pet side, our strategy, starting with the Bayer acquisition and bringing in OTC is we want to be where pet owners want to shop. We want to keep the veterinarian in the center just like any consumer market, people with AI, they have more information and more awareness. They walk into a vet clinic or get online or call into telemedicine with more awareness than ever before. So our goal is to offer the right SKUs, the right product portfolio in the channels that are necessary, while keeping the vet in the center. I think that's really important.

On the farm animal side, it is more access direct to farm. It's more of a B2B business and the ability to be able to reach farmers, but I would say that's much more of a direct to the farm approach is kind of the channel. We will use partners, distributors, feed companies where necessary, but today, farms are bigger, and it's much more of a B2B business.

Moving on to kind of 2027. I know you're ready to guide, but interesting to see what are the moving pieces? You mentioned the growth driver, Quattro is one of them. Maybe just talk a little bit about that.

Yes. So I stay to our commitment of the algorithm. I think we're out there. We're guiding quarterly. Our goal is to keep the consistency of delivering and doing what we say quarter-by-quarter. So we'll continue to guide quarterly. We'll continue to outline every quarter kind of what's coming, what's next. So because animal health is maybe covered by a lot of analysts that cover a lot of other industries. We want to be very clear. Putting out the press releases and share is really important. But as you look at '27, we would say, hey, starting with the algorithm of a mid-single-digit top line, high single-digit EBITDA, low double-digit EPS, our goal is to stay on that mantra. What will be drivers? Befrena coming into the U.S. and some other markets as well. Quattro globalizing, that will be another big driver.

Zenrelia and Quattro in the markets they are in today, lapping as we're picking up these 400 or 500 clinics a month, that lapping effect is going to be quite significant, we believe. And then the farm animal side, I think, yes, there will be some normalization back to maybe mid-single digit, high single-digit growth rates. We've got AHV, we've got other innovation that's come in that will be additive, and we continue to believe it's a durable market, just saw accelerating price in July and August, we'll continue to see price. We've said in that 2% to 3% range.

On the margin and then you mentioned the pricing. Again, it's a competitive market. How do you think about like ability to continue to gain pricing and then at the same time, if competitors be more aggressive, how do you really protect the margin as well?

I kind of say the four things of why we see the next tranche of our stock has done extremely well over the last couple of years, what will drive the stock in the next couple of years, I'm just taking your question. Without question, the profile of our company is quite different. 50-50 Farm, Pet international, U.S. is really good. Two is we're in major markets with 6 innovations. Some of our competitors have one innovation in one market. We've got six. We will double those six innovations over the next three years. That will be the next tranche of value. The next 5 to 6 are coming and then margin, to your point, margin and cash. We're just like in the early markets and early share, we're in the early, early innings and the early stages of margin. So what we've committed to is we're mid-50s on gross margin. We are tracking to 60% given the exact time line, but we have a trajectory and a glide path to go from 55% to 60% gross margin, low 20s headed towards the 30% on EBITDA. What will drive that is 75% will come from gross margin. On the EBITDA side, 25% will be G&A. So we see nice margin expansion in net dollars on EBITDA year-on-year going into next year.

Sounds great. We mentioned quite a lot about pipeline innovation. When is the next time we're going to hear updates, details? Yes.

Well, please know that first, exploiting the six blockbusters we have that are really small and big growing markets is #1. So we talk about my top priorities on growth. It is launched well. We'll keep spending on these products because we see them as maybe the biggest products we've ever had, and they will be some of the biggest the industries ever had. That's what will become Zenrelia, Quattro, Befrena, Experior, okay? That's one.

Then I think as you look at the next -- what we're saying is we've got 15 projects in clinical development. And we don't want an air pocket in innovation, and I'm confident, more so today than even December, when we had our Investor Day, we've had no attrition. Why we had no attrition, a stable R&D team, a matrix structure built around capabilities. Ellen de Brabander what she's done there and her team are amazing, the use of AI on the front and the back of the pipeline. And so we didn't have attrition with the six we launched. We now have 15, I'm committing to 5 to 6 by 2031, and they won't all happen in the last couple of years. So you're going to start to see a string of innovation, and they're in the big markets. Their differentiated assets are not -- oh, we hope to create a new market. They're going to be in the big markets.

Okay. So you're not worried about like a second offer into the market -- how do you take the big market versus you want to be #1 to market?

Yes. So we're looking at that and look at the big markets are para, derm, pain, productivity and sustainability, infectious disease. Outside of the big six, I would say then, yes, we're chasing CKD. 1 out of 3 or 4 cats gets renal failure, and so we're all chasing chronic kidney disease. We're chasing oncology. We need a broad spectrum oncology product, that's cost efficient. That's going to be a big market for us coming up. Obesity, yes, in pets will be a big market And I think this environmental productivity market on the farm animal side, all of those will be future markets that we're chasing and some of our competitors are as well. But because we don't have 70%, 80% share in those other big markets, we still have a lot of room to innovate in those main markets.

Okay. That's helpful. I wanted to go back to more of the margin questions, cost savings. Any specific areas that you're targeting right now? You have the ASCEND program. You were on track to 200 to 250 EBITDA savings by 2030? Any chance that can go beyond, what are the areas of upside?

Please know that Elanco ASCEND, and I'm bringing in Bob VanHimbergen that came really from Johnson Controls and brought a low-margin manufacturing industry into pharmaceuticals, it's all about optimized margins. So while we're investing in innovation and launches, the rest of the company is saving. We have 5,000 projects. My top 100 leaders, senior leaders are paid on two things: beating cost of capital on cash, so tight cash utilization, cash creation what shareholders want and beat last year's EBITDA. Those are the two metrics. And so what I would tell you is we're going to get flat to more efficient G&A by shared service centers, use of AI, a lot more productivity, but the big one will be on the cost of our products. Bigger products are going to have higher gross margins that are going to look a lot more like our parent industry, and that's going to be able to drive a lot more margin. So over 75% of our margin expansion will come from gross margin, which is active ingredient procurement to better plant utilization to more efficient footprint.

Sounds great. I guess and maybe just a final one here. Where do you think the Elanco story is being underappreciated right now? I know that usually the leverage is one part of it. Anything else that you want to mention?

I think big markets we're early. So in a very volatile, maybe capital markets time, animal health is durable. It continues to grow. Elanco is coming in with very differentiated innovation in an industry that rewards differentiated innovation. And when I'm $100 million into a $2.5 billion market in derm, $150 million into a $6 billion parasiticide market. We have a lot of runway of growth with stuff that's already approved, that's globalizing and the same on the protein side. So I think it's our profile of our company, our early innings on innovation, and we're not going to hit an air pocket. I'm very committed that we've got 5 to 6 innovations that are coming to continue this trajectory for the next decade. So our commitment to the algorithm, low double-digit EPS growth is good. And then I think, look, we have delevered the company. So that cash is going to be able to create shareholder value as well. So we're a multipronged very compelling, I think, investment story inside the most durable industry on Wall Street today. That's my opinion.

Awesome. Thank you so much for your time.

Thank you. Thanks.

Hi, good afternoon, everyone, and welcome to the Morgan Stanley Global Healthcare Conference. I'm Erin Wright, Healthcare Services Analyst at Morgan Stanley. For more important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And with that, we're happy to have Elanco Animal Health with us today. Thanks so much for joining us. We have CEO, Jeff -- we have the full team. CEO, Jeff Simmons; CFO, Bob VanHimbergen; and also Bobby Modi, who heads up, I think I have this right, U.S. Pet Health and Global Digital Transformation Head. So thanks so much for joining us.

I'm going to hand it over to Jeff first. He wants to give some prepared remarks or some initial remarks. There was obviously a press release out this morning as well from Elanco giving some, I think, some very helpful color in terms of how things are progressing. So I'll hand it over to you, Jeff.

Great. Thanks, Erin. Thanks, Morgan Stanley, and thanks for your interest in animal health. We're excited to be here. Exciting time in the era of our company right now, and I wanted to bring Bobby along, and we did put a press release out this morning. But maybe just some overall comments at a high level, and we can, I know, get into with your questions.

But continue to see animal health as a durable compelling market, I think data shows that, not just over the last 30 years of growth. '25 was an interesting year. We saw Pet Health grow 5%. Farm Animal grow 10%, twice the growth rate of Pet. So some of these drivers we've talked about, we continue to see. There's a few things. One, the whole protein revolution that's happening, that's the whole wellness movement for more protein, definitely an aging population for muscle retention, that is also driven by GLP use. We're seeing animal numbers, like poultry up 3% to 4%, dairy up 4%. That's just an animal number. So Elanco is well positioned there.

I think on the Pet side, Pet grew last year 5%. It grew in all the major markets, and all the major companies, most -- 80% of the companies grew in the first half of this year. So we continue to see pet spending for health as a protected budget item, is also another contributor to durable growth. And yes, some changing pet behavior, we can talk about pet buying behavior. So we do see the industry growing from $40 billion to $60 billion over the next 10 years or so because of these trends. Innovation wins, innovation will be rewarded.

And in the release today, what we try to do is put a little color on the here and now of some of these trends. And so I think in summary, we continue to see the market growing. We see a responsible market. We see and expect our pricing to accelerate as it has in July and August. And that, I would say, is because of really the headline of the release is the need on the pet side has grown. As some of you may know, this tick challenge has actually grown at the highest level since 2017 when CDC recorded, and the itching dog in the Northern Hemisphere has continued to be a challenge.

So the seasonality used to be 70-30 Elanco first half, second half is becoming more 50-50. So we have some -- we have 3 pet products that we believe are medically differentiated, best medicine, I believe, and they're taking share. They're allowing us to take price and add clinics, and we can put some color to that. So that was the essence of the release. And again, we can get into a little bit of our strategy in details.

Okay. Great. So let's get into the release since you brought that up. So you reiterated kind of high single-digit to low double-digit U.S. Pet Health in the second half. I guess, can you unpack that a little bit in terms of innovation contribution, volume, price, say, other dynamics to call out?

Yes. I'll toss it to Bobby that's running the business. But I just come back to, I think one of the things that needs to -- and it came from a lot of our meetings this morning is, look, these are big markets, and I'll step back and say derm is a market that is the itching dog challenge continues to grow and the markets grow. International grew 9%, and the overall market is continuing to grow and broad-spectrum parasiticides is growing, and we're in early innings. We're -- we just announced $100 million in derm and a little over $100 million in para. In these $2 billion and $4 billion markets, we're in the early, early innings with differentiated medicines. So no matter what's happening in the marketplace, we have a lot of runway relative to our share in very big, growing markets.

Maybe a little color, Bobby, on the U.S.

Yes. I think our growth is going to be really balanced. So I would think about a portion coming from price, innovation being the main contributor to growth across 3 products, right, Zenrelia, Quattro and then Befrena, probably more Q4, a little bit in Q3 and then a stable base. And that's sort of how we think about sort of the contribution of the business and what's going to contribute to the sustained momentum that we saw in the first half of the year.

Okay. And you gave that guidance potentially before you were fully kind of aware of what a competitor in the market was going to do from a pricing perspective. What has played out relative to your expectations on that front?

Yes. So great question. So on pricing, things have played out exactly as we had anticipated. First half of the year, we saw pricing of about 2%. And that's really across Farm and Pet. It's across international and U.S. So it's pretty broad-based. But we did say we expected price to accelerate in the second half of the year. And in today's press release, we did state that, hey, we have seen that price accelerate 2 months into the quarter. And so we feel great about what we expected and what we've seen there.

Yes. And I'd just say broad strokes, what we see in the marketplace is responsible pricing. We see some investments in pockets that tend to be time bound. That's not been very different in our industry for sort of years to come. And we're not seeing massive sort of price investment that sustained because, frankly, you can't generate a return on that. And what we really lean into is medical differentiation and commercial execution and largely driven by share of voice. And we think those are the winning formulas for success with our customers.

And when you're talking about price and the competitive environment, you're talking about broad-based price, too. And I think that, that's important across the portfolio given some of the competitors deploying bundling tactics across the portfolio. Are you seeing anything outside of the innovation -- outside of the more innovative product, meaning in derm and para in terms of price pressure?

Yes. I would start and you guys add here. But I mean, it's always typical to have a pocket or 2 around the world in a certain segment to where there may be -- it is a competitive environment. It's not a payer environment. But there's nothing that has changed from the first half in July and August that we see that's any different. Maybe what -- to Bobby's point, what has changed and why we wanted to highlight in the release, the need has increased. The speed of tick kill that we're seeing with Quattro and the significance of that differentiation has increased because of the need and the willingness to come. We're adding, again, 500 to 600 clinics a month. And that's because I think the differentiation continues to grow through our opinion. And the same with the itching dogs and Zenrelia, as we highlighted in the competitive derm market in Europe, we picked up 10 share points in the first semester, and that's 2 points to our competitor, the new incumbent coming in.

And I would just say innovation has given our portfolio greater relevancy. So we've seen our vaccine business grow market share the most it has this year in the first half prior to the previous 5 years. And we've seen Credelio, a product that's been on the market for 8-plus years, in the most clinics that it's ever been in as sort of these new products give us greater relevancy with both pet parents but also our customer base in clinics. And that's a nice sort of fuel that's allowed our base to sort of stabilize and put us in a really good position.

That was my next question because I think that was the other highlight, I think, that I like to focus on a lot, too, in the press release this morning was the base business and how much you truly are seeing some of that halo effect on the back of innovation and how that's truly materializing. Any other examples you can give us? You mentioned the vaccine portfolio. Obviously, you've had some innovation there, too, with canine flu vaccines that gives you a more well-rounded kind of portfolio there. But any other areas where you do see probably a longer tail in terms of like you're under-indexed in this category, but there's a long runway for growth as you continue to take share and leverage the broader innovative portfolio around it?

Yes. We have a very large therapeutic portfolio, and those products tend to be sort of smaller in nature. And it's nice that when you get into a clinic and have a discussion with a clinic that you haven't had normally, you get to talk about the whole portfolio, and we're seeing really nice growth on those products as well.

And I'll jump over on the Farm Animal side. We had second quarter, Bobby's business grew 11% U.S. Pet Health. Our U.S. Farm Animal grew 11%. We have Experior with the beef shortage, adding a lot of value to the U.S. beef industry, but that's pulled the majority of the beef portfolio with it as there is a portfolio effect that we get from innovation as well on the Farm Animal side.

I think I know the answer to this to some extent, given kind of the way you're answering the questions in the press release this morning, but since I asked a competitor the same question, but do you think some of this behavior truly is temporary in nature in terms of some of the competitive moves? Or maybe you're not even seeing it hardly at all, but what could be more of a structural change across animal health in terms of industry pricing and durability of pricing across these areas?

I think our industry has been very durable. I think if you look at the 12 or so companies that report in animal health and what they did in the first half, we saw more than 80% of them show growth. We see innovation be rewarded. We've been on both sides of this. I mean when you get the next generation of innovation, our customers reward it. Bobby and I had dinner with some of the major vets here in Manhattan last night, and it's very clear to say, hey, they're moving to the innovation because a vet clinic wants pet owners to be satisfied. And they'll do that because it's the right thing to do, but it also adds value to them. So I believe that we're moving to another era of innovation in our industry and Elanco is well suited going into that era.

Okay. Let's take a step back in terms of so much on kind of pricing and competition and everything else. But just overall the health of the market in terms of underlying utilization trends or demand trends across companion animal. And then also if you want to comment on livestock as well.

Yes. Maybe start, Bobby, and talk some, I think, also about the channel and what we're seeing with changing pet behavior in the channels as well.

Yes, I'll start with just Q2, the companion animal market in the U.S. grew, and it grew roughly 500 to 700 basis points faster than Q1. So you saw a sequential sort of improvement in the growth of the companion animal market. But what we actually focus on is actually pet parent behavior. And what we're seeing is pet parents are buying their products in different places. And what we're seeing is more and more pet parents are buying omnichannel and more and more pet parents are buying online. And actually, what we see is 40% of pet care has now moved to subscription base. And that's a good thing because it drives greater compliance, more doses.

What we see in Elanco's own portfolio is when somebody buys online, they buy 50% more when they're on a sort of subscription base. And that's good for the veterinarian, that's good for Elanco, and that's good for the pet and pet parent, and it's a win-win. And so we really think the future is going to be being everywhere the consumer wants to buy the product and showing up with the right education and information they need to make their sort of purchase decisions.

And then I think just jumping to the protein market. So with this protein revolution and increased demand, it's increasing numbers of animals and then the demand for more value. And so I would say that the winner right now is dairy. If I ask everyone in this room who's more concerned and wants to eat -- I mean, thinking more about eating more protein, statistics would show that over 80% of you are doing that. That's driving animal numbers globally. So poultry and dairy are probably the global winners. Beef, we're in for about a 5-year global shortage of beef. And so Brazil, Argentina, I was in Brazil last week, are going to take advantage of this shortage of cattle in the U.S.

And so when that gets to Elanco, it means our portfolio is adding more value. There's a higher ROI. Food safety, we got a big food safety vaccine portfolio. Food safety has never mattered more. And they want to win with the retailers in the food chain. So that's -- and they are looking for more innovation. Where we're probably under-indexed, where some of our competitors have a little advantage is we need more vaccines as a whole. But overall, we're well positioned on the farm side. And we see a 5-year run here with this protein change.

And just one quick clarification for Bobby. The 40%, was that inclusive of OTC?

That's just pet care in general. So it's broad. Yes.

Okay. And then so when I put this all together in terms of thinking about the fundamentals across kind of companion animal, but also livestock and then you raised your organic growth target, so growing off of sort of a faster kind of growth rate into 2027. Like what's durable? How do we think about the continued growth as we head into next year, just higher level?

Yes. Maybe I'll take that one, right? So I think it's going to be innovation-led, is what's going to grow the business and the continued stabilization of our portfolio with this halo effect. That's important for us, the innovation growth that we see because it does carry higher margins, Erin, than our corporate average. As we think about just the margin profile for next year, so we expect to grow, we're going to stick with our algorithm we gave at Investor Day, right, although we do have a couple of proof points where we've outperformed the algorithm, but innovation growing at higher margins.

As I think about 2027 and beyond, we're going to have fixed cost leverage as we continue to execute on our current cost structure. And then we have Elanco Ascend coming in, being very proactive on margins. And I remind you, 75% of that value is going to be in gross margin, 25% in OpEx. And again, we've accelerated some of those opportunities in the second quarter, and we saw that benefit come through margins in Q2. But as I think about going forward, I'm incredibly enthused about the globalization of what we have with Ascend. We have over 5,000 projects that are being tracked on a global basis.

We have visibility to new opportunities within procurement, within G&A, with AI, opportunities within our 4 walls and then even cash, all right? So as I think about '27 and beyond, I think we're going to have continued growth in innovation, margin improvements. We did lay out or state in our last earnings call the path to 60% gross margins, not putting a time frame on it, but you think about the levers I've just highlighted, I think just a high degree of confidence that we can do that and Ascend is a major part of that.

Okay. Okay. That's great. So let's move to Credelio Quattro and dig into that a little bit. So can you talk about where we stand now in terms of share, however you want to quantify it, whether it's puppy share, broader share? And then can you talk a little bit about what you're seeing more specifically from a pricing perspective there as there -- and I assume that there was no need for kind of competitive response, but if you feel that there was, anything to call out from a pricing perspective on that front?

Yes. I'll just -- I'll highlight just the marketplace backdrop of we continue to see the differentiation across palatability in our minds, the tick differentiation and speed of tick kill. We are going to continue to invest in medical data to continue to show and demonstrate what we believe is a product that has medical differentiation or, in my opinion, best medicine. We've got the quick worm kill in month 1 and just the broader coverage, tapeworm, et cetera, with 4 active ingredients. So I think we're going to build a medical program that just continues to demonstrate that differentiation. And the marketplace has given us a problem that we're going to lean into in a big way. This Alpha-gal concern on the human side as well as the Lyme disease has opened up, I think, a much higher interest by veterinarians to have that tick be removed before the dog re-moves back to the house.

But maybe now talk a little bit about the marketplace, Bobby, and the specific dynamics.

Yes. We've been very consistent. There's 3 really drivers for growth for us as we think about Credelio Quattro. One is market growth. And the nice thing to see is the endecto market grew mid-single digits in Q2, and that was a significant increase from Q1, and we expect that to sort of continue to grow through the balance of the year. The second is we're adding new clinics each and every month. And in the press release, we talked about the run rate of 500 to 700 clinics a month. So we added 1,100 clinics between July and August. And that's really not a slowdown in spite of whatever competitive reactions you may sort of see in the marketplace.

And the third area of growth is share within the clinics. And as our Puppy Index continues to grow and is higher than sort of that ratio, that means our share is only going to grow within the clinic, and we're certainly seeing that play out thus far this year.

And any seasonal dynamics to call out? I think when we spoke kind of after the most recent quarter and sort of that sell-side breakfast, you kind of called out some dynamics in terms of the quarter-to-quarter progression in terms of Quattro. Is there anything else to call out or any nuances? Should we see that sort of seasonal slowdown? Or should you be able to grow through that as still a newer product?

Yes. I think, look, the endecto market is still seasonal. So you'll see it sort of the market itself sort of the absolute numbers shrink in the, call it, the October, November, December time frame, January even as well. So -- but what we're seeing and what we talked about this morning is an elongated season. So we still see very strong demand in August and September.

Yes. We've shifted a lot as a company when, as I said, we were 70-30 from coming out of Bayer to now it's more 55-45 in terms of the split.

And then -- where do you think share ultimately shakes out in terms of the combo parasiticides, either overall as a category and then with Quattro?

I would just speak into the $800 million international market. It just continues to -- it's growing at a faster rate. Again, we've got dog numbers continuing to grow where they've leveled off in the U.S. Internationally, they continue to grow. And again, I see this segment continuing to grow at a faster rate internationally. So when you balance that out, I continue to say this is the fastest-growing segment in parasiticides, our largest market. And to Bobby's point, we had a cold January, February, which I think caused a lot of concern in the marketplace. I think it was more weather-related than market-related, and we've seen the bounce back pretty consistently all the way through August.

So that growth that Bobby is talking about in the second quarter is pretty important to note. And look, and I would just say our belief is Credelio Quattro, as I've said, and the family of Credelio will be our largest brand family. We feel strongly about that in our 70-year history, and we're going to continue to invest as we continue to see this product, continue to add clinics. Inside those clinics, as Bobby said, it's going to take share. And next year, we plan to launch in Europe, U.K., most of the major pet markets, Brazil, others. So next year, look for not just Befrena to be a big driver, but OUS Quattro will also be a driver of growth.

Okay. Okay. And then you mentioned you were at dinner with some consolidators, I guess, last night. How is this resonating in terms of whether it's product differentiator? Or how -- what's the go-to-market strategy when you go to a larger player like that? They're probably using multiple different -- of a lot of different products, right, in terms of different brands. How do you make sure you're kind of first on the list in terms of demand?

Yes, everything for us starts with medical differentiation, right? And we know that specifically in this area, ticks is a big deal and speed of kill is really important. As you think about sort of disease transmission, not just sort of with the pet, but also in the house. And we also know that a message like broadest coverage really resonates with the consumer, and our media strategy that is driving awareness of the brand and causing consumers to ask for our product is really important in terms of what vet decides to dispense and ultimately stock. And I think that's been a winning strategy for us and one that we will continue.

And what's next in parasiticides? What are you thinking about in terms of long-acting injectable products or other? You kind of play in a bunch of different categories, OTC, collars, oral solids, obviously, others, so how do you think about your playbook in parasiticide?

I'll start just by saying when we acquired Bayer, shortly after the IPO, the whole idea was omnichannel. I mean it was meet every pet owner, where they want to shop, at the price point they want to shop at. We're in the dollar store. We're in the vet clinic. We're in all the major retailers, major online, and we're using that leadership position now to even as the script business starts to move into some of those channels in a big way. So we will continue. Ellen has built a great pipeline with Bobby's help and Bobby's retail team for retail OTC.

AdTab is a great example of that over in Europe. 4-month collar that we're launching now, we're leveraging the Advantage brand, probably one of the most known, recognized brands by pet consumers. And then look, yes, we are looking at the next generation of innovation. We know that everything from long-acting injectables to the next generation of retail, to even just other modalities that can add more value to the veterinarian will be key. So we're in all those spaces.

Let's talk about derm. So Zenrelia, where do you stand now in terms of kind of adoption trends across the U.S. market? And OUS, it seemed to really pick up nicely. Is that continuing in terms of the momentum that you're seeing there? And yes, what's the latest on Zenrelia?

Maybe I'll start with Zenrelia U.S. Really similar to Credelio Quattro, our drivers of growth are going to be market growth, clinic penetration growth and market share growth within the clinic. What we're really pleased about is we continue to see clinic penetration growth. It's been very consistent month-to-month, again, 500 to 700 clinics a month, and that's really positive.

The other thing we continue to see is frontline use increase. And so now 42% of the clinics we're in, people are using Zenrelia as a frontline treatment. And that's -- and we've seen that shift significantly over the last 8 to 9 months where we were just below 20% before that. And so we're going to continue on that momentum. And look, what Zenrelia really means in the marketplace is differentiation. And really what we see is differentiation on efficacy. And I think once people see their dog get on that product and get relief, they're hooked for life. And I think that's really a powerful thing for us.

I would pick up just the international derm market grew 9% as we highlighted this morning. So the market continues to grow. Innovation, let me be very clear. Innovation in today's innovation is making markets grow, and that's what the data shows. And so the derm market is one that continues to be dissatisfied. If you have -- if you're a veterinarian and you have a dog return and it's itching, they will do whatever is needed. At the same time, if a dog is satisfied on a product, it's less likely to change. So there is also a dynamic that a satisfied customer is one that's hard for us to get a hold of if it's not on Zenrelia.

The data I like to see is in Europe as well as in the U.S. and other markets is we're getting a lot more first-line treatment. We've taken over market share leadership in Brazil and in France, and we're close in a few other markets. And as we highlighted this morning, we're anywhere from 13% to over 30% share in Europe with 3 JAK products, and we have picked up 10 points, as I mentioned, while the other competitive entrant has picked up 2. So -- and why? I think Bobby and I -- the consistency across the 40-plus countries is efficacy. And the efficacy is very strong, and it's a special product. And I think Befrena will just add to our derm leadership following Zenrelia.

Where is pricing shaking out amongst the 3?

Yes. I think there's not a lot of differentiation on price in the European market. I think there's definitely launch programs that are coming to an end. And I think now it's starting to be the efficacy is determining the price level. And I think there's -- in Europe, there's very little difference. I was in Brazil. We have that competitive entrant in there, and the price differences are very, very similar.

Yes, it depends largely on weight band and dosing. But on average in the U.S., the market incumbent is still slightly premium priced, low single, mid-single digits, and the 2 competitive entrants are a little bit less than that. We've taken 3 price increases since we've launched Zenrelia, and our philosophy is always to price the value. And the more people sort of see the value in the product, the greater sort of the willingness to pay is.

And that's even post some of the price actions taken from a competitor.

That's correct.

Okay. And then I think you still have commitment to hopefully a clean label for Zenrelia. Where does that stand in terms of what's the latest on that front?

Yes. We're on a path for continued label improvement. We're committed to that. So the research continues. Our plan is to make a submission at the end of the year, and the FDA with ADUFA would be coming back to us in middle of '27.

Okay. Okay. And then Befrena. So I think that it's been a nice surprise to see kind of you highlight that as such a driver for what was supposed to be kind of a measured launch. So where do we stand right now manufacturing-wise, in terms of any sort of limitations on that front, but also what you're seeing in terms of traction in the go-to-market strategy?

Bobby is causing a lot of trouble for Grace that's on manufacturing. So the demand has been greater than we expected. And so on monoclonal antibodies, there's a ramping that occurs when you go from one stage of bioreactor to another. They can be over 100 days to move. So there's a stage manufacturing supply, and we're in the midst of that. That's tracking. Grace's team is all over it. I was in the plant a couple of weeks ago, Bobby and I. So it's going well, but it's ramping, and the demand is much greater than we expected. Maybe share a little bit of the market reaction. Our plan is to be off from a constrained demand sometime in the first half of '27.

I think what's great about the product is the differentiation, right? And we say very similar to Zenrelia, differentiated on convenience, value and ultimately efficacy. And the good news is we started seeding this with KOLs months ago, and they've used it on dogs and the product is performing as intended or better, and that's always nice to see. And the second thing is it's a great complement to our derm portfolio. I think now with this product in, we have arguably one of the broadest sort of derm portfolios, which is going to be a tailwind for the rest of our derm products, but it also will help the ramp even quicker once we get into an unconstrained supply situation.

And I think, Erin, just step back, we're talking about a $2.5 billion market that has a growing need that's becoming more elongated in the year, and we're coming in with 2 products that we believe have medical differentiation, and we're less than $100 million or so in a $2.5 billion market. So that's -- I mean, there's a lot of market dynamics going on right now, but I think even investors coming back to us, I think that's the one piece of feedback is we have a long runway here. And our intention is more share of voice, more commercial execution globally, more dollars against those launches and really good investment in medical differentiation. That's -- and we have -- Ellen's got more products coming in derm. Our plan is to be a major player in global derm the rest of this decade.

Yes. I think that, that's an important dynamic to think about in terms of you're under-indexed in certain categories, there's significant room for you to grow, especially in some of these even more competitive categories as well. There's probably room for more than one player. Do you think that there is a portion of this market that is sort of underserved, if you will, in terms of derm and in terms of response rates to Apoquel or others. Is there also room for significant market expansion with the one -- not just the 3 of you competing all against each other in terms of fighting for this $2.5 billion market that it could be actually bigger?

Yes, we expect the market to grow. And historically, what you see with innovation as the market expands and what Jeff alluded to is the data internationally is very clear, with the 2 players launching in the marketplace, you're seeing that market continue to grow. And so I think there are plenty of pet parents that have an opportunity to move into a new mode of treatment, whether that be a JAK inhibitor, an IL-31 mAb or new technology that comes in the future.

Okay. And so you alluded to it, and I do want to get to it, so innovation from here. We get the question a lot in terms of, okay, what's next, which is the inevitable question from investors.

We've given you 6 new products, and we got to know what's next.

And everyone wants to know. So what is next?

Well, I start with, first of all, what Ellen and her team have done is, for 5 years, we focused on the fundamentals. Let's get 6 products into the marketplace that are major. We've upped our innovation guidance for 3 years pretty consistently. We were very clear at our Investor Day last December is that we've got 15 candidates in clinical. They're in the big areas and a couple of the opportunistic areas. And we're committing to 5 to 6 new blockbusters between now and 2031. It won't be a hockey stick. It's going to be a nice accretion, but we've got a really nice runway with Befrena and all the things that we just talked about into '27 and beyond.

But, look, for us to continue, I think this is really important, Elanco, is one is we can take a lot more growth and bring a lot more innovation in the big markets. So you've got a $6 billion parasiticide market, new modalities, new innovation, derm, pain. Pain will definitely be a market, $1 billion market headed to $2 billion, all the vaccine infectious disease. And then over there in farm, that what I would call performance sustainability market, is a couple of billion dollars as well. Look for us to be there. And then, yes, CKD, oncology, obesity, even derm in cats will be 4 markets that we have a pipeline in.

What I'm excited about is we've got the most stable, probably, I think, one of the most capable R&D teams, and that stability is the lead indicator, I think, right now. So very confident that we're going to bring you no air pockets in innovation. That is what keeps me up at night as an innovator is that. We're going to be focused on that.

Yes. I did have a question kind of like novel therapeutic kind of categories versus others. I mean we do hear from others kind of targeting similar type of categories, like where do you expect to be first to market. One of them that you've talked about is a novel immunotherapeutic that has the potential to be first-in-class and a major pet health blockbuster potentially in the next 2 to 3 years, if I'm correct. Any more color you can give on that?

We've got an accelerated process for the regulatory body on this. It is in a major market. We do think it is a new type, a new mode of action that can actually have a significant breakthrough, and we'll report more as we go forward. But, again, we believe we can be an innovation leader the rest of this decade. And hopefully, what we've shown over the last few years that demonstrates that.

And anything from an investment perspective, like internal investments in commercial capabilities, manufacturing capabilities as you do roll out this next wave of products, do you think you have the capacity from a manufacturing standpoint to withstand that? Do you think you have the commercial capabilities based on what you've learned with Quattro and others? Would love to hear kind of how you feel on that.

Yes. From an investment standpoint, there's a lot of investment put in in '25 and even a little bit '24 and '26, but particularly in the Elwood facility for our mAb production. But I think from an investment standpoint, I think we're -- we'll see that investment really normalize as we have in '26 and going forward, and we continue to invest in R&D, and we continue to invest in DTC. But I think from a capacity standpoint, there's really no gaps as I see here.

Are you taking advantage of some of the disruption that you're seeing in the market, whether it's sales force defections or otherwise? I assume you're waving people in.

Yes. We're always opportunistic. I mean we are on offense right now. We want to have the best share of voice in the marketplace. I think that's something globally and not just commercially, but I think manufacturing and R&D as well. And so yes, this is a really good season right now for us and what we think is a very attractive market for talent as well in our industry and even outside coming in.

Well, I think it says something in terms of your dedication to organizational stability as well. So congrats on that front. But thank you so much for the time. I appreciate it. Yes. Thank you.

Thank you.

Thank you. Thank you, everybody.

Good day, and thank you for standing by. Welcome to the Elanco Animal Health Reports Second Quarter 2026 Results Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tiffany Kanaga, Vice President of Investor Relations and ESG. Please go ahead.

Good morning. Thank you for joining us for Elanco Animal Health's Second Quarter 2021 Earnings Call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Bob VanHimbergen, our Chief Financial Officer; and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.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 discussed in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements.

Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. References to organic performance represents revenue growth excluding the impacts from royalty revenue that was sold to a third party, foreign exchange rates and acquisitions and divestitures. After our prepared remarks, we will be happy to take your questions.

I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. Elanco's second quarter results demonstrate our momentum and leadership in the attractive durable animal health industry. I'd like to thank the global Elanco team for their disciplined execution and once again delivering on our commitments.

As highlighted on Slide 4, we achieved 8% organic constant currency revenue growth, outperforming the high end of guidance for revenue, adjusted EBITDA and adjusted EPS, allowing us to once again raise our guidance for the year. Growth was led by the U.S. Pet Health and U.S. Farm Animal, each up 11%, followed by international pet health up 9%, and we saw strong contributions from both price and volume.

Elanco's diverse portfolio and omnichannel approach provide a strategic advantage with commercial execution across species and geographies. In the U.S. Pet Health, we continue to achieve share gains across all 4 major categories: derm, para, osteoarthritis pain and vaccines. Zenrelia, our newest blockbuster after reaching that milestone in July was the largest contributor to second quarter total Elanco growth, closely followed by Credelio Quattro.

In farm animal, the other half of Elanco revenues we added to our leading position in the U.S. We grew nicely in international and saw global ruminants up 17% on a reported basis. Our Big 6 led by Zenrelia and Quattro helped drive $340 million of second quarter revenue from innovation on top of a stable base. Our differentiated portfolio creates clear value while our strong commercial success is also attracting top industry talent, allowing us to further enhance our sales team and distribution partnerships with significant runway ahead for the Big 6, we are raising our full year innovation revenue target to $1.25 billion.

Our robust top line growth plus faster-than-expected margin expansion and working capital discipline have driven down our net leverage ratio more rapidly than planned. we are improving our year-end net leverage target to approximately 3x, down from a range of 3x to 3.2x previously.

With our solid first half performance and business momentum, we are raising our top and bottom line full-year outlook. We now expect organic constant currency growth of 6% to 7% and adjusted EBITDA of $1.01 billion to $1.035 billion, representing 13% growth at the midpoint and adjusted EPS of $1.10 on to $1.16, representing 20% growth at the midpoint. Our consistent delivery demonstrates our IPP strategy is working to expand our industry and at the same time, gain share across key markets and now also improve Elanco's profitability.

While there has been much focus on U.S. vet visit volumes, we have consistently demonstrated that innovation and omnichannel leadership can drive strong growth in the U.S. pet health market. Stepping back, our positive results are clearly not aligned with secular declines in vet visits. This is about changing pet owner buying behaviors, not about that visits. Very importantly, Elanco is bringing highly valued innovation into an industry-leading omnichannel capability, while there is more diversity in consumer spending that matches our broad access to the pet owner. For example, our data indicates that vet home delivery sales are growing nearly twice as fast as in clinic sales.

Combined across channels, we see a growing U.S. pet health industry, up mid-single digits for the trailing 4 quarters through Q1 with resilient pet owner spend and rational pricing. In summary, Elanco is growing even faster through our comprehensive portfolio of differentiated innovative products and omnichannel execution. Simply said, the durable pet health market is growing, and the pet owner is simply shifting behaviors like in most consumer markets.

Looking more closely at the second quarter revenue performance on Slide 5, we break down the 8% underlying organic constant currency revenue growth. Our recently closed acquisition, AHP International, contributed about 0.5 point of growth not included in the organic rate, building on our global ruminant success. U.S. Pet Health's 11% increase reflects a strong growth, both inside the vet clinic, online and at retail as well as in both prescription and OTC products.

In the clinic, we achieved robust double-digit growth with our basket of innovation led by Zenrelia and Quattro, outperforming on top of a stable base. And the new launches also benefited the greater portfolio, including vaccines and pain. At retail, our OTC parasiticide portfolio performed well, building on our leadership position.

Seresto and the Advantage family, both experienced good consumption growth in a mature market. reflecting strong trends for our products and supported by expanded in-store availability with Costco and Dollar General as new customers. Additionally, while building off a small base, Zenrelia and Quattro are growing rapidly in alternative channels.

Moving to international pet health. We delivered 9% organic constant currency revenue growth, driven by Zenrelia, AdTAb and Credelio. While Zenrelia has reached blockbuster status globally, we expect it to attain this goal in both the U.S. and separately international pet health where it is quickly capturing share in the $850 million international derm market.

U.S. Farm Animal increased 11% in the quarter with continued growth across all species. Our cattle portfolio led the way as a robust consumer demand for high-quality, sustainable animal protein continues to outpace inflation at retail. International farm animal grew 2% in organic constant currency, reflecting previously mentioned timing of certain shipments in Q1 2026 primarily to the Middle East. Year-to-date growth of 7% shows the strong underlying fundamentals that demonstrate the global nature of the protein revolution reinforcing the long-term value of the farm animal business.

Turning to Slide 6. We delivered $340 million of innovation revenue in the second quarter. With growth across all of the Big 6, our broader basket of innovation outperformed expectations. As a result, we are raising our anticipated innovation contribution for 2026 by another $50 million to approximately $1.25 billion reflecting many large products growing and gaining share in key growing global markets.

Let's further discuss the progress of our major innovation products on Slide 7, starting with our newest blockbuster Zenrelia. With over 2.5 million dogs now treated, Zenrelia's growth trajectory, both in the U.S. and internationally has accelerated further and continues to surpass our expectations with rapid share gains in the $2.2 billion and growing global dermatology market. Zenrelia's momentum is driven by a strong efficacy differentiation. June was Zenrelia's largest month yet, despite new competition in the quarter with U.S. penetration climbing to approximately 18,000 vet clinics. That's greater than 60% of the total clinic base with a reorder rate maintained at over 80%. Our U.S. JAK market share improved 9 points year-on-year and also gain versus Q1, reflecting these new purchasers.

Importantly, we are seeing increasing use of first-line treatment, now to over 40% of users demonstrating growing belief that Zenrelia is the first choice for derm treatment for many veterinarians. Outside the U.S., Zenrelia is now in 47 countries, all without label restrictions. We continue to drive significant share gains across key geographies. For example, Zenrelia has built on its market-leading position in Brazil and gained #1 JAK status now in France. In Europe, we continue to outperform the competitive entrant with JAK market share as high as 40% plus.

As we've previously shared, Zenrelia performed well in a head-to-head study against the market incumbent. This strong performance is also clear in a new study commissioned by the competitive entrant that compares the efficacy of available JAK inhibitors in a laboratory model. The results reflect our real world experience that Zenrelia's efficacy is a game changer. On to our second derm innovation, Befrena, which soft launched in May ahead of the allergy season. commercial product has shipped to approximately 1,400 U.S. clinics with strong early feedback. We are ramping capacity to meet higher customer demand that is double the size of our expectations with weekly increases in supply.

Given the robust demand, we anticipate supply, reaching unconstrained levels in early 2027. A phase launch is typical for monoclonal antibodies or mAb products, as we scale our bioreactors with the anticipated manufacturing ramp-up. Overall, we're pleased with Befrena's very early momentum and ability to increase our competitiveness, especially with corporates.

Next, on Credelio Quattro. We are excited by further acceleration of dollar share gains and broad spectrum dispensing sales from U.S. clinics. Quattros market share increased 4 points in Q2 and on top of the 3 points in Q1. We rapidly expanded the number of clinics that carry Quattro to over half of the U.S. based today, up 10 points since Q1. That's an increase of approximately 3,000 clinics. We achieved this significant penetration as a direct result of our strategic brand investments year-to-date, helping veterinarians and pet owners gain appreciation for the four dimensions of differentiation that make Quattro what we believe is best medicine.

The speed of Tick Hill is proving especially relevant to pet owners today. As the Wall Street Journal and others have recently reported black legged tick populations are expanding and Lyme disease cases are rising as a result. Quattro is resonating with pet owners who want robust protection for their pets and themselves with our newly published data, again, showing faster speed of Black lagged Tick Hill than the leading competitors. This combines with Quattros first FDA conditional approval for the treatment of New World screw arm and dogs, all to represent powerful examples of life cycle management to build on our differentiation.

Like Zenrelia, Quattro's momentum accelerated during the quarter, with June also as the product's largest month ever. We're seeing strong pet owner demand activated by DTC activities, where we continue to make high return on investments. Our targeted media approach and industry-leading position with reps and distributors differentiate Elanco and drive our share of voice in the pet health marketplace. Together, we're taking this differentiated product to new heights with runway for significant share gains ahead. We continue to track Kinetics Puppy Index as an important leading indicator where Quattro ranks highest versus other broad spectrum and deco. Globally, we are confident Quattro can lead the Credelio family to become our largest product family ever. So far this year, Quattro is launched in Australia, Canada and Japan. The EU and the U.K. are next in the nearly $800 million international broad-spectrum market, which is growing double-digits.

Finally, our international OTC parasiticide AdTab has continued its rapid climb toward blockbuster status with sales up more than 30%. And AdTab is the fastest-growing brand in the nearly $600 million OTC Acto category in Europe with success also supported by data-driven, high-return DTC investments.

Moving to farm animal. Experior grew double digits in the quarter. This growth, plus the benefit to our cattle portfolio have helped power another quarter of double-digit U.S. farm animal results. We expect Experior to continue to grow and provide portfolio synergies with multiple levers from extending days of use, continued adoption and price. However, we anticipate moderating growth rates against challenging comparisons. Lastly, on Bovaer, our expectations and trajectory are consistent with our last update as we continue to see demand from CPG companies that supports sustained interest and consistent count numbers. Bovaer achieved good year-over-year growth in the quarter, albeit off a small base, and we're investing in long-term initiatives for this potential blockbuster to enhance the product value and demonstrate user flexibility. For the balance of 2026, we continue to expect growth at a measured pace.

Moving now to Slide 8. We provide recent highlights across the three parts of our consistent IPP strategy innovation, portfolio and productivity. Starting with innovation. We've had meaningful progress since our December Investor Day with the Next Wave portfolio growing and progressing without attrition. We now have even higher confidence behind the 5 to 6 blockbuster potential innovations expected through 2031. Alan and the R&D team have increased the number and value of projects in development and the overall probability. This is driven by a few specific things that are working very well.

We built a project centered organization and established a one-of-a-kind innovation execution capability that leverages the potential of AI and has an optimized global footprint combined with strategic partnerships in clinical and technical development. And most of all, a stable, engaged, highly capable and experienced team of scientists who are laser focused on progressing the next wave portfolio and refilling the pipeline. We are working hard to ensure a consistent flow of blockbuster potential innovations through the end of this decade and well into the next.

Today, our basket of innovation is driving our broad-based growth. This can be seen in global ruminants, our fastest-growing species as innovation fortified our beef and dairy portfolio up 12% in the quarter on an organic constant currency basis or 17%, including AHV and FX. Our pet health launches are powering growth with U.S. corporate account sales, adding 300 new corporate clinics with year-to-date sales ahead of total U.S. pet health. Innovations also driving pricing gains, up 2% in Q2 for total Elanco.

We are on track for full-year acceleration from 2025, including a back half step-up from customer mix. Finally, we continue to pay down debt faster than planned and strengthened our balance sheet. At 3.1x net leverage in Q2, we are now approaching the under 3x landmark enabling greater capital allocation flexibility. This opportunity is enabled by productivity gains with gross margin expansion in the second quarter, up 80 basis points, and Elanco Ascend on track to drive meaningful efficiencies and margin improvement in 2026 and beyond. I firmly believe we are at just the start of the next era of value creation for Elanco as our consistent execution, along with growth, innovation and cash will add to our momentum and leadership in Animal Health.

With that, I'll pass it to Bob to provide more on the second quarter results and financial guidance.

Thank you, Jeff, and good morning, everyone. My comments today will focus on our adjusted results for the second quarter. Please refer to today's earnings press release for the details of our reported year-over-year results.

Starting on Slide 10. We delivered $1.368 billion in revenue, up 10% on a reported basis. Organic constant currency revenue grew 8%, driven by a 6% increase in volume and a 2% contribution from price.

Slide 11 provides revenue from the four quadrants of our business. Total Pet Health revenue grew 11% in organic constant currency. Our U.S. business increased 11% with strong momentum in both vet and retail channels. Performance was led by strong demand for our innovation, specifically Zenrelia and Credelio Quattro. In retail OTC, Seresto led top line growth in the quarter. Internationally, Pet Health revenue increased 9% in constant currency, led by the continued momentum of Zenrelia and AdTab. Our farm animal business delivered 5% growth in organic constant currency. In the U.S., organic revenue increased 11%, reflecting broad strength across all three species. Beef cattle led the quarter supported by Experior.

Our international farm business grew 2% in organic constant currency with both ruminant and poultry contributing. As a reminder, results were impacted by accelerated shipments of the Middle East earlier this year. So it's important to view the quadrant growth on a year-to-date basis, which is up 7%.

Moving to Slide 12. Adjusted gross margin reached 58.1% this quarter, an 80 basis point improvement versus the same period last year. The outperformance was driven by a favorable product mix benefit and Elanco Ascend acceleration that more than offset the anticipated inventory cost pressures.

Looking ahead to the second half, we are well positioned for continued margin expansion, supported by the sustained momentum of our U.S. Pet Health business and early contributions from Elanco Ascend. Operating expenses were up 10% in constant currency over the same period last year. reflecting our commitment to strategic growth. This increase was driven by targeted DTC support for our new product launches and ongoing R&D initiatives.

We view these as high-return investments that align directly with our strategic vision that are expected to drive long-term value. Interest expense for the quarter totaled $44 million, consistent with our expectations.

On Slide 13, we show an adjusted EBITDA year-over-year comparison for the quarter. Adjusted EBITDA was $288 million, an increase of $50 million or 21%. Adjusted EPS was $0.34 in a 31% increase year-over-year.

Slide 14 highlights our ongoing commitment to the balance sheet discipline. Our strong operational performance and a decrease of approximately $90 million of net debt have resulted in a half turn reduction in leverage since the start of the year. We are closing in on our target of sub-3x next year. This is a key milestone that will unlike greater capital allocation flexibility as we pursue our long-term target of 2x to 2.5x.

Moving on to financial guidance, starting on Slide 16. Our strong second quarter performance allows us to both raise our full-year outlook and continue to invest in our innovation products, driving market share gains while expanding the total industry. We are increasing the midpoint of our organic constant currency revenue growth expectation with the range now at 6% to 7% and up from 5% to 7%. We expect revenue dollars of $5.09 billion to $5.4 billion, which includes a $60 million year-over-year tailwind from favorable foreign exchange rates, most of which was realized in the first half. Additionally, our recent acquisition of AHV International is expected to contribute approximately 1 percentage point to total reported growth for full year 2026.

Guidance for adjusted EBITDA increases approximately $32 million to 13% growth at the midpoint, capturing our quarterly beat and approximately $6 million of incremental investment in our innovative launches. For adjusted EPS, we we are raising our guidance by $0.07 at the midpoint, bring the new range to $1.10 to $1.16, up 20% at the midpoint. Finally, we updated year-end cash and balance sheet expectations and now anticipate a net leverage ratio of approximately 3x by year-end.

Turning to Slide 18. You will see the primary drivers within our guidance ranges are unchanged from our previous update. Our guidance reflects the balanced view of the competitive external environment and growth opportunities within our portfolio and Elanco Ascend, our multiyear productivity and cost savings agenda.

Now let's discuss Elanco Ascend. Since launching at the start of the year, we have outpaced our initial milestones as we work towards delivering $200 million to $250 million and total adjusted EBITDA savings by 2030, net of inflation and program reinvestment. We built Elanco Ascend on four strategic pillars: procurement, price, organizational optimization and automation. Last quarter, I shared an update on our AI-driven automation progress. Today, I will highlight procurement. Our team is doing exceptional work identifying global suppliers that deliver high-quality materials at a significantly lower cost. Our recent win includes securing an additional API source for a Big 6 innovation which directly improves our margins and strengthens our supply chain resilience.

I'm excited by how the organization is truly leaning in and engagement is translating to results. The global Elanco team is executing on an expanding pipeline of Ascend opportunities, which gives me a high degree of confidence in our ability to deliver long-term gross margin improvement and stronger cash flows on a lower cost base. When you pair that agenda with our growing portfolio of high-margin innovations, we believe the path to a longer-term 60% gross margin is clear.

Moving to our third quarter guidance presented on Slide 19. On a reported basis, we expect $1.195 billion to $1.22 billion in revenue, representing organic constant currency revenue growth of 5% to 7%. The year-over-year increase in operating expenses primarily related to launch investments is expected to be approximately 11% in constant currency. As a result, we anticipate adjusted EBITDA of $200 million to $250 million and adjusted EPS of $0.19 to $0.22.

Finally, on Slide 20, we highlight the acceleration in U.S. Pet Health growth with expectations for continued robust gains in the second half of the year. We are confident in driving high single-digit to low double-digit growth despite challenging comparisons, driven by strong momentum for Zenrelia and Credelio Quattro contributions from Befrena and significant corporate account growth. For the full year, we expect the U.S. pet health business to achieve at least high single-digit revenue growth, once again leading the industry.

Now I'll hand it back to Jeff for closing comments.

Thanks, Bob. Elanco is clearly winning through our differentiated innovation, our comprehensive portfolio and our diverse go-to-market model, along with our commercial execution. Our strong year-to-date results underscore Elanco's long-term opportunity.

As I close on Slide 21, let me address the three broader U.S. Pet Health industry questions that we have heard. Have prices, the consumer and the market remain durable. The answer all around is yes, with many proof points highlighted on this slide. The U.S. pet health industry grew 5% in 2025, led by derm and the broad-spectrum parasiticides. After a weather-related speed bump in early 2026, we've seen a strong market rebound starting in March, also evident in Elanco's results across a holistic omnichannel view, the industry is well positioned for continued growth in 2026. Vet channel revenue is up low single digits year-to-date. We see solid consumption trends at retail with OTC flea and tick category up more than 4% year-to-date, and alternative channel prescriptions growing very rapidly.

Additionally, there's generally stable pet ownership. Demand for pet health has always been broader than a singular metric like vet visits and even more so today. Pet owners spend remains resilient as the expectation of care has never been greater with pets at the center of the family. A number of recent studies included in our own conducted at the end of May showed that pet health and wellness remain an absolute priority for pet owners as a protected budget item. 95% of surveyed owners said they would not cut spending on pet health and 90% expect to maintain or increase spending over the next year. Consumer spend is clearly changing, favoring highly accessible and convenient purchasing channels. Finally, on pricing. This is a market that responds to value and differentiation, and that's where we're leaning in. In fact, at the start of 2026, our innovation allowed us to implement our largest price increase in the U.S. market in 5 years. Price accelerated in Q2 in our U.S. Pet Health business, and we expect continued acceleration in the back half of the year.

Stepping back, it's also important to keep a global perspective. the U.S. Pet Health market is just 1/3 of the global animal health industry with farm animal driving 10% growth in 2025.

Moving to Slide 22. We expect total Animal Health to expand from $40 billion to $60 billion in annual revenue into the next decade, driven by a fundamental increase in global protein consumption, international humanization of pets and pet owners seeking increased care, convenience and value. In my many years in animal health, I've seen this industry show reliable growth even in times of economic challenge. Animal Health provides consistent long-term growth because we're at the center of society's most important needs with pets and protein.

Turning to Elanco specifically on Slide 23. Our charge is clear. keep innovating, keep delivering, keep making life better for animals. Elanco has four key drivers of value creation through the rest of the decade, providing a compelling investment opportunity.

First, growth. We have consistent growth across businesses and geography. The Big 6 offers significant runway ahead expected to double in size over the next 3 years. Importantly, our growth is not dependent on a single product or two. Meaningful differentiation is driving share gains in large growing markets with globalization largely just beginning.

Second, innovation. We have increased confidence in our robust pipeline that is progressing without attrition since our December Investor Day, on track to provide 5 to 6 blockbuster potential innovations by 2031. Our R&D engine is stronger than ever with a highly engaged team and stable leadership and a collaborative project centered matrix structure. We know we cannot have an air pocket in our pipeline. We have built a robust organization that is moving faster and more efficiently than I've seen in my career to deliver a consistent flow of high-impact innovation. We're excited to share updates with you in the quarters and years ahead.

Third, we have an accelerating cash and margin profile. We've increased our full-year adjusted EBITDA margin guidance to approximately 75 basis points year-over-year improvement, including 50 basis points of gross margin benefit. This expansion is happening while we're also driving strategic DTC investments to accelerate market share gains, and we're just getting started. Elanco Ascend is gaining traction faster than anticipated, driving strong early results and becoming embedded in our culture. Improved productivity is accelerating our free cash flow to fuel our rapid continued reduction of our net leverage ratio and increased capital allocation flexibility.

Finally, Elanco's profile is purposely balanced to align with an evolving growing industry. We have diverse exposure split between farm animal and pet health and U.S. and international. We have a pet health leadership in retail and vet clinic innovation. Elanco is strategically built for the next decade of Animal Health value creation with strong alignment to the fundamental drivers across pets and protein. I believe no other animal health company is so well positioned to consistently execute to transform and grow the industry and create long-term value for our customers, communities and you, our shareholders.

With that, I'll turn it over to Tiffany 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.

[Operator Instructions] Our first question comes from Glen Santangelo with Barclays.

Jeff, I just want to start out talking about your prepared remarks, you specifically called out Zenrelia and Quattro as being the biggest contributors to growth. And my question is really on the pricing environment around those drugs. You've commented -- or the company has commented several times about price increases across the portfolio being greater in 2026 versus the past couple of years. But given the concerns we hear from investors around the competitive landscape and pricing generally, can you comment on what you're seeing specifically with respect to pricing in para and derm.

And then maybe I'll just ask my follow-up. This is for Bob. I'm trying to reconcile the EBITDA margins comparing what we saw in the first half of the year versus your expectations for the back half. Considering the strength that you have in the innovation portfolio, it seems like this improved mix and pricing should continue to be a tailwind for you in the back half, you have obviously more conservative expectations. Maybe there's some seasonality and some other investments in there that I'm not thinking about. And I'll stop there.

Thanks, Glen, for the question. I will point to Slide 21 just on the three common themes we've heard and why we wanted to really put up some key data points. But we continue to see industry growth, a resilient pet owner and durable price. And let me double down on price in your question. Look, we see a marketplace that's remained responsible on pricing. Again, with portfolio value and differentiation, you can take price. That's why the industry has seen 2% plus over 30 years.

We're seeing no change. If anything, in Q2, it's probably been more responsible. I'll point to just in the last 2 weeks, we've seen a competitor actually mid-season take a map price increase, which shows, hey, they believe that a pet owner is resilient and will spend and that, hey, pricing is not where you're going to get changes. I would say, specifically in derm, and the broad-spectrum parasiticides, we're seeing strong double-digit outside the U.S. growth in the U.S. continues to grow.

Derm and broad spectrum have lessened, but it's still low single to mid-single-digit growth that we've seen here in Q2. So Overall, we're seeing price acceleration in our U.S. Pet Health from Q1 to Q2 and will continue to accelerate in the second half, where I see competition as there's different plays relative to spend to get share. spend is going up to get share. And we actually -- our share of voice and our competitiveness has increased. We've added competitive reps, multimedia and more importantly, distributions kind of on our side where we've seen some competition actually play margin and decrease in restructuring cut reps. So I think our competitive position is stronger, price remains responsible and the markets are very durable.

Yes. Maybe I would just add a couple of points to that. And then Glen, I'll get to your second question. But price in the quarter, again, was just right in line with our expectations. We saw a great balance of pricing between pet health at 2% as well as farm, and I'd highlight pricing from quarter-to-quarter can be and is influenced by both customer and product mix, but we've got a high degree of confidence in the second half, seeing that acceleration on pricing.

So then on your second question, Glenn, on margins. And maybe I'll just give you color across both gross margins and EBITDA margins. But starting with gross margins, we are estimating gross margin expansion of 50 basis points year-over-year. That's up a bit from the 40 that we had previously guided. And it is driven from the second half with productivity. Procurement is doing a fantastic job with the supply base and then volumes. This is partially offset by the first half, which we saw muted growth from inflationary pressures and the high cost of inventory flowing through.

And so that has flushed out, but the U.S. pet business had a fantastic second quarter, and we expect that to continue here in the second half. As I mentioned, and Jeff has mentioned, we do see pricing accelerating in the second half as well. And then finally, our basket of innovation continues to grow. And as that brings higher margins than the corporate average, we'll see that benefit.

Now I want to highlight a couple of things. One, we are still seeing inflation above historical levels. And then number two, as we think about EBITDA margins, we are going to continue to invest in DTC to drive market share gains. I can tell you there is a very high correlation with data-driven decisions that we see but a high correlation between the DTC spend and the market shares that we've picked up here in Q1 and Q2, particularly in Credelio Quattro. We spent a lot of time with Bobby Modi and his marketing team on investments and the results. And again, you've seen -- and we're going to continue to invest in these product launches and you see that step up here in Q3, Q4. But you highlighted this as well, and this is absolutely true. There is a phasing to the business.

Our business is more first half weighted versus second half, so there is some seasonality in there. But listen, I want to leave you with this. Longer term, we are very confident in our ability to improve gross margins and EBITDA margins as we continue to see a favorable mix and the benefits from Elanco Ascend coming in.

Our next question comes from Jon Block with Stifel.

So Jeff or Bob, the 8% organic constant currency is roughly $10 million of dollar growth, if I've got that correct, year-over-year. You called out Zenrelia and CQ as the two biggest drivers of that $100 million. Can you just provide some sort of a framework? In other words, are those two about half of that $100 million on a year-over-year basis in terms of growth, more than half or less than half? I think obviously, key products for you that continue to do really well. We're just trying to get a better sense for the level of contribution.

Yes. So Jon, so listen, as I think about -- I probably won't give you numbers, and we think about this as the basket of innovation growing well. But listen, we saw growth across the entire portfolio, right? So we did see our basket motivation go $340 million. That's on a stable base, again, stable base. We view as up or down low single digits. And in the first half, we saw strength in Q1 and actually growth in Q1. Q2 was a little bit more balanced, down 1%, but year-to-date, we're still up on our core business. But listen, we saw quality growth across the entire portfolio.

In the U.S., again, up 11%; and yes, Zenrelia and Quattro were the leaders. Outside the U.S., we continue to see strong performance from Zenrelia. AdTab grew over 30% internationally, and then the Credelio family performed well. And then on the farm side, listen, in the U.S., we grew 11% growth across all species. I'd say solid growth from Experior and Rumensin. And then outside the U.S., 2% growth, but as I highlighted in my prepared remarks, we did have some timing between Q2 and Q1. So it's important to look at that as a year-to-date number, which grew 7%.

Okay. Got it. That was good color. And then I'll pivot for the second question. Jeff, it was good to hear the demand trends, the early demand trends from Befrena. Maybe you can tell us where the successes are coming from? Are those called Zenrelia accounts that are giving you a little bit of a running start into atopic derm. Is the traction with the corporates? And how do we think about the worldwide opportunity for Befrena if that can start to take hold next year in 2027?

Yes. Thanks, Jon. Look, I just back up and say, derm, we're excited. When I look at Befrena coming in and joining Zenrelia, and then look at Alan's pipeline, we've highlighted during the Investor Day, we see ourselves continuing to grow and become more of a leader in derm for the rest of the decade. So -- and derm continues to grow nicely, double-digit outside the U.S., as you know.

And the Zenrelia's success is definitely going to pull Befrena. So look, we did the survey, Jon, and it showed 83% of veterinarians in the U.S. wanted to use Befrena. Very clearly, we're seeing that come through. Bobby's expectations of demand from Q1 to Q2. It's more than doubled on Befrena. So we're being very careful. We're using a gating demand system because once you start a dog on by front, you're going to want to keep them on.

So we're gating that demand. Supply is stepping up every week. And you know the monoclonal phasing as we move the bioreactors up in size. All of that's going to help margin is going to help quantity. And so that demand is going to become, we think, more unconstrained and fully into the marketplace as we go into 2027 on the early side. So -- and yes, the Zenrelia has opened the door, look at that first-line treatment and more than half the clinics without question, that is where we're seeing Befrena come in.

Befrena will be a key to unlock, we think, for a lot more corporates. But at this point in time, we've not leaned in as much with corporate yet because that unlocks a lot more demand, and that will be part of the gating system. So look for this to be a nice key driver for '27 growth as we go in. And then I just think think Elanco, global derm, multiple products, derm leadership by the end of the decade is our focus.

Our next question comes from Daniel Clark with Leerink.

I wanted to ask about the 40% first-line usage in Zenrelia about half the clinics that you've highlighted. I mean how I guess, how do you kind of think that, that can go given the trajectory that you've seen? And what are the -- what's the messaging that you're really leaning on to drive first-line usage?

Yes. Thank you very much for the question. Yes, I think it's probably one of the bigger proof points of the quarter for Zenrellia. Zenrelia is our #1 contributor for growth for the entire company. The expectation of this product continue to grow. Manufacturing stays at 24/7, 47 countries internationally that's really driving growth. I just think that the veterinary community come out of the BMA convention here this past month. And you just look, I mean, they're very connected globally. So when they see 47 countries, they see the 2.5 million dogs I think the first-line treatment up at 40% demonstrates there is a vet confidence in this product. there's a desire to satisfy that pet owner right away, and they believe that Zenrelia is that option.

And we believe from our perspective, this is best medicine right now in a market that wants a pet owner to be satisfied when they come in with an itching dog. So we continue to see that climb. We continue to see Zenrelia's leadership grow. And as we just addressed with Jon, Befrena will help Zenrelia, Zenrelia will help Befrena. So -- and again, I think the international growth is really in the early innings as well. So that's where we stand a very, very strong quarter with Zenrelia.

Great. And then just a quick follow-up. Any update on the time line with the additional study and sort of what you're doing with the FDA on the label front?

Yes. new study is progressing as planned, nothing new to report. Again, it's a time research is in process, and we anticipate submitting the data as planned to the FDA by no later than the end of the year.

And our next question comes from Michael Ryskin with Bank of America.

Congrats on the quarter and strong result. I'll stick with Zenrelia and Quatro specifically. You really continue to stock up share gain, share gain, share gains in terms of clinic penetration in terms of market share, both for 1 year-over-year, quarter-over-quarter was a Quattro accelerated. I kind of want to get into how much runway there is there? I mean I think you're still obviously very, very early in both launches. You're still breaking into what effectively has been on Opel in both markets. A lot of this is going to be clinics placing initial orders, sort of setting you up as that alternative? Or is that other vendor out there. But when you think about peak market share opportunity, anything you could say in terms of how much momentum you think you still have, how much runway you still have feels pretty safe through the rest of 26%, but we talk about '27, '28 and just sort of the runway you see there.

Yes. Thank you, Michael. There's no question, as I highlighted, the next big era unlock for Elanco value First is the long runway we see for all big blockbusters coming. But specifically to Quattro and Zenrelia, I'll start with Quattro. I mean, Bobby said in the Investor Day, more clinics, more share and new puppy starts, and all three of those metrics are green and they're moving forward to pick up close to 3,000 clinics pretty much in a quarter thereabouts, that is a significant ramp. And now we double down on the penetration within that clinic. I'm going to point to one thing just on Quattro. And again, Ellen and the team just life cycle management, you've probably seen, I mean, the tick awareness and the linkage to Lyme disease, a recent Wall Street Journal article, many media reports, even the New World screw arm and the worry of any tick bite with dogs. This black legged tick, we have set out our second new research study on this showing competitive advantage on speed to kill. That's an example of a catalyst to drive Quattro to come into a clinic and become first-line, first choice.

So I think that differentiation is getting solidified. It's getting widened, and we see best medicine. So -- and then as you look at it really just getting started internationally. Romero is out traveling right now in Australia and Japan, where we're launching. And Europe and U.K. is up next. As you know, that's a big $850 million market. And I would say the same with Zenrelia news is coming. It's outstanding, and look, new research, I point a competitive study, the second head-to-head is out there with all three JAKs. And all I would say is when you look at that study, any KOL or vet that sees it around the world is seeing, hey, Zenrelia efficacy is demonstrated in research, and it's demonstrated in the 47 countries.

I'm really proud of the French team becoming #1 right now in the Q1 with Zenrelia. So long runway, Jon, I see ahead. And both markets are growing. The two markets are growing double digit outside the U.S.

Okay. Okay. And then related to that, if I could, on the incremental investments you talked about in the second half, I think you touched on it in an earlier answer in terms of you're seeing really good payoff with DTC. And so you're going to take some of the some of the outsized earnings you're seeing some of the top line benefit you're seeing in reinvested back to support these growth drivers. I kind of see those two moving up in lockstep, right, as the products get bigger and as the ramp continues, you're going to invest more to support more growth, where do you see the biggest payoff in DTC spend? How much runway is there on that front, right, on the investment side how long until you sort of hit a steady state in terms of the dollar amounts you need to invest to support these? Or do you see kind of growing throughout the rest of this year, next year and beyond? So like what's the right level until you've kind of hit saturation on that?

Yes. So it's a great question, Mike. And listen, like I asked that as well. And again, like I'll reiterate the time I spend with Bobby and his team and looking at data, and I can't emphasize enough the direct correlation we can see with the OpEx spend in DTC and the market share gains. It's just unbelievable data and data that both Bobby and I would say we've never seen this correlation before in our careers. So we're going to continue to use data to make the decisions. And it's hard to put a time frame on that, but really pleased with the 3 points of Quattro growth we saw in market share growth we saw in Q1 and the 4 points in Q2. And so listen, like we're just going to keep going there and grow that top line with market share gains. And when we get to a point, we don't see the return, that's where we'll scale it back.

Our next question comes from Umer Raffat with Evercore ISI.

Congrats on all the execution on top line growth. I wanted to focus on OpEx for a quick second. So top line is up 8% organically in 2Q and OpEx is up 10%. So I guess my question to you is not even so much on operating leverage, it's really, what are your plans on OpEx going forward in general? I realize we should continue to expect top-line growth, but how much operating leverage should we truly be expecting? And on an absolute basis, is the OpEx build-out complete? Or is it going to continue to go up mid- to high single digits over the next couple of years year-over-year as well?

Yes. So great question. And listen, I think a lot of the OpEx is particularly tied to the DTC, Umer. And so listen, like we're going to keep that OpEx investment. But certainly, we do see leverage continue to improve I'd say as we move out through 2027, listen, one of the major contributors to '27 margin growth and beyond and you think about the algorithm that we gave at Investor Day, but it's Project Ascend, all right? And so what Project Ascend is going to do is is not only fund a lot of the OpEx, but it's also going to drop to the bottom line.

And listen, like I think we're at a new level with Ascend here recently. Really pleased, as I mentioned in my prepared remarks, with the the acceleration of projects across the OpEx as well as what's happening in the 4 walls. We have a highly engaged team and a great cadence of reporting and meetings. But listen, the granularity is at a new level. And so what I expect to see moving forward, continued improvement in in operating margins and really funding some of that OpEx. But I think you'll start seeing leverage here improve here in 2027 and beyond.

Our next question comes from Brandon Vazquez with William Blair.

Congrats on a nice quarter here. One, I think, Jeff, you had briefly mentioned this, but maybe something that I get a lot of questions from investors on that might be helpful to go over. Just what's the response from competitors in the market? You guys are clearly doing well. You have a good innovation cycle here. What are they doing to try to take share? Maybe you could just talk about that a little bit.

Yes. I think overall, a durable market that I said after the January, February weather bump, we've seen a rebound in the market. So I think the markets are robust. You're seeing that in the results. the pet and protein trends. I mean I'd point to our rum in it's up 17%. I mean the cattle the dairy business. So I think the overall global market, remember, U.S. pet out is about 1/3 of the market the other 2/3 really start to look at international pet and protein as big drivers as we go from this $40 billion industry to $60 billion, I think that's important.

But yes, when you get into some of the competitive spaces, there's a combination of things. One is, it's selling the portfolio. I think that's important. It's really direct. This direct marketing is getting more sophisticated. It's less TV advertising and a lot more direct to specific niches and using today's technology that I think is working. And that's where I see the most is a lot of competitive spend to target in niche markets.

We like where we are with our reps. We've got one of the largest teams in the industry with the best relationship, a real call out to our distribution partners and what they've done. So it's competitive, but it's durable and I don't think there's -- and it's been very responsible in the marketplace. We sell our portfolios in this industry, and that's what we're doing.

Okay. Great. And Jeff, I don't ask you enough on farm animals, so let me ask on farm side. Experior continues to do well, [still low] double digits, but you're getting more penetrated into the TAM that you guys have outlined. Between Experior and Bovaer, maybe just level set us where are you on kind of TAM penetration there? What should we think about for any potential catalysts or the -- what we should expect growth rates in that -- those two products to be.

Yes. They're going to continue to be growth drivers second half as well as into next year. No question, the ruminant market, both beef and dairy. We've got beef shortage globally, and that's going to be there for a while. And when there's this high demand for all protein groups a healthy animal as a productive animal. Our value proposition in farm animal continues to climb when the economics are strong, that makes more affordable protein for the consumer. So all those trends are positive for us. I point to probably ruminants and poultry, as we said in our Investor Day, is where we're going to lean in heavily, Bovaer and Experior. Experior is going to have tougher compares, but still going to be a nice growth driver as it globalizes and we get more days on use here in the U.S. and Bovaer, small base, but will continue to climb. We love the the farmer value and the farmer retention on over in the U.S. dairy industry and that will climb as well and be growth drivers in 2027.

Our next question comes from Dave Westenberg with Piper Sandler.

I'm actually going to continue with that parental question. Just can you talk about how long herd expansion does support growth? I mean how much of this would be, in fact, a multiyear driver? And then you kind of mentioned on the call, innovation, not desire for no air pockets and that innovation through 2031, can you talk about how much of that could be in farm animal? You also kind of mentioned you're in later launch cycles with Experior and Bovaer -- well, maybe not Bovaer, but 3 years into it, so it would be great to hear how you could be growing in that 28%, 29% time frame. And if I can ask just one more sleeping into capital deployment, now that you are approximately or heading there. Does this change your capital deployment strategy?

Thanks, David. Yes, look, I think just specifically of the beef industry, yes, there -- we saw a tick up about 1% year-on-year in replacement cattle. So a rebuild, but much slower. The drought has definitely been a headwind. But look, I see overall beef demand right now is great globally. So the beneficiaries are Argentina and Brazil and and other smaller markets, Canada, others. And I would just say this is going to be a really nice runway.

At the same time, dairy and poultry specifically, and in places pork are taking advantage of it. There's a lot of innovation right now, and dairy as an example, and we're seeing that our AHV acquisition has been integrated nicely. So I see a real positive moving forward.

Look, we see the industry 60% farm animal. This protein thing is going to be, I think, a positive bump for our industry, Elanco's leaders in the U.S. and other places, we're going to lean in pretty heavily. Ellen already has. She's got dedicated focus with these project teams that I mentioned. And our farm animal pipeline look for us productivity, sustainability, disease treatment, food safety, vaccines, feed additives and other modalities are all moving very nicely. Ellen's farm animal innovation team is as robust as probably we've ever seen it in our history.

Yes. I mean on the capital allocation question, David, listen, no change to the strategy that we've outlined in the past. Debt paydown is still the #1 use of free cash flow right now. We're continuing to invest strategically in the business, supporting R&D, manufacturing as well as commercial launches. M&A is going to be a part of our midterm and long-term strategy, but think of these as smaller tuck-under opportunities. But as we get below that 3, as we've said before, that will unlock capital allocation flexibility. And right now, we're hyper focused on getting there.

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And our next question comes from Chris Schott with JPMorgan.

So first one is just on AdTab. It seems like another good quarter for the product. Just elaborate a bit more on the trends that you're seeing, what's driving the strong uptake and how big you think that product can get over time? And second question is just on parasiticides and Credelio Quattro. Can you talk about the growth you're seeing for the broad spectrum parasiticide category? I don't know if you have this data, but what percent of dogs are currently on a broad spectrum product? And where do you see that going over the next several years?

Thank you for the questions. On AdTab, you've got a $600 million-plus market in Europe that is products that can be even scripted here in the U.S. that are retail there. And look, I think we said this as well on a path to be a blockbuster. It's #1 in the marketplace. It's grown double-digits now for quite a few years in a row, real credit to the European team and how they're launching the product, 30% growth this past quarter.

Look, I think I'd point to AdTab, we put advantage into the marketplace in 3 or 4 new SKUs globally. The advantage brand loyalty is strong our launch capabilities are strong. We see a really nice runway for this product. We'll have some tougher compares going forward but look for this to become a blockbuster and continue to be a leading product in that $600 million market that continues to grow nicely. And I think it does demonstrate that pet owner that wants to shop in multiple places.

AdTab is an example of that. And look, back to the broad spectrum, I point to it's a $1.5 billion market. It's continuing to grow. It's going to grow double digit outside the U.S. We think it will be low mid-single digit here in the U.S. Price has been durable. And look, we see Quattro fastest-growing product in here took 7 points of market share in the first half, and we continue to see this being best medicine and the most attractive Animal Health segment. And I see broad spectrum oral dose continuing to be the top choice for parasiticides globally, and I'm really excited about the European laws coming up.

And our last question comes from Steve Dechert with KeyBanc Capital Markets.

I guess just on Zenrelia. I mean it sounds like you're seeing really nice competitive wins against [new Melby]. Maybe just could you talk about what's driving that? Is there anything beyond just efficacy you can tell us?

Yes. Zenrelia, as we mentioned, a really great quarter and the continued momentum. It all comes back to efficacy in the derm market, right? And that will be the story we're talking about in 2 years. And what I'm excited about is the whole portfolio that we have coming with Zenrelia and Befrena and the next products. But it's playing out in Europe where you see the multiple products. We've gained share. We continue to grow. We've seen up to 40% shares in Europe. And I think even in the head-to-head study that was just released by a competitor that I mentioned, I think it just continues to demonstrate that, hey, we've got a differentiated product in our opinion, that could be best medicine, and it's playing out in the field in any one in the derm market, if you're going to compete, it's got to work -- it's probably the most visible problem to a pet owner if it works or doesn't work, and Zenrelia is playing well there. And I would point to a longer runway as we continue to globalize and launch this product.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Jeff Simmons, CEO, for closing remarks.

Thank you for the time and real call out to the Elanco team for great execution. I want to just emphasize an approach that Bob and I and the team are taking. We've got a lot of potential in the future, and that was my closing comments in the earlier statements, but our approach is going to continue to be measured and balanced one quarter at a time. We'll continue to guide quarterly. We've got our 3-year algorithm out there.

We'll look at our pushes and pulls overall, and we'll be very accessible to you as our shareholders and any questions that you have post these calls and between the earnings response. And just now, yes, it is a dynamic marketplace, but our strategy is working. Innovation, portfolio and productivity is delivering growth, innovation and cash. And this first semester, this first 6 months was the best 6 months I've seen since our IPO, but it's been built over the last 6 years.

Thank you for joining us today, and we look forward to continuing engaging with you as investors going forward. Have a great day.

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

My name is Brandon Vazquez. Thank you for joining us. I cover medical devices and animal health here for William Blair. I am required to inform you that if you want a complete list of disclosures or potential conflicts of interest, please visit our website at williamblair.com.

I'm excited to have Elanco with us here. We have Jeff Simmons, CEO; and Bobby Modi, the U.S. Pet Health VP. And I'm going to hand it over to them. They're going to give us a corporate presentation, and then we are going to breakout room Adler after, and I'll remind you at the end again, but thanks.

Thanks, Brandon. All right. Good afternoon. I look forward to Bobby and I sharing a lot about our company. And I'll point also to December 9, we had an investor conference. We'll show a few of those highlights as well, but really laid out the next 3 years. I think the best place to start for the company is to really this slide, which -- it's our 71st year as a company. We're a spinout of Eli Lilly. I think we're in a very compelling durable industry of animal health. I'll put a little case for that together. We're in the midst of 3 years of growth and just finished Q1, which we've said is really the best quarter we've had since our IPO in 2018.

And this just sets up a little bit of some of the algorithm that we put out from now for the next 3 years, which is really looking at a mid-single-digit company at the top line, driven by innovation. We've seen, and I'll show you, we've got a basket of blockbuster innovations in the biggest markets, both Pet and Farm. And right now, we're expecting about $1.2 billion. We've raised that guidance in Q1 from the basket of innovation, with a pipeline of $2 billion, 15 candidates in our pipeline, with another 5 to 6 blockbuster products coming as well. And then leverage that will come on our bottom line of high single-digit EBITDA, low double-digit EPS and generating about $1 billion of cash flow over the next 3 years.

So we're a different company. Since the IPO, we're in the position of strength that we've been targeting, 3 years of high-quality growth. And again, consistent, durable, we think most compelling value proposition in Elanco inside of a very durable Animal Health business. I'll just kind of follow a couple of the kind of key what we think pillars around how and why Elanco will win.

I start with the industry itself. This being a growth conference at a time that's quite dynamic in our world I've been 37 years in animal health inside of Lilly and then as a spinout. And I would say in this slide, we try to capture this $42 billion industry that we think in the next decade is headed to $60 billion. And here's what I think is the best of some of the industries that we come from.

First, it is pharma-like. We are regulated, FDA, EPA, high bars, high cost of capital to get into manufacturing and R&D. Sourcing the R&D. There's really 4 major players in the industry. But different than pharma, I was said as an Executive Officer of Lilly for 10 years is what's different is we also are CPG-like. There's brand loyalty, pet owners, farmers and veterinarians are very loyal to their brands. So we've got brands like Advantage on the Pet side or Rumensin on the Farm side that are 40, 50 years old, still growing, with life cycle management because of that loyalty of our customer base. And then lastly is it's very value-oriented. Vet clinics, pet owners and even farmers, you need to have that interface with the customer, and you need to be able to have the sophistication and the services to be able to reach. And that's why we're in over 90 countries both on the Farm and the Pet side.

So that kind of creates this durable $42 billion industry that's going to grow close to $20 billion. What I would tell you is we play in the big markets. This is where the markets are when you start to look at the projections for 2030. The good news about Elanco even relative to maybe competition is we are under-indexed in some of the biggest markets with very compelling differentiated innovation. So on the Pet side, you've got a market in parasiticides today, $6 billion to $7 billion headed to $10 billion. You've got a derm market, $2 billion, the itching dog headed to $3 billion. And then you go down through biologicals is also important pain as well. And this is where our pipeline is geared right now. So we don't need to create markets or going into markets that are very large today, and differentiated.

On the Farm side, in the U.S., we're #1 in cattle, poultry and pigs. We're the #2 farm animal player. And you can see these markets, again, protein, I'll talk about here in a minute, is actually experiencing a revolution. And actually, they're expecting this year alone, U.S. protein production will grow 5% alone, just in animal numbers and size.

So this is a little bit of the trends. I kind of say the 2 Ps that drive our markets are pets and protein. On Pet, you see the humanization of pets. And right now, about 7 out of 10 homes have a pet in America. But when you look at Brazil and China and others, it's only 2 or 3 out of 10. 70% of new puppies today are international. So this market is globalizing.

But underneath it, and Bobby is going to double down on pets because there's been a lot of discussion about the opportunities and maybe even the dynamics of this, but convenience drives compliance. Today, we're seeing a high percentage as we say 40% of pet care today is delivered to a door or on a subscription and spending goes up when that happens. And that convenience we like is 12 pills a year. Typically, our industry has been 6 or 7 a year. That compliance is a great market growth opportunity. Willingness to spend continues to be very high, and I'll leave that to Bobby to talk a lot about, and again, the globalization of this industry.

On the protein side, I stood in front of a lot of groups 5 years ago, and they said, boy, the impossible burger and meatless Mondays are we going to have meat? It has truly been a cycle that has totally changed. From GLP use today, we're seeing 30% to 50% more protein being consumed by GLP users to the changed dietary guidelines to even an aging population. At the end of this decade, we'll have 25% more people over 60 and that muscle retention is really driving protein use. And we're seeing dairy win, poultry win, even with a shortage of beef, the international markets, grass-fed beef and pigs are growing as well.

So we're set up well. This is what's going to drive this industry's $20 million of growth -- $20 billion of growth. And we kind of -- we're in a very purposeful industry. We say, hey, we touch every life every day driven by, hey, in Elanco, we believe in making animals' lives better, makes life better. And that's driven, we think, a durability of an industry, 30 years in a row, this industry has grown consistently mid-single digit, a nice blend between volume and price.

Elanco has been very intentional since becoming an IPO to build a durable business. I would really focus to the far right. We've really worked really hard with the Bayer acquisition and Kindred and others to be able to say this is exactly where we want to be, and we're a little different than our competition. We like the mix half-and-half, protein and pets. And international and U.S. And that's really set us up well, we believe, for the rest of the decade to really grow our leadership. We're in the countries we need to be in, and again, well positioned. We're #1 in pet retail, that's 1/3 of the pet owners that actually go OTC. We're in most 1 or 2 in farm animal, and we're the leaders right now in vet clinics with innovation and innovation growth.

This has been our journey since the IPO. One was the standup, the separation and then the acquisition of Bayer, which took money. It did lever us up but it allowed us to get the mix that I just showed you on the last chart and the scale, our R&D budgets went from $210 million, $220 million to now we're nearing $400 million revenue, so -- or excuse me, R&D spend, which has really given us the leverage to be able to bring the innovation to the market that I'll show.

We then really double down a little bit like Lilly, a page out of their playbook to really focus on innovation. Here's a company in 70 years, had 6, 7 blockbusters and we got 6 more in the last 3 years with a lot of runway for growth. And those blockbusters have great margin opportunity. So you've heard earnings calls from us the last 3 years, it's been very simple. Our entire organization is focused on 3 things: growth, high-quality, industry-leading growth, which is we're achieving, innovation, record innovation that will drive that growth and cash.

And I'll just to kind of double down on that. This strategy, IPP, I would really focus on the biggest one that is driving the multiples in this industry, a consistent flow of high-impact innovation, not having an air pocket. You want to have that consistent flow and it doesn't need to be in one market. We like to see it between Farm and Pet, and international and U.S., and I'll show just briefly that.

And then your portfolio is consistently every portfolio getting a little better, a little stronger as we go. And then we brought in a new CFO, Bob, that's here with us today and will be part of the Q&A where we really doubled down to say we also want a productivity agenda and we've launched Elanco Ascend.

So let me just hit each 1 of these 3 priorities quickly, and I'll turn it over to Bobby. So first is just our growth rates. And you can see that we've focused heavily on just kind of a very increased focus of quality of growth. We hit 10% in Q1 and we increased our mid-single-digit kind of 4% to 6%. We're now projecting 5% to 7% for the rest of this year. So the quality of growth is increasing.

And it's driven really by innovation. These are the big 6 products that we have talked about relative to the size of them. And really, you can see our innovation growth is a nice blend, but we've increased that substantially. We came into this year at about $300 million of growth. We've raised that guidance. And I'll just -- Bobby will talk some about Credelio Quattro, that's our parasiticide in a $1.5 billion market, Zenrelia in a $2 billion derm market, and we're launching a second derm product, Befrena. Those are going to be the big drivers.

But even in the cattle market, where the cattle numbers you've heard about are slowing, we have a product Experior that's now exceeded $200 million with a $350 million runway that's really created a market to where you can actually get quality of meat, the size of the growth of numbers of days to actually get more protein on less head and also reduce ammonia. So we've the first FDA product that had an environmental claim, which still matters a lot to the meat and milk companies.

So we see, if you look at, all right, how do we sustain growth through the rest of the algorithm 2028 and into the rest of the decade, we've committed these blockbusters will double the big 6, between now and 2028, and we're well on that track and have a lot of momentum here in 2026. And then I'll share a little bit the next wave of innovation, 15 key products in the pipeline, and we're committing to another 5 to 6 in the next 5 years. And a base business that last quarter grew, but we're kind of saying we'll be stable, plus or minus low single digit on the base business.

This is what excites me the most. In 37 years of animal health and even other companies in the past that have created a lot of value, it's a lot about the pipeline. Ellen de Brabander has got, I think, the best team in the industry, a lot of stability, and we've really created an engine that is creating a lot of innovation. So we've got the 6 innovations I just talked about, $1 billion of value. We have another $2 billion in the 15 candidates, and we are committing to 5 to 6 more in this window of '26 to '31, and then the next, next wave.

And we've shared in our Investor Day a lot of detail about these. What I would say is, they're accretive to margin. They only stay in our pipeline if we believe they're best-in-class or first-in-class. And we do believe that most all of these are in already created markets. We don't need to go out and create a new obesity market or a CKD, not that we're not chasing those, but we see these as real opportunities to drive quality growth.

The third priority is cash and we've delevered 2 full turns in the last 2 years. We're very focused on this. We've committed that we will be under the 3x levered by 2027. We're well on that track, and we actually improved our guide by committing to 3.1 to 3.0 by the end of this year.

And then this is just the initiative that Bob, our CFO, has really committed, and we're working across the company on Elanco Ascend is company-wide productivity from AI to procurement, to gross to net, to 5,000 projects across the company where everyone is incented to drive productivity at the same time we're driving record growth.

This is my last slide, which is really just highlighting Q1 and the durability of our business. And I would -- why I want to really segue now to Bobby is there's been questions about, hey, how durable is this market? Is that pet owner being hit a little bit with the sensitivity of the marketplace and the economy. And we want to be very clear today and spend a little time doubling down on this because I think our Q1 results exceeding expectations on revenue, EBITDA and EPS, raising our innovation, improving our cash flow. But probably most importantly is our guidance for the rest of the year highlights that U.S. Pet Health, especially, the marketing question, is actually going to grow high single digit, low double digit and the durability, we believe, of the industry and our business is well suited.

So I thought because this has probably been the most highest question in our industry in quite some time. I wanted to just spend a little time and have Bobby Modi. Bobby has come from the CPG industry and has really led our U.S. Pet business for quite some time now to just take a double-click on U.S. Pet Health. Bobby?

Thanks, Jeff. Good afternoon. I'm Bobby Modi. I have the privilege of leading our U.S. Pet Health business. And I'm going to talk a little bit about Elanco's U.S. Pet Health business. I'm going to talk about the drivers of growth. And then I'm going to address a little bit of the market dynamics that we see [ playing on ] in the U.S. Pet Health market.

So first, we're about $1.3 billion market. We represent just around 30% of Elanco sales. And much like total Elanco, we have a very diversified business. Our channel diversity, for example, allows us to reach over 1/3 of pet parents that don't visit the veterinarian on a regular basis. And second, different than many of our competitors we play in all 4 of the major medical spaces in animal health. And in the last 4 years, we have launched differentiated innovation in all of these spaces.

With the upcoming launch of our IL-31 monoclonal antibody, Befrena, we'll be one of two animal health companies with a comprehensive portfolio to address the needs of veterinarians and pet parents. And this makes us very attractive to vet clinics, but specifically makes us attractive to corporate clinics. And in 2025, we grew with 90% of our corporate partners compare that to only growing with 13% of our corporate partners in 2024. And in Q1 of 2026, our corporate business grew by 12% over 2x the average of our U.S. Pet Health growth rate going forward. And we expect this trend to continue to accelerate.

Now let me talk to you a little bit about the growth drivers on our Pet Health business. First is Credelio Quattro. And we are incredibly pleased with the performance of Credelio Quattro. It's defying all archetypes of a third-to-market launch, and it's actually behaving like best medicine. And we believe it's behaving like best medicine because there are 4 degrees of differentiation. The first degree is broadest coverage. The second degree of differentiation is speed of kill with ticks, which is especially important as you think about disease transmission. The third degree of differentiation is heartworm coverage after 1 month versus some other competitors that require 6 months. And the fourth degree of differentiation is palatability, which we know is important when you're trying to switch pet parents from one product to another product.

And although Credelio Quattro was Elanco's fastest blockbuster in the company's history, we still believe there's plenty of upside. Three reasons why we believe there's upside. First, we're participating in a growing market. The broad-spectrum endecto market is $1.5 billion and grew 25% in 2025. And we look at 2026, it continues to grow, and we're poised to capitalize on that growth. Second, we have a significant opportunity to drive clinic penetration. We're only in 40% of the clinics in the U.S. today. And although I'm really pleased that we added 7 percentage points of penetration since our December Investor Day, we still have ample opportunity to get best medicine in all of the clinics in the U.S. And the third vector is share within the clinics. We grew our share within the clinics by 17 points from our December communication to Q1. And that's really driven by our direct-to-consumer advertising campaigns as well as our Puppy Index, which puts more -- which shows that we're putting more puppies on this product that will ultimately stay on it as adults. So although we're pleased with Credelio Quattro, we still think there's plenty of gas in the tank.

Now let me talk about the second big parasiticide category, which is differentiated for Elanco. We have a leading share position in the OTC parasiticides category, which is over $1.1 billion. We've broken that category down into two segments: the premium space, which is roughly $750 million, which are leading brands like Seresto and K9 II and Advantage II play in. We have a clear market leadership position in that category, and we've continued to expand our share in that category over the last 3 years, driven by smart direct-to-consumer advertising, optimized pricing and new customer expansion, we recently brought on Costco in Q1 of 2026.

But what I'm really excited about is the growth that we see in the value channel, which is almost a $400 million segment, which was a segment that Bayer Animal Health didn't play in at all. And over the last 3 years, we've added almost 4.5 share points of growth, and we continue to see that expand. And that growth has really been driven by taking premium brands and applying them to value formulas and bringing new products to Bayer to meet the needs of value consumers where those value consumers ultimately shop. And I was really pleased that in Q1 of 2026, we launched our first-ever value Collar for Dogs under the Advantage brand, and this innovation allowed us to bring on a top 8 retailer for us, Dollar General that really caters to the value consumer. Given our share position in the segment, we still see plenty of opportunity for growth and expansion in the OTC space.

And then lastly, let me talk to you about the second largest space in U.S. Pet Health, which is the derm space. The derm market is $1.3 billion with strong growth. 90% of this market is actually broken down into two segments: JAK inhibitors and IL-31 monoclonal antibodies. Elanco launched its JAK inhibitor, Zenrelia in September of 2024 in the U.S. Since then, we've continued to see rapid sort of adoption and market share growth. We're actually in 50% -- over 50% of the clinics in the U.S., and we added 5,300 clinics since our September label update. We also grew our double-digit JAK share by 5 share points from Q4 to Q1. And we've also been pleased with the globalization of Zenrelia, where the label is different from the U.S., and we're seeing market leadership positions in countries like Brazil and expanding market share in Japan. And in Q1 of 2026, we were pleased to announce that Zenrelia reached global blockbuster status on a trailing 4-quarter basis.

Now I want to shift your attention to the other 40% of the market, which is the IL-31 monoclonal antibody market. As I said earlier, we have just recently launched our IL-31 mAb, Befrena, appropriately named because it stops your dog's itch and allows it to be your friend again. We're launching it in a staged approach, and we've recently given it to veterinarians in our early experience program and the feedback has been overwhelmingly positive and very similar to Zenrelia, Befrena will be differentiated on efficacy, convenience and value. And based on the results of Zenrelia, we know that this is a winning formula for success. We look forward to continuing to scale the Befrena launch as supply improves over the back half of 2026.

So I think you know that Elanco is poised to succeed and continue to take market share, largely based on our differentiated innovation assets but also because of our broad comprehensive portfolio. But now I want to take a moment and address a few sort of questions that we've been getting recently.

The first question that people have been asking is, is the industry or the U.S. pet health market is still growing? And the short answer is yes. The U.S. pet health market grew 5% in 2025, and it grew high single digits in the broad-spectrum parasiticide market and the derm market, double digits in the broad-spectrum parasiticide market and high single digits in the derm market. And yes, Q1 in 2026 was off to a sluggish start, largely driven by weather-related events in January and February that shut down clinics in various parts of the country. But we've seen March and April rebound. And we've seen year-to-date dispensed to consumers, both the derm market and the parasiticide market showing positive growth. We continue to expect this market to grow low single digits to mid-single digits this year and long term return back to mid-single digits.

Now let's talk a little bit about the second question we often get is, given the macroeconomic uncertainty, is the pet owner still resilient? And the answer is absolutely yes. Most pet owners now think of pets as part of the family. In fact, almost half of pet owners said, they spend more on their pet's care than they do their own care. And if we look at recent survey data, almost 90% of pet parents said, they are not going to spend less on their pets care going forward. What we are seeing is how pet parents spend their money is changing and different. And we're actually seeing more pet parents shop omnichannel multiple channels, not just the vet clinic and moving that spend to subscription-based spending. And Elanco's omnichannel capabilities and our diversified portfolio allow us to meet that pet parent where he or she wants to shop.

The third question I want to tackle is, is there a price race to the bottom? I know that's been a fear lately based on Elanco taking lots of market share in growing spaces. And the short answer is no. And let me explain a couple of things. First, both consumers and veterinarians have always proven that they are willing to pay for differentiated innovation that addresses unmet needs. And we've actually seen that play out in the marketplace. Second, as we've studied the industry, over the last 20 years, there's never been a major blockbuster product that's actually taken a price decrease in the marketplace. Third, Elanco actually took the largest price increase it has ever taken in the veterinary channel in January of 2026. Based on the differentiation of our Credelio Quattro brand and the differentiation of Zenrelia. And lastly, we've committed to price realization to accelerate in 2026 versus 2025.

So what I want you to take away. Simple. First, the U.S. market is strong and the pet parent is resilient. And second, Elanco is poised to win. Our differentiated portfolio and our differentiated innovation assets plus a stable pipeline give us the ability to take market share and expand already growing marketplaces. In fact, in our Q1 earnings, we shared this slide, which where we committed to growth accelerating in the back half of the year based on continued innovation expansion, new launches and corporate account growth. We now see our U.S. Pet Health business delivering a full year revenue growth rate of high single digits.

So I'll end where Jeff started. 2026 marks a new era for Elanco with a new financial algorithm. Organic revenue growth in the mid-single digits, adjusted EBITDA growth in the high single digits, adjusted EPS growth in low double digits, free cash flow over the next 3 years of over $1 billion in excess and a leverage ratio under 3x by 2027. I've never been more confident in our ability to reliably deliver growth in a consistent manner because we have the right plans, the right products and the right team to do so. Thank you for your time. We look forward to taking questions.

Okay. Thanks, everybody. We'll head up to the Adler room for the breakout...

Good morning, Jon Block at Stifel, and welcome to 2026 Jaws & Paws. We've got a great day. We've got 14 total sessions. Overall, we have a solid 2 days plan. We've got 22 companies, 4 physician panels, 1 animal health industry discussion across the next 2 days. So we'll be busy up here. We're going to kick things off with Elanco Animal Health with their CEO, Jeff Simmons -- President and CEO, Jeff Simmons; and CFO, Bob Robert VanHimbergen. Guys, good to have Elanco here again this year. Appreciate it, and I appreciate you guys kicking off the conference.

Jeff, a really good first quarter, and then I think some questions followed after a competitor printed their quarter. I figured that's a good place to just start off. Let's go back in time, walk us through 1Q, the good things and then maybe what's followed shortly thereafter.

Yes. I'll have Bob maybe build on the first quarter. But -- thank you, Jon and Stifel and the opportunity here. We need to get this Jaws, Paws and Hooves. We got to get the farm animal in here too.

We'll figure out a way.

So hey, just at a high level, yes, a great Q1, a lot of momentum coming out of 2025. We've had 3 years of growth. The growth and the quality of the growth continues to improve. I've said pretty openly, and I think the organization believes inside Elanco, this is the best quarter since the IPO since 2018. Just the quality of growth, farm, pet innovation, our base business grew. So back to the algorithm in December that we laid out for the next 3 years, we're more confident than even December on delivering on that algorithm. And Bob and I can build on that here going forward. So a nice strong 10% quarter and growth and a beat and raise on all accounts. And I think the big one that everyone is watching is the innovation, which we will unpack. But we've got some special innovation in major markets that are growing.

But I want to come to your point. I think there's 3 questions that came out of earnings season in animal health. And we spent a lot of time since then really trying to -- with data and facts and was on CNBC this morning, et cetera, just really trying to articulate these points. Question one is just stepping back, is animal health the market growing? And the answer is yes, it's growing, and it's growing in a durable way. And the fundamentals underneath this market are strong. The market grew 7% last year, 10% farm, 5% pet. You're seeing it on the retail side growing farm animal and pet and you're seeing it in the international markets, both in farm and pet as well. I think most importantly is I think the January, February cool weather that maybe hampered a little bit of growth in Q1. As we've said, we've seen a really strong rebound.

I think that's probably what's been over-indexed to say, oh, is there a problem here? We saw derm grow 10% last year. We saw broad-spectrum para grow 27%, and we see a lot of those trends just continuing. So is the animal health market still growing? The answer is yes. And I think January, February weather, the rebound we've seen in March, April and even into May is showing that, that durability continues. I think the second one that everyone is saying is, there is some consumer worry out there. There's pressure on the consumer. But what we've seen in our market research and seen in our business, especially on the pet side, is the consumer is prioritizing pet care even over priorities like entertainment, eating out for themselves.

And I want to emphasize some omnichannel retailers are saying, well, they've seen some pullback. I think that's a lot on durable goods, hard goods, not as much on pet care itself. So on pet care, derm, para, where we're playing, the spend continues to be resilient. The pet consumer continues to be resilient, and we've seen that. And then you add on top the globalization of pets and you add on the increased compliance. And then something Elanco has and nobody else does is from the standpoint of the retail business, 1/3 of pet owners that maybe are a little more price sensitive, we've seen really strong growth with that Bayer portfolio. So that's -- and then the third question is pricing, which has been -- well boy, is pricing being used? Is pricing going to be used? Listen, I've been in animal health 37 years. I said last night in the dinner, show me anything back from the frontline days in the '90s to now where price has been used in pet health to capture share.

It is not one of the incentives. It doesn't drive consumer behavior in pet, and I don't see that happening. We started this year with record high pricing as an industry. Those prices have held. We saw that a strong pet pricing in the first half. I can talk, we're guiding the second half for strong pricing. So pricing is not being used as a lever, and we haven't seen it be used as a lever. This is a market that responds to value and differentiation, and that's where we're leaning in. I think the biggest change I've seen in the last 6 months is more spend to get and hold share, but it is not with pricing. So animal health is growing. The pet consumer is as durable as I've seen. I mean it's on animal health. And three is pricing continues to remain constant and strong, and we see pricing being strong throughout the whole year, both in pet and farm for Elanco.

That's a great place to start. And I'll bounce around, Bob, maybe I'll just jump over to you to Jeff's comments of pricing being strong. Maybe talk about that price in 1Q, where it landed and then why the conviction you should sort of have an increasing contribution from price throughout the balance of the year?

Yes. No, that's great. Yes, thanks for the question. Yes. So price in the quarter was 2%. That was right in line with our expectations. And we've been clear that we expect price to be an accelerator in 2026 versus 2025. And why we have conviction around that? We did take the highest pricing out of the vet clinics. It's been the highest in 5 years. And then number two, I would say, because we have pricing now on our launches from last year, Zenrelia and Quattro, we continue to price to value. and we're seeing price come through on some of those products.

And listen, the industry right now, Jeff talked a bit about this just now, right, is we're not seeing pricing being a lever right now. What we're seeing is increased spend in DTC and really trying -- competitors trying to maintain share. And we've been using some data to really determine how and where and how much we spend on DTC. We've been using data for quite a long time. It's been extremely successful. That's where we're seeing the competitors respond is really an investment in that area versus price right now.

Okay. Fair enough. I am going to bounce over to U.S. Pet Health, right? That was a focus in the quarter. You guys mentioned improving trends exiting the quarter. March was up 8%. April was even better. And then I think you earlier alluded to May being pretty solid as well. But in that very helpful slide that Elanco had in its earnings deck, you did talk about U.S. Pet Health up high single digits to low double digits in the back part of the year. Jeff, just talk about the conviction there and maybe as best you can detail the drivers that would sort of accelerate the growth to those levels in the back part.

Yes. And I'll let Bob build on this. But I think the big thing here is, again, first is the new products. We continue to see Quattro and Zenrelia and the significance. These are big markets. We've got -- we've said Zenrelia coming out, same trailing 12 months. So we've got blockbuster status. The Quattro differentiation continues to really continue to really resonate with pet owners and veterinarians. So we're going to be lapping really a second half that's much smaller. So that's going to be a key growth driver.

Two is the Befrena launch. We're now with the KOLs. We're launching this product by the end of the second quarter. It will be a phased step-up monoclonal antibody launch. So Befrena will play pricing, will also play, and Bob can get into that. Those will be the key drivers. And then the continued retail business, we continue to see being stronger than last year, more share than last year, and that will be another factor.

And, I would maybe add on just our corporate account growth. We saw 12% growth in Q1. That's been an area where we've seen some continued progress here over the last, call it, 3 to 4 quarters, just now as we have a broader portfolio, and we're seeing that certainly that pull Jon come through. So yes, we're very confident in the second half. That is why we provided that clarity, not only from the topics we talked about, but also Elanco Ascend as we've launched that 5, 6 months ago.

We're starting to see in early days still, but we're going to start seeing some of the operational improvement come through on that phase as well. And the other thing I would tell you is like, listen, our guide, we've been clear on guide. We're going to be on the right side of it. We're going to give balanced prudent guidance. Our guidance does not assume a recovery in vet clinic volumes, and that's because of our omnichannel approach.

Doesn't assume recovery in vet visit volumes, didn't assume Zenrelia label improvement either. And does assume some competitive -- I don't want to say headwinds, but I guess just to maybe close the loop there, Bob, what it assumes around competition has anything deviated from that of late?

Yes. So nothing has deviated from our expectations in the last several quarters, but we're conscious of different things that could happen. And listen, that's why we give balanced, prudent guidance and we think about the puts and takes, and we said we'd be transparent on that, and I think we have, and we'll continue that going forward.

Okay. Fantastic. Zenrelia, maybe let's go over there. So really good quarter. Jeff, you were very bulled up, I thought on the earnings call, you mentioned again the trailing 12-month blockbuster status. Let's talk about the initiative here in the U.S. You're going to -- you're running the additional trial. You expect to submit by the end of the year and hear back from the agency mid-'27, but I'll throw it to you.

Yes. I think I'll just start with Zenrelia. We've got over half the clinics in the U.S. on. That's higher than our first phase of Credelio. I mean, before we got Quattro. So I mean, this is one of -- we don't have many products we can say we've had over 50% of the clinics on. And then just looking at the momentum of the product relative to just its efficacy profile and the number of users that are moving from second line to first-line treatment, picking up 5 share points, the number of clinics that we're adding. The U.S. has a lot of momentum with Zenrelia. And I would also say we'll get into the global side of this, moving to 24/7 manufacturing gives you an idea that we see future year demand happening now.

So -- and then we expect seeing some of the early data that this is going to be a pretty robust derm season given weather trends and things that we've seen. So I mean, that kind of leans in. Relative to the label, as we've said, we had a multipronged approach. First was the PCR data we submitted. We got the change, the fatally induced taken off. Second is we had the booster study that we ran and published more for public awareness of how the product performs. That's turned out really well for us relative to the use of that data.

And we submitted that data to the FDA upon response from them with hopes of potentially a change. And then lastly, I think importantly is given their response, we've made a decision to go ahead and run a trial to actually work, and we've got concurrence on that trial to actually would remove the box. That study has started. We expect to have that study completed and data submitted by the end of the year. That would put us into '27 for a decision. So -- but I think relative to how the product is performing globally and in the U.S. and 24/7 manufacturing, we see this as a nice opportunity later, but is not needed now.

Yes. And Jon , the way I think about the time line, too, right, is you figure a mid-2027 approval and a clean label at that time just provides some nice year-over-year growth in '27 versus '26.

And even '28 potentially, you might have color...

Exactly. And in the meantime, we're at 24/7 manufacturing. We're in a good spot.

Okay. And Jeff, to push a little bit, you mentioned a clean label. I was thinking when we thought you were going to hear last around maybe 3 outcomes, status quo, clean label or middle ground. Is this more with the additional data that you're going to submit, more of a binary event where either it's a clean label or status quo? Just your thoughts there.

Yes. I think like pharmaceutical standards, we've got concurrence on a protocol that will create an endpoint. The endpoint will create a change. And that's where we are, and that's what we believe will be the outcome. Again, there's always nuances when you're running studies like this. But yes, that is our belief.

Again, I would just say the expectations of where we were even at our Investor Day to now, the Zenrelia success, we're in 44 countries, the international momentum, that high teens, 30% share in Europe, even with a third competitor, the head-to-head study, we're the only one share in a head-to-head study that is playing out in the field. The efficacy of Zenrelia, this is a special product that is taking unusually amount of share. I point to Brazil that just came through the Southern Hemisphere derm season, and we've just taken over the majority of share over Apoquel within a year. So that, I think, demonstrates what kind of product we got here.

So you stole a little bit of my thunder because I was going to go down that road. But I'll follow up. So I actually think there was a precursor that a lot of people missed for Zoetis in 1Q, and it came out in the fourth quarter when you guys really started talking about your share for Zenrelia internationally, the share was too high for just to be new adopters. In other words, you had to be winning switchers to get to that share level, right, because the market is just not growing that quick. So just talk about this, is the head-to-head data that's sort of catapulting those shares OUS? And are you seeing anything from Merck's Numelvi as they've now been over there for a couple of quarters?

Yes. I think, look, if there's one category where there's obvious pet owner and vet, obvious quick observation of differentiation product, it's derm. It's an itching dog. It's the #1 reason they go to the clinic, but it's also probably the #1 way to observe products. And you look at some of these labels, as I've said, some of these labels say, hey, only 65% of dogs respond. That puts you already in the fray. And I do think starting out where we did with Zenrelia put us in some of the worst cases. which then I think gave us a higher bar and that actually gave us a chance to show what kind of efficacy we have.

Look, it will -- time will tell with other entries into the marketplace. The early -- I think it's a little early with the new entrant, but what we have seen is the data is playing out. We have taken more share earlier. The European team knows how to execute well. You've seen it with Adtab. Now you're seeing it with Zenrelia and they're getting ready to launch Quattro. So I think we've got a good product. And derm grew 10%. So we're not only taking share, but we're rising with the tide that's rising as well from a market standpoint.

Fair enough. So let's use that sort of as a good segue to Befrena. Anything to share from, I'll call it, the early, early experience launch? And let's start there.

Yes. You share a little bit. You've dug in on this product a little bit extra.

Yes. Listen, so obviously extremely excited for Befrena. We had several hundred vets, probably 300 vets in our office here a couple of weeks ago. And the buzz was around Befrena and Zenrelia. And so I think there's certainly a need. And listen, we've surveyed outside of that survey 400 vets on Befrena showed them a label and over 83% of them expect to bring Befrena into the clinic.

So I think there's a lot and a need for a differentiated product. And I think the impact that Zenrelia is having is certainly going to be pulling in certainly Befrena into their clinics. Now Befrena, the launch, I mean, we just issued a press release last week. And if you haven't seen it, I urge you to take a look at it, but there's pictures of a dog pre-Befrena and then post Befrena just 3 weeks, and it's life-changing is what you can see. So I think there's some great commentary in there, but it's another special product we have and just builds out our overall portfolio, which again helps us with clinic penetration and corporate accounts.

That's helpful. And maybe for both of you guys, is there an analog to think about of second player to market with a clean label, some level of differentiation when we think about duration, and we'll have to find out about price, but where we can sort of maybe benchmark to when we think -- we know the Cytopoint numbers. We know it for the U.S., we know it globally. Again, an analog on where we might land with share after 12 to 24 months.

I mean there's been data out there showing second to market can be 30%, 40%. I want to be careful here because I think the derm market is growing. I think the good news is, I think, with more efficacy and more options, look for the derm market globally to grow. Second is I do think, yes, there's analogs, but there's also the JAK mAb category that I think is playing out as well. There's also a lot more being scripted online. which I think is going to drive better compliance, which is going to grow the market. So we really like where the derm market is headed. And I think that's important.

And then to Bob's point, look, the label has 6 to 8 weeks. The incumbent has 4 to 8. So it's like, hey, we see a little bit of a longer efficacy line there. But the other one, what the buzz was at that day is, hey, we had to have 300 dogs, which was a significantly higher hurdle. That's why we had to wait a year for Befrena because they raised the bar. So we actually had a higher bar going in with dogs, and I think that's made people lean in. So the KOL support is matching the same support we saw with Zenrelia.

Okay. Very helpful. Maybe last one on Befrena monoclonals. It can be tricky from a manufacturing standpoint. How do you feel now, Jeff? And how do we think about where you might be maybe exiting '26 from a capacity standpoint?

Yes. So we're right in line with our launch expectations. Product has been in KOLs here for a little bit now, and we have orders in hand and expect to certainly start shipping here this quarter. Production continues to ramp. There hasn't been any hiccups on that standpoint. But we'll continue to launch and ramp here throughout the rest of the year. And it's going to be, I'd say, a modest impact to 2026, but certainly exiting '26 with some strong growth and '27 will be a nice strong year-over-year impact versus '26.

Okay. Very helpful. Sometimes I have my head down, guys. If you have any questions, please throw up your hand or just shout out and I'll get to you. I'm going to continue to work my way through innovation. I'll go to Credelio, Quattro. Zoetis talked about on their call, their share for Trio being down year-over-year, but actually alluded to it stabilizing Q-over-Q. You guys mentioned share up 3 points since 4Q '25. How do we reconcile those comments if we can? Or should we start thinking about NexGard Plus and maybe they've been a little bit more vulnerable as of late?

Yes, there's multiple players. So I do think that. I do think that look at the data that I think 40% of the clinics and then I think the most material piece of data we shared is inside those clinics, we have 53% share. So that, again, there's multiple products, right, but the 2 other big incumbents. What that is saying is typically, when you go into a clinic, there's going to be maybe we'll carry 2, not 3. And so I think what Quattro has done is placed itself into one of those 2, and now it's taken and moving to first line. With Quattro with the 4 points of differentiation. We're hearing a lot about fast tick kill and that data and tick bites up more than we've seen in Q1 with CDC and two, I think the palatability.

So Jon , I think that, yes, I think it's both of the incumbent products. I also say, hey, we grew 27% last year. I still see the January, February was slow, but I think you're going to see a really robust broad-spectrum endecto market growth. And Bobby in the Investor Day said, hey, we need more clinics. We've picked up a bunch now that we're at 40%. We've got to grow share within those clinics and become first line, and we're doing that with the 53%. Puppy starts now for 3 quarters in a row. That is -- we're getting the new puppies faster than anybody else. And now we're globalizing. We're in Australia. We launched last Wednesday in Japan, look for us to globalize with Quattro in a pretty robust way.

So just to maybe put a bow on that, market still has robust growth. The 40% of practices can go higher. The 53% share within practices can go higher. And then you have the CQ International, which is just arguably the first thing.

In a $1.5 billion market. And I just got to put a pin in Befrena, Quattro, Zenrelia, when you look at the aggregate of our pet products, I want everyone to know this. We're at parity to premium on pricing. That's really important that we are pricing to value. We got value, we got differentiation, and we're doing that. So some people out saying, well, there's some discounting. That is not the case. And you'll see that even as we go the rest of this year.

That's helpful. I want to talk about the next wave of innovation and certainly, Bob going a little bit into the P&L. But on that next wave, look, the air pocket, and I'm saying this to be clear, tripped up one of your primary competitors. I still think there's a lot of incrementals with what you have in your portfolio today. We just alluded to CQ International, Zenrelia traction, maybe the improved Zenrelia label. Befrena is almost all incremental in '27. But it does seem like 2028 could be in need of incremental dollars. So let's go back to your Investor Day. You talked about 5 to 6 potential blockbuster approvals through 2031. How about a little bit more about the cadence of these products? And could we actually see one of these surface in 2028?

Yes. And I'm going to jump over to the farm animal and retail as well. But I think, first of all, these are major markets and Elanco is very under-indexed on share. I mean we were not in derm 18 months ago, and this is a $2 billion market that's growing double digit. Para's, this broad-spectrum injectable market is the fastest growing and now watch it globalize, that's going to surpass $2 billion, and we're very under-indexed there and you're seeing these shares. So I think you can model those 2 alone and say derm and para, the growth overall. So I think that's important.

And then watch for this life cycle management. I mean, Ellen is dropping in a vaccine approval every 6 months to a year, and that $10 billion bio market continues to grow naturally, and we continue to have innovation. I jump over and say, Experior continues to have a lot of growth. The portfolio effect of Farm Animal, throw in our NutriQuest acquisition, now AHV, you're going to see really nice -- in the U.S., I highlighted on [indiscernible] this morning, I mean, the protein demand is going to grow. The market is going to grow 5%.

First time in 30 years, Farm Animal outgrew pet health 2x, 10% versus 5%. So I think we're going to see as leaders in Farm Animal, we're going to see natural organic growth. And then on pet retail, we're #1 there. Pet retail has, I think, surprised a lot of people with double-digit growth. So I think those are all the things. But Bob can get to it, too. I mean innovation continues to be our priority. We've got the most stable R&D team in animal health, and we're very focused. We've got 15 candidates in our pipeline. We haven't had any fallout since our Investor Day. And look, I mean, we say that word, I think you've taken that for me, that air pocket thing. We will not have air pockets. We want a consistent flow of high-impact innovation. And we've said 5% to 6% in the next 5 years. So you should start to expect some of that in that window as well.

Okay. Very helpful. I will follow up on livestock, and then I will get to gross margins. You alluded to livestock maybe up 5% from a market perspective. You guys have had some really impactful products, but Experior is coming back down to earth and Bovaer might be taking a little bit longer to take flight. When we think about that market growth, can Elanco be a net share gainer within that rate of growth for livestock?

Yes. So absolutely, right? The industry is great. And you think about our -- we know our success, if you think about just Q1, we grew 13% and 15% in the U.S. And obviously, Experior is a major product in that category. We're on 55% of the cattle in the U.S. right now. And that's after -- think about last year, Experior grew 80% in 2025. But we still see opportunity for Experior to continue to grow above the market, really on a couple of levers. One, it's going to be continued, I'd say, adoption. So we've hit the larger farms and now we're moving on to the, I'd say, the next tier of farms. And so it takes a little bit longer to get there.

We've added some resources to get there as well. add in geographical expansion. So that's going to be the opportunity to get on more farms. I'd say price is going to be the second lever. And then the third is going to be just days on use. And so we're still in the early stages of what days on use are. It's about 42 days, and we believe you can get up to about 56 days, right? So there's really 3 levers that's going to show growth. And so listen, we're coming down to a more normalized off an 80% last year, but certainly, Experior is going to be one of those products that's going to grow above the market.

Okay. Bovaer still believe in it, just might take a little bit longer to get there.

Bovaer is, I think, a great classic example of the combination of CPG value, productivity, sustainability, how do you package a portfolio over time? How do you put life cycle management behind it? And we're doing that. We did it with Experior, Bovaer look at something very similar. And for the dairy market is probably one that's a little underestimated right now. It is growing. It's probably winning the protein boom, especially in Europe and U.S. And the AHV acquisition will more than double our share of voice on farm and dairy. And we're leaning in, as we said, ruminants and poultry, we see as our 2 big bets on the Farm Animal side where we can win.

We've got maybe about 4 minutes left. Let's dig a little bit into the P&L. And Bob, if I look at the 1Q '26 gross margin and the 2Q '26 guidance for GM, it implies a solid year-over-year lift into the back part of the year, call it, 2H26 lift for gross margins. Talk to, please, the drivers of that. I think you've alluded to it a bit. And then maybe as importantly or more importantly, does that momentum or run rate continue as we think about into '27?

Yes. Great. So great question. Yes. So I think about the first quarter, margins were right in line with our expectations, and we did reiterate 40 basis points of gross margin improvement in '26 versus 2025. And a couple of levers, Jon . One, we are flushing through some higher cost inventory. You saw some of that come in Q4, some in Q1 as expected, there's going to be some of that in Q2, all right? But then that's going to be flushed through. We're going to start seeing gross margin improvement in the second half.

We've got some of the other contributors is going to be the basket innovation continuing to grow. The margins on that basket are higher than the corporate average. And so as that momentum continues, we'll see that natural pull-through. We'll see some fixed cost leverage as well. And so we've got some great operational performance in the 4 walls. So we're seeing the normal continuous improvement benefit. We're also leveraging the existing cost base. We'll get some absorption there. And then the last thing, still early days, but as I think about the second half of '26 and even beyond and more importantly beyond, Elanco Ascend. And Elanco Ascend is going to provide $200 million to $250 million of net EBITDA improvement through 2030.

That's net of inflation, net of investment. But 75% of that value is going to come through the gross margin line, 25% through OpEx. Now I think about 2026, we're a little bit more weighted towards the G&A save because of the restructuring charge we took in December, and the team has done a great job of executing that. But overall, it's going to be 75%, 25% gross margin to G&A, and we'll see that over the next several years.

Okay. So that sort of answers the question around gross margin trajectory into 2027. Can you get OpEx leverage as well when we think going forward? Or do we have to take into consideration, look, as you mentioned earlier, the response from competitors has not been to cut price, but it's been maybe to spend a little bit more behind their products such as DTC. So just curious, if we move down to the OpEx leverage, if you see that surfacing as well.

Yes. We do, Jon . And listen, we're going to give balanced guidance, but our balanced guide assumes we're going to have some of the levers we talked about as well as Elanco Ascend. And that Elanco Ascend is going to fund the need for DTC and I'd say more importantly, fund continued R&D investment and continuing that basket of that next wave and next, next wave. And we see nice improvement there as we continue to move those products in the pipeline. But absolutely, our algorithm is going to be to deliver what we did in Investor Day, but also continue to think through the investments needed to fund the business near term as well as long term.

I'll end with one last question. Jeff, it's funny. In the past years, I'd have you up here, and it was like capital allocation, pay down debt, pay down debt, pay down debt. But it's still largely that. You're doing a great job of delevering, but you do have more flexibility, right? And so you've executed some tuck-ins. Maybe just talk about your appetite for ongoing tuck-ins. What's the optimal leverage for the company? Is it 2, 2.5? And how you sort of balance that going forward now that you are in a better position there?

Yes. I think still the top priority is at 2, 2.5. We've said that's where we're headed to, and we're well on track, a little bit ahead maybe at this point in time. So I think then as you start to look, we're going to look at shareholder value. What is the optimal thing? And I think without question, we're committed to that algorithm. And I think, Jon I end there. I mean we want to be a consistent deliver on the right side of expectations. We've got a 3-year algorithm out there right now that we're very committed to, a mid-single digit. We're ahead right now in that on the revenue side, high single-digit EBITDA. We can do that confidently. We've got a lot of levers.

Ascend gives us some extra levers, low double digit on the EPS side and creating $1 billion of cash. And yes, look for us to do some tuck-ins, starting probably with Ellen, if there's molecules that we think that we can continue to grow her capacity and bring more molecules in that are differentiated. And then secondly is looking at things like AHV that makes sense. But they will have to be accretive to our algorithm. They will have to be strategic, and they won't be that sizable. They won't take us off our debt track.

So I think that's -- and again, I'd just emphasize our priorities still remain growth, innovation, cash. We're a very disciplined company. We're not going to get ahead of ourselves. We're keeping our feet on the ground. We definitely know it's a dynamic marketplace, but I really want to emphasize this market is growing. Prices are strong. The pet owner for animal health products is strong and durable, and we're set up really well here for not just 2026, but the next 3 years.

Fantastic. Guys, we got to conclude there, but really appreciate your time.

Good day, and welcome to the Elanco Animal Health Q1 2026 Earnings Call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the call over to Tiffany Kanaga, Vice President of Investor Relations and ESG. Please go ahead.

Good morning. Thank you for joining us for Elanco Animal Health's First Quarter 2026 Earnings Call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Bob VanHimbergen, our Chief Financial Officer; and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.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 discussed in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC.

We do not undertake any duty to update any forward-looking statements.

Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. References to organic performance excludes certain royalty and milestone rights that were sold to a third party in May 2025.

After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. Elanco's first quarter represents growing strength, momentum and value. The company's solid first quarter results and raised full year guidance demonstrate continued progress on our priorities of growth, innovation and cash. As highlighted on Slide 4, we delivered 10% organic constant currency revenue growth in the quarter, outperforming the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. This high-quality performance was driven by both price and volume, with growth across all major geographies and all species. Thank you to the entire Elanco team for the execution for high levels of engagement and unified approach that have created a sustained, consistent delivery across the company.

Elanco is in a position of strength with a base business that grew in Q1 and a basket of significant innovation, all within a durable animal health industry. Our momentum in each of our 4 businesses is evident in market share gains across our global portfolio. We drove share gains across all of our U.S. pet health major categories: parasiticides, osteoarthritis pain, dermatology and vaccines. Elanco's leading share growth in the largest categories, Para and derm, with accelerating gains for Zenrelia and Credelio Quattro. Internationally, both Zenrelia rely and AdTab continued their growth trajectories and captured market share. We also bolster our leadership in U.S. farm animal and achieved strong growth in international farm animal, particularly in poultry and ruminants. Our diverse basket of significant innovation is a key driver for this global momentum. After delivering $287 million of first quarter revenue from our innovation products, we are raising our full year innovation target to $1.2 billion. Our big 6 products are performing extremely well, and they are providing portfolio benefits that supported our base business growth in Q1.

Robust top line and adjusted EBITDA growth combined to enable continued deleveraging in the quarter. We are improving our net leverage target for year-end to 3.0 to 3.2x from the previous guidance of 3.1x to 3.3x.

With our solid start to the year and accelerating trends into March and April, we are well positioned to raise our top and bottom line outlook. For the full year, we now expect organic constant currency growth of 5% to 7%. Adjusted EBITDA of $975 million to $1.005 billion, representing 10% at the midpoint, and adjusted EPS of $1.03 to $1.09, representing 13% growth at the midpoint. This guidance continues our prudent, balanced approach in a dynamic macro environment.

Our confidence comes from the consistent outperformance of our diverse basket of innovation, a growing base business in Q1 and the mega trends supporting durable growth in today's global animal health industry.

Looking more closely at the first quarter revenue performance on Slide 5, we break down the 10% underlying organic constant currency revenue growth. U.S. Pet Health achieved 6% growth despite winter storms impacting January and February in the vet clinic. We saw a sharp recovery in March to 8% growth with April even better. Both months were ahead of expectations and demonstrate our underlying strength. Zenrelia posted its best quarter yet, leading our Q1 growth in the clinic and far exceeding our plans. Also robust Credelio Quattro demand with accelerating market share gains more than offset the anticipated headwind from last year's typical launch dynamics of initial stocking. Both brands exited the quarter with strong momentum in March and extending into April. We are well positioned for active derm and parasiticides seasons with tik bites sending Americans to the emergency room at the highest rate in nearly a decade, according to April CDC data. We expect one of the most robust parasiticide seasons in a long time.

In our U.S. retail OTC business, Q1 saw high single-digit consumption growth in a low growth market, reflecting strong trends for our products and Costco and Dollar General as new customers. These 2 new retailers were meaningful additions to our business as flagged at the December Investor Day and should also contribute to growth in upcoming quarters after initial stocking. Both Seresto and the Advantage family saw double-digit dispensing growth at our top retailers. Additionally, Zenrelia and Quattro are growing nicely at retail. We continue to expand our retail market leadership and competitive advantage with what we believe is the broadest access to pet owners in the industry.

Overall, our U.S. pet health business is demonstrating solid fundamentals with our basket of innovation driving industry-leading growth. We are confident in an expected acceleration for the business to high single-digit to low double-digit growth in the back half of the year as our new products continue to gain share.

Moving to international pet health. We delivered 9% organic constant currency revenue growth, driven by Zenrelia, Adtab and Credelio. Zenrelia is rapidly capturing share in the $800 million international derm market with accelerating gains in key markets. U.S. Farm Animal was up 15% with good growth across all species and product categories. Our results demonstrate the power of innovation and a diverse portfolio and a favorable macroeconomic backdrop.

Finally, international Farm Animal was up 13% in organic constant currency, also achieving growth across all species. The quarter benefited from customer-driven accelerated shipments primarily to the Middle East contributing 1 percentage point of growth for the total company.

Turning now to Slide 6. We delivered $287 million of innovation revenue in the first quarter. With a strong sales trajectory of the Big 6 driven by our no regress launch approach, we are again raising our innovation guidance for 2026 by $50 million to $1.2 billion. The Big 6 are well positioned to drive sustainable growth over the coming years as we continue to expect this group to double in revenue from 2025 to 2028 on top of a stable base.

Let's further discuss the progress of our major innovation products on Slide 7, starting with Zenrelia, the single largest brand driving Elanco's 10% growth. Zenrelia reached blockbuster status on a trailing 4-quarter basis with a growth trajectory well exceeding our expectations even since the late February earnings call. We are in a stronger position with momentum accelerating in the U.S. and in our international business and growing recognition of the strong efficacy profile. We see potential for Zenrelia to be a blockbuster in both the U.S. and international as we grow the $2.1 billion global dermatology market and continue to take share.

As we enter the derm season, we see Zenrelia as the leading derm market share taker with demonstrated strong efficacy in the JAK1 category. March was Zenrelia's largest month yet with U.S. vet clinic sell-in 30% larger than any other month to date. We're now at over 16,000 U.S. vet clinics or over 50% of the total, and the reorder rate is over 80%. We've added 4,300 new purchasers since the September label improvement and veterinarians are moving it to first-line treatment as they gain experience and see how this special product just works. We expect continued momentum entering the allergy season with those cases representing about 1/3 of the patient population.

On the U.S. label, we continue to have constructive dialogue with the FDA regarding our previously submitted data. The FDA has requested additional data and a new study is already underway. Given Zenrelia's success to date that is well beyond our plans, we now have greater expectations for the potential of this product with additional label improvement in the U.S. representing only further possible upside. Our guidance has always conservatively assumed no incremental change to the U.S. label.

Building on this success outside the U.S., Zenrelia has posted an excellent quarter across key geographies. A great potential leading indicator example is the first market for Zenrelia, Brazil. Zenrelia has reached over 50% JAK market share in Brazil, becoming the market leader after just 1 year and achieving this coming through the Southern Hemisphere derm season. In Japan, it's over 35%. Traction continues to rapidly build also in Europe with JAK market share in the high teens to over 30% in key European markets, again outperforming the competitive entrant.

Our EU head-to-head study has resonated well with veterinarians, and we're the only player providing this competitive data. With the recent launches, Zenrelia is now in 45 countries and our international labels are all without restrictions. Zenrelia's efficacy is a clear differentiator and game changer, addressing the top reason dogs go to the vet and satisfying an unmet need for pet owners. Over 2 million dogs have now been treated with Zenrelia, and we're just getting started. We are increasing manufacturing capacity and move production now to 24/7 to keep up with a sharply rising global demand and going into what we expect to be a robust derm season.

Moving to our second derm product, Befrena. Our phased launch approach is on track with product already shipped to early experience influencers and in use. We expect to officially launch Befrena this quarter and have orders in hand as vets are eager for this new solution. Remember that a phase launch is very typical for a monoclonal antibody or MAB products as we scale our bioreactors with anticipated manufacturing ramp-up. We're excited for Befrena as a potential blockbuster with positive differentiation on convenience, value and efficacy. It's recommended at a dosing interval of 6 to 8 weeks post treatment versus 4 to 8 weeks for the current market competitor.

When we shared a close proxy of the label to over 350 veterinarians, 83% responded they're likely to use Befrena, especially in seasonal cases. And importantly, Befrena is complementary to our broader portfolio, creating a more comprehensive offering to veterinarians. Last week, we hosted over 300 veterinarians at our headquarters as part of the North American Veterinary Dermatology Forum. Anecdotal feedback from early experienced KOLs was positive on the efficacy of Befrena.

Next, on Credelio Quattro. We are very pleased by our accelerating pace of dollar share gains in broad spectrum dispensing sales from U.S. clinics. Quattro's market share is up 3 points since Q4 and exceeding our expectations. Most importantly, in the clinics that carry Quattro, which is now over 40% of the U.S. clinic base today, our share increased 13 points in Q1, reaching 53%. Simply put, the clinics carrying Quattro are using it more than half of the time for any broad spectrum application. These accelerating gains 1 year after launch demonstrates strong demand and growing interest from veterinarians and pet owners who increasingly agree that Quattro is best medicine with its 4 dimensions of differentiation.

The product's success also reflects our strategic DTC investments, enhanced sales team and distribution partnerships, which combine to fuel a growth trajectory more like a first-to-market product. We will continue to fund our data-driven high ROI investments in the brand. Like Zenrelia, sales for Quattro accelerated during the quarter. March has been the product's largest month ever, creating strong momentum into the parasiticide season. We've added over 2,500 new clinics year-to-date through April and counting. And yet there remains ample room for Quattro to continue to grow and take share in the $1.5 billion U.S. broad-spectrum parasiticide market. An important leading indicator is Kinetics Puppy Index, where Quattro ranks highest versus other broad-spectrum andectose and grew versus Q4.

Outside the U.S., Quattro has made its debut in the $750 million international market, which is growing double digits. In April, the product launched in Australia and gained approval in Canada. The EU, the U.K. and Japan are next as we look to rapidly globalize sales. We expect the global Credelio family to eventually become the largest product family in Elanco's history.

Finally, our OTC parasiticide Adtab has continued its robust growth trajectory with sales once again up more than 50%. Adtab is the fastest-growing brand in the $600 million OTC acto category in Europe, further strengthening its market leadership in Q1.

Moving to Farm Animal. 55% of U.S. Catalon feed are now using Experior. Overall, we expect Experior to continue to grow and drive meaningful portfolio benefits including geo expansion as another long-term growth driver with recent expansion into Mexico. But we expect a moderating trajectory for this blockbuster with more challenging comparisons ahead.

Lastly, on Bovaer, we continue to see demand from CPG companies supporting relatively consistent count numbers. We're investing in long-term initiatives to enhance the product value and demonstrate user flexibility. More near term, we expect growth at a measured pace as we build on Bovaer's value proposition.

Moving to Slide 8. we provide recent highlights across the 3 parts of our consistent IPP strategy: innovation, portfolio and productivity. Our innovation engine continues to make great progress with further globalization of our Big 6 innovations resulting in recent approvals for Zenrelia in LatAm countries in Eastern Europe, Credelio Quattro in Canada and Australia and new submissions, including Befrena Dossier in Canada. The next wave of innovation portfolio further expanded and progressed in line with our plans, and we are clearly tracking towards 5 to 6 blockbuster potential approvals expected through 2031.

Finally, Ellen and her team have further strengthened the innovation pipeline with new additions coming from our internal discovery teams while advancing key clinical programs, enabling us to clearly see our vision of a consistent flow of high-impact product innovations. Today, the Big 6 are driving broad-based growth across our portfolio and share gains across all quadrants. These launches are powering growth in U.S. corporate accounts, up 12% in Q1 versus the same quarter last year. They've enabled growth for our base business in the quarter, and we are seeing gains from pricing up 2% in Q1 and on track for full year acceleration from 2025.

We implemented our largest price increase in 5 years to U.S. fat clinics, reflecting our latest innovation and the value of our portfolio of customers.

Finally, we continue to pay down debt and strengthen our balance sheet. At 3.5x net leverage in Q1, we have a clear path to the under 3x landmark in 2027. Our December strategic restructuring has further streamlined our organization with expansion of R&D in our Indianapolis headquarters, and as Bob will detail momentarily, our company-wide productivity initiative, Elanco Ascend, is on track to drive meaningful efficiencies and margin enhancement starting in 2026.

With that, I'll pass it to Bob to provide more on our first quarter results and financial guidance.

Thank you, Jeff, and good morning, everyone. Today, I will focus my comments on our first quarter adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results.

Starting on Slide 10. We delivered $1.371 billion of revenue, representing an increase of 15% on a reported basis. Organic constant currency growth was 10% compared to the first quarter of 2025, with 2% from price and 8% from volume.

Slide 11 provides revenue by the 4 quadrants of our business. Total Pet Health revenue increased 7% in constant currency. In the U.S., we achieved 6% growth with broad-based strength across all channels. Key drivers were Zenrelia, Credelio Quattro and our over-the-counter retail parasiticides business.

Outside the U.S., our Pet Health business grew 9% in constant currency, driven by sales momentum of our innovation portfolio, including Zenrelia, Adtab and Credelio family products. Globally, our Farm Annual business achieved 13% growth in organic constant currency growing across all species. The U.S. Farm Anima business delivered 15% growth with contributions across all product categories, driven by cattle and poultry. While we are extremely pleased with the outsized performance in the quarter, we do expect growth to normalize to levels consistent with our long-term algorithm.

Outside the U.S., our Farm Animal business contributed 13% in organic constant currency growth with poultry and ruminants the major contributors. We estimate that the favorable timing of customer purchases in the Middle East this year contributed 1 percentage point of growth for the total company.

Continuing down the income statement on Slide 12. Adjusted gross margin was 57%, a decrease of 40 basis points. As a reminder, we anticipated a year-over-year decline in the quarter due to pressures from inflation and the flow-through of inventory costs.

Gross margin performance was also impacted by product mix, with strong Farm Animal growth, partly offset by benefits from both price and volume. Looking ahead, we continue to expect meaningful gross margin expansion in the second half of the year as we move past inventory cost headwinds and and with mix benefits from expected acceleration in our U.S. Pet Health business.

Operating expenses increased 6% year-over-year in constant currency, driven by planned investments supporting our product launches, continued R&D investments and compensation expense.

Interest expense for the quarter totaled $43 million, in line with our expectations.

On Slide 13, you'll see an adjusted EBITDA year-over-year comparison for the quarter. Adjusted EBITDA was $334 million, an increase of $58 million or 21%. Adjusted EPS was $0.40, an 8% increase year-over-year. As a reminder, adjusted EPS was impacted by lapping favorable onetime tax benefits in the prior year.

On Slide 14, we provide an update on our cash and debt balances. We ended the quarter with net debt of $3.3 billion and a net leverage ratio of 3.5x. Debt paydown remains our primary use of free cash flow with a long-term target ratio of 2 to 2.5x. We expect to reach below 3x next year, giving us greater capital allocation flexibility. In the meantime, we continue to evaluate disciplined bolt-on M&A. I'd like to recognize the closing of our AHV International acquisition on April 30, and welcome our new colleagues. AHV expands our share of voice and dairy, and we are excited about this platform for farm animal innovation.

Now let's move to our financial guidance, starting on Slide 16. Our first quarter overperformance allows us to raise our full year expectations and continue to invest in our innovation products. We now expect to deliver organic constant currency revenue growth of 5% to 7% versus our previous outlook of 4% to 6%. We are increasing our expected reported revenue range to be between $5.01 billion and $5.085 billion. This includes an expected $60 million year-over-year tailwind from the favorable impact of foreign exchange rates, majority of which was captured in our first quarter results.

Slide 17 provides year-over-year bridges for 2026 adjusted EBITDA and adjusted EPS, and Slide 24 in the appendix provides additional assumptions to help support your modeling efforts. We are raising adjusted EBITDA guidance by $20 million. The increase reflects our $34 million outperformance in Q1, partly offset by approximately $9 million of incremental investment in our innovative launches and previously mentioned timing of international farm animal sales.

For adjusted EPS, we are raising our guidance by $0.03, bringing the new range to $1.03 to $1.09. We have also updated our cash and balance sheet expectations for 2026 and now anticipate end of year net leverage of 3x to 3.2x. We continue to take a balanced and prudent approach to our guidance, considering a number of potential scenarios. On Slide 18, we list drivers that could influence our results within the guided ranges.

We remain disciplined in monitoring external headwinds, specifically, heightened competitive pressures, including generics, and consumer level economic shifts. These could move results toward the lower end of our expectations. We also continue to invest incremental dollars to support the launch of our innovation products, driving our market share gains and sustainable growth. Alternatively, the continued acceleration in our innovation pipeline, underlying strength from a growing base business and our ability to leverage our diverse portfolio could drive results towards the high end of our expectations. A favorable macro environment and rapid progress in Elanco Ascend could provide important tailwinds.

In conclusion, we see a stronger set of opportunities and momentum in the business, outweighing potential headwinds, resulting in the balanced guidance raise.

Now let me take a moment to offer an update on Elanco Ascend. We are seeing significant engagement across the organization as we execute initiatives to optimize our cost structure and drive operational efficiencies. We continue to expect the projected Ascends savings detailed during our December Investor Day. As a reminder, 75% of our benefit from Ascend will be in gross margin, but the near-term benefits are more in G&A, driven by our previously announced restructuring. With more than 5,000 projects logged to date from large-scale transformations to smaller localized improvements, Ascend is becoming deeply embedded in our operational discipline.

Additionally, Elanco Ascend is integrating automation and AI across our entire value chain to accelerate our innovation pipeline, enhance manufacturing quality and drive sales through deeper data-driven customer insights. Our comprehensive AI agenda also includes leveraging AI-driven automation to transform legacy processes as part of Ascend. For example, we recently implemented an automated sales order tool that modernizes the order-to-cash process. This initiative enhances fulfillment accuracy and accelerates order cycles leading to improved cash flow visibility and lower operational costs. When you combine our focus on operational excellence and productivity with the continued scaling of our margin-accretive innovation portfolio, we see a clear path for sustainable margin expansion over the long term.

Now moving to our second quarter guidance presented on Slide 19. On a reported basis, we expect $1.3 billion to $1.325 billion in revenue, representing organic constant currency revenue growth of 4% to 6%. Growth is impacted by lapping Q2 2025 pretariff buying primarily in China, by accelerated shipments to the Middle East in Q1 of this year and by Farm Animal normalization against more challenging comparisons. The year-over-year increase in operating expenses, primarily related to launch investments, is expected to be approximately 8% in constant currency. As a result, we anticipate adjusted EBITDA of $240 million to $260 million, and adjusted EPS of $0.25 to $0.28.

Finally, on Slide 20, we outline our expectations for a meaningful acceleration in our U.S. Pet Health business in the second half of the year. As Jeff highlighted, we saw a sharp recovery in March to 8% growth and even better April, demonstrating our underlying strength. We are confident in our expectations for high single-digit to low double-digit growth in the back half of the year, reflecting continued momentum for Zenrelia and Credelio Quattro and contributions from our Befrena launch.

Additionally, our comprehensive portfolio is driving significant corporate account growth. I'd also highlight, our assumptions are not contingent on improvement in vet visit volumes. For the full year, we expect the U.S. Pet Health business to achieve at least high single-digit revenue growth, once again meeting the industry.

Now I'll hand it back to Jeff for closing comments.

Thanks, Bob. As we accelerate into 2026, our innovation, portfolio and productivity strategy is working. Elanco is a different company today, well positioned to lead growth in animal health through consistent execution of our strategic priorities: growth, innovation and cash. The base business grew this quarter, while the launch of our Big 6 innovation portfolio builds momentum. Elanco will stay disciplined and focused while anchored on the belief that we are about delivering that promising.

We are now advancing our next wave pipeline, targeting 5 to 6 new blockbusters by 2031 and unlocking more than $2 billion in unproblized peak sales potential. Through Elanco Ascend, we expect to drive meaningful margin expansion and operational efficiency beginning this year, aiming to deliver more than $1 billion in free cash flow through 2028 and reduce net leverage below 3x by 2027, all of this on top of sustainable megatrends in pets and protein that make animal health a durable, resilient industry and one of the most compelling long-term growth sectors.

Elanco is confident in the animal health industry in both 2026 and into the longer-term future. These tailwinds are expected to extend animal health's mid-single-digit growth, adding an estimated $20 billion in industry value over the next decade. Last quarter, I highlighted the robust protein trends for our Farm Animal segment. Specific to pets, I would point to my recent shared table podcast episode with Jay Mazelsky from IDEXX and J. Price from Mission Pet Health. The pet opportunity is significant. Diagnostics are completed on just 20% of pets today. We see only the surface of the true disease spectrum that exists. And as we expand what we detect, AI accelerates what we can learn and a generation of middle-aged pandemic pets enter their highest care years, the pie is growing. The leaders who focus on delivering value to the pet, the owner and the veterinarian to meet this increasing expectation of care will be the ones who grow with it and beyond.

I especially want to thank the Elanco team for their commitment to serving customers and continuing to push boundaries to exceed their expectations. Today, strong results and raised outlook for 2026 were made possible through our team's dedication building on more than 70 years of transforming animal health to create long-term value for customers, communities and our shareholders.

With that, I'll turn it over to Tiffany 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 1 question and 1 follow-up. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.

[Operator Instructions] Our first question comes from John Block with Stifel.

I'll start the U.S. Pet Health result in the quarter was up 6%. I'm guessing it was probably a bit lower if we normalize for advantage sales, call it into the new doors. So Jeff, can you talk about what held back the U.S. Pet Health in the earlier part of the quarter, and more importantly, the main drivers to the accelerating assumption? I know there's some good color on Page 20, which I think is very helpful. But any additional feedback would be great. I think that is a focal point for investors here in the near term.

Yes. Thank you, John. Look, we had, I think, like the whole industry, January and February, that was cooler, but we saw a really nice rebound and all the lead indicators on our new products were extremely strong. So an 8% jump back in March, even stronger in April. And as we look at the forecast with Bobby and his team for the rest of the year, and as highlighted on that slide, we see Zenrelia, what a quarter for Zenrelia. I mean it was #1 brand for our company and growth driver, and we'll talk more about that, but Zenrelia was a major contributor as well as Quattro. And then we've got the Befrena launch, we've got a step-up in price, and all of this, we believe, on the existing kind of industry backdrop.

You mentioned on retail. Retail had an extremely strong quarter. And the strategy is working. If you look at retail, it was Adtab internationally, but in the U.S., it's bringing an advantaged collar, adding distribution points with a value store in Dollar General all the way to a box store. And today, we've got -- we're taking share. We're adding double-digit growth to these major key retailers. So the omnichannel is working. We see a nice step up the rest of the year. That's why we wanted to be clear and it comes with a lot of confidence with a March and in April trajectory change.

That's great color. And then the second question, it seems like you're talking more openly about these corporate accounts, and it seems like that also has a role in the acceleration. So I'm just curious, are these commitments from corporates, call it, for a first time? Are they competitive wins? And also, when we think about these corporate deals, is it broad-based? In other words, are we talking CQ, Zenrelia, Befrena upon launch. Maybe you can provide some details there.

Yes. Thank you. Yes, corporate accounts, we were very under-indexed [indiscernible]. We shared in the last quarter how the number of corporate accounts were growing that weren't growing last year. We saw a 12% step-up, so double the growth rate in corporate accounts. It all comes back, John, you know this, to a winning portfolio. When you start to see the uptake, when you got over half the clinics in the U.S. using Zenrelia, you see 40% with Quattro and you look at best medicine with Quattro demand for Zenrelia, if you're a corporate account, you don't have this and you've got clients coming and asking, there is more of a pull than a push that's happening with corporate accounts.

I think Bobby and his team, Chris Bertelle and Matt, Hudson Piller and the team has done a very nice job of making sure though it is value-based. We are not going places where price would be impacted negatively with corporate accounts. So we're taking very value-based approach to these corporate accounts and it's working.

Our next question comes from Michael Ryskin with Bank of America.

Great. I'll ask 1 big 1 on Zenrelia and then maybe a quick follow-up. So on the one hand, you're doing, I think, much, much better than any of us had anticipated given the label restrictions. You touched on blockbuster trailing 12 months. We're kind of backing the something like $40 million for the quarter, so continues to ramp very, very nicely despite the label. On the other hand, the FDA label update, I think, is less than what people were expecting. So I just wonder if you could talk about why you're having such success despite the label restrictions? And if you could give an update on -- you called out the additional trials, the data generation, just any thoughts on timing when we could get either more updates or see that label change? And then I have a quick follow-up.

Yes. Yes, Michael. I think I start with the derm market, continuing to grow double digit, truly an amazing quarter. We got a special product here in Zenrelia. We've got future year demands coming into this this year. So we see the potential of this product much greater than we saw it even last quarter. We've got just greater expectations and we're seeing it globally, and you know this and we've talked about this, it's all back to efficacy. And the product just simply works. Relative to the label, I would say no. I think it's a little bit of a line relative to our strategy. We had constructive dialogue, as I mentioned, with the FDA regarding the data. They've requested a little bit more research. I stepped back on this multipronged approach we took, which is, hey, first, we submitted the PCR data. We got a positive improvement in the label. They requested the published booster data. That's what we submitted, and we knew this was a potential expectation. They requested this additional data, and we've already started the trials along the way. We've got good concurrence on the study, and we'll be submitting it by the end of the year, Michael. But given Zenrelia's success that's well beyond our plans, we now have greater expectations for the potential of this product, with additional label improvement in the U.S. really representing just further possible upside.

So our guidance has always been, as I said, conservatively assumed with no incremental change to the label. With all of this, I come back to the most important thing. We're taking share. We're in over 50% of the clinics in the U.S. Our expectations are growing. We have moved to 24/7 manufacturing because we see the future forecast for this product growing, especially as we head into derm season. And again, we got now 2 million dogs, 2 years of use, great PV data, 44 countries internationally now with all labels without restrictions. So we're in a really good place.

And Michael, and Jeff highlighted it, right? But just as a reminder, our 2026 guidance and our Investor Day guidance we gave back in December, assumes that the label is as is. It did not assume a label change here in 2026. And so where we are today, right, with the current status and time line, that provides potential upside to growth potentially starting in 2027 with the clean label.

Okay. Okay. And if I could squeeze in a quick follow-up on price. I think you saw a 2% price in the quarter. But you also, in your prepared remarks, talked about implementing a significant price increase as you mentioned in the past. Could you just talk about prices, how big that was price assumptions for the rest of the year? Any specific on that would be helpful.

Sure, sure. Yes. Thanks for the question. So price in the quarter is right aligned and right with our expectations for the quarter and for the year. So price in the quarter, as I highlighted, was 2% across the board. That's both on the pet side and the farm side. I'd remind you that pricing can be influenced by customer and product mix for any quarter. But we do expect 2026 pricing to accelerate from where it was in 2025. And that, quite honestly, just reflects the enhanced value that our best and innovation is bringing and the comprehensive portfolio we're bringing to customers. And I'd remind you that in U.S. Pet Health side, we did bring the highest pricing to vet clinics this year. It's been the highest in 5 years as we continue to price to value. And listen, I think you'll see price accelerate as we see continued ramps in Zenrelia and Quattro throughout throughout 2026.

I think Bob and I and Bobby and other, I think an observation we made, Michael, is prices in the industry are holding up strong. Even in U.S. pet very nicely, even in corporates. I think what the change has been is there's just an increased need to spend to hold and capture share. So -- and I think that's a positive. As everyone is selling value, and we don't see price impact, we see spend maybe impact, and we got good measures on seeing the return on our spend, and that's why we're leaning in on it.

Our next question comes from Umer Raffat with Evercore.

I thought I would focus a bit today on the noninnovation side for a second. And specifically, what I'm seeing is, while there's all this focus on some of the new launches, your cattle business might have hit an all-time high, if I'm not mistaken. And poultry is also at near the best numbers you've ever put up. So could you speak to the broader dynamic in farm business? I realize herd count is part of it, but I don't think that's all of it. And I'm just trying to understand what the underlying drivers are on both sides, but also how sustainable they are as herd counts come back, et cetera, over time?

Yes, very insightful question, Umer, and I agree with you. I don't think people realize that last year in 2025, our industry grew 7% and Farm Animal grew 10%, Pet Health is 5%. Farm Animal has got durable undertones. I saw -- we spoke at the SEMAFO conference out with some of the major, major CEOs the last 4 months, and there is a protein revolution going on, and it's playing through in the numbers. You see Tyson's results yesterday with the chicken business. What you've got here is you've got -- we're expecting a 5% growth in the U.S. on the protein side. We've seen meat sales up 100% the last 5 years, and it's coming back to this shift back to protein.

Now as you look at the different species, yes, there's a shortage in the beef market, but you're seeing the benefit carry over to international beef and poultry. And actually, producers are making a lot of money, packers are not so -- and we serve producers. So that dynamic in beef is positive. Probably the quiet species nobody is talking about is dairy, and dairy could be second to poultry and benefiting from this protein revolution. The guys just got more SKUs when you look at the shakes and the yogurts and the things that are going on. So I think there's a big investment in dairy. That's where HV acquisition plays nicely. And then yes, poultry, 3% growth the last 3 consecutive years, and we don't see that slowing at all.

So I think the carryover of protein, there's been a little bit of an over-indexing on the cattle herd size and that may be a little longer. I actually think that benefits us and benefits producers as the rebuild comes a little stronger, the prices will hold up. So Farm Animal business, we look like we're in a very strong position. We're in a leadership position the medicated feed ads, vaccines and across all the other additives, and we're adding to that portfolio with the HV acquisition.

Our next question comes from Brandon Vazquez with William Blair.

Congrats on a nice quarter here. There's not too much to pick on on a nice quarter, but I did want to go back to the question that John was asking just about the U.S. Pet Health number, and I can appreciate there was a little bit of noise, maybe in end markets, things like that. But I'm kind of curious, is there anything else we should be thinking about on a year-over-year basis as you think of that number, trying to think of the ramp, why would a business that if you think about Quattro was a pretty low base in Q1 '25? Why would the monthly be changing so much? I think that's part of what a lot of us are trying to understand as we think about the ramp through the rest of the year.

Yes, so maybe I'll give you some color, Brandon. Thanks for the question. So a reminder, last year in we did have the initial launch of Credelio Quattro, and so we did have a tough compare. But even in light of that, we still outgrew Quattro versus last year. So that's kind of 1 point of interest. But we did highlight it, Jeff touched a bit about it, and it's certainly on a slide I presented, but maybe just to give you a little bit more color on the second half, which gives us a high degree of confidence in the second half of the year. I mean we continue to see strong momentum in Quattro and Zenrelia. And you think about the clinics and the data we gave about new purchasers, that's going to continue to ramp throughout the year as we see order rates holding strong. And we are investing more in DTC behind these brands. Befrena continues to be on pace with our launch expectations and there's a high degree of of excitement from that, particularly on our entire derm portfolio.

Bobby did have a group of vein last week, and the buzz was about both Zenrelia and Befrena. And then corporate accounts, you talked a bit about this on the call. But listen, those contracts will continue to ramp throughout the year. And so again, we're confident in the second half of '26 here with the U.S. pet side. And again, our guidance does not assume an improvement in vet visits for the year here.

Okay. And then as a follow-up here on the guidance, there was a comment about generics in the investor deck. And just in general, competition, you guys have talked about this that it's the competitive space. How do you guys think about competition when you're putting together guidance? I think you're in a unique position now where you're -- you have a lot of innovative products out there. So this is something to think about on a go-forward basis. How do you bake that in? Are these transient headwinds? Are they price? Are they volume? Any details you can give on what's baked into the guidance from competition in generics would be helpful.

Yes. We assess it market by market, Brandon, and do this in our quarterly forecasting. We've got good read, good data from a competitive standpoint and a good competitive intel group. And I believe, as Bob has highlighted, we've taken a balanced approach. So no change. We're in our third year of growth and delivery, and that same philosophy is carried forward as we look at the rest of the year for U.S. Pet Health or look at the rest of the year for any one of our businesses, generics included in competition. So feel very good about our assumptions as we look at the rest of this year.

Our next question comes from Daniel Clark with Leerink.

Just wanted to ask about how we should think about the progression of clinic penetration for both Zenrelia and Quattro and the share within those clinics as we go through the rest of 2026, especially just given the ramp you had for U.S. Pet?

Yes, maybe because we haven't talked much about Quattro, I'd just point to a couple of statistics we highlighted. It's off to a really great start. And the momentum we have with this product, we do see everything relative to best medicine here. Bobby highlighted 4 key metrics that were critical at the Investor Day, more clinics, increased share within these clinics, puppy starts and growing market. I would keep anchoring back to these, Daniel, as we look going forward. We picked up 2,500 new purchasers year-to-date through April. We've got -- I think, the biggest metric that I would point to is we're in 40% of the U.S. clinics with Quattro. That will continue to grow, but most importantly, as we picked up 13 points of share, now we're at 53% of share within those clinics. So we are truly moving to first-line treatment, and we're the #1 growth company and market share growth.

So I think that's the statistic to watch as it's really demonstrating best medicine. And now this is the third quarter in a row that we're winning the puppy index and Q1 was greater than Q4 And the market grew 27% last year. So I think when you put all that together, maybe a weather challenge in January, February, we see a lot of resiliency, tick bites being up, we see potentially one of the biggest parasiticide season.

And then on derm, it's just continuing not only to get more clinics, but we're seeing a major shift now to first-line treatment and watch the international markets especially within Zenrelia given the market shares that we've seen. Those would be the key areas to watch. And again, it's all back to market share and market growth. We're getting market share growth and market growth while a base business in Q1 grew.

Got it. Super helpful. Actually I wanted to ask on the international dynamics for Zenrelia. What are you seeing in terms of competitive or promotional intensity from other manufacturers that have [indiscernible] on the market? Any change there? And then can you just size the market growth you're seeing in derm ex U.S.?

Yes, it's an $800 million market internationally, and that's growing double digit, growing even faster than the U.S. Again, remember, 70% of puppy starts are actually outside the U.S. So a lot of positive trends. And then, yes, we again, see that with the head-to-head study playing out in field and a lot of KOL support you're seeing these market shares, I mean taking over market leadership after 1 year in Brazil coming through a Southern Hemisphere derm season, I think, is a great proof point of how strong this product is. And even with a new competitive market entrant, the head-to-head study is showing, and we're winning share even there with high teens to 30% European markets. So -- and we'll continue to globalize. But again, we're in 44 international countries. Now it's all about more share and moving to first-line treatment.

Our next question comes from Christopher Schott with JPMorgan.

Congrats on the progress. Just first one for me is the no regrets launch approach has clearly paid off. And I guess my question is if this outperformance continues, how should we think about Elanco thinking about reinvestment of potential upside back into the business? I mean should we think about this still as you got to keep putting money back in for promotions? Or do we reach a point where we think about more of the top line upside maybe falling to the bottom line?

And then my second question was just on the type of pets moving on to Zenrelia given the share gains you've been seeing. Can you just elaborate a little bit more of what you're seeing there in terms of new starts versus those who maybe failed Apoquel in terms of just the type of animals going on the drug?

Chris, I'll take the first one here. Thanks for the question. Yes. So as I sit here today, like I'm really pleased with take Q1, for instance. I mean this is the exact profile that I'd love to have where we exceed our expectations and we continue to reinvest in these innovative products. And so we're using data to determine how much we invest, and we see high ROI on these investments, and we'll continue to use that data to keep the pressure on and keep the pedal to the metal, if you will, on growing these top line numbers with these brands. And so we're going to keep doing that.

But Elanco Ascend is so important to this process because what it allows us to do is continue to beat expectations, drive value to the bottom line while also reinvesting in the business. And I would say that investment is really in 2 spots. It's not only in the near-term DTC, if you will, for the brands, but it's also continued to fund more in R&D for that next wave and that next next wave.

I'd pick up, Chris. We just hosted last week there was a major vet conference here in Indianapolis and dermatology experts had over 300 of them here at the headquarters. And I would say the buzz is the Zenrelia efficacy, the movement to first-line treatment. And really, as you know, we started out with acute and seasonal cases and the shift going more to chronic, which is 2/3 actually of patients are acute and seasonal. But the volume, of course, is in the chronic side. So I would just say that we're starting to see that shift and, of course, the global momentum of the product.

I think I got to highlight also Befrena. I mean here we come with -- this quarter, we're launching. We've got the product in the hands of all the major influencers and KOLs. A lot of buzz at the conference about that product being differentiated to with a 6- to 8-week claim. And I think it's going to do really well, Even as new innovations come, with the 2/3 of derm patients being acute and seasonal, that plays really nicely with Befrena. And really, Elanco now becomes a very competitive derm player with 2 differentiated assets with a lot of momentum in a marketplace that wants new products, in a derm market that's growing double digits. So the news here in this quarter has to be pointed to Zenrelia and the momentum and the increased momentum and then here comes Befrena and our derm competitiveness and Quattro will help derm as well.

Our next question comes from Steven Dechert with KeyBanc.

Just wanted to touch on your expectations for visit volumes. It sounded like in March saw a big improvement and then in April, that continued. I guess just how are you thinking about the rest of the year with what might be a more constrained consumer budget? I understand you're not baking any of this into your guidance, but just wondering to get your outlook.

Yes. Thank you. We believe that vet visits are something we keep our eyes on. non-wellness visits went up. I know people have pointed to that. We really look at -- we think they're over-indexed for Elanco. They will not play a factor and be a determinant of our success in 2016, and we don't see this even as a short term or a long-term factor. I think the ones we point to are expectations of care are driving a willingness to spend. So you got to have innovation and portfolios, and we do. Convenience matters and we are the leader in omnichannel. We can reach more pets where they want to shop at the price points they want to shop at and you got to be globalized. And I think that's under-indexed as well. all of that run by a really good team and a great ground game. And 1 thing I would call out is our relationship with distribution is giving us a share of voice advantage.

So all of these things matter so much more and the trends that we think are more important than vet visits, and there will be some we monitor, but we don't see it being a determinant of our success.

Great. I just want to ask one more on Befrena. Just any key milestones we should be looking for over the next few quarters? And then just any more color you can provide on the feedback that you've received to date?

Yes. I'll remind everybody, it's a ramp launch that will come into H2, which is common with monoclonal antibodies will be into the marketplace. We're in it now with KOLs and the key influencers. We'll start to move into the marketplace here this quarter, and then it will ramp in a staged way into the second half and be a contributor to the U.S. Pet Health growth. We've also got a submission into Canada as well. And then it will be a major player of growth as we go into 2027.

Our next question comes from Navann Ty with BNP Paribas.

One on Befrena, if you can maybe expand on your strategy, especially as competitor is launching a long-acting likely in early 2027. So interested to hear if you take a similar approach that you did with Zenrelia? And in Farm Animal, you touched base on herd regrowth. Can you discuss your outlook for MFAs in particular?

Yes, great question. Again, I would step back and say we've got our second derm product coming with a lot of momentum with Zenrelia, differentiation on efficacy, convenience and value across the board with Befrena coming in. I would point to we start with a big market that we already have with 2/3 of derm patients being acute and seasonal. And so that's less than 3 months of use window. So that plays very nicely. We're a very big market for Befrena. And yes, we've got in our pipeline, next-generation derm, including long-acting as well. So we're well suited to grow our leadership in derm, the rest of the decade globally.

And then on the MFA question, durable trends. MFAs continue to grow nicely. We point to our portfolio of Experior, Rumensin even our [indiscernible] and poultry, we are the MFA market leader, and we continue to hold and grow share there across the globe.

And our last question comes from Daniel Grosslight with Citi.

Congrats on the quarter here. I did want to ask about capital deployment priorities now that it seems like you're going to hit that leverage target earlier than anticipated. I'm curious how you're thinking about M&A. You obviously had a nice tuck-in this quarter. But going forward, does this open up the aperture for larger M&A deals? And if so, what are some areas you'd be looking at there? And also, I guess a similar question on share repurchases. When would you feel comfortable turning on share repurchases as your leverage comes under that 3x target?

Right, Daniel, thanks for the question. Yes. So as I think about capital allocation, really no change to the strategy that we've laid out here for a while here. So organically investing in the business and paying down debt is still going to be our #1 priority. We will continue to look at M&A, but I would tell you, these are going to be small tuck-under opportunities. It's not going to derail us from our deleveraging time line of getting into that now 3 to 3.2x at the end of this year and getting below 3 in 2027. And what we said as we get below 3 in 2027, that certainly gives us some flexibility with capital deployment and shareholder return. And so we haven't been explicit on what that looks like yet. We'll continue to obviously work with our Board of Directors on what that strategy is. And we'll certainly be transparent with the Street as we have more clarity around that.

Maybe just to -- sorry go ahead.

Yes, I was actually going to I was going to ask another question on just the ramp-up given the new deals with Costco in Dollar General on the retail side. How should we think about the revenue and the margin impact of these new partnerships as they ramp in '26 and then kind of scale in '27 and beyond?

Yes, maybe I'll give just color on what I would call normal buying patterns of these sort of customers and particularly with the Advantage brand is where we saw strength here and launches with Costco and Dollar General. But these are more seasonal buys here, and what you'll see is really a first half of the year purchasing dynamic with reorder rates kind of throughout the first half.

And then because it's a seasonal, you'll actually see inventory deplete here over these customers here in the second half. But we'd expect reorders again in 2027. So think of this as a seasonal first half opportunity for us as we move forward.

Just maybe close -- thank you for your time, everybody, this morning and continued interest in Elanco. The best quarter that we probably had as an independent company since being an IPO, high-quality growth. The base business that grew in Q1. The basket of significant innovation is building momentum, all on the backdrop of what I believe is a very durable animal health industry. And our momentum, I hope is evident in the market share gains that we highlighted today across our portfolio. The IPP strategy is working. The level of engagement in Elanco is very high. We're a different company today well positioned to really be a leader in the animal health business. We'll keep our focus on growth, innovation and cash. And we appreciate all of the interest in Elanco. We'll remain focused. I promise you on delivering value for you, customers and greater society as well. Thank you for your time today. We look forward to engaging with you all through the quarter. Have a great day.

Thank you. This concludes the program. You may now disconnect.

Good morning, everyone. My name is Steve Dechert. I'm with KeyBanc Capital Markets on the Healthcare Tech team. This morning, we have the pleasure of CFO, Bob VanHimbergen joining us from Elanco Animal Health.

Before we get started, if anyone would like to ask a question, you can do so through the webcast on the chat. But Bob, maybe just to kick things off. You guys saw some really strong growth in some of your key products to close out fourth quarter with Zenrelia and Credelio Quattro. Maybe just talk about some of the metrics that you saw to close out the year.

Steve, thanks for the question. Yes, you're absolutely right. We continue to see some strong momentum in the business and particularly with our basket of innovation. We did land the year with revenues of $892 million from that basket of innovation. And we exceeded our expectations and our guide of $840 to $880 million throughout the year, and that actually enabled us to continue to, I'd say, accelerate and increase our guide on that basket for 2026. Back in December, our Investor Day, we did highlight we expected $1.1 billion of revenue coming from that basket. And a couple of weeks ago with our 2026 guide, we did raise that to be $1.150 billion, again, on the momentum that we saw through December.

And you're right, it's the Quattros and Zenrelias but also on the farm side, our Experior, but just a couple of data points. Quattro, we firmly believe is best medicine in the fastest-growing animal health market in parasiticides. Broad spectrum is about a $1.4 billion market growing at 30%, and that represents about 40% of the U.S. para market. Quattro right now is in 1/3 of our vet clinics. We have the highest Puppy Index. And just recently, we announced that we did get approval in Australia. And so you'll start seeing us launching and getting approval in further countries overseas. In regards to Zenrelia, again, we believe this is a special best product as well. We did reach a double-digit share in the U.S., and that's with the current label. And then certainly, there is some opportunity to improve that label working through the FDA.

But even with the label cleanup we saw in September, now Zenrelia, we've added 3,500 clinics since that September language update. It's still not a perfectly clean label that we hope to get. But certainly, we took the fatally induced language off, we saw some clinics really lean into again, what we think is best medicine. And then overseas with Zenrelia, we've got double-digit share in many countries several countries in Europe, France, Italy, Spain. In Brazil, we have a 30% market -- I'm sorry, a 40% market share and then in Japan a 30% share. So strong on the pet side. And then on the farm side, Experior, those revenues are north of $200 million that we saw in 2025. It grew 80% in a TAM now that's $350 million between the U.S. and Canada. And listen, we see growth in 2026 with the extended use of that product. And continued adoption. And then over time, we expect to see just the globalization of that product. So I feel really great about the overall basket that we have right now.

That's awesome. And before we get more into '26 guide, I just wanted to touch on the conflict in Iran. We've got sustained oil prices around $100 a barrel now. We're in the third week of the war. What impact are you seeing maybe to the logistical side of your business, any inputs to your manufacturing process? And then just to maybe build off that a little bit. If this goes on for another few months, prolonged conflict and you see oil prices remain high. What does that mean for Elanco?

Yes. I mean it's something that we're certainly paying attention to. I'd say right now, Steve, it's not a material impact to us. Fuel prices, certainly, those are escalated, but that's not a significant piece to our cost base. What we're seeing short term is just obviously disruptions with supply chain. But again, we think that's pretty immaterial and there's going to be some minor timing within the quarter right now. But certainly, as time progresses, if this war should extend something that we'll certainly keep an eye on and certainly provide updates. But as of now, it's really not a material impact.

Okay. Awesome. Yes. So on the '26 guide, I just want to touch on the different considerations to the low end versus high. You're guiding to 4% to 6% organic constant currency, 8% adjusted EBITDA growth and then 10% adjusted EPS growth. So just kind of touch on low end versus high end, if you could.

Yes. No, that's great. So listen, we feel great about the guide. It's right in line with what we shared at Investor Day back in December. But we've been successful in launching our products here over the last 1.5 years and continue the momentum on that basket of innovation. But with that being said, obviously, we do think about different puts and takes as we give guide and I think of various scenarios. And if I think about what would we need to do to get to that high end, it'd be a couple of things. One, it'd be the continued strength in that basket of innovation. And so we've seen momentum, obviously, the last several quarters. And if we continue to see that momentum that would be an opportunity for us to get to that higher end.

The only thing I would say is just the foreign business continues to perform extremely well. And so that would be another -- that macro trend continues, which we expect it will, that would be another lever to get us to that high end. Now obviously, there's things that could bring us to the lower end. And again, things we contemplate. But one would be the overall macro environment. Two, I would say would be just competitive response to the success that we've had. And so it's something that we're certainly thinking through what that could look like. And I'd say more recently, I'd say foreign exchange rates could be an impact, more so obviously, on the reported number as we've seen strengthening of the dollar, but certainly wouldn't impact our organic growth.

Perfect. You kind of talked about trying to avoid air pockets with your innovative product launches. Just as we move beyond 2026, you've had tremendous success with Quattro, Zenrelia. And hopefully, with Befrena coming up later this year. Just how do we think about your cadence of product launches as we get into '27, '28?

Yes. So great question, and it's something that we're extremely excited about internally. So at Investor Day, we did highlight that we're adding mAbs and immunotherapy technology as additional areas that we're focused on and investing. But right now, we're focused on maximizing capacity and throughput and really focused on the larger markets, particularly derm and para. So although we're expanding some of the areas that we're looking at, derm and para is really going to be the biggest markets and areas that we see tremendous growth. And we're a company that we don't need to go create new markets. Our expectation is we're going to have best medicine and grow share within those markets.

And I'd tell you, I firmly believe we're well positioned to win in these large markets. And really, a lot of credit goes to our R&D team that's ensured that we don't have these big air pockets. We're going to go several years without a major innovation coming to the front line. We really have a good approach to continue to fill the pipeline. At our Investor Day, we did highlight we have over 10 products we think could be blockbusters over the next decade, and we kind of put them in 2 buckets, Steve. The first being the next wave, which we highlighted, we expect 5 to 6 potential blockbusters to come to the market by 2031 with an unprobabilized sales opportunity of about $2 billion, which is twice the value that we see here today on the current big six. And then we've got this next wave, which would be another 5-plus opportunities beyond 2031. So internally, we're heavily focused on continuing to fund the R&D team, continuing to fund opportunities and again ensure we don't have an air pocket where we go several years without a major product coming to the market.

Got it. Just now that you have Quattro, you have Zenrelia, you have this more big suite of products than before. How is that helping you grow with vet clinics and add new clinics?

Yes. I mean -- so it's helping tremendously on a couple of fronts, Steve. The first one I'd say was just the portfolio lift that we're seeing from Quattro. There's thousands of clinics that have brought in Quattro that have also made first-time purchases of other Elanco products, including Zenrelia and vaccines, all right? So we're seeing this natural lift really just from this basket of innovation. And you go back to 2025. Q1, our base business deteriorated a little bit more than what we would have liked. But once we saw our launches coming through, particularly in Q2 with Quattro and Zenrelia and starting to see that ramp, we actually saw a much more stabilizing base. And our view of stable base, our definition, if you will, is up or down low single digits. And that will shift by quarter and by geography.

But starting in Q2 because of the innovation, we saw the stabilizing base because of this halo impact from really the broader portfolio that we're bringing. The other thing I would say is just the progress we're making with corporate accounts, where having a broad portfolio is important and critical. In 2025, if you look at our corporate accounts, 90% of them grew. When you compare that to 2024 when we didn't have the innovation, only 13% grew, all right? So that's the importance of innovation. It's not only stabilized in base, but then something we're obviously super focused on just because the margin profile of the basket of innovation is also higher than our corporate average. So we're seeing a lot of benefits just from this basket to improve.

Okay. Got it. I wanted to touch on Zenrelia. You mentioned a label change in September. You've added 3,500 clinics as a result of that. I believe that's up from 2,500 to what you gave on your last update. If you get a full black box removal that you're trying to go for this year, I'm just trying to gauge what that could mean for that product? How -- what's the potential magnitude of that complete removal?

Yes. So a great question. And you're right, Steve. We did -- previously, we had said 2,500 clinics at a couple of weeks ago, and now that's up to 3,500 clinics through the last couple of days. And so we continue to see momentum on Zenrelia. And really what's triggered that is just a little bit of the label cleanup we saw in September, where we took the fatally induced language off that label. And so we've been actively working with the FDA over the course of the last year and obviously got that update in September. But we're actively working with the FDA now on further improvements in the label. We did submit data to them back in October. There is not a formal time line when we expect a response. But I would tell you we are having active discussions with the FDA. And I think the FDA certainly recognizes and part of our submission back to them was the fact that we do have a clean label in 40 countries.

There's now over 1 million dogs that have been treated with Zenrelia and it's been in the market here for over a year now. And so we're seeing, obviously, good adoption of that. But listen, like what the upside could be. We expect Zenrelia to be a blockbuster in the U.S., but also a blockbuster overseas. So again, we think it's a special project. We've been -- it might have been a blessing in disguise, Steve, that with the label, and here's why. Zenrelia is being used as a second line of defense, where puppies and dogs were not getting the treatment or the relief from other products in the market. And so we were coming in as another option, and it's worked tremendously. And so what we're seeing is that work in the market and so if you step back and think about just the clinics within the U.S., there's 30,000 clinics or so.

I'll put them in kind of 3, 10,000 clinic buckets. The first 10,000 clinics are -- were really using Zenrelia right away. They believed in the efficacy of the product. Then there's 10,000 on the other end of the spectrum, that because of the label and the risk aversion, they weren't going to use Zenrelia. And then there's 10,000 in the middle that were kind of in this wait-and-see mode. And because of the label update and because of how well it's working in the market, we saw them really start to convert, and that's that 3,500 bucket. So listen, right now, our guidance assumes the label as is, and that's not only for '26, but also for the next 3 years. But certainly, a label update, I think, would move Zenrelia to that first-line use and certainly would be a major differentiator for what our trajectory could be.

Okay. Perfect. Yes. So this kind of leads into my next question, which I had here, which is the guidance doesn't include Zenrelia, which clearly some upside there potentially, if you get the label change. But just wanted to touch on Befrena. I get it's not probably launched until midyear, but is there any -- is that being included in the guidance of '26 at all, and if so, to what degree?

Yes. So it is in our guide. It's not a meaningful impact to 2026, but it's a special product, right? So as we think about the second half of '26 and into '27 because of the value of Befrena and the dosing intervals being a major differentiator moving from 4 to 8 weeks, which is currently in the market. But Befrena providing a 6- to 8-week coverage is important. We did survey over 350 vets and 83% of them expect to bring Befrena into their clinics. But as far as the launch, we're right in line with our expectations. So we did get approval in Q4 of '25. We've been ramping up production. We do expect to commercialize Befrena here in the second quarter, but it's going to be a phase launch throughout Q3 and Q4. And so it is in our guide. It's not a meaningful impact to revenues and earnings. But as we get scale throughout the second half and into 2027, it'll be a more meaningful impact to both revenues as well as profitability.

Got it. You mentioned the Quattro approval in Australia. You guys, I believe, are expecting more geographic approvals this year. What can you tell us about those maybe what regions are you potentially expecting how many? Just any color you can give would be great.

Yes. No, that's great. Yes. So yes, we did get approval in Australia, which is important. That's our first overseas market. The overseas market is about $700 million. We do have submissions in Canada, the EU, U.K., Japan as well. We do expect to get those approvals here throughout 2026. But with that being said, we don't expect that to be a material impact to 2026. That's going to be more in 2027 and beyond. But certainly, the globalization of Quattro is certainly a key driver to our longer-term growth profile.

Okay. Yes, that's actually going to be my next question. It was how much of international growth at Quattro was being put into guide, but it sounds like it's kind of...

Yes.

Okay. And then Jeff has talked about over-indexing the vet visits as an industry and that we should be looking at other metrics that are more important. Just what are those metrics you're referring to? And what are those telling us?

Yes. So that's a great question. So a couple of things I'd highlight. One, the willingness to spend on pet health right now has never been higher and continues to grow. The younger population, the millennials and Gen Zs, they expect higher expectations of care for their pet. 1/3 of pet owners right now, Steve, spend more money on their pet's health than their own. Then you couple that with the decision-making power shifting more towards the pet owner and that connection to the pet owner is really critical. And so you think about just the OTC opportunities and our leadership position within retail puts us really in a position of strength. The omni-channel approach and capabilities is key. It ensures that pet owners can shop what's most convenient for them. And obviously, convenience is probably the most important factor right now.

As you look at omnichannel shoppers, they spend 30% more than single channel users. And then another data point subscription sales represent 40% of pet health sales. So as you think about in your own world, when you're shopping with Amazon, right? A lot of people have shipments coming once a week. And if you're in my household, they're probably coming every day with what we do. But a lot of that is on subscription, right? And so the pet market has certainly shifted towards that as well. The one thing I would highlight is just the globalization of pet care. What we're seeing in the U.S. is expanding globally as well. And then comprehensive portfolios matter. So as we get more decision-making to the pet owner and the convenience of shopping online, having a complete portfolio for pet owners is critical.

Okay. So I think one of the impressive things about your 2025 growth is that you grew 7% organic constant currency, and that was with only a 2% price increase. And now this year, you're taking a price by the highest in 5 years. So could you dive into what's allowing you to take price up by that much versus that 2% increase from last year?

Yes. No, great. So yes, you're absolutely right. So we did see 2% price in 2025. We do expect that to accelerate in 2026 and a couple of factors. One, as you mentioned, in the U.S. pet side, we did take pricing to the clinics. It's the highest pricing we've taken in 5 years. But really, what we're doing is pricing to value. And we believe we've got best medicine across our entire portfolio. And so we'll continue to lean in to that strategy. The thing I would tell you as well is last year with the launches of Zenrelia and Quattro, we're now lapping those, right? And so those are the opportunities to take pricing. So that gives us confidence that we'll see some price acceleration in '26 versus 2025.

You talked about doing some tuck-in acquisitions on the R&D side. Can you provide more color on where Elanco could strengthen its R&D capabilities through these acquisitions?

Yes. So yes, so we'll continue to have M&A as part of our mid- and long-term growth strategy. It's going to be the areas where we can expand R&D and be more efficient with an M&A transaction versus with our own spend or M&A could be aligned with where there's a good product in the market, and we can provide significant value with our distribution model, much like with the AHV acquisition we announced a couple of weeks ago. So that's going to be really where the strategy is going to be, Steve. But financially, a couple of things I would highlight. My focus, and we've been clear on this, we're not going to let any M&A transaction derail us from our deleveraging time line. And so we still expect to get in the low 3s by the end of this year. and we'll expect to get below 3 in 2027 as far as leverage.

Then a couple of other financial metrics I'd highlight. At Investor Day, as you -- as we've talked about, we did highlight mid-single-digit top line growth, high single-digit EBITDA growth and low double-digit EPS growth. And the M&A transactions need to be accretive to that model. Now they won't be necessary in the first year. But as you get into year 2 and year 3, that's my expectation. And then the last thing that's really critical for me particularly is ROIC. I do want to make sure ROIC exceeds our weighted average cost of capital within 3 to 5 years and it might be near that 5-year time horizon depending on launches of products. But if I think about the AHV acquisition we announced a couple of weeks ago, that's going to be on the shorter end of that time frame. Then the last thing I would say is what's super critical is that we're not going to let any M&A really derail us and distract us from the big 6 products that we've launched internally here as far as innovation goes.

Got it. Okay. Here at KeyBanc, we cover a handful of AI drug discovery companies on the human health side that really speed up the discovery stage of drug discovery. I'm just curious, is that something that there's room to be implemented on the animal health side? Is it already being implemented? How is Elanco looking at that? Just anything you can provide there?

Yes. Listen, so with Elanco Ascend, that is a -- that's really our program over the next 5 years, where we expect to get cost savings through just being more efficient within our P&L. But also how we adopt AI and lean into AI and automation a little bit differently. And so we're seeing AI be applied really across every function within the business. And so if I think about the commercial teams, AI is going to enable them with better real-life data, real-time data to our frontline sales team so they can be more effective. Within the 4 walls or manufacturing facilities, predictive maintenance and our procurement team using data to understand cost opportunities. And then G&A opportunities in the back office we're using AI and we've implemented many already, including the finance organization, where we're seeing hard save already because of some of the efficiencies.

Now in particular to R&D, let's say, a couple of areas where we expect AI to provide some value. One is going to be just with regulatory filings and accelerating that, but also AI to help us, I'll say, fail fast as we think about how molecules work together. And so that will create the opportunity for our R&D team to really focus in areas where we see some success. And so ultimately, we do expect to see products come to the market a little bit quicker because of the help of what AI can do for us. Then the last thing I'd say is more kind of macro opportunity. With the new headquarters we've built here at Indianapolis, we are building what we call a One Health innovation district, which really provides researchers the opportunity to bring their innovation to concept. And that's something that Elanco is acting as really a catalyst to bring products to the market. And so we're really attacking innovation from many different angles there, Steve.

Okay. I should have asked this earlier, but just we had some M&A activity on the distributor side earlier this year. Just how does that impact Elanco to build on that, you guys have talked about how you guys are adding value to the distributors, and they're adding value to Elanco. Just how is that relationship? Or just talk about that more, I guess, yes.

Yes. So great question. So listen, as we sit here today, we don't see an impact in 2026. And TBD, if there's an impact beyond, but I'd say our relationship is very good with both MWI and Covetrus where there was that announced potential merger. But our President of our U.S. pet business, he's got a great relationship with both and probably talks to them on a weekly basis. So listen, we don't see an impact. Again, great relationship with them. We are doing better with them and they're doing better with us. And these distributors are very good at launching product, and you've seen that here in 2025. We expect the same with Befrena in 2026. But listen, if that model changes and we see not the same value, I mean, obviously, we'll pivot where we need to. But right now, a great partnership with both.

Okay. Great. We do have a question in the queue. As Credelio Quattro, Zenrelia and Befrena scale, how much of current growth is coming from structural share gains versus launch-based tailwinds? And when should we expect growth to normalize?

Yes. I mean -- so listen, I'm going to -- I'll pivot back to our algorithm that we gave at Investor Day. I mean with our basket of innovation, we see stabilization of our base and so we're still committed to that mid-single-digit top line growth and high single-digit EBITDA growth. But you'll see us continue to fund the pipeline with R&D and continue to grow that basket of innovation. And listen, internally, it's very important to us that basket of innovation because, one, we see growth, we see the market expanding and we see margin enhancement from that basket because the margins are higher than our corporate average.

Maybe just one on Befrena as you're launching later this year. You guys have that great head-to-head study with Zenrelia, Apoquel incumbent. Any additional head-to-head studies you guys have planned, maybe even one with Quattro versus Trio, just anything in the pipeline on that front?

Yes. I mean I think there's various head-to-heads that we're investing in. Again, we feel we have best medicine. And so we're really leaning into that opportunity. And I'd say that's really more across the front on Zenrelia right now. But again, Quattro, again, we believe it was best medicine. So head-to-head studies are something that we're certainly leaning into.

Okay. I think we can close it out there, Bob. I mean, I guess, maybe before we go, why don't we just -- the 3-year outlook from Investor Day. Maybe just kind of walk us through the expectations there, where the savings are coming from on the gross margin side versus the OpEx side. Yes, that would be great maybe to end.

Yes. No, that's great. Yes. So Elanco Ascend is a big contributor to margin enhancement. But maybe we'll put that to the side first and just talk about the natural tailwinds we expect. The first, the basket of innovation continuing to grow that basket again carries higher margins than our corporate average, right? And so that grows, you'll see margins grow. I'd say volume leverage and so leveraging our existing cost base will also be a tailwind to margins. And then we get to Elanco Ascend. And Elanco Ascend, we expect $200 million to $250 million of net EBITDA improvement by 2030. That's going to be net of inflation and net of investment. And 75% of that save is going to be in the gross margin areas.

And so think of that as really focused on the commercial areas, again, using AI to help our frontline sales team think through how they can be more effective with better data. And then we're going to see some improvement within the 4 walls of our manufacturing facilities. And then procurement. Procurement has already done a fantastic job of locking in lower raw material prices than what we've had in the past. And so we'll see that natural benefit come through. And then 25% of the benefit from Elanco Ascend is going to be in OpEx. And a lot of that comes from the restructuring program that we did announce on December. And I'm really pleased really across the board on how the Elanco global team has initiated and actively gone after, I'd say, every opportunity that we have.

But we're well in line with the restructuring, for instance. We expect $25 million to save this year. We expect that to happen and really all activities to be completed here this year. So we'll see that $60 million benefit come through in 2027. But overall, we highlighted we expect 30% of the Elanco Ascend benefit to come through in 2026. And again, we're right in line with that expectation.

Okay. Awesome. Bob, thank you so much for joining us. It's been a pleasure speaking with you. And hope we'll speak again soon.

Great. Thanks, Steve. Appreciate it.

All right. Great. Thank you, everybody, for joining Day 3 of the Leerink Global Healthcare Conference. I'm joined by Elanco's CFO, Bob VanHimbergen; Head of the U.S. business, Bobby Modi. We've got Tiffany Kanaga from IR in the audience; and Eric Seremet from finance in the audience. Very happy to have you all here. And Bob, you want to kick us off with some opening remarks.

Yes. No, great. I appreciate it. Thanks for having us. So listen, as I think about Elanco and where we are, we continue to operate with just a tremendous amount of momentum. We ended Q4 on a strong note and really beat our guide really across the board on revenue, earnings, EPS. Cash flow came in much stronger. So we were able to delever even a little bit lower than what we anticipated. And it's really driven a lot from our basket of innovation. We ended the year with $892 million of revenue from that basket, which is above what we had guided as well. And because of that momentum, we were able to actually increase our expectations for that same basket in 2026, raising that to $1.150 billion.

And so you think about the guide we gave just a couple of weeks ago for 2026, really right in line with what we highlighted at Investor Day in December with a mid-single-digit top line growth, high single-digit EBITDA growth and a low double-digit EPS growth and then continued performance on trade working capital and cash flow. And so we do expect to get leverage in the low 3s this year and then getting below 3 in 2027. And that certainly gives us some flexibility and optionality with shareholder returns. So a lot of momentum, and I'm really looking forward to the discussion here today.

Great. I wanted to dig in a little bit more into innovation revenue. So starting with Quattro, really strong second half performance doing well in the Kinetic Puppy Index. You increased your kind of your index output there. How are you thinking about Quattro's positioning in 2026 for puppies? And if we think about like the primary growth drivers of Quattro, has that primarily been puppies?

Yes. I think the way to think about the growth for Credelio Quattro is really twofold. First is continued clinic occupancy. So we're only in about 1/3 of the clinics in the U.S. And so we have ample opportunity to expand that. And the second is our market share within the clinic. So our market share as of December on average was about 40% of the endecto space, which is relatively low. And so we see continued penetration opportunity going forward. Obviously, getting new puppies on Quattro will continue to help grow the brand as puppies that start on the drug tend to stay on the drug. And roughly 35% of the volume on Quattro is essentially new starts. So either new puppies or new adults, and we see that continuing to fuel sort of momentum throughout the growth of the product.

Got you. And when we think about sort of the ground game to grow clinic penetration, increase kind of patient starts, whether puppies or non-puppies, like what are the main levers you're pulling? And where have you found particular success?

Yes. I think driving clinic penetration starts with the product itself and it starts with the degree of differentiation with the product and Credelio Quattro really differentiated in 4 vectors. We would say broadest coverage as you think about tape on coverage, speed of kill on tick. So we've got head-to-head study against the competitive products in the marketplace. Heartworm efficacy in month 1. And then palatability, which has been a nice surprise as people have tried the product to market or fed it to their dogs. And palatability is really important because it enables switching, like switching a dog off of an existing product if it's highly palatable, makes it a lot easier.

And I think the other big vector as we think about sort of driving occupancy is our direct-to-consumer campaign and the investment we've put behind those launches and really driving consumer demand to ask for the product by name and create sort of pull at the clinic level going forward. So this combination of what we believe is best medicine plus sort of driving consumer pull and medical education is sort of the strategy as we think about occupancy going forward.

Great. Jumping to Zenrelia here, your oral derm product. How are you thinking about the longer-term market opportunity in the U.S., just sort of based on the current label and then the broader competitive landscape?

Yes. We're really pleased with the momentum that we're seeing on Zenrelia, and it's really ramped up in Q3 and Q4 of 2025, and we see that momentum continuing in 2026. You'll know that we updated the label in October of last year. And since updating that label, we've got 3,500 clinics to sign on to Zenrelia. We are now in over half of the clinics in the U.S., so just over 50%. And we continue to add roughly 600 to 700 new clinics each and every month from an ordering perspective.

So it's great that Q4 was one of our strongest quarters ever, and we were exiting sort of peak derm season, right? We were in off-season time period. So we see upside with the current label and continued market share growth driven by, again, same factors as Quattro, continued expansion of clinics as well as share within the clinics. And then concurrently, we're also working with the FDA to sort of update the label even further, and we're cautiously optimistic that we'll hear something in the near future regarding that.

Great. And then if you do get a cleaner label, how should we think about your sales and marketing playbook if that does play out? Would there be any change in tactics or strategy?

Yes. I think you could think about -- I mean, we're going to continue to drive medical education. We feel like sampling is a great tool because people -- what sets Zenrelia apart from maybe other players in the market is its efficacy and how well it performs. And certainly, the head-to-head data that we have indicates that. I think -- but beyond that, I think a cleaner label may give us the opportunity to go direct to the consumer and drive a little bit more consumer demand on the product.

Yes. On the topic of having a cleaner label, obviously, internationally, Zenrelia does have that and it has performed quite well. So it sounds like you just touched on some of the learnings from those markets. Like are there any others that you found particularly useful that you can kind of leverage in the U.S.?

I think we actually have more experience with the launch in the U.S. They probably have more experience with a cleaner label. So I think the rules in terms of how you can talk about products is different internationally versus in the U.S. So the places that we're all leaning in sort of very similarly is on the medical education, utilizing KOLs and sampling, and we'll continue to do that. We may -- in the markets that we're allowed, we may start some direct-to-consumer campaigns OUS, so they may get some experience with what we think is a nice global campaign on Zenrelia.

Got you. I mean you've got, as you mentioned, the head-to-head data on the label over there. It seems like it's going well. Can you talk about sort of where Zenrelia wins relative to others in oral JAK space, whether it's the incumbent or the newcomer out there?

Yes. I mean we talk about Zenrelia being differentiated in 3 vectors: convenience, efficacy and value, and that's sort of the positioning that we like sort of in the marketplace. So on the convenience front, which also plays into the value front, it's one pill all the time versus this notion of a loading dose that sort of the incumbent in the marketplace has.

And then on the efficacy side, there's obviously real-world experience. And actually, there's great real-world experience in the U.S. because of our label. We were originally sort of -- we started as more of a second-line treatment, and we got handed the toughest cases and the product performed extremely well. But we also have the head-to-head data, which supports the efficacy of the product.

Moving to Befrena. How are you thinking about the longer-term opportunity in the IL-31 mAb space given what is differentiated label versus the current market on product and then any future launches in the space?

Yes. We're really excited about the Befrena launch. And we said it will be a 2-stage launch this year. And I think our excitement for the launch is anchored in a couple of things. First, when we did market research on the label, 83% of veterinarians said they would adopt the product that indicates sort of high demand for the product. The second thing is really the portfolio effect on derm. So we'll be 1 of 2 manufacturers that really has a comprehensive solution kit.

And we actually have some additional products like Atopica in the derm space. So really giving us the broadest sort of portfolio in dermatology. And then lastly, we're in 15,000-plus Zenrelia clinics. So those will be great sort of adopters for the Befrena product. So I think this ramp rate should be faster than what we've historically seen on Zenrelia.

So I'll circle back on the portfolio effect in a minute, but I know you don't guide by product, but if we had to think about a bigger market opportunity, should we be more excited for Zenrelia or Befrena?

We love all our children equally. I actually think there are reasons to bet on each of those products. And that's why we've always talked about the basket of innovation. Like certainly, Credelio Quattro is in the biggest, fastest-growing space, and you believe as operating at best medicine, there's opportunity there. Obviously, Zenrelia is the most incremental to our portfolio and with a clean label, it could do even more.

And then you look at Befrena, which already has a clean label and is differentiated in terms of its efficacy on the label and being 1 of 2 only manufacturers in that space, obviously, you'll see a lot of potential with that and also highly incremental to the portfolio. So -- I don't know, depending on the day, you could pick one or the other in terms of your lead horse, but we're excited about the full basket and the potential that it brings.

Great. Yes. I had to ask. Jumping back to the portfolio commentary. You've talked about the potential for improved sales into corporate practices, both U.S. and overseas. How are you thinking about the opportunity, maybe the pacing of potential corporate wins and just really the cadence of RFPs as those come up?

Yes. I think it's important to note that all the corporates are in different stages. Some have multiyear agreements with other vendors. Some are probably not in a stage where they want to be switching the medicine in their clinics because they're focused on other priorities as they think about what they're overall trying to achieve. So I think what you can expect from Elanco, which has historically been underdeveloped in the corporate space is a gradual build in business over the next coming, call it, 1 to 4 years as we bring on more corporate partners and see more growth.

And the relevancy of our portfolio allows us to do that, I think, better than almost anyone else sort of in the animal health industry. And I'll give you one stat. In 2025, we grew net sales with 90% of our corporate partners. And in 2024, we were only doing that with 13% of our corporate partners.

I guess to pull on that thread a little bit, where is the growth coming from? Is it specific products you're placing better, more volumes in specific areas? What's driving that?

The growth in U.S. pet health, specifically?

In the corporate practices where you're seeing more of an uptick.

Yes. I think what you're seeing is new products and then the portfolio effect of those new products bringing the portfolio along. So -- and I'd just say in aggregate, we grew market share in every major category in 2025. So vaccines, parasiticides Rx, parasiticides, OT, OA pain and dermatology. And so you certainly -- yes, we love the growth we're getting from Zenrelia and Quattro, but we also love the halo effect we're getting on the rest of the portfolio.

Got you. Shifting to farm here, we should certainly touch on that. Experior has been a real standout since launch, now north of $200 million in annual revenue. You've talked about a total market of around $350 million and pulling a couple of levers to achieve that, whether it's [indiscernible] use, price, continued adoption. How should we think about the importance of each of those 3 in order to continue to drive what's been strong Experior growth?

Yes. I mean, so you highlighted that Experior for us is a blockbuster, $200 million in sales, operating in a $350 million TAM between U.S. and Canada. And listen, it's going to be -- that's 80% growth just in 2025, but still runway left. And really, it's probably all 3 levers, Dan. I think there's going to be continued adoption with the product as we get to that next level of producer size.

Price, we did take price out in 2026. We'll continue to price to value. And then I'd say a longer term, tailwind would just be geographic expansion even beyond U.S. and Canada. But right now, we've got a very strong customer retention. It's north of 90%. And so as you think about this moving forward, a gradual herd size improvement is going to be just a longer-term tailwind for Experior.

Great. On a higher level, can you kind of remind us of where conditions sit in the cattle market? It seems like they're favorable producer economics. So like how do we think about the duration of that?

Yes. Yes. So just to look at Q4 for us, we grew 17% in the U.S. farm business and it's really driven really on Experior and to a lesser extent, Pradalex, but just a good portfolio mix there. But the herd -- I mean, right now, we're obviously at historically low herd size in the U.S., and we've got high demand for beef. And so what that equates to is high beef prices and favorable economics for the producer and therefore, for Experior.

So as I think about kind of what we see going forward, I think the liquidation of the herd size is flat right now or it's kind of ceased and the growth is stagnated. So really a relatively flat herd size here as we move into certainly the next era. But for us -- I mean, that's good news. Again, gradual herd size and favorable economics for the producer should continue to strengthen the business.

But if you take a step back and look at the overall macro environment of proteins and a couple of things I'd point to. First is just the new dietary guidelines in the U.S., where we want to move from 1.2 to 1.6 grams of protein per kilogram of weight. You've got just the increased use of GLP. And so our belief is when we get to 2035, over 20% of the population in the U.S. will be on GLPs, and we know that population is using -- or eating more protein to a point of like 40% to 50%.

And then the aging population will be the third lever, I would say, is the last macro trend that's going to support the farm business where by 2030, we expect the population of those 60 years old and older to improve by 25%, right? And so the need for that population to have more protein to sustain muscle mass is critical. So I think there's just a lot of great macro drivers for the farm business.

Got you. And we were talking about this earlier. But just on the topic of macro, I haven't checked oil prices in the past 15 minutes, but they're elevated where they've been historically. How are you sort of thinking of the impact that hit both the pet and livestock business?

Yes. I mean -- so listen, obviously, if something is more prolonged, my answer would change. But as we sit here today, it's really not a meaningful impact. It's really material to where we are today and what we see for 2026. But obviously, if this war goes on a lot longer, things could change.

That makes sense. I guess moving to the cost structure here. Bob, you've come in, you moved pretty quickly. You launched Ascend to drive additional G&A savings. How would you characterize the program having gone thus far in line with expectations ahead? Just what are you thinking at this point?

Yes. No. So I'm extremely excited and enthused about the actions that we've taken. And just to remind you, I mean, we're going to see a couple of natural margin improvements just with the basket of innovation continuing to grow. Those margins have a higher margin than our corporate average. And then just with volumes improving, we're going to see some fixed cost leverage as we leverage our existing cost base, right?

So Elanco Ascend comes along, and that's us taking a proactive approach to margins beyond just the 2 natural levers, if you will. But it also has another pillar of really leaning into AI and automation to a new level to bring efficiencies. But Elanco Ascend, I'd tell you, across the entire P&L, the manufacturing team has already done some great work. I sat in a workshop with them last week on their ideas, and they're executing a bunch of things to improve what they're doing in the 4 walls of their facilities.

Procurement is already locked in some favorable pricing what we had in the past with leveraging their global supply base, and so we'll see that benefit coming through. There's some AI and automation that's supporting some pricing and some gross to net promotional stuff and better visibility to our frontline salespeople. And so we're going to see that.

And then on the restructuring charge that we announced as well in December, very quick action on that. And so we do expect $25 million of save from that restructuring action in 2026. And then all the actions will be actually completed here in the year. And so we'll see the full run rate benefit of $60 million starting in 2027.

But we're right where we want to be. And over the entire Elanco Ascend program, we expect $250 million -- $200 million to $250 million of EBITDA improvement, net of inflation and investment. And so listen, I think the team is actioning very quickly. We feel really good about what we've laid out so far.

Great. Just circling back to your commentary on kind of gross margins. I believe you've guided to kind of back half weighted growth in 2026. Like how should we think about, given you mentioned improving innovation mix, incremental benefits from scale, like how should we think about the ramp of gross margins throughout your LRP term?

Yes. Yes. So great. Yes. So you're right about 2026. We'll see some natural improvement in margins really in the second half. We do expect pricing to be an accelerator to what we had in 2025. So we had 2% price in 2025. We expect that to be a little bit stronger in '26, but also improve throughout the second half of this year, but even a contributor over the next 3 years.

And so we do have -- we expect we've guided 40 basis points of gross margin improvement throughout 2026. But if I think about the next several years, with not only the -- again, the natural mix benefit and the cost leverage with Elanco Ascend, we do see between 200 and 350 basis points of EBITDA margin enhancement by 2028.

Got you. Just wanted to ask you philosophically, Bob, how you think about if the business does overperform, how much of that do you -- again, it probably varies case by case, but how do you think about reinvesting versus letting it flow through to the bottom line?

Yes. So first off, we're highly committed to the 3-year algorithm of mid-single-digit top line growth, high single-digit EBITDA growth and low double-digit EPS growth, all right? So highly committed to that as a team. But we will continue our no-regrets approach to launches. We are absolutely using data at least monthly with Bobby, myself, the finance team, the commercial team and recognize and understanding the ROI on the investment we're making in DTC.

We're also funding R&D to ensure we don't have air pockets within the innovation pipeline. But Elanco Ascend comes in, and that's why it's so important. It allows us to ensure we're dropping through the right level of profitability to the bottom line, but also funding top line growth as well as innovation. So my short answer is we're using data to make the decisions, number one; and number two, highly committed to the algorithm that we've given.

I guess to kind of follow this train thought, you've had a very, I would say, it seems like the promotional strategy you've taken has gone well given where product penetration sits in the clinic on the pet side. What is the data telling you in terms of continuing to spend on promotional activity here?

Yes. We're -- the largest spend for our business is direct-to-consumer advertising and primarily TV or digital in that form. And today, other than our OTC brands, the lion's share of that spend exists on Credelio Quattro. And what we are seeing is we're still on the steep part of the curve in terms of return on investment. We were really pleased with the ROI that we saw last year, and we measured the return in a couple of different ways, market mix modeling, A/B testing.

And we've got the same sort of approach going into this year, and we actually increased the budget for Credelio Quattro from a spend perspective this year. And as Bob said, we talk every month on how the business is trending and where we think we are on the curve. But we think we have more opportunity to continue to spend.

Makes sense. I guess shifting gears to the pipeline. You've got a lot in the works. You highlighted that at your Analyst Day in December. of wave 1, wave 2, I forget you call that next wave.

Not very original. The finance guy came up with that one.

I believe it. How do you sort of think about the indications that in either of those waves or both that are sort of the most exciting here today?

Yes. I mean listen -- so yes, you're right. So at Investor Day, we laid out kind of the next wave, which we would define as, call it, 5 to 6 potential blockbusters by 2031. And then we've got like that next, next wave, which we think is another 5-plus that could be blockbusters. But listen, we kind of highlighted we have over 15 products across that mix. And we did add 2 new areas in the investment areas, if you will, being mAbs and immunotherapy.

But listen, our focus is going to continue to be on the bigger markets, the derm and parasiticide markets. We don't think we need to go create a new market. Our plan is going to be to participate in these markets and bring differentiated product and be first to the market.

And it's really a tribute really our R&D team and Ellen with how she's changed the model, and we collaborate a lot differently within the R&D team to ensure that, one, we're not going to have an air pocket with a lack of innovation coming through; but two, globalizing the products that we have and not only some of the products we've recently launched over the last, call it, 18 months, but also the plans moving forward. So feel really great about what that team has done and what we see over the next 10 years.

And when we think about sort of the -- again, every indication is different, but thinking in broad strokes, when we think about the commercialization strategy for these upcoming launches, you've had 2 recent ones go well. How do you sort of apply the learnings from Quattro and Zenrelia to create a playbook for these future launches?

Yes. Look, I think it starts with best medicine. So our innovation philosophy is either first-in-class, best-in-class or highly differentiated. And so that's what you should expect us to bring to market with future innovation. And then when you have best medicine, you want to anchor that best medicine on medical education. And then I think one of the key components of success is share of voice. And so what you've seen us do is expand our physical sales force, not just in the U.S. but globally as well.

You've seen us bring new capabilities to bear like inside sales and digital to really increase our share of voice by over 100% on a touch point basis. And then the other vector of where we're driving share of voice is really leaning in with our distributor partners and taking their 400 reps that are in the field and using them to amplify sort of the noise about our products or the equity about our products going forward. And we'll take that same approach as we think about future innovation.

Great. Actually, shifting gears to distributors, been some movement in the space. You've got MWI and Covetrus merging. How do you think about the potential impact to your business given that like you just mentioned, you sort of partner with them to empower sales message?

Yes. I think in the short term, it's business as usual. I think they've got to go through their regulatory process, which I think in this case, may take a little bit longer than maybe some other deals that have gone through. We have a great relationship with Covetrus and a great relationship with MWI. And so if the 2 companies come together, we don't really see any change in our business or any material impact in terms of how we would operate.

And we're going to continue to lean in on the share of voice comment. And my conversations with both partners is their intent is not to scale back sort of their representation in the field. They feel like there's other ways they can create growth synergies, and we think we would be a benefactor of those growth synergies.

Great. We should probably touch on tariffs as well. I know it's still sort of a fluid situation. But can you just remind us what's embedded in your guidance at this point? And I can't remember where tariffs are at the time, but what are you thinking about the latest developments there?

Yes. I mean a couple of things. So first off, listen, tariffs, it is really material to us. The recent noise we saw really at the end of February was embedded into our guide. That was not much different from what we -- the clarity we had at the end of the year. And so listen, tariffs as of now, it's really immaterial nonissue for us. But listen, we -- I feel good about really the proactive approach we've taken over the last, call it, 6, 7 months.

We've got great visibility with the finance team. I mean, like just about real-time information from the team to Jeff and me on what the impact is. But two, because of that data, we've been able to think through mitigating strategies, whether it's pricing, supply base manufacturing. So as of now, not an issue for us, but certainly, it is dynamic, and we'll stay on top of it. But again, I feel great about how quickly we're getting visibility to data so we can shift if we need to.

And then just how are you thinking about capital deployment from here? You've talked about you're getting close to your target leverage. Once you get there, what are you thinking in terms of where that excess capital could go?

Yes. So a great question. So really no change in really what we've said historically. Our first priority is going to continue to be invest in the business organically and pay down debt. And you've seen us do that here over the last couple of years. We've brought down leverage 2 turns. We had a couple of onetime items to do that, but I think you'd also see the trade working capital improvement we've made to continue to improve and pay down debt. And so we did get to 3.6x at the end of the year. We do expect to get in the low 3s here at the end of '26 and get below 3 in 2027.

I'd highlight, I'd say, small tuck-under M&A will be a component of our growth strategy, but it's not going to derail us from the deleveraging time line. That is still a top priority for us. But listen, we get below 3, I'd say that's going to open up the optionality to shareholder return. And then so I think there's going to be a component of that shareholder return kicking off as well as continue to pay down debt. We do expect leverage to get to that 2 to 2.5x, and it's going to be twofold. It's going to be the growth in EBITDA to get us there as well as just being efficient on trade capital to pay down debt.

When you talk about tuck-under M&A, are there any commonalities between targets that look particularly interesting to link up?

Yes. I mean it's going to be -- think about areas that could really unlock R&D capabilities or it's a great product, and we can leverage our size and distribution network to really expand the product. But I'd say from a financial lens, a couple of the bars that I'm holding. One, don't derail our deleveraging in the next couple of years. Two, I want to be accretive to the 3-year algorithm we gave at Investor Day. And so what that means if we gave MSD sales growth, high single-digit EBITDA growth, low double-digit EPS growth, I want these acquisitions to be accretive to that, right?

Now we did announce a small acquisition at the day of earnings. 2026 is not going to be a material impact. But 2027, I expect to start being accretive to that. So that will be good news. And then the last thing that I highly focus on the most important metric for me with M&A is when does ROIC exceed WACC? And I generally want that in this industry between 3 and 5 years. But I'd tell you, the AHV acquisition we made is on the shorter end of that time frame. So I feel great about, quite honestly, that Jeff and the entire leadership team really focused on the priorities around capital and the discipline around M&A. And so I feel great again about the overall strategy here over the next several years.

Great. I think last question for both of you, two-parter. What are you most excited about for the Elanco story over the next 12 months? And what do you think investors are missing that most right now?

Yes. I mean, I'll just give you my thoughts. I think the farm business is still underappreciated. Although gross margins are lower in that business, the EBITDA margins are on par with the pet side. So it's incredibly efficient with OpEx to run the business. It's a good cash business. And again, those big macro tailwinds will, I think, continue to move that business forward. So to me, that's the most underappreciated piece of the story.

Yes. And I think it goes without saying, I'm most excited about the basket of innovation, not that we just have in the U.S., but what we have globally across farm and pet and what that means for the growth across all 4 quadrants of our business. And -- even though I'm the pet guy, I would just say that the farm business is the most underappreciated thing about Elanco from investors.

All right. Great. We can wrap it there. Bob, Bobby, thanks for the time.

Thanks.

Thanks, Dan.

Okay. Great. All right. Well, why don't we get started? Thanks, and good morning, everyone. Thanks for joining us. We're obviously very excited to have Elanco here with us today, and representing the company is Bob VanHimbergen, who's the Chief Financial Officer of the company; and to his left, Bobby Modi, who is Head of U.S. Pet Health and the Global Digital Transformation.

I think I know many of you, but for those of you who don't, I'm Glen Santangelo, and I cover Elanco for Barclays amongst a bunch of other things. So we're very excited you all came down here to Miami and spend time with us. Both Bob and Bobby, thank you guys for sort of joining us. Great to have you.

Thank you. Glad to be here, Glen.

And I should mention, Tiffany Kanaga is in the front row. She heads the Investor Relations for the company that I think most of you know as well.

So maybe a good place to start, I think, would be helpful just to sort of level set the conversation. You came off a very strong quarter, gave very, very strong initial fiscal '26 guidance. Maybe that's a good place to start just to sort of bring people up to speed on some of those positive developments that culminated in 4Q '25 and provided the foundation for that 2026 guidance, and then we can sort of dig in after that.

Yes. No, sounds great. Thanks for the question.So listen, at Elanco, we've been focused on growth, innovation and cash. And we're just operating from a tremendous amount of strength, and we've got just a tremendous amount of momentum. We did beat our guidance in our fourth quarter really across the board on revenue, earnings and cash flow. Growth in the quarter was 9% organically. Bobby's business grew 10% and our U.S. Farm business grew 17%. And really all 4 quadrants, including the international business performed well. Internationally, we had 9 of our countries grew and really our top 5 franchises grew. So it's just a high quality of business growth there.

And then on cash, right? I mean -- so listen, we continue to have good fundamentals around trade working capital and aligned on paying down debt. So we delevered to 3.6x, a little bit below what we had guided. And that momentum is continuing into 2026. And so we've guided 2026 right in line with what we did -- what we said at Investor Day with a mid-single-digit top line growth, high single-digit EBITDA growth, low double-digit EPS and then continue to delever. We expect to get below 3 in 2027, and that certainly unlocks the opportunity for shareholder return. So we're extremely excited about what we've seen across the board.

And the last thing I'd highlight is a lot of this is enabled by our basket of innovation, where we've got some special products, but the entire basket performs well. And because of the strength coming out of Q4, we were able to, again, increase the guide for 2026 up to $1.15 billion on that basket.

Yes. Okay. Thank you for that. Bobby, Bob talked about some of the growth in U.S. Pet Health, right? Maybe that stole the show, right, in 4Q '25, and we get obviously a lot of questions on that. And if you look at sort of where we were in the first half of the year relative to the second half of the year, we saw some very nice acceleration and particularly night and day versus 2024. And I sort of feel like Quattro and Zenrelia, they suck all the oxygen out of the room, and that's what people want to talk about. But it feels like there's a lot more beneath the surface there as well. So maybe you can just sort of comment on those trends throughout sort of 2025 in your business with so many success stories to sort of talk about.

Yes, Glen, thanks for the question. So what I would remind you is that we grew share in every major category. So pain, vaccines, derm, OTC parasiticides and Rx parasiticides. So the total business is healthy. And yes, Quattro and Zenrelia get a lot of the sunshine, but we launched 12 differentiated assets across our OTC and Rx portfolio in the last 3 years, and all of them are contributing meaningfully to growth.

And then the third thing I would say is yes, we are -- we have launched differentiated assets in large growing spaces that have allowed us to extend the growth of those spaces and also capture market share. But those new assets have strengthened our portfolio, which has allowed us to reach new clinics. For example, we are now in 2,600 clinics that never bought an Elanco product before because we have -- because they were interested in Credelio or Quattro, and that's been a really nice tailwind for our business overall.

That's excellent. One of the things that if I think back to the middle of last year, one of the concerns people had with sort of the innovation outlook and expectations was on the pricing side, right? And what strategies Elanco would sort of take. Could you sort of talk about the volume versus pricing dynamic as 2025 sort of played itself out? And we're going to segue soon and talk about 2026, where I think you guys are excited about sort of the pricing side of the story in 2026 based on the demand that you're seeing. But if you could just touch on '25 first and then segue.

Yes. Yes, sure. So maybe I'll take that, and then Bobby can answer or add anything else. But listen, pricing in 2025 was 2%, volume 5%. And we're seeing a good balance between the volume with this basket of innovation, not only growing, but also stabilizing our base business. And so we saw 2% of price. So we're seeing good volume, 2% price in 2025. We expect that to accelerate in 2026 as we continue to price to value. And so we have that mentality. Bobby's business, we took the highest list pricing out to vet clinics this year. It's the highest that we had in 5 years.

And so listen, we're going to continue to price to value, and we do see acceleration in 2026 versus 2025 on price, and we also expect it to accelerate throughout the year versus Q1, Q2, if you will.

Okay. So much focus on U.S. Pet Health, obviously, right? But you participate in a lot of other things, right? I mean, outside the U.S., obviously, is big. You got Farm both in the U.S. and outside the U.S. When you think about those 4 quadrants, if we exclude U.S. Pet Health for a second, let's talk about some of those other quadrants. Let's talk about Farm in the U.S. and your international business and maybe some of the drivers there because I think there's a lot more to the story than just Zenrelia and Quattro as we were just sort of talking about.

Yes, great. So listen, I'm happy to do it. I'm extremely excited to talk about the Farm business. So the Farm business grew 17% in the fourth quarter, really led by cattle and poultry, and cattle, particularly led by the strength in our Experior product. And so right now, Elanco is benefiting from just a small herd size. And we believe the liquidation in the U.S. cow herd has stopped. The growth is -- or the rebuilding, if you will, has been stagnant. So we kind of expect a flattish year for herd size. But that low supply and high demand for proteins and beef is leading to higher beef prices. And Experior wins in that sort of environment.

And so Experior, we crossed $200 million in revenue in 2025, operating in a TAM of $350 million in the U.S. and Canada. And we're seeing continued adoption of the product. We're seeing a high retention rate of the product. We have the ability now to take price and then we expect the geographic expansion to be a longer-term driver of Experior. So strong growth on the U.S. Farm side.

Now as we move to international, the Pet business grew 8% in the quarter, really strength from our Credelio family, Adtab, as well as Zenrelia. And we've got a clean label with Zenrelia and some great market shares already in Brazil. We've got a 40% market share of the derm JAK market. In Japan, it's 30%. Internationally, in Europe, several countries, we've got double-digit shares already. And so some really good performance on Zenrelia. And then international Farm grew 4%. That's really led by, I'd say, ruminants as well as poultry and just that global demand for proteins.

So when you put all that together, right, when you talk about Adtab, Experior and some of the other growth drivers, you keep exceeding your expectations on your innovation bucket, and that's added, I think, over $400 million on a year-over-year basis. And the expectation is for something maybe less than that in this upcoming year. But can you talk about the continuation of those trends and what gives you the confidence to continue to guide that sort of innovation expectation higher?

Yes. I mean it's a great question. So listen, what's unique about Elanco is we have this entire basket. We don't have -- historically, there might have been -- or company may have one product in one sort of area of the business and we lean in heavily. But we've got this entire basket now, just really bearing the fruits of a lot of the investment over several years. And so the entire basket continues to perform well, which is incredibly important for us for two reasons. One, the margins in this innovation basket are higher than our corporate average. And two, what we're seeing is it's stabilizing our base business. And you look last year in Q1, our base business had a little bit deeper drop. But then as Quattro and Zenrelia launched, we saw a stable base in Q2, 3 and 4.

So listen, we're going to continue our no-regrets approach to launching these products. We think they are best medicine. And maybe even more importantly, because of just the focus on R&D, we continue to fund the pipeline, and we've got more products coming to the market here over the next 5 and even 10 years. I know that's something we'll probably touch on later.

One of the things I also wanted to talk about and you touched on it in your prepared remarks is maybe the leverage that this innovation basket is sort of giving you in other areas of your business now that you're in the clinics in some of these new therapeutic areas, but it's maybe strengthening some of your portfolio in other areas, and that may be underappreciated by investors to an extent. Bobby, I don't know if you want to touch on sort of that leverage multiplier effect that you maybe get from penetrating these clinics in ways that are new versus just a couple of years ago.

Yes. I think I spoke about this a little bit earlier, but I think the real opportunity is Elanco has historically been underdeveloped with corporate clinics in the U.S. and having a full portfolio of products now gives us -- and differentiated assets, which they really want and which consumers are asking for, it gives us a sort of meaningful presence with corporate clinics and allows us to drive further penetration, not just of the differentiated assets, but our entire portfolio. And we will be sort of 1 of 2 animal health companies with monoclonal antibodies. We'll be 1 of 2 animal health companies with a full comprehensive derm portfolio, and we've got a differentiated sort of broad spectrum endecto. And then the nice thing from just an overall leverage perspective, Bob talked a little bit about sort of investing from a no-regrets perspective, but we expect our investment to ramp less than the overall sales ramp that we get on innovation. And so that will fuel sort of EBITDA growth to the bottom line.

Okay. I think it's obvious to say you've been very pleased so far with the launch of Quattro and you sort of characterized it on the most recent call as a first-to-market product where you're third to market, obviously. So could you maybe talk about the product and maybe what differentiates it and maybe what you're doing a little bit different on the commercial side that's driving these strong results?

Yes. So Quattro is differentiated in 4 areas. The first area, I would say, broadest coverage, we're the only broad spectrum that gets tape forms. The second area that is differentiated is speed to kill, specifically with ticks, which is important as you think about disease transmission. And so we've run head-to-head studies versus the competitive products in the marketplace. The third area of differentiation is heartworm efficacy in 1 month. So you don't have to wait to get that.

And then the fourth area of efficacy, which we -- or differentiation, which we saw play out in the marketplace is palatability. And Alan and her team have done a phenomenal job making the product taste great, which allows vets to switch dogs from existing products to a new product much easier.

And then our focus on how we continue to accelerate sort of the growth of Credelio, Quattro is twofold. We're just in 1/3 of clinics in the U.S. And so we have an opportunity to increase clinic penetration, and we're adding roughly about 500 clinics each and every month to the portfolio. And the second is, as of last year, our share in the clinics we were in was only about 40%. And so we have our opportunity to increase our endecto share in the clinics we're in over time as we drive more dispensing via consumer demand or DTC going forward.

As a category, right, these combo products are growing very fast, right, 30%. So there's clearly a rising tide lift all boats. Could you maybe talk about the durability of this growth that we've seen? And do you feel like it's coming from new puppies? It's just sort of just people sort of trading up from the legacy products. Like how should we think about the durability of the growth that we've seen in this combo market?

Yes. I think it's a great question. I think overall, what's driving the growth of the combo segment is consumers' demand for convenience, right? The ability to get an all-in-one and one pill versus having to take two pills or look at different modes of treatment has really helped. But I think a really good indication of where the market is growing is what's happening with puppies because typically, what you start a puppy on is what they ultimately stay on in their adult life. And 2/3 of puppies now are starting on a combo product, which sort of alludes to the fact that you've got a -- in the U.S., you've got a $1.4 billion business that's been growing at 30%. But the fact that 2/3 of puppies are on it indicates that you will sustain that growth sort of going forward.

Okay. All right. Maybe why don't we shift gears a little over to derm. You launched Zenrelia at the end of 2024. You're earlier in Europe. Could you talk about maybe the differences in the launch trajectory you've seen outside the U.S. versus inside the U.S. with the label differences between the two geographies?

Yes. We've seen a faster acceleration of market share outside the U.S. So we've gotten in the countries we've been in the market, OUS with a clean label, which is every country that we've been there for at least a year, we've seen sizable share advantage. We were public with a 40% share in Brazil, a 30% share in Japan, and we've now seen double-digit share sort of in Europe as we think about that launch.

In the U.S., the ramp was a little bit slower. We exited December with double-digit share of the JAK market. Q4 was our best quarter yet when we got an updated label in the U.S. in October. Since then, we've added 3,500 new clinics to Zenrelia. We're now in over half the clinics in the U.S., and we're seeing that momentum sort of carry through in Q1. So we think the U.S. will get there. It will just take us a little longer.

I'm sorry, since the positive label update in October, could you give us that stat again?

Yes. Since the positive label update in October, we've had 3,500 clinics come on to Zenrelia and Q4 was our best performing quarter, which was -- is not peak derm season as many know.

And the timing on the potential FDA decision related to the boxed warning?

Yes. We haven't sort of given specific timing, but we feel really optimistic about sort of the data package we submitted as well as the confluence of data, the pharmacovigilance data we've had for the product being in the market for over a year, plus 40 countries with a clean label and over 1 million dogs on Zenrelia globally. And we'll continue to have constructive dialogue with the FDA.

Can we talk more broadly about the success of Zenrelia? I mean I know the company is going to increase its investment towards the product and maybe what's sort of driving the attractiveness of that investment? Do you think it's sort of having better head-to-head data? I mean, do you feel like pricing is differential or a combination of a bunch of different factors?

I think Zenrelia is a special product and what makes it special is the efficacy in market. And a little bit of a blessing in disguise is with the warning label that we originally had on the U.S. label, we got pigeonholed to maybe second-line treatment. So we were being used on the toughest cases where pet parents couldn't get relief for their pets and Zenrelia was working. And as vets saw this, they really started to believe in the efficacy. And so I think first differentiated on efficacy, but continues to be differentiated on convenience and value. And I think that's really driving the momentum of the product.

Do you think the market share shifts at all with a third competitor? I mean, I think people know that Merck has launched a product. And how do you think the competitive dynamics in the market may shift yet again?

Yes. I think we have experience with how Zenrelia is doing with a third competitor in Europe. And I'd say Zenrelia is doing extremely well. And I think what will continue to drive Zenrelia is the efficacy that it brings to pets and ultimately, what vets seeing those results in the marketplace.

Okay. All right. Can we talk about the pain market a little bit? I think you've disclosed that you view that as having a $2 billion TAM by 2030. Where do you stand today? And how we should think about sort of further penetrating that TAM over the coming years?

Yes. We're really excited about the pain market. We sort of were public in our Investor Day about a number of assets that we are pursuing in the pain market. So not only are we excited about the future assets that could come to market, but we're also excited about our portfolio today. We actually have a very sizable portfolio. We have a great product in Galliprant, which is the #1 branded NSAID for OA relief. And we have seen Galliprant continue to grow this last year, and we expect growth sort of going forward as more vets are shifting back to traditional OA treatment.

Obviously, a lot of scrutiny on that category. Does that factor into your thought process or your conversations at all?

I think the scrutiny on the category helps a product like Galliprant, which is known in the industry for efficacy and safety. And I think that's why we saw the return to growth in 2025. And I think as we think about our innovation going forward, we're really cognizant as to what vets and pet parents are looking for.

Last year, you gave that 3-year guidance, right? So people now have a framework to think about the growth algorithm, but we also have talked about -- or the company has talked about its pipeline and all the opportunities that you have, and we've talked about some of them here today. Help us think about sort of the launch cadence coming up in the next sort of several years and sort of layer that into the conversation around that sort of mid-single-digit revenue growth number that you provided the Street back 3 months ago, whenever it was.

Yes. Yes, so great. So at Investor Day, we laid out, obviously, our current portfolio, but then we talked about, call it, the next wave and then I'll say the next-next wave. And so listen, we're heavily focused on ensuring we don't have an air pocket without some innovative products coming to market. And we've got a fantastic R&D team led by Ellen that's just making sure that the team is functioning well and sharing knowledge and making sure we don't have those air pockets. But listen, what we see is by 2031, we expect to launch another 5 to 6 potential blockbusters in the market. And beyond that, there's probably another 5 to 6 in that category beyond that. But listen, the next 5 to 6, we have an unprobilized sales peak of $2 billion, which is twice what we had here in 2025. So I feel great about kind of the pipeline and also great about just the focus of the global team ensuring that.

Any specific therapeutic areas in that next wave that you want to sort of call out?

Yes. I mean we're going to focus on -- I mean, we don't have to go create a new market. And so we're going to really focus our attention on the bigger markets, the derms and the paras and have a differentiated product, Glen.

Okay. All right. Could we maybe talk about the 2026 guidance? We got a couple of minutes left. So I just want to touch on this because last year, you sort of raised prices 2% and you sort of talked about this year, I think that the pricing was even -- maybe even a little bit better this year versus last year, which would imply something greater than 2%. And when we look at the volumes that the company sort of generated in the second half of '25, and I kind of put all that in the mixing bowl versus your sort of 4% to 6% revenue guidance, it doesn't necessarily all add up. And so how do you bridge that sort of disconnect? Or how should we think about maybe some embedded conservatism or just not wanting to get ahead of yourself? Like how do I think about that revenue guidance in the context of the individual pieces that all seem like they're doing better than the guidance might imply?

Yes. I mean -- yes, first off, I mean, I think we feel great about the guidance we gave. It's right in line with the algorithm that we showed at Investor Day. We absolutely have a tremendous amount of momentum really across all 4 quadrants. I'd highlight we are lapping some bigger growth numbers we had from this basket of innovations. We grew that basket $400 million in 2025, and we're expecting to grow that another $250 million on top of that here in 2026. But listen, we said we're going to be grounded with guidance, and we're just being cognizant of the macro trends that we see as well as competitive response to the success that we've had. But again, we feel great about the guide that we gave that mid-single-digit growth.

Yes. Maybe let's just go down the income statement a little bit. Obviously, the adjusted EBITDA, sort of that high single-digit growth outlook kind of implies some modest margin expansion. Talk about sort of the margin trends in the business as this innovation bucket continues to grow faster than your overall total and maybe layering in some new product launches over the next couple of years as well. Just sort of talk about the general margin trends and some of the some of the tailwinds maybe to that margin trend to drive that faster EBITDA growth?

Sure. Yes. I'll highlight really three things. First is this basket of innovation growing. Again, these margins carry a margin profile higher than our corporate average, so that will be accretive. Number two, I'd say we're going to continue to leverage our existing cost base. And so as volumes accelerate, we're going to see some fixed cost leverage. And then the third lever is going to be Elanco Ascend, which is our proactive approach to improving margins really across the P&L, where we expect $200 million to $250 million of net EBITDA improvement by 2030. 75% of that is going to be through gross margin, 25% through OpEx.

And listen, this covers the work we're doing within the 4 walls of our manufacturing facilities. It incorporates the procurement team. It's already done a fantastic job of locking in some better pricing, leveraging AI and automation to really improve efficiency across the P&L. And then we also announced a restructuring charge at the end of December, and we're well on path to executing those commitments, and we expect $25 million of save coming through in 2026 from that program. We expect to conclude all of those actions and get a $60 million run rate benefit in 2027.

Okay. Listen, we're out of time, but I want to give you all the last word to figure out how we can sort of tie all this together. I mean, obviously, a lot of trends are going in the company's favor now with the innovation basket. It feels like there's still opportunities in the pipeline. You're able to sort of take pricing. But even the strength is even beyond just U.S. Pet Health, right? It feels like a little bit more of a diversified strength if you sort of will -- if you will. I mean we've been recommending the stock for a couple of years now. 2024 could have gone a little bit better for us personally and yourselves, and that all sort of worked itself out and then some in 2025. But as we sort of sit here maybe with a more bullish outlook, is there something that you think that you want to leave investors with that you think maybe they should spend more time on, may not be fully appreciating, maybe we didn't spend time on it here today. Let me give you the last word to sort of close it out on what you want to leave, the message you want to leave the investors with.

Yes, great. So great. Thanks for loving to do that. So one, I think the industry is fantastic. We expect the industry to grow by $20 billion over the next decade. And that's going to be a mix between the Pet side as well as the Farm. I think we talked a bit about Farm and the financial profile of that business. But listen, there's some macro dynamics behind it that supports it, but also just the profitability of that business is unrecognized. Although it's got lower gross margins than the pet side, the EBITDA performance is -- and the margins are in line with the overall business, including Pet. So that's an underappreciated aspect of the business.

And again, we talk a lot about vet clinics being down. But I would tell you, there's never been a more willingness to spend from the end consumer and take care of their pets. We have an omnichannel approach, which ensures that we can be and provide product to the consumer where they want to shop. And listen, I think our basket of innovation is going to continue to grow and the globalization opportunity we have with these products and then continued strengthening of the balance sheet just makes us someone that's going to participate and continue to lead in this animal health industry.

Okay. Bob and Bobby, thank you very much for joining us today.

Thanks, Glen. Appreciate it.

Well, good afternoon, and 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 in the U.S. Farm Animal business, Luke Smith; and from Investor Relations and ES -- 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?

Yes. So thanks, Chris, and thanks for the question. So listen, Elanco has really started off on a great foot in 2026, really leveraging the momentum that we came out of Q4 2025. And so 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. And so we saw four quadrants of our business performed well. We saw the basket of innovation performed well. Cash came in better than we had expected as well on just good fundamentals of the business. And so we're able to pay down debt even a little bit more than we had projected. And so we landed leverage at 3.6x. So we ended 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 delever and bring leverage down into the low 3s. And so like we're really pleased with the performance, the momentum we're seeing across all four quadrants.

Maybe 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?

Yes. So listen, like we do give a wide range of guidance, reflecting a couple of different things. If I think about the momentum of the business, obviously, that's certainly some upside. And the globalization of our products. So we've got some fantastic products with Zenrelia and Quattro and so the continued globalization of those products. So if you see the macro improve, if we see those products and the ramp of that basket of innovation improve, certainly, that's going to help us get to that top end of guide. But listen, like we're also cognizant of the competitive environment. And the industry is growing great, but competition certainly is bringing products to the market as well. And so 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 -- we could get there just with continued success in the products that we've launched.

And are there any specific data points you'll be watching for near term that we could have updates on by Q1 results?

Yes. I mean maybe not so much on Q1 results, and I probably won't put a time line on this. But listen, with our Zenrelia label, certainly, that's something that's what's baked into our guidance is the label as is. Now with that being said, the FDA has asked for data from us back in October. So we have provided data at their request on our label. And 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. But 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 in the market for close to 1.5 years now. And so those are some data points that could get us to a clean label. But listen, we're not putting a time line on that. It's our hope and expectation we'll get that eventually. But listen, when we hear from the FDA, obviously, we'll assess where we are and continue our no-regrets approach to continue success with Zenrelia.

So 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 percent of Seresto sales are in the U.S., and your expected time lines for generic impact in the U.S. and ex-U.S.?

Yes. So Seresto is a global brand with sales composition roughly 50% U.S., 50% OUS. And as you mentioned, we've seen some recent competitive entrants into the market, but we've shared that we've been planning for this for some time now and feel like the brand is well positioned to perform going forward. I maybe just begin by first acknowledging that we believe strongly in our intellectual property, and we'll continue to defend through the duration of the patent, which extends here in the U.S. through Q3 of 2027. But with that stated, we feel like the brand is well positioned to compete given a variety of factors. We have a leadership position in the retail channel. We have broad points of distribution, which gives us access to customers, and we also have incredibly high brand awareness and loyalty with Seresto. So at this point in time, we expect limited impact from the generic. We factored that into our guidance for the year. And 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. And so maybe I'd also just offer that we continue to bring innovation and life cycle management to the category, including our recently approved four-month collar, that we'll be selling under the Advantage Family brand name. So again, I feel like Seresto is in a great position to compete and excited about the performance that the brand has.

And maybe longer term, kind of where do you see this brand in 2030?

Yes. 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. We'll have the basket of innovation -- 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? And are there any specific factors like tariffs that might be driving this pressure?

Yes. So 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 businesses 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. So our focus on the pet side of the business will continue to be meeting that mono 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 about a 5% clip. And 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, giving the aging population where protein will become more important due to muscle retention as well as the emerging trends of GLP. So 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.

And amidst these macro pressures, have you made any changes to your business pricing strategy to -- at this point?

Yes. I mean, on pricing, I mean, we continue to price to value. Listen, we believe we've got best medicine, and we'll price accordingly. Just 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 5 years. And so listen, we'll continue to price to value. We expect in 2026, an acceleration, not only from 2025, but also accelerating throughout the year. And I'd remind you that we're lapping key launches we had in 2025 with Zenrelia and Quattro. So it will 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?

Yes. I mean -- so listen, we do consider competition in our guide. I mean if you take a step back and just look at the industry, we expect the industry, the animal health industry, to grow by $20 billion over the next decade or so. But listen, it's a robust industry. But listen, competition is here as well. And listen, right now, we feel like we've got a lot of momentum with the best medicine or the best products. We've got an omnichannel approach that helps us reach customers where they want to shop. We have a full portfolio now with Zenrelia and Befrena will certainly just continue to enable that. And that's helping us make inroads with corporate accounts in 2025 specifically. We grew 90% of our corporates, and that's compared to 13% last year. And that's just showing the value of the broader portfolio. But listen, like we saw, obviously, Merck launched there or had approval of their derm product last week. And our view is with Zenrelia, we've got best medicine, and we'll continue to lean into a no-regrets approach to launching that product. But you think overseas, we've highlighted some key market share profiles last week at our earnings call. But listen, in Brazil, we've got a 40% share. In Japan, it's 30%. And in several countries across Europe, we have double -- low double digits, and in U.S., low double digits. And so 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. And so listen, we know competition is going to be there, and that's embedded to our guide. But listen, we're going to lean in to what we have.

Since you mentioned the Merck product, I think their label lapped a claim for treatment of chronic dermatitis. Any thoughts on that label, any thoughts about positioning in the U.S. versus expectations?

Yes. I mean -- yes, so 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. But 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. And 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. And again, I'd point to those margins that those market shares that I just referenced.

And then maybe taking a step back, you have 6 big products launching over the next couple of years. What percent of innovation revenue was from the Big 6 in 2025? And where do you see that going over the next 2 to 3 years?

Yes. So we don't talk about each individual product within the basket of innovation, but we did have $892 million of revenue from that basket in 2025. We saw continued momentum near the end of the year. And so at Investor Day, we did say we'd expect about $1.1 billion of revenue coming from that basket in 2026. And because of the momentum that we saw here at the end of the year, we raised that to $1.150 billion for 2026. But no surprise that basket is led by Quattro, Zenrelia, Experior on the farm side, Adtab in Europe. And listen, like we're going to 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? So we'll see a higher degree of profitability flow through with growth.

And 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?

Yes. 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 in late summer for us. We continue to see strength there. We see that 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 base -- our base business. You go back to Q1 last year, our base was down a little bit more than you saw in Q2, 3 and 4 of 2025. And again, it's because of the halo effect of these new products coming in. And so as we look forward, we expect the base to continue to be stable, and we view stable as up or down low single digits. And I'd tell you that can 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 6. Is 60% gross profit margin a good way of thinking about this, or how should we think about this in modeling out the company?

Yes. So listen, like -- so I know historically, we've put out a 60% gross margin target. Is that achievable? Yes, right? We're not putting a time frame on that, but I would -- I'd give you just a couple of points of interest for modeling purposes. Our basket of innovation does carry a higher margin profile than our corporate average. We've also have Elanco Ascend that's coming in, and we've started to execute that program. And 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. And we expect $200 million to $250 million of EBITDA improvement from Ascend by 2030. 75% of that, we expect to get gross margin and 25% on OpEx. And so we'll see not only the natural gross margin benefits from the basket of innovation that mix profile, the natural benefits of just volume leverage, but also Elanco Ascend and really improving margins. So 60% achievable, absolutely yes, we're just not putting a time frame on that.

Makes total sense. Maybe diving into some of these specific products, what percent of U.S. dogs today are on broad spectrum products. And what do you see as the biggest contributor to Quattro growth in 2026 and over the next 2 years? Is it price, share gains, growth of the class overall or ex U.S. launches?

Yes. So the U.S. parasiticide 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. As we think about our performance with Credelio Quattro in the first year, we've been incredibly pleased, as Bob mentioned. We've seen the product reach blockbuster status in just 8 months on the market, which is the fastest pet health product to achieve that status in the history of Elanco. And it's been really define 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. It's broadest coverage. It's speed to kill of ticks. It's heartworm efficacy in just the first month, and it's 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. So we're in roughly 1/3 of the vet clinics here in the U.S. today, and we continue to see that number steadily increasing each and every month. We are growing our partnership with corporate accounts, but we've also been leveraging that key relationship with distribution, which we feel is really critical to launching the product with success. But furthermore, we see an opportunity to grow share in the clinics that we already have penetrated in as our portion of the business here is still relatively low. And our confidence here is driven by the recent kinetic puppy index metric, which Quattro was ranked highest in Q4 relative to all other broad spectrum products and grew sequentially relative to Q3 2025. So share will continue to be one of the key vectors for growth.

The second will be price. So we believe that this is best medicine, and we'll continue to price to value and want to ensure that, that value is reflected in how the product is positioned in the market. And then third is globalization. So 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. So 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 potential best-in-class profile. Why wouldn't it have the largest market share of the broad-spectrum class in 2030?

Yes. So I think we've been very intentional about balancing our ambition for the product with the current market reality. So we anticipate that this will continue to be a highly competitive space and one that will continue to breed innovation. But 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 parasiticide 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.

And are there any risk factors investors should be aware of thinking about the outlook for Quattro? Do you expect the 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 can take -- 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. So again, we feel like we're in early innings here, and why 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?

Yes. So we're not going to outline a specific time frame, 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. And 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 value. And we've already seen some really exciting proof points. So we're in roughly half of the U.S. vet clinics currently and are seeing reorder rates north of 80%. And then in the international cohorts of launches that we've had, specifically Canada, Brazil and Japan, we're already seeing year 3 or year 4 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 what we see in the 40 other markets that we've launched, where we've received approval without restriction. And 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. And since that point in time, we've already seen 2,500 new clinics purchasing the product. And then we've also submitted additional booster study to the FDA and continue to have very constructive dialogue with the agency. And we remain steadfast in our belief that this data, combined with the evidence at hand, as Bob mentioned, 40 markets using the product, over 1 million dogs worldwide, a strong pharmacovigilance profile continues to support label enhancements, and 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.

And what has your market research shown on willingness to use Zenrelia with versus without the vaccine washout period?

I don't think we have anything specific to add at this point in time. But again, really pleased with the performance. We've seen it be used moving more towards that first-line treatment, and we continue to expect that as we see label enhancements that will only improve going forward.

And just to clarify on Zenrelia region blockbuster status, did you have a time line?

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?

Yes. I mean so think of inflation for us in our guide. It's largely aligned with CPI. I mean as I mentioned last week in our prepared remarks for our '26 guide. We do have some higher cost inventory flowing though the P&L. We saw some of that in Q4 and expect a little bit more in Q1, Q2, but with 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.

And you touched upon Elanco Ascend, how is that implementation progressing? And are there any opportunities to accelerate those cost savings?

So 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 and then also leaning into the benefits of AI. And so listen, our procurement team has already done a nice job of locking in some favorable pricing compared to what we've had in the past. And so 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 and their manufacturing facilities every day. And then 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, and so we do expect about $60 million of benefit from that on a run rate basis starting in 2027. So listen, the team has 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.

And you've laid out a long-term leverage target of 2.0x to 2.5x. How should we think about capital allocation as Elanco moves beyond that or toward that target?

Yes. So really no change in what we've communicated in the past. So listen, we're going to continue to invest organically and paying down debt as a priority. And we do expect to get leverage in the low 3s by the end of this year and get below 3 in 2027. I've been clear that we do expect M&A to be a part of our growth strategy, and I would tell you in the near term here those are going to be smaller opportunities, primarily around R&D. But with that being said, it's not going to derail us from our deleveraging time line. With the financial algorithm that we gave at Investor Day, I expect our acquisitions are going to be accretive to that model, right? So if we laid it out mid-single digit, high single digit, low double-digit growth on revenue, EBITDA and EPS, these acquisitions will be accretive to that model. And so in 2026, we did announce a smaller acquisition last week. Now 2026, we're not going to see a significant opportunity. But as we get into 2027 and 2028, it's going to check those boxes. And then the other thing I personally look at is ROIC, and how quickly are we going to exceed our WACC. And generally speaking, I want to see that in 3 to 5 years. And reflecting that it could be closer to that 5 years based on the nature of the launch of a product. But with the HP acquisition and the announcement last week, we expect that ROIC to achieve WACC on a shorter time frame of that time horizon. So we'll continue to focus on paying down debt. We're going to get to that 2x to 2.5x. And I'd say, once we get below 3 in that 2027 time frame, that unlocks the opportunity for returning to shareholders. And so that will be the plan and certainly more to come as we work through the timing of that deleveraging.

And is it fair to say most of your potential acquisitions will focus on therapeutics. Some of your peers have looked at diagnostics a little bit for the field or too early to say?

Yes, I think it's probably early to say. I'd tell you, though, it's going to be across both of our businesses. And so when I say both of our businesses, that needs going to be both on the pet side and farm animal side and to make sure it's going to be something that's within our longer-term strategy.

You also touched on AI. What areas of the P&L might see the most tangible benefit from AI over the next 5 and the next 10 years?

Yes. So great question. So if I think about just the near term, I mean where you'll see the benefits of AI for Elanco in the near term. It's really going to be on the cost side and specifically G&A. And I can give you several examples where we've already launched AI within the organization in our shared service center. And so we're seeing benefits, hard savings of benefit already through procurement and finance. But then as you kind of think about the next several years, we're going to 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, getting real-time data to our frontline sales team, so we understand the impacts of marketing and promotional discounts and touch points with customers. And then as I think more midterm, we also expect AI to enhance our R&D capabilities. And so not only regulatory filings and celebrating some of that, but also how do we use AI to test the molecular capabilities, and how to molecules work together, and so we can think about failing faster which will enable us to bring products to the market a little bit quicker.

Before we move to my final question, if we have any questions in the room or from Steve?

Actually, I did want to follow up on one. On Zenrelia, you said the reorder rate was north of 80%. It's hard for us or at least me to put that into context. So tell us why that's a great number, like what compare it to something else?

Yes. So we think it shows just the vets willingness to continue to use the product. As Bob mentioned, we're more so in secondary line treatment right now, but we see that continue to move into first-line treatment. So really pleased with the responsiveness that we're seeing there.

I got that, but I'm wondering, compared to another product, what's the reorder rate for another product? What is it for another recent launch from Elanco?

I don't think we've shared that formation in the past. I don't know if we're in a position to do that right now.

Okay. But suffice it to say this is above what are those...

Yes. I'm pleased with the performance, correct.

Last question is what could be the biggest surprise or change at Elanco over the next 10 years?

Yes. I mean as I think about just Elanco, I mean, we're a different company today than we were a couple of years ago, right? You just think about the profile of Elanco. We spun out from Lilly in 2018. And so the first couple of years were about separation and standing up ourselves. And then we acquired Bayer. There's a lot of integration work to be had. And now we're really entering this next area of growth. And so we're seeing now the fruits of the investments on the innovation front. And so as we sit here today, like, listen, we're entering this next area of growth. And 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 there's a high priority high at us -- high priority for us to continue to fund that pipeline. We do expect another 5 to 6 potential blockbusters to hit the market by 2031. And so -- 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? So I think we're really entering a fun area for Elanco and investors.

Great, Bob. Well, with that, I think we're out of time, but thank you for joining us today.

Yes. Thank you.

Thanks, guys.

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Michael Ryskin. You may begin.

Great. Thanks, everyone, for joining us. My name is Mike Ryskin, Bank of America Life Science Tools and Diagnostics Analyst and also covering animal health space. Excited for our next session with the Elanco Animal Health. We're joined by Jeff Simmons, President and CEO; and Bob V., Executive VP and CFO. Jeff, Bob, thanks so much.

Great to be here. Thank you.

We'll do the same as prior sessions. It will be fireside chat for the duration. Investors, you can certainly feel free to send me question, either via the Veracast portal or Bloomberg chat, email, text, fax machine. You know how to get in touch with me.

Maybe just kick things off, you guys reported 4Q results and gave us your initial fiscal '26 guide just a couple of days ago, so still fresh in everyone's mind. But maybe you could talk through sort of the key points of how the year played out relative to expectations, meaning last year, sort of the key points you want to focus on as you're moving into 2026.

Yes, maybe -- and Bob, you can touch on the guidance. Thank you, Michael, and the opportunity to be here with Bank of America. We appreciate you guys a lot, and what you do for the industry. Love where the animal health industry is right now in pets and protein trends, and where Elanco is. So as you know, Michael, we've been very intentional in the last 3 to 5 years in building what we have, and where we're going, and we're excited about our investor conference we had in December on the rest of the decade.

But our focus has been on three things: Growth, innovation, cash. We've been a pretty consistent story. Our strategy is all around an innovation portfolio, productivity flywheel. And we ended the year delivering above expectations on, I think, adjusted EBITDA, revenue and EPS, a real strong quarter, I would say, on the growth side, probably the best quality year and quarter that we've had relative to all four quadrants, growing on international, U.S., Pet Farm, price volume, all underpinned with innovation. Innovation exceeded our expectations every quarter.

I think our storyline, if you remember, kind of a headline on Elanco, it is a basket of innovation that is performing like best medicine in double-digit growing markets. We don't need to go in and create markets. We're still even lower indexed in the big markets like para, derm and cattle. So -- and then Bob can talk about the balance sheet is strengthening every quarter. And that just sets us up well.

And then we lean into the algorithm of commitments we've made, and we're keeping our priorities the same. We want to be a consistent, reliable deliverer of growth, innovation, cash. We want to invest appropriately, and we want to make sure that we're on the right side of expectations. So we're going to be balanced, disciplined, very prudent, and that's -- we had a long track record of that for many, many years. We did hit a little air pocket, and Ellen is making sure we won't ever do that again. So I don't know, Bob, on that guidance...

Yes, maybe just add a little bit of color. Yes, Jeff summarized it well, but our guide that we gave a couple of days ago was right in line with the targets we gave at Investor Day. Growing mid-single-digit top line growth, high single-digit EBITDA growth, low double-digit EPS growth, and we expect to delever and get in the low 3s by the end of the year. And I'd say, if you kind of double-click into that, we did raise our innovation revenue target. We were $1.1 billion at Innovation Day. We raised that to $1.150 billion. We're seeing just a lot of momentum there.

And I would say the algorithm within the algorithm, how we're focused on internally is to ensure we hit the guidance that we've given out. But internally within the P&L, it's ensuring that we're continuing to our no-regrets launch approach on our products, continuing to fund the pipeline with R&D, and that's where Elanco Ascend is coming in to make sure that we are being operationally excellent.

So we can continue to fund not only the short-term growth opportunities, but also the longer term with the pipeline. So a lot of momentum, and we're being balanced with the competitive response, what that could look like and the overall macro. But again, a lot of momentum entering into 2026. And obviously given the guide that we feel great about right in line with what we laid out a couple of months earlier in December.

Okay, okay. That's a great place to start. I want to follow up on a lot of that. Obviously, we've spent a lot of time talking about the innovation basket. I think that's a big part of the story. I think that's been -- if I could drill down what's been the key factor between IBEX stock -- sorry, Elanco stock. I'm still in the last session. Elanco stock re-rating over the last year, it's been the innovation basket, really delivering, really hitting on that, and how well that's done in recent quarters. So maybe just to pick on one of them.

Let's start with Zenrelia. I think you've had better and better performance as the year has gone on, despite the label as it came out originally. You've had constructive dialogue with the FDA in getting changes already, and there's potential catalyst around the midyear. What would you say a year -- and have been your learnings on it, both in terms of, you've got an incumbent, that's got a 10-year head start, how do you position around that. How do you position or how do go to market around the label? How do you discuss about the label change? Sort of -- what have been your takeaways over the past year? And how do you think about that opportunity going forward?

Yes. Great momentum. We're 1.5 years in really since we've brought the product in, and we're looking at the whole decade. We got a pipeline. So we just got Befrena approved, Michael, as you know. So derm for us is, boy, what we see between now and the end of the decade for derm as Elanco is going to be a leader in this category, and we like the marketplace. It is a marketplace that rewards efficacy. It is the most visible pet issue, an itching dog is not only why people go to the vet, but it's also one that you can quickly determine efficacy better than you can in para and even pain.

So I just kind of say the headline is the product's got to work. It's got to work really well. And if so, even with Zenrelia, where it came into the U.S. with some limitations on the label. That may have been a gift because it put us into the toughest cases, and we're rising right now in a really strong way. So -- and the international launch is exceeding our expectations.

And every story from Brazil, we just had a webcast with Brazil this morning. I mean 40% market share and climbing and the shortness of a market, Japan 30%, already double digit in Europe in the key European markets, half the clinics now in the U.S. I mean this uptake is climbing at a exceeding rate. And the reason for that, I think, is we're not even in derm season yet. I think a lot of that is efficacy, Michael.

So -- and that's what the KOLs are seeing and highlighting. And then we're going to be adding, especially here to the U.S. with the Befrena product that we also think has differentiation. So look, I think we'll continue to work hard on globalizing the product. Bob can talk. We're going to lean in. We're probably increasing some investment around Zenrelia now given what we've seen. We've got good manufacturing plans to take on this increasing demand, and we're going to continue to -- we're the only company out there with head-to-head data, and we're going to demonstrate it scientifically. We're going to demonstrate it with KOLs.

And maybe the biggest proof point is the acceptance by corporates, to have every European corporate sign on to Zenrelia and see 90% growth in corporates in the U.S. last year compared to 13 is, I think, a real symbol of proof points around Zenrelia. And we'll work with -- we can talk some about the label in the U.S., but we made a submission of the booster data after the PCR change to the label. That label change helped us a lot. We picked up 2,500 clinics.

We continue to pick up more, and we're in a constructive dialogue. We hope to hear from them soon. But our case is quite compelling. We believe to move that label closer to the other 40 countries. And Bob -- we'll continue to invest. Bob has spent a lot of time with Bobby and Ramiro on the data to make sure we're not going to slow down on the ramp rate here.

Okay. On the upcoming label discussion or update from the FDA, there's been a lot of focus for investors. You've talked about a number of times. Could you sort of lay out the scenarios as you see, and what the outcome for that would be. Remind us the timing, we're kind of expecting way 2Q maybe summer, if you've got any more clarity on timing?

And just any way you could hedge the scenarios, any way you could give us a likelihood of which outcome it would be. Just I think that could be a pretty meaningful further positive catalyst.

Yes. I start with the current momentum. I mean there's a lot of momentum in the product. So we're not -- nothing is in our guide on a new label. The current scenario we're going to lean into and the momentum is increasing. So we're going to stay focused on what we have right now. And -- but I would just say if I just start with the facts, we've got 1.5 years of good data, the efficacy. We've got 40 countries with clean labels.

We've got PV, pharmacovigilance data for over a year [Audio gap] million dogs. So -- and what we've done, we've got the PCR data, where they changed the label. And now we've made a submission of the published booster data, which was done in a constructive way that actually they desired and wanted. So a submission has been made. That was made in the fall. It's a little unusual, so I don't want to say it's like a new drug ADUFA, Michael.

But I do think we're hoping to hear from them soon, and we believe our case is pretty legitimate for continued label improvements. And I would just say, hey, the FDA is doing a lot on reform, great leadership under Dr. Shell, good constructive dialogue with the team. And I'll leave it there and just say that we're hopeful. But again, it is not something that is in our current guidance.

That's the hedge, Michael, right? Our guidance assumes label as is. And so that's really our hedge against potential outcomes for the rest of the year.

Okay. And in terms of what those outcomes could be, I think it's -- as you said, you already had a label update or improvement in the fall or last year, last summer. It could be similar to that where there is a minor update that's option 1. Option 2 is completely remove the black box, or my understanding is option 3, the FDA could come back and say, "Okay, we need even more data. Let's go back and do more trials." Those are the three outcomes.

Yes, yes. I think you're right. Yes, I do believe so.

Okay, okay. And then the -- just some fresh news overnight or last night, yesterday Merck's NUMELVI was approved nin the U.S. Obviously, a product we've known about for a while. A lot of the focus when we think about Zenrelia ramp in the U.S. is sort of positioning Zenrelia relative to Apoquel, the major incumbent, but now you do have a third player. I think you guys had some really interesting commentary during the call on Tuesday about how Zenrelia has done in Europe, where NUMELVI is already on the market. Could you expand on that a little bit as just sort of what you see as the pros and cons of Zenrelia relative to NUMELVI from the label perspective?

Yes. Again, Bob can highlight. We assumed this in the guidance. We assumed a competitive entry in the U.S., and we had it in Europe. So that's all assumed probably the news last night is it's probably for us, a little bit more favorable relative to the label that came out, so probably positive relative to that. But I mean, let's see.

Look, I think the commentary always comes back. I think I would keep it real simple. Let's not overcomplicate this. It's efficacy. And efficacy will be proven out in the field, and it will be visible to pet owners. And I think duration, breaking that bond with a pet owner because of an itch is what needs to be corrected. And the duration and the quality of efficacy is seen in living rooms and homes all over the world.

And that's where we're getting the testimonies. And what I will say is, we'll start with head-to-head, which we demonstrated against the market incumbent in Europe. And I believe that now that head-to-head data is proven out even against the new market entry in Europe, and we will execute accordingly the same way in the U.S., I think, and it will be determined by efficacy.

And I think that I don't want to get into all the details of the label right now. Everybody can see there are definitely differences, and we're going to focus on what we have. And at the same time, we're one quarter away from launch in Befrena. So I think we've got a portfolio approach. We've got a head-to-head approach. We've got 1 million dogs. And we've got a very strong label in 40 countries, and we have an improving label in the U.S.

And I think we've got one of the largest teams and Michael, I would even call out, we've got a distribution advantage right now. We believe, where distributors are getting a lot of value from us with Quattro plus Zenrelia, and they will with Befrena, and they probably will get even more value from Befrena, and vet clinics will as well. So that's where we're set up, and I don't know if I can elaborate more...

Yes, just to make sure that we all understand, as Jeff mentioned, like this was assumed in our guide that this would be coming out. So it's not a surprise to us with what we -- the commitments we've made a couple of days ago.

Yes. And like you said, you've already gone head-to-head against them in Europe and other markets, and that's...

Yes. And we are -- as I said, just to be clear, I didn't answer that, but we are outperforming them. And I think that's a combination of product KOLs, corporates, I think our ground game is very strong. We've got the largest sales force we've had in Europe and the U.S. in pet health ever, and we're leveraging our partners as well.

Okay, okay. Yes, the way we'll definitely have some interesting tidbits in there in terms of allergic derm versus atopic derm, needing to be administered with food, things like that. So there's a lot of things to dig in there. The strength you've seen with Zenrelia in the international markets, I mean, I fully recognize that every market is going to be distinct. There's different dynamics in terms of how your competitors are positioned, what type of go-to-market strategy you can or can in terms of advertising.

But the strength you're seeing in Brazil, the strength you're seeing in other markets, is that I mean assuming that you can get a similar label in the U.S., like would that be -- is that an aspirational goal to achieve that what's Zenrelia in the U.S.? Sort of like what makes -- what should we carry over from that because that is the biggest market, that is where a lot of the focus is going to be.

Yes. Well, look, I think why we're spending a lot of time looking at the analytics to make sure that we invest. These assets are bigger than we realized, and we've got a whole portfolio of them now. As you know, Michael, so it's very unusual to see we're in major markets, and now we've got best medicine. And this is a best case kind of scenario. So we're going to make sure we're not going to let up.

We will use Ascend and other productivity initiatives to ensure that we can give you that high single-digit EBITDA. At the same time, we will keep increasing investment, if that's what it takes to get the share, we will do that. So these markets come -- share comes at an expense to get it, but we believe we've got the assets to get it, and we're going to do that. And we're -- look, we've got the most experienced, most stable team in animal health. Our ground game is proven.

The other thing that I think is underappreciated is we've got an omnichannel approach, 40% of pet care dollars are under some type of subscription, and we like that because that brings compliance. And so all that aspect of our ground game is really important, and that's where we put a lot of energy in Europe and U.S. in these other markets. So -- and you got to -- if you've got the products that are working, make sure you've got the assets and the commercial engine to get behind them, and I think we do, right now.

Yes. And as far as aspirations, I mean, listen, we firmly believe Zenrelia is a blockbuster. And I would say it's a blockbuster in the U.S., and we expect to be a blockbuster overseas. So we're going to lean into exactly how Jeff spoke about, but we're pretty excited about the efficacy of the product, and what it can mean for us.

Okay, okay. Certainly, look forward to there. While we're on this topic, I definitely want to bridge to Befrena as well then, you talked about a 2Q phased launch, that's something -- that's going to be really exciting if that happens at the same time as a potential label update to Zenrelia. But even if it doesn't, I mean, that's still a really important incremental contributor. So similar to how you talked about Zenrelia and framing the opportunity there, what gets you most excited about Befrena?

I mean I think that obviously, we know the -- it seems like the dosing is going to be a little bit more favorable in terms of a slightly longer period relative to the incumbent there. I don't believe we have the full label out yet in terms of the USDA has now released it. Correct me if that's wrong. But just sort of how do you see Befrena entering that market and the opportunity -- and also the opportunity between having both Befrena and Zenrelia rally hand-in-hand?

Yes. I think you've got it framed very nicely, yes. So we kind of talk about where do we go on differentiation. We think we've got the three dimensions of convenience, value, efficacy. Yes, that efficacy picking up at 6 to 8 weeks. As you know, it also came with a higher bar. It's been 10 years since the last one in this space. So we had to take on a lot more dogs in the trial. So it really creates validity to this study, and that's we took a lot of that and this label to 350 veterinarians.

And as I shared 82%, 83% came back saying, "Hey, we will use this product and especially in seasonal conditions." So -- and then, yes, there will be a portfolio effect with Elanco now coming in, there'll be no real portfolio differences between para and derm with Elanco. We've got the four kind of legs to the stool now with the portfolio that we have and Befrena further differentiates us from even the new market incumbent coming into the U.S.

So all of that plays well. More to come, know the label is not out. We do plan to launch in Q2. It will be a phased launch like other monoclonal antibodies. And I get asked a lot of questions about manufacturing. Manufacturing is tracking really well. Part of the Kindred acquisition, it's in the plant, that's making the parvo. We've been working on this thing for a couple of years, and everything is tracking very nicely for a Q2 launch and probably more of a second half impact.

Yes. Okay, okay. I think that's going to meaningfully change the portfolio setup as you can position with the -- with your customers. I want to touch on one more basket of the -- one more part of the innovation basket in depth before we move on. And that's Quattro, obviously. Really, really impressive 2025. I think -- I mean, it's been a product that was anticipated for a while. It's a market that's really well known. I mean I think the para market is probably the best studied and best understood market in animal health and relatively saturated market in a sense that there already are a lot of products, a lot of alternatives.

Still really, really impressive results. There are multiple factors to the differentiation there in what you bring with Quattro versus what Trio has or NexGard PLUS has. But still if you could distill it for us, do you think like what really drove the success you saw in 2025? You referred to it a number of times as sort of not second in line or third in line, but first in line. What was behind that?

Yes. So maybe I'll just provide a couple of comments here on Quattro. So it's our fastest growing product that we've had. It's not acting like a third to market, it's acting like a first to market. And the differentiation is the speed of tick kill, it's tapeworm coverage, it's heartworm coverage from month 1, but I'd say one of the biggest differentiators is a palatability. And the fact that it's easy for a dog to take is something that certainly, I think is making us see the success where we are.

One of the leading indicators, I'd highlight, Michael, is the puppy index, and we continue to see that rise. And we believe, with Quattro, honestly, once your dog goes on Quattro, and the success we're seeing, we expect that to continue throughout the life of the puppy and the dog. And we're seeing transition from other dogs and existing clinics move over to Quattro. And listen, if you think about just market share, I think we were the only animal health business to see market share grow in para in the clinics this year.

And it's because of the differentiation we've talked about. So Jeff talked about how we're continuing to look at DTC spend, and I meet with the team, and Jeff meets with the team on the ROI on that, and we'll continue to lean in with this no-regrets approach. We've done that all year, and we'll continue to do that, and we're seeing that success.

Yes. In the appendix of your deck, you guys always have really helpful stats revenue performance for select products. So that was really informative. I mean you've given us updates on how Quattro was tracking year-to-date. I think it was early September, you had a press release of it had blockbuster status. So we have pretty good sense for how it was going, but still really, really impressive to see the full year number for that entire line, the Credelio line at -- with $350 million plus $358 million, something like that.

So really strong results. Any way you could characterize how much of that has been share gains from competitors? How much has been market expansion versus -- I'm sure there was some cannibalization of stand-alone Credelio that's to be expected. But it seems like that was relatively modest. We were kind of estimating that to be like 20%, 30%, not more than that. Just any way you can talk about the...

Yes, it's tracking favorable to that, I believe so. And I think you're going to see continued -- I mean, Quattro's got a lot of room to grow, where I think both, I think another key storyline here even with derm competition as you know, is we're small on a relative basis. When we started Quattro, we said we're $300 million in this big $3 billion, $4 billion market. So we're small on a relative basis. Now we've got best medicine, and we've got this omnichannel approach.

The Bayer OTC being able to say, "Hey, we've got some leading capabilities on subscriptions, drop shipping in and outside the vet clinic that's going to leverage us too." So portfolio plus capability is going to give us, I think, leverage there to take more share. I think that's important. I would call out also on that Credelio franchise two other things. Credelio Cat, as I'm traveling around the world right now, meeting with all the affiliates and customers. Credelio Cat is very uniquely positioned. It's got great share growth around the world, and there's a lot of runway. I mean, we've got some unique and only capabilities there.

So -- and then I think Credelio Plus has really got a good foothold, but here we come with Credelio Quattro internationally. And we may have some cannibalization there, Michael, but I believe the Credelio brand awareness is higher in a lot of international markets, which is going to ebb very well for Quattro because its awareness is stronger than the U.S. So we come in and saying, "Hey, we got something better than plus. We'll cannibalize ourselves, but we're going to take more share, we believe that." So it's good. But again, we weren't thinking international is going to be that opportunistic. But given the best medicine aspects of Quattro, international probably has a little better runway.

Okay. And just taking maybe a step back from that innovation ask, especially those three that we talked about Zenrelia, Befrena, Quattro. 2025 was sort of your first year really hitting the market with those. When I think forward to 2026, in some ways, one of the things we wonder is like what the response will be, right? Like now that Zoetis has seen -- your go-to-market has seen your market positioning and the success you had with these products, how will they respond?

Now you've got NUMELVI coming in, how will Merck respond? And what will BI do? What are you -- what have you seen from your competitors sort of like a punch counterpunch? What are you anticipating from them? And sort of how do you see that dynamic playing out?

Maybe, I'll give -- continue with the -- yes, go ahead.

Maybe I'll just give a couple of comments here, Michael. So listen, like you think about the guide we gave, right? And so we've put various scenarios in our guide. That's why we give ranges, right, and competitive response is certainly one of them. But I would tell you, we firmly believe we have best medicine. And so if there's a punch we take, I think that's going to be short-lived, and we'll win the long game. But listen, I think there's -- the market is growing tremendously.

We expect the overall animal market to grow by $20 billion over the next decade, right? And so we see the market growing. We think about us, we believe we got best medicine. We're also investing in innovation, right? And so we see us as a long-term win in this space in a dynamic environment. So short term, there could be something. That's again, why we have it in our wide range. But listen, I think our best medicine is going to win at the end of the day.

And historical relationships. I mean this distribution relationship. Let's talk about the changes and stuff. But hey, there's -- we had a long legacy of staying in a buy/sell, that's major share of voice. And we've been working on the digital and been launching some of these smaller products before these bigger products. So to Bob's point, it's best medicine, it's our offering, and we do not believe it's a price game. It's a value game and the vets want that, the pet owners want that, and we do too.

So that's why -- and then you've got this rising tide right now as an industry. So I'm not a believer that I think we're way over indexed on vet visits as an industry, and I think there's these other metrics I've talked about that I think are much more important.

Okay. That's helpful. A couple -- we've got about 5, 10 minutes left. There's much more topics I want to hit on. One is price. We've had a lot of questions, a lot of debate on this. You guys -- you talked about price accelerating into 2026, which makes sense. I think both from an arithmetic perspective and a model perspective and a portfolio perspective. Any way you can help us frame accelerating by how much? What's the right price level to take in '26? How do you balance, "Hey, we've got a better portfolio of new products, baskets doing well" versus counteracting what I talked about in terms of competition and some of the risks there?

Yes. So I'll give you just a couple of thoughts here. So if you think about, again, our algorithm we gave on growing mid-single digits. Obviously, price is a component of that. We did have price of 2% in 2025. In 2026, we're going to be lapping the Quattros and Zenrelias, and so we're going to get some price uplift on those products. But listen, I want to highlight, we've taken the highest pricing in our U.S. vet clinics this year. It's the highest we've taken in 5 years, okay? Now obviously, we're conscious of what a competitive response would be. But we're going to continue to price to value. And I'd leave you with -- like we are winning share, not because of price, we are winning share because of efficacy.

Yes. Is there a way for you to sort of think about price? And we had this conversation a couple of days ago on the earnings call, of what the price is from the legacy portfolio, apples-to-apples versus how much of the price is the fact that you're lapping the new product launches, and now they're factoring into the arithmetic whereas they weren't before. Is there like an apples-to-apples price metric you could give us?

There's really not. I mean -- again, we will continue to price the value. And I think as a basket of all of our products, I would assume that there is pricing taken in that, and obviously, we balance the volumes and gross to net opportunities. But net-net, we expect price to accelerate from '25, and we expect price to accelerate throughout each quarter within '26.

Okay, okay. All right. Something you alluded to earlier, Jeff, was sort of the distribution relationship, and how that could be a tailwind for you this coming year. I want to talk about that. Obviously, there's been a lot of news in recent weeks with Covetrus and MWI. It's been anticipated and talked about for several weeks, several months, but it finally did come through.

Can you just talk to us about your relationship with the major distributors. I don't know if you want to talk about those two in particular or maybe the major ones as a basket. How you see Elanco as potentially being better positioned to win from that or to benefit from that? And also over what time frame? Is this say, hey, this -- a change of that happens, and we can see immediate tailwinds or is -- this will take years to play out?

Yes. I think today, we've -- we're tied to a long history. We haven't been in and out with them and changing things. We've added the Bayer portfolio in. We've been buy/sell, which is the most optimal for them, where they buy the product. We create demand together. They can make some nice margin with us and value because they're creating value. We've got better metrics than we've ever had with the distribution channel, and that's allowed us to make sure we're spending money in the right area, getting the right value from them.

This year, we come in probably leaving the best year we've had with distribution in '25 in a long time. We're the only company I believe that sells pretty much all of its portfolio by sell, not selected pieces and parts. And it will continue to do that as long as they deliver the value. They're good at launching products. And so they're going to get a lot of value, I think, from Elanco, which is positive, right, for us as we go forward. Any scenario looking forward, we'll do what we've always done, which is we will be close and constructive with them, Bob and their CFOs, and Bobby and the team, and we'll look at it through a lens of value creation.

And Bob, you touched earlier on -- I think the word you used was we're going to invest appropriately in 2026. And you talked about no-regrets launch at the same time. So some pushes and pulls there, right? You can argue what invest appropriately means, you can argue what no-regret launch means, so what's the right level? How are you balancing that?

I guess, maybe put it in other ways, how much of that is a lever that you're willing to toggle, or you have a buffer to toggle, to say, "Hey, like we're seeing really good traction here. We're going to really push harder on Befrena, harder on Zenrelia or maybe we're going to go for a little bit more EBITDA this year." How do you balance those two in your mind?

Yes. So it's a great question. So first off, I would reiterate, we're going to hit our guidance that we give on that high single-digit EBITDA. So that's first and foremost, but a big lever in this, Michael, is Ascend, all right? So we firmly believe we are going to continue on no-regrets approach. And we are going to -- if we see, again, the ROI on the investment dollars in DTC, we continue to see that data supporting that top line growth. We will continue to lean into that. And obviously, when you get the sales, obviously, you're going to get the EBITDA, right?

So I'm somewhat -- at some point, starts funding itself, right? But then Ascend comes in, and it's ensuring that we are doing the right things across the P&L to be more efficient, which again, funds DTC and funds the long-term R&D growth. And listen, I've said this before and maybe not to you, but one of the great aspects and the success factors to Elanco is we don't have silos within the organization. And what that means is the entire leadership team, the organization is aligned that, "Hey, listen, we need to do two things as priorities, grow the top line with -- and that could mean more funding DTC and continue to fund the pipeline with R&D." And all the rest of us may have good ideas, but we're all aligned on the priorities. And that's the success that we're bringing right now.

Okay. And then maybe, again, we're almost out of time. Maybe I'll expand it into sort of a bigger picture question or a longer-term question. Right now, you're heavy in launch mode, you're heavy in a ramp mode for the innovation basket as you should be. As we think about those ramping over time. How do we think about that operating leverage framework as these products get bigger, both on a gross margin basis as the revenue base gets bigger, but also on an OpEx basis as maybe you've already done that initial investment. Should that -- should lever open up more and more in future years?

Absolutely. And think about Investor Day, some of the messages that we gave. Certainly, with volume leverage, we're going to see margin enhancement, that's going to be on the gross margin and EBITDA lines. We're going to get the natural mix benefits associated with the basket of innovation carrying higher margin levels. And then you're going to see the EBITDA -- overall EBITDA performance coming from Ascend. And so we do see EBITDA margins improving 200 to 350 basis points by 2028.

And then Elanco Ascend to frame it for you, 75% of that benefit is going to be gross margin, 25% OpEx. And again, that's a 5-year period, where we expect $200 million to $250 million of net EBITDA improvement after investment, after inflation. So you'll see a mix of both coming through, Michael.

Okay. That's super helpful. That's great. All right. Well, unfortunately, we're out of time. I want to thank you, Jeff and Bob, for joining us. This is a really great session. Always a pleasure. Thanks, everyone, for listening in and...

Thank you, Michael.

Thank you.

Thank you, everybody.

Congrats again.

Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to hand the call over to Tiffany Kanaga, Vice President of Investor Relations. You may begin.

Good morning. Thank you for joining us for Elanco Animal Health's Fourth Quarter 2025 Earnings Call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Bob VanHimbergen, our Chief Financial Officer; and [ Beth Haney ] from Investor Relations.

The slides referenced during this call are available on the Investor Relations section of elanco.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 discussed in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements.

Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. References to organic performance exclude the estimated impact of the Aqua business, which was divested July 9, 2024, and certain royalty and milestone rights that were sold to a third party in May 2025. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. 2025 was a year of significant delivery for Elanco across all three of our priorities: growth, innovation and cash. As highlighted on Slide 4, Elanco delivered a strong fourth quarter with 9% organic constant currency revenue growth. We outperformed the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was led by U.S. farm animal up 17% and U.S. pet health, up 10%. This now marks 10 consecutive quarters of underlying total growth.

Revenue from innovation exceeded expectations in 2025 at $892 million for the year as the fourth quarter was our largest quarter for innovation to date. We are raising our 2026 outlook for innovation to $1.15 billion, reflecting contributions across a broad set of geographies, species and products. Our continued focus on cash, combined with strong results, improved our net leverage ratio faster than planned to 3.6x at year-end. We now expect to finish 2026 at 3.1x to 3.3x.

With our consistent execution, we are well positioned to introduce 2026 guidance in line with our longer-term algorithm. We expect full year organic constant currency revenue growth of 4% to 6%, adjusted EBITDA of $955 million to $985 million, representing growth of 8% at the midpoint and adjusted EPS of $1 to $1.06, representing growth of 10% at the midpoint. This guidance continues our prudent, balanced approach in a dynamic macro environment.

On Slide 5, let me ground today's discussion and accountability and transparency by sharing a checklist for the year in review. Elanco delivered across our full set of 2025 commitments to our customers and our shareholders. We have entered our new era of growth with a track record of consistent execution. Innovation revenue cleared a bar that was raised each quarter in 2025.

We brought the entire [ big six ] across the finish line with [ Befrena's ] December approval. This is a real testament to the optimized innovation engine that [ Ellen's ] team has built over the past few years.

Organic constant currency revenue growth reached 7% for the full year. with balanced contributions across species and geographies as well as between volume and price. 2025 revenue, adjusted EBITDA and adjusted EPS all exceeded last February's expectations with steady outperformance throughout the year. And we delevered about 0.5 turn faster than expected, while also refinancing our Term Loan B ahead of schedule.

Team Elanco, I want to extend my gratitude for an incredible year. Your level of engagement and execution has never been higher while you're unwavering dedication to transforming animal care has truly shown.

Looking more closely at the fourth quarter revenue performance on Slide 6, and we break down the 9% underlying organic constant currency revenue growth. This chart demonstrates strength across our global business with all four quadrants growing nicely.

U.S. Pet Health had a robust quarter, up 10%. Credelio Quattro and Zenrelia led solid growth in the vet clinic and also drove broader portfolio benefits with positive trends for Galliprant. Retail likewise grew in Q4 and dispensing trends were healthy across our OTC parasiticides, including Seresto and the Advantage family.

Importantly, our strong end of the year for U.S. Pet Health led us to gain share in every major category for the full year 2025. Prescription parasiticides osteoarthritis pain, dermatology and vaccines.

Moving to international pet health. We achieved 8% organic constant currency revenue growth, driven by Zenrelia, Credelio and Adtab. Zenrelia is exceeding expectations in the $700 million plus international market with double-digit share in several key markets and strong early traction in Europe, the U.K. and Australia.

U.S. Farm Animal delivered an excellent quarter, up 17% on top of 6% last year, building on our market leadership. Cattle led the way with strong growth for Experior and Pradalex with positive contributions from poultry as well.

And finally, international farm animal was up 4% in organic constant currency with growth coming from ruminants, swine and poultry.

Looking at Slide 7. We delivered $892 million of innovation revenue in 2025, outperforming across a diverse basket led by Credelio Quattro, Experior, Zenrelia and Adtab. We are now committing to at least another $250 million of growth in 2026 to $1.15 billion. This target is led by our [ big six ] gaining traction in the global marketplace with our no-regret launch approach. We are driving sustainable growth as we expect the [ big six ] to double in revenue from 2025 to 2028, and on top of a stabilizing base. And we've refilled the pipeline to deliver a consistent flow of high-impact innovation.

Let's further discuss the progress of our [ big six ] major innovation products on Slide 8. And starting with Credelio Quattro. This groundbreaking parasiticide, the first FDA-approved product with four active ingredients is the fastest blockbuster in our history and we believe has the potential to become our biggest product class ever.

We see Quattro as best medicine with its four dimensions of differentiation, fueling a growth trajectory more like a first-to-market product. In the fourth quarter, Quattro continued to gain dollars share of U.S. broad spectrum sales and was the only one to gain share in the quarter in vet clinics, demonstrating continued strong momentum almost a year after its launch. Credelio Quattro enters 2026 with the most momentum and the $1.4 billion U.S. broad-spectrum parasiticide market.

We have significant runway ahead, with approximately 1/3 of clinics penetrated today and plenty of room to grow share within those clinics. A good leading indicator is Kinetics Puppy Index, where Quattro ranked highest in Q4 versus other broad spectrum [ anddectose ] and grew versus Q3. Quattro is gaining share and also expanding what is the fastest-growing animal health market today. the U.S. broad spectrum [ anddectose ] market up 30% year-over-year.

We expect Quattro to lead that growth through its profitability for the clinic and its differentiated offering for the pet owner, aided by our DTC investments, expanded sales teams and distribution partners.

Importantly, Quattro has boosted our broader Elanco portfolio in clinics. Its momentum and portfolio benefits drove Elanco to be the only major animal health player to see share gains for the total parasiticide prescription portfolio in U.S. vet clinics in 2025.

Looking beyond the U.S., Quattros global rollout begins now with approval in Australia last week, with this approval, we are kicking off our expansion into the $700 million international market, which is growing double digits.

Next, we couldn't be more pleased with Zenrelia's performance in the $2 billion derm market. Every quarter, Zenrelia's efficacy profile becomes more recognized and its success is becoming more global. We have a special product in Zenrelia. The Zenrelia momentum is building with December as our best month yet. Importantly, we exited the month with double-digit share of the U.S. JAK market. This strength is continuing into January. We're now in about half of the clinics in the U.S. and the reorder rate is over 80%.

Trends accelerated after the label update in September, adding 2,500 new purchasers. We remain committed to making the U.S. label consistent with the other 40 countries where it's already approved without restrictions.

Zenrelia's Q4 international results were exceptional. In our first cohort of launches, Brazil, Canada and Japan, we've already achieved year 3 or year 4 analog share in just the first year. Zenrelia's JAK market share in Brazil has reached 40%, and Japan is over 30%. The rapid success and overwhelmingly positive customer feedback are driven by Zenrelia's strong efficacy and support our long-term belief in the product with a clean label.

We're also encouraged by the early traction in Europe, the U.K. and Australia. Zenrelia is outperforming the new competitive entrant in the EU markets. Local sellout data confirms double-digit JAK market share in France, Italy and Spain. We've already contracted with all major EU corporate accounts, helping to drive growth ahead of our expectations. We've also achieved more than 10% share in the U.K.

Our EU head-to-head study results are coming to life in the field, and we're the only player providing that competitive data. Again, efficacy is the differentiator across Europe and around the world with over 1 million dogs treated with Zenrelia globally. Its efficacy is resonating strongly with vets and pet owners alike. Zenrelia works, and it works really well.

Moving now to Befrena, our second monoclonal antibody and our second derm product. We gained USDA approval on December 31, fulfilling our year-end commitment. We expect a launch in the second quarter of 2026 as we progressed through the anticipated manufacturing ramp-up. A phase launch is very typical for monoclonal antibodies or MAB products as we scale our bioreactors. Our expanded facilities in Elwood, Kansas are ready, our manufacturing plans are right on track, and we feel good about our overall MAP capabilities for Befrena and beyond. Befrena offers positive differentiation on convenience, value and efficacy. It's recommended at a dosing interval of 6 to 8 weeks post treatment versus 4 to 8 weeks for the current market competitor. And when we showed a close proxy of the label to approximately 350 veterinarians, 83% responded they are likely to use Befrena especially in seasonal cases.

Finally, our OTC parasiticide Adtab has continued its robust growth trajectory with sales up more than 50%. Adtab is the fastest-growing brand in the $600 million OTC/comarket in Europe, achieving more than 50% oral OTC share to become #1 in less than 2 years on the market.

Moving to farm animal. Experior continues to grow nicely, up 35% in Q4 against a tougher compare. We are benefiting from the historically small U.S. cattle herd size while noting that [ Happer ] retention recently turned positive for the first time since January 2017.

Experia crossed the $200 million mark in 2025, up nearly 80% for the full year with significant runway still ahead for this blockbuster and its portfolio benefits. We see strong opportunity in an estimated potential market of over $350 million in the U.S. and Canada through extending the days of use, continued adoption and price with geo expansion as another longer-term growth driver.

Lastly, regarding Bovaer. We continue to see demand from CPG companies that support sustained interest and consistent count numbers. With farmer retention remaining over 90%. We will continue to invest in Bovaer to achieve its expected potential by enhancing the product's strategic optionality and demonstrating an increased value proposition for farmers and CPG companies.

Long term, we continue to view Bovaer as a blockbuster with near-term growth at a measured pace in a dynamic market backdrop.

Moving to Slide 9. We offer some recent highlights across the three parts of our IPP strategy, innovation portfolio and productivity. [ Ellen ] and her team have built a science-based engine and organizational capability to maximize throughput. With the [ big 6 ] now each approved in the U.S. without attrition, we are focused on the next wave with 5 to 6 blockbuster potential approvals expected through 2031.

Elanco's R&D engine is humming with depth and expertise and a laser focus on the next milestones, all with a vision of creating a consistent flow of high-impact innovation. At the same time, we're optimizing our diverse portfolio to drive near-term growth and to gain share. We experienced broad-based organic constant currency top line growth in 2025 across our top 5 product franchises and in 9 of our top 10 countries. And very importantly, our launch excellence is enabling share gains with accelerating pricing.

As Bob will detail, we achieved 2% price growth in 2025, in line with our expectations, and we anticipate acceleration in 2026, including our largest increase and 5 years to U.S. Fed clinics. Our pricing strategy reflects our latest innovation and the value of our total portfolio to customers.

We've also signed an agreement to acquire [ AHP ] International, a Dutch-based farm animal health innovator focused on a portfolio of products for cattle that improves animal health and optimize efficiency while reducing the need for antibiotics. The deal accelerates Elanco's efforts to expand our leadership in the dairy industry, particularly in North America and Europe, growing both our share of voice and enhancing our portfolio with exciting solutions that supports transition Cal Health, one of the greatest needs in the dairy industry. We're excited about the potential of this opportunity to bring needed solutions to producers and one of the fastest-growing proteins. And we believe one of the greatest market opportunities in animal health.

At the same time, we continue to rapidly pay down debt and strengthen our balance sheet. We improved our net leverage ratio by two turns in just 2 years. with the under 3x landmark expected in 2027. And as Bob will also describe momentarily, our company-wide productivity initiative, Elanco Ascend, is off to a good start. To drive meaningful efficiencies and margin enhancement starting in 2026. With that, I'll pass it to Bob to review our fourth quarter results and financial guidance.

Thank you, Jeff, and good morning, everyone. I will focus my comments on our adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results.

Starting on Slide 11. We delivered $1.14 billion of revenue in the fourth quarter, representing an increase of 12% on a reported basis. Organic constant currency growth was 9%, primarily driven by an increase in volume with price contributing.

Slide 12 provides revenue by the four quadrants of our business. Globally, Pet Health revenue grew 9% in constant currency during the fourth quarter. U.S. performance delivered 10% growth, driven by demand for our key innovation products Credelio Quattro and Zenrelia. Outside the U.S., the pet health business grew 8% in constant currency, led by Zenrelia. On a global basis, our farm animal business achieved 10% organic constant currency growth. The U.S. Farm Animal business grew 17%, driven by the strength of Experior, Pradalex and poultry vaccines. Outside the U.S., our Farm Animal business contributed 4% in organic constant currency driven by broad geographic and species growth led by ruminants in Europe and Latin America, poultry in Europe and the U.S. and swine in the APAC region.

Continuing down the income statement on Slide 13. Adjusted gross margin increased 30 basis points to 51.2%, primarily driven by price, increased sales volumes and mix benefits, partially offset by the flow-through of higher inventory costs. Year-over-year expansion was also impacted by the outperformance of our U.S. farm animal business, which carries lower gross margins, but more comparable EBITDA margins to the Pet Health business.

Our operating expenses grew by 10% in constant currency. This planned increase supports our strategic investment in our global pet health product launches and our R&D pipeline development. As expected, interest expense totaled $47 million in the quarter, a 2% increase compared to the same period last year. As a reminder, we have the expiration of a favorable interest rate swap amortization benefit in the third quarter of 2025, which originated from a 2022 interest rate swap restructuring.

On Slide 14, we include a bridge for fourth quarter results compared to the prior year. Adjusted EBITDA was $189 million, an increase of $12 million or 7%, adjusted EPS was $0.13 in the quarter, a 7% decrease year-over-year driven by an anticipated higher tax rate primarily due to timing of onetime benefits.

On Slide 15, we provide the full year income statement highlights. We generated $4.715 billion in reported revenue, representing 6% growth. Revenue breakdown by key affiliates and products are available on Slides 29 and 30.

Continuing down the P&L, Full year adjusted gross margin of 54.9% was flat compared to 2024. The favorable impacts from price, increased sales volumes and mix benefits were offset by inflationary pressures and higher manufacturing costs. These factors, combined with an increased investment in our strategic growth initiatives resulted in adjusted EBITDA of $901 million for the full year, as shown on Slide 16.

Full year adjusted EPS came in at $0.94 and compared to $0.91 in 2024. The effective tax rate for 2025 was 21.8%, a year-over-year increase of 370 basis points, primarily due to the recognition of nonrecurring tax credits in 2024.

On Slide 17, we provide an update on our balance sheet. Cash generated from operations was $108 million in the quarter compared to $177 million in the prior year. The year-over-year reduction reflects expected cash tax payments related to the 2024 Aqua divestiture, partially offset by continued momentum and working capital improvement.

We ended the quarter with net debt of approximately $3.2 billion, and a net leverage ratio of 3.6x. Looking ahead, we remain disciplined in our capital allocation strategy, prioritizing debt paydown alongside making high-value strategic investments like [ AHV ]. The acquisition is not factored into our guidance, given its size and additive bolt-on nature and expected second quarter close, we anticipate [ AHV ] to provide a modest contribution to revenue and adjusted EBITDA in 2026. The with greater benefit in 2027, and it will not impact our deleveraging time line.

We expect to reduce leverage to 3.1x to 3.3x in 2026 regardless of [ AHV ] and a long-term target range of 2 to 2.5x and with a path to sub-3x leverage in 2027, as previously stated in our December Investor Day.

Now let's move to our guidance starting on Slide 19. Our 2026 full year outlook is consistent with the framework provided at Investor Day. We expect organic constant currency growth of 4% to 6%, which translates to revenue between $4.95 billion and $5.02 billion. This guidance incorporates an accelerating contribution from price versus 2025. And reflecting the enhanced value that our latest innovation and our comprehensive portfolio bring to our customers.

For adjusted EBITDA, we are forecasting $955 million to $985 million, which represents 8% growth at the midpoint. We expect Elanco Ascend to enable adjusted EBITDA margin expansion, while at the same time, we will continue our strategic investment in the global launches of our innovation portfolio and advancement of our R&D pipeline. Gross margin is expected to be up approximately 40 basis points and OpEx up 7%. Finally, adjusted EPS is expected at $1 to $1.06 or up 10% at the midpoint. Slide 31 in the appendix provides a number of additional assumptions to help support your modeling efforts.

Our first quarter guidance presented on Slide 20, includes organic constant currency revenue growth of 4% to 6% and led by our Farm Animal business and good growth anticipated in Pet Health, which translates to $1.28 billion to $1.305 billion in revenue. Adjusted gross margin is expected to decline year-over-year with the timing of inflation and the flow-through of higher inventory costs, particularly in the first half of the year.

We are continuing to invest in our launches, with OpEx up 7% or 4% in constant currency. Adding it all up, we anticipate adjusted EBITDA of $290 million to $310 million, representing 9% growth at the midpoint and adjusted EPS of $0.33 to $0.36.

Turning to Slide 21. We summarized the 2026 headwinds and tailwinds integrated into our guidance. Our outlook anticipates sustainable competitive revenue growth as our innovation portfolio scales globally on top of a stabilizing base. This innovation, combined with strategic pricing helps to insulate us from broader macro pressures. In pet health, we expect to gain incremental share by leveraging our comprehensive portfolio and OTC retail leadership. We are now shipping product to three major new retailers.

We also acknowledge that these tailwinds are balanced against competitive pressures, including generics within the market. On the farm animal side, despite tough U.S. comparisons, we see a clear runway for growth driven by new cattle products, favorable producer economics and accelerating animal protein consumption. We expect to further strengthen our leadership position in both ruminant and poultry.

On the margin front, Elanco Ascend is our company-wide productivity program focused on general and administrative cost savings as well as manufacturing efficiencies. I am pleased with the progress we have achieved so far in 2026. The recently communicated restructuring is on track to generate $25 million in savings this year. These savings are expected to directly contribute to our profitability, reflecting our commitment to operational efficiency and prudent cost management. Additionally, our teams are actively advancing key AI, operational and procurement initiatives, which are expected to result in both P&L and cash flow benefits. Now I'll hand it back to Jeff for closing comments.

Thanks, Bob. Before we move to Q&A, I want to reiterate my deep confidence in Elanco's trajectory. We are not just a company delivering results with significant momentum for also a dedicated team. building a durable long-term foundation for the future of Animal Health.

On Slide 22, you will see that this is more than a story about Elanco's compelling growth proposition. It's about the accelerating opportunity across the broader animal health industry and our ability to lead it. It's about having the best of pharma with science-based innovation, disciplined regulation and high barriers to entry. This, combined with strong customer relationships built on trusted brands and a cash market that responds to growing value propositions from winning portfolios. It's about generational shifts in both pet health and farm animal where pets and protein are increasingly central to culture, care and global demand. And together, it's about the animal health industry at an inflection point, projected to add $20 billion in value as we enter the next decade. With Elanco uniquely positioned to convert momentum across both pet and farm into sustainable, consistent growth. Simply, we will grow from both expanded market share and a growing industry.

Let's take a closer look. In Pet Health on Slide 23, we're seeing a fundamental shift in pet care as owners take a more active role, choosing not only what products to use, but how and where they access care. While vet visit volumes remain a metric to track, the more powerful shift is in the global consumer behavior where access, convenience and willingness to spend are becoming more material and more meaningful.

Today, subscription sales account for 40% of pet care dollars with omnichannel consumers spending 30% more annually than single channel shoppers. The pet owners behavior is changing. Our strategy is built around meeting the modern pet owners where, when and how they choose to engage. This unique omnichannel approach is core to our pet health strategy and is driving our industry-leading growth.

Over on the farm animal side, on Slide 24, we're capitalizing on the accelerating global animal protein consumption, which is projected now to grow at 5% annually in the U.S. alone. There are several key factors driving the real food movement, fueled by consumer focus on health and wellness.

First, 70% of U.S. consumers are actively increasing protein intake. Second, updated dietary guidelines now recommend nearly doubling current average protein use. Also, by 2035, 21% of Americans are projected to use GLP-1 therapies who will consume 40% to 50% more protein, and this trend is now globalizing. Increasing protein intake is a key also for mule retention with an aging population. The number of people over 60 is expected to expand by more than 25% globally by 2030.

And finally, taste still drives 2/3 of protein choices, making animal protein the most accessible, cost-effective preference. Strong demand for high-quality protein presents significant opportunities for Elanco and our customers, both in the near and long term.

To close on Slide 25, our strategic focus on growth, innovation and cash is clearly paying off, demonstrated by our strong performance in 2025 and the robust outlook for 2026 and beyond.

Elanco is a different company today, more agile, more innovative, more capable than ever before. We are building on our 70-year legacy of delivering for our customers, and we come into 2026, entering our new era of growth, well positioned to continue transforming animal care and to create long-term value for our shareholders. Thank you. With that, I'm going to turn it over to Tiffany 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.

[Operator Instructions] Your first question today comes from the line of John Block from Stifel.

Is that really an international share gains really stood out to me and implies switching to Zenrelia from the incumbent because you just really can't get that level of share that quickly in this market dynamic without switchers. So maybe, Jeff, just to kick things off, can you elaborate on the ramping internationals and Zenrelia share gains and then what that may mean for the U.S. if the label is altered positively down the road? And then I'll ask my follow-up.

Yes. Thank you, John. Thanks for opening with maybe one of the most exciting things in the quarter. Zenrelia is all about efficacy. As I said in my comments, every quarter, John, Zenrelia efficacy is more and more recognized and that is happening in the international markets. So that was in Japan 3 weeks ago. It's the buzz in the marketplace. We've exceeded 30% share there, acting very much like a differentiated best medicine product. Brazil is a very mature market compared to what people think, and we're a 40% share.

So yes, I would tell you that efficacy and in derm, it is all about stopping the dog's itch, and we're seeing that really resonate. In Europe, interestingly, even with the new competitive entrant we continue to climb and be the leading market share gainer in Europe, as I noted in some of the major markets. And again, it's coming back to clean labels high efficacy profile, and we do see this product with greater expectations and it's far exceeded our expectations in international. So more to come.

And as I step back, I think, to your linkage to the label, I think it's really important to understand that, hey, we now have 1 million dogs on. We've got -- we picked up 2,500 new clinics in the U.S. were nearly 50% in the U.S. 1.5 years of usage, 40 countries with clean labels with good pharmacovigilance data, and we're the only company out there using head-to-head efficacy studies, which I think also is significant. So we are optimistic, and we can talk more about the label. We're optimistic that with our submission into the FDA that we look forward to hearing a good response from the FDA soon.

Yes. And John, maybe I just maybe add on. Our guidance assumes the label as is right now.

Okay. That's helpful, Bob. And maybe I'll zoom out for the second question. Your the first industry leader to maybe be teed up for an earnings call post some of the news on the distributor side. So would love your thoughts on the [ Covetrus ] and [ MWI ] merger and what that may mean for manufacturers. And more specifically, Elanco as I believe you guys have a solid, broad relationship with [ Covetrus ], but it's certainly a lot of share going into the hands of [indiscernible]. So any thoughts would be great.

Yes. Thanks for the question. I have to start with the '25 momentum and '26 early fast start. We've got a great relationship with distributors. We're adding them a lot of value, and they're adding us a lot of value right now. The major distributors. You know they're very good at launching new products. And we're the only one -- today we have competitive advantage, I believe, strongly, and you probably picked us up at [ VMX ], Western last week, there's a lot of momentum in those distributors with the Credelio Quattro, the Zenrelia. We're the only company that really has our total comprehensive portfolio with them in a buy-sell agreement where others have actually retracted.

So we're focused right now on the current state. Of course, as the structure evolves, we'll continue to focus on value and the value they can provide, and that's the lens that we're going to look through. But Bobby and team, I think, have done an amazing job. And when you step back and look at U.S. Pet Health, we gained share in every category this year from derm to para to pain and also vaccines. And I attribute to contribute some of that to the distributors.

Your next question comes from the line of Michael Ryskin from Bank of America.

As on the results. I want to ask first on price. You guys called out accelerating price a number of times looking forward to 2026. I was wondering if you could quantify that a little bit more specifically. Just more broadly. In 2025, I think you had, we'd call it, introductory pricing or sort of initial go-to-market pricing for some of your products. For '26, is this just a matter of that being lifted and going more to a normal price? Are you taking the price more aggressively? Maybe you can just comment on how much of that is coming from the [ big six ] or the new products versus the rest of the portfolio? Then I've got a follow-up.

Sure, Michael. Thanks for the question. So a couple of points. One, I'll point you to Investor Day, right, where we did highlight we expect mid-single-digit growth, which does include price.

As we think about 2026, we do expect price to accelerate from where we were in 2025. 2025 as a reminder, was at 2% and really, that's reflecting the enhanced value we're bringing with innovation and our comprehensive portfolio that we're bringing to customers.

Jeff highlighted in his prepared remarks that in our U.S. Pet Health business here in the U.S., we took the highest price increase to vets in the last 5 years, all right? So we'll continue to price based on the value we're bringing to customers. I mean, the last thing I would highlight is you think about pricing in 2025, we had a lot of launches -- and those launches were not a contributor to price. We'll start lapping those in 2026. And so the Zenrelia and Quattro will have a pricing component in this 2026 year compared to 2025. So I would walk away with the expecting price to accelerate from where we were in the last 12 months.

Okay. And you had some relate comments when you were talking about Quattro in terms of not just the strong results you've seen with that product itself, but sort of the uplift for the rest of the portfolio, the ability to use that to gain share for other products as you bring a more complete portfolio to your customers. Just wondering how you think about that continuing in '26 as Zenrelia ramps, as you got Befrena coming on, maybe kind of tying that back to John Block earlier on distributors. Is it enabling you to become a better competitor as you go in for the big contract renewals, either with distributors or individual vet clinics. Just talk about the broader [indiscernible] you're getting from those.

Yes. Thank you, Michael. Great question. Yes, Quattro had a great quarter, definitely acting like best medicine, only major animal health company gaining U.S. Rx para share, which I think is a real representation and our share continues to climb, as we not only come to the fourth quarter, but even here in the beginning of the year, and we're still seeing more than 75% being new starts.

But I would point to a couple of things, specific number. We've got -- if you think about we're near 1/3 of the clinic, so 10,000-plus clinics, we got 2,600 that have actually by purchasing Quattro are now adding on additional products. So we're seeing that additive portfolio effect, I think, is definitely obvious. And we're seeing that confidence with the puppy index, as I mentioned, is it's climbing. It's the highest of all the major products, and it grew from Q3, and we're in the #1 position on that puppy index. So we see that.

I would also point to corporates. As I mentioned, it's on the slide, but I didn't get into it in my commentary, that we actually saw corporates really move in on this portfolio effect. So 90% of our corporates, which grew significantly in number, all of them grew only 13% grew in 2024. And the European team has done a masterful job. We've got all the corporates on the Zenrelia product as well. So we're seeing it with portfolio. We're seeing it with corporates. We're seeing the confidence from the corporates even in the Puppy index. So yes, we do expect this to be beneficial.

And then when we come with two derm products, right now, then we can say not only do we have as equal of a portfolio, we've got best medicine. We got best medicine in Zenrelia, Quattro, and we believe Befrena has got, again, differentiation. So I think you're onto a very important point.

Your next question comes from the line of Erin Wright from Morgan Stanley.

So can you speak to any stock destocking dynamics in the quarter or as we head into some of the seasonal purchasing from some of the distributors that typically happens in the first quarter. And one of your competitors, a very significant player in parasiticides historically is further deemphasizing, I think you alluded to this earlier, further deemphasizing distribution in 2026. I guess how much does that help your positioning in parasiticides, especially just continuing the conversion to combination parasiticide.

Thanks, Erin. Yes, and I know you've been engaged in some of the major industry shows. I'll just take the second question first, and that is that we see our relationship as good as it's ever been with distribution. They're adding a lot of value. and all the way down to the field force. They're working very much in collaboration with the largest sales force we've ever had in U.S. Pet Health ourselves.

So our share of voice has never been stronger on Elanco with our team and with distribution as well and then the investment we're making in the media.

Look, on stocking, it's real clear to us no change. We've got distributors ordering multiple times per quarter. There's a strong dispensing and you can see it, dispensing demand coming out of the clinics, the multiple orders going in, we don't see stocking having really any effect at all as we head into this spring.

And then can you give us an update specifically on the time line for the label update for Zenrelia in the U.S.? I think before, maybe at [ VMX ], you mentioned 5, 6 months, so now we should hear an update on that front. Is that still the case?

And then -- just where are you matching up? And I think you also alluded to this earlier, but where are you matching up to the existing competitor versus the new entrant in Europe specifically. So we don't have head-to-head data for new [indiscernible], but where are you seeing the vets actually use the different JAKs in Europe?

Yes. Thank you. Look, first of all, on the label, I just want to say, we are in a constructive dialogue with the FDA. They've made one adjustment to the labels. We mentioned we picked up 2,500 new users since then. I step back, Erin, as I just mentioned earlier, you've got 1 million dogs, 1.5 years of use, 40 countries with clean labels, strong pharmacovigilance data. We've submitted the PCR data before to get the first label change.

And then this was a request from the [ CVM ] at the FDA on the booster data and the package that we submitted in the fall. We've not given a date, but we are confident with everything that I just mentioned that we believe with this data, it allows us to get a label that looks a lot more aligned with the other 40 countries, and we do look forward to an FDA response and we'll update you when that happens.

Look, I think the story in Europe is it actually probably has profiled Zenrelia's efficacy in a more differentiated way than any market that we've been in. And not only the head-to-head study, but the head-to-head study is being seen by the KOLs in Europe in a very significant way. We're off to a much faster start than the other market entrant and double digit in the first months is something that does not look like an analog of a second or third to market products.

So where is it being used? I mean it's being used in first line in a lot of these big countries, like I mentioned, like France and Italy and Spain and off to a good start. And look, it's a small world, too. There's a lot of buzz from the Canada, Japan and Brazil markets as well. So more to come. We're coming into derm season as we get into that spring and summer, and that sets up well for Zenrelia.

Your next question comes from the line of Brandon Vazquez from William Blair.

Congrats on a strong end of the year here. I wanted to start for some of the guidance, maybe just push a little bit, just to understand if there's conservatism baked in here, if there's something we're missing because if I think of a price of 2 points in a volume of 5 points that gets you 7% growth in '25. We're talking about meaningfully more price coming through in 2026. And I don't think there's any reason that volume should meaningfully decelerate. So that algorithm already puts you above your initial 2026 guidance, the high end of that range. So again, like the question is, one, am I -- are we simply baking in some conservatism here? I want to make sure that we're not missing any big moving pieces that would meaningfully change that algorithm in the '26 guide.

So thanks for the question, Brandon. So listen, we feel great about the momentum that we've seen exiting 2025. And listen, our guidance is right in line with the framework we gave at Investor Day, so mid-single-digit top line growth, high single-digit EBITDA growth and low double-digit EPS growth. And again, we're going to be focusing on deleveraging and getting to that low 3s by the end of the year.

But listen, we feel great about the basket of innovation. We feel great about Elanco Ascend coming in. But listen, there's -- we're also in an environment where we see higher than normal inflation. We're being responsive and cognizant of competitive response. And as we mentioned at Investor Day, we're going to take a wide range of potential headwinds and tailwinds and be transparent on that. But listen, we feel good about the 2026 guide we gave is also the long-term algorithm we gave as well. And then the last thing I would maybe just highlight when you're looking at just growth trends. Keep in mind, we are lapping some significant growth within that basket of innovation. Our basket of innovation grew $400 million in 2025, and we've -- we're growing that $250 million here with the recent uplift additional $50 million that Jeff highlighted.

Great. And then one maybe follow-up is a little bit of a bigger picture question on the commercial side. I think in the past, we've talked about trying to more meaningfully get into the corporate accounts, you need a broader portfolio of innovation. You certainly had a lot of good products coming out. You have more coming, where are you guys today in terms of maybe what inning are you in getting into those big corporate accounts to draw some of that big volume? Is there are any kind of like portfolio gas left that you need. I think in the past, we've maybe talked about vaccines as being one of those areas. What is the last that you may need to do for the corporates and what's the time lines to start making -- moving that forward a little more?

Yes. Thank you, Brandon. So yes, a great finish to the year, our best corporate year, and I know more than 5 years, we've got a dedicated team. We brought in some additional expertise from industry competitors, and it has been a very big focus point for Bobby and the team and [ Chris ], and so a real credit to them, probably some of the best metrics as we look at lead indicators. So we're seeing growth we're in most all the clinics here in the U.S.

Befrena will be a big addition because you start to now say, "Hey, we've got everything that everyone else has and we believe they're differentiated". When you look at Befrena, having efficacy value and convenience differentiation, it last a minimum of 6 weeks. All of that's going to resonate really well. But I think our offers in our portfolio show that. And again, we see that in the results.

Europe has been tremendous. I mean, to see I'm really surprised by how quickly we got Zenrelia into all the corporates already. So that's been beneficial. But yes, if I had to point to what's next. I think the international pet vaccines will be important. And that's going to take some time. We know that. Vaccines are continued to be a focus point for us. But as a whole, look for a corporate impact to be a really nice growth driver for us in 2026, and it really comes from the team's working really hard on building best in industry teams.

Your next question comes from the line of Daniel Clark from Leerink Partners.

Just wanted to, I guess, first start with Quattro. The further gains via the kinetic index that you saw in the quarter, was that sort of in line with your expectations from a couple of months ago? Or was that incremental upside.

Well, I think it's, as we said, to see the jump we had in third quarter and then exceeded again in the fourth quarter. and being the leader in the puppy index, I always have looked with my many years in this industry, the Puppy Index is definitely where people are leaning in and saying, "Hey, this is this is the opportunity". And if I'm going to put you on a product, I'd like you to start on the best that's available today. And I think that's a real statement about Quattro, four active ingredients, four dimensions of differentiation. We've added palatability, which has really come out as a , we think that the fourth -- now dimension of differentiation.

As I mentioned in my trends earlier, Daniel, I think the to comment around 70% of new puppies are in international markets, getting the Australia approval last week and starting the global approvals of Quattro will also be advantageous. So yes, good trends and a nice opportunity here with Quattro. And hey, this space grew 30% last year.