Prepared remarks
Thank you for joining us. Welcome to Elanco Animal Health's Third Quarter 2025 Earnings Conference Call. I will now pass the call to Tiffany Kanaga, Vice President of Investor Relations and ESG. Please proceed.
Good morning. Thank you for joining us for Elanco Animal Health's Third 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. 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 strong third quarter results build on our consistent priorities of growth, innovation, and cash. As highlighted on Slide 4, Elanco continues to deliver, growing 9% organic constant currency in the quarter and outperforming the high end of our guidance for revenue, adjusted EBITDA, and adjusted EPS. Growth was led by U.S. Farm up 20% and U.S. pet health up 9%. This marks nine consecutive quarters of underlying total growth and our highest quality of growth in the nine quarters. Innovation continues to exceed expectations, achieving $655 million in year-to-date revenue. We are further raising our full-year expectations by an additional $100 million at the midpoint to $840 million to $880 million. The consistent outperformance reflects broad-based momentum from our diverse basket of innovation across geographies, species, and products large and small.
The portfolio benefits of our newer products are also driving more stability in our base business. Our strong focus on cash and operational execution improved our net leverage ratio faster than planned to 3.7x at quarter-end. We now expect to end the year at 3.7x to 3.8x. Additionally, we refinanced our $2.1 billion Term Loan B facility, extending the maturities through 2032. We expect our balance sheet to be in a strong position as we exit 2025. On tariffs, our intervention actions, FX tailwinds, and year-to-date execution are mitigating potential impacts and risks. We continue to expect a 2025 net impact of $10 million to $14 million and believe any likely tariff risk scenarios are covered in our 2025 guidance. With our consistent outperformance, we are well positioned to raise our top and bottom-line outlook. For the full year, we now expect organic constant currency growth of 6% to 6.5%, adjusted EBITDA of $880 million to $900 million, and adjusted EPS of $0.91 to $0.94.
This guidance raise considers the dynamic macro environment and our confidence in the underlying momentum, agility, and strength of our business. We are turning strategy into results, providing a long runway for shareholder value creation. Looking at the third quarter revenue performance on Slide 5, 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 another solid quarter, up 9%. We saw growth in the vet clinic driven by Credelio Quattro and Zenrelia and also at retail through our OTC parasiticides. It is clear that our innovation insulates us from vet visit volume declines and benefits the broader portfolio with Galliprant and vaccines also showing growth in the quarter. Moving to international pet health. We achieved 8% organic constant currency revenue growth, driven by Zenrelia, Credelio, and AdTab.
We are very pleased with the early results for the Zenrelia's launch in the EU and Great Britain, following our success in Brazil, Japan, and Canada. We expect geographic expansion to be a tailwind for our basket of innovation in the coming quarters and years. U.S. Farm Animal delivered an outstanding quarter, up 20% on top of 11% in Q3 of 2024, bolstering our market leadership. Cattle led the way with strong growth for Experior and Pradalex, poultry vaccines also contributed to the quarter. Finally, international farm animal was up 5% in organic constant currency with growth coming from poultry and ruminants. As expected, the quarter was modestly impacted by some pre-tariff buying shifting to Q2 from Q3 to satisfy customer demand, primarily in China. Overall, we're encouraged by the performance of the business, supported by strong animal protein markets. Looking at Slide 6. We delivered $655 million of innovation revenue year-to-date with outperformance across a diverse basket, led by Credelio Quattro, Experior, AdTab, and Zenrelia.
We are again raising our innovation guidance for 2025 by $100 million at the midpoint of the range to $840 million to $880 million. This target reflects several large margin-accretive products, and they are gaining traction in the marketplace with our no-regrets launch approach. Let's further discuss the progress of our major innovation products on Slide 7, starting with Credelio Quattro. In early September, Quattro became Elanco's fastest pet health blockbuster in history and one of the industry's fastest ever, reaching blockbuster status of $100 million in net sales in less than 8 months. This is especially notable with a single geographic approval. We're seeing incredibly strong demand for the all-in-one products from both pet owners and veterinarians pushing the U.S. broad spectrum endecto market to $1.4 billion today with growth at almost 40%. We believe Quattro is best medicine and its fastest-growing animal health market, and our product is not only expanding the market even further, but we're also gaining share ahead of expectations.
These gains grew from the second quarter, both into and out of the clinic. Our strategic DTC investments, our expanded sales team, and distribution partners are all driving the success of this launch, as veterinarians and pet owners clearly appreciate Quattro's three dimensions of differentiation. First, Quattro has broad coverage. This includes multiple species of tapeworms. And following a recent label update also includes protection against the black-legged and longhorn ticks for prevention of Lyme disease. Second, Quattro kills ticks twice as fast as the competition as detailed in a published head-to-head study. And third, Quattro has heartworm coverage from month one. We've also received positive feedback from vets and pet owners praising its great palatability. Introduction of Quattro has bolstered our broader Elanco portfolio in clinics as we now offer veterinarians a complete ecto, endo, and endecto portfolio with a variety of parasiticide coverage at a variety of price points to meet veterinarian and pet owner needs.
This more complete portfolio is especially enhancing our offering for corporates where we've historically under-indexed. Cannibalization has been limited as approximately 70% of Quattro share capture has come from the competitive product switches, new starts, or repeat patients. Our product ranks highest on the Kynetec Puppy Index versus other broad spectrum endectos. This is supported by our puppy program and DTC investments, but mostly by the differentiated product profile and performance. Looking ahead, we are excited about Quattro's international rollout with launches expected to start in 2026. Next, on Zenrelia. We are seeing strong momentum and positive developments on several fronts as we make further inroads into the $2 billion global dermatology market that is consistently growing at a double-digit rate. We estimate our market share at approximately 5% in the countries where we have launched.
Zenrelia posted its best quarter since launch. As we move through peak allergy season sales accelerated nicely, nearly doubling globally compared to the second quarter. Over 12,000 U.S. clinics are buying the product, up from 10,000 in August, and the reorder rate also continues to climb now over 80%. We have continued to achieve growth ahead of our expectations with more first-line treatment use and willingness to use, a reflection of Zenrelia's efficacy, convenience, and value. We are also expanding the market with approximately 18% of Zenrelia patients being new to therapy. Zenrelia's momentum in the U.S. was particularly strong at the end of the quarter with a label update in September. Upon evaluation of submitted data, the FDA concluded that the totality of evidence supports the removal of vaccine-induced disease language, which has been subsequently removed from the Zenrelia label in the U.S. This development has sparked new interest among veterinarians and increased pet owner acceptance.
Also, Elanco has recently submitted additional new data to the FDA Center for Veterinary Medicine seeking to further update the Zenrelia label in the U.S. This data, peer-reviewed and published, evaluated Zenrelia's impact on dogs' immune response to common booster vaccinations. Our aim is to amend the vaccine warning to make the U.S. label more consistent with the other major geographies where it's already approved. Overall, we believe this data combined with 13 months of positive use in the U.S., along with 35 country approvals, all with non-restrictive labels support further positive change to the U.S. Zenrelia label. In the $700 million derm market outside the U.S., Zenrelia continues its good progress, launching in the European Union, Great Britain, and now Australia. You remember, we completed a head-to-head study in Europe versus the marketplace incumbent as part of the EU approval process.
We are encouraged by the early results in these geographies, reflecting the head-to-head data and overall strong efficacy of Zenrelia. The newest launches follow success in Brazil, Canada, and Japan. Notably, Zenrelia has double-digit percent market share in these markets, supporting our long-term belief in the product with a clean label. We believe the consistent key driver to Zenrelia's increased momentum is product testimonials on its differentiated efficacy profile. Now our OTC parasiticide product AdTab. In Europe, it continues to achieve good growth with sales up more than 25%. AdTab's robust trajectory is fueled by the April approval and launch in the U.K. and supported by data-driven strategic DTC investments. AdTab is now the market leader in the European ISOC OTC market and the only product in the space that can be used in both dogs and cats. Finally, on CPMA, our treatment for the deadly canine parvovirus we do expect growth to remain tempered in the near term.
We are working to expand access to shelter promotions. Moving to farm animal. Experior continues to grow rapidly, up 70% in Q3 on top of more than 100% growth in Q3 of 2024. We continue to benefit from the historically small U.S. cattle herd size, which reached the lowest midyear count in more than 50 years of record keeping. This dynamic is driving stronger producer economics and sticky demand with Experior's customer retention rate remaining over 90%. Looking ahead, Experior does face stronger comparisons as it laps the combination clearance for heifers. However, there are early positive signs of herd rebuilding, representing a multiyear tailwind. We see significant runway for this blockbuster and the benefits of its portfolio synergies and an estimated potential market of over $350 million in the U.S. and Canada, with geo expansion as another expected tailwind over the longer term. Lastly, regarding Bovaer, the product continues to grow, but at a more measured pace than initially projected.
We see consistent demand from CPG brands, which supports sustained interest and consistent cow numbers. As we've seen with other innovative farm animal products, the adoption curve can take time. However, our experience shows that once these products are integrated and their value realized, they become sticky, providing significant and lasting benefits to farmers. Overall, we continue to see substantial value in Bovaer for both our CPG partners and the producers we serve. Moving to Slide 8. We offer some recent highlights across the three parts of our IPP strategy, Innovation, Portfolio, and Productivity. First, on Innovation. Ellen and her team have refilled the pipeline and are progressing our next wave of blockbuster products. She's created an organizational capability to generate a consistent flow of high-impact innovation. More near term, IL-31 remains on track for commercialization in the first half of 2026.
We are in the final stages of the USDA dossier review. Given our data submissions and constructive conversations with the USDA, we're cautiously optimistic that the product will be approved in the fourth quarter. However, the lack of ADUFA timelines and the government shutdown introduced some potential for variability beyond our control. Our commercialization timeline can absorb a modest potential delay from the shutdown and perhaps, most importantly, this year's progress and growth innovation and cash has clearly demonstrated that our results are driven by our total portfolio. As our diverse portfolio of innovation scales, it also stabilizes our base business, driving overall industry-leading growth. Our U.S. Farm Animal business is consolidating its leadership, having achieved 11% growth on a trailing 12-month basis, led by beef cattle. At the same time, our life cycle management efforts continue to strengthen our portfolio.
For example, Credelio recently became the first ever FDA product to receive emergency use exemption for treatment of New World screwworm in dogs. Price is also an important portfolio growth enabler. We have achieved 2% price growth year-to-date, and we continue to expect the full year to also be up 2%. While pricing was flat in the third quarter, this performance aligned with our expectations, representing fluctuation in customer and product mix. Remember that our newest launches like Quattro are not reflected in price. Our strategy continues to align price with customer value. Finally, on productivity, we continue to rapidly pay down debt and strengthen our balance sheet. We now expect to improve our net leverage ratio by 2 turns in just 2 years with the under 3x milestone in sight in 2027, especially as our company-wide margin enhancing initiative, Elanco Ascend, drives meaningful efficiencies beginning next year.
Our recent debt refinancing further strengthens our balance sheet with an improved capital structure that both extends our maturities and lowers our cost of debt. We expect our net leverage ratio to benefit on multiple fronts ahead, growing EBITDA and debt paydown. And on the manufacturing front, we remain on track for a strategic expansion of our facilities in Fort Dodge, Iowa, and Elwood, Kansas, with the latter supporting our MAB platform for IL-31 and beyond. With that, I'll pass it to Bob to review our third quarter results and financial guidance.
Thank you, Jeff, and good morning, everyone. I will focus my comments on adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in reported results. Starting on Slide 10, we delivered $1.137 billion of revenue, representing an increase of 10% on a reported basis. Organic constant currency growth was 9%, primarily driven by an increase in volume. As anticipated and as Jeff noted, price was flat in the quarter. On Slide 11, you'll see revenue by the four quadrants of our business. Globally, pet health revenue increased 8% in constant currency in the third quarter. In the U.S., pet health delivered 9% growth, driven by demand for our key innovation products, Credelio Quattro and Zenrelia. Outside the U.S., our pet health business grew 8% in constant currency, with growth led by Zenrelia. Moving to farm animal. Our global business achieved 10% organic constant currency growth.
The U.S. farm animal business grew 20%, driven by the strength of Experior and poultry vaccines. Outside the U.S., the farm animal business contributed 5% growth in organic constant currency, driven by cattle in Europe and poultry in both the LatAm and APAC regions. Continuing down the income statement on Slide 12, gross margin increased 90 basis points to 53.1% primarily driven by productivity from increased volume. Our operating expenses grew by 7% year-over-year, largely driven by strategic investments in the global pet health product launches. The increase was slightly below our 8% target as some expenses will shift to the fourth quarter. Interest expense totaled $34 million representing a $12 million reduction from the same period last year. This decrease reflects our continued progress in deleveraging. On Slide 13, we provide walks to illustrate our year-over-year performance and adjusted EBITDA and adjusted EPS.
Adjusted EBITDA was $198 million, an increase of $35 million. Adjusted EPS was $0.19 in the quarter, an increase of $0.06 year-over-year. On Slide 14, we provide an update on our cash, debt, and working capital. Cash generated from operations was $219 million in the quarter compared to $162 million in the same quarter last year. We ended the quarter with net debt of approximately $3.3 billion and a net leverage ratio of 3.7x, better than expectations. Now moving to Slide 15. We have communicated a consistent capital allocation strategy with debt paydown as a primary use of free cash flow. We are pleased with the progress we have made on deleveraging this year, having already exceeded our 2025 debt paydown target with gross debt paydown of $562 million. We expect to end the year with net leverage between 3.7x and 3.8x. Longer term, we aim to be under 3x levered and anticipate capital allocation flexibility below that level.
On Slide 16, we provide an update on our debt capital structure. On October 31, we successfully refinanced our $2.1 billion Term Loan B facility into three new debt facilities. Importantly, this refinancing activity improves our debt portfolio's maturity risk profile by extending the 2027 maturity to 2029 and 2032 and reduces our cost of debt. Looking ahead to 2026, we forecast interest expense to increase by approximately $15 million year-over-year. The projected increase is due to 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. The increase is inclusive of the interest savings secured through our recent debt refinancing transaction. Now let's move to our guidance, starting on Slide 18. We have consistently delivered on our commitments this year. And this momentum gives us confidence to once again raise our full year expectations.
We now expect to deliver organic constant currency revenue growth of between 6% and 6.5% versus our previous outlook of 5% to 6%. We are increasing our expected reported revenue range to be between $4.645 billion and $4.67 billion, inclusive of an expected $30 million tailwind from foreign exchange rates since our August earnings call. Slide 19 provides year-over-year bridges for 2025 adjusted EBITDA and adjusted EPS. And Slide 28 in the appendix provides a number of additional assumptions to help support your modeling efforts. We are also raising adjusted EBITDA guidance by $20 million at the midpoint of the range. The increase reflects our $28 million outperformance in Q3, partly offset by $10 million of increased investments in our recent launches and $5 million in shifted timing. We're also passing through the $15 million in FX tailwinds for adjusted EBITDA that was previously held back with macroeconomic uncertainty, half of which benefited the third quarter results, with the remaining expected to benefit the fourth quarter.
For adjusted EPS, we are raising our guidance by $0.05 at the midpoint, bringing the new range to $0.91 to $0.94. On Slide 20, we continue to expect a net impact of $10 million to $14 million on adjusted EBITDA in 2025 due to previously announced tariffs. This estimate is included in our guidance and considers our multiple mitigation strategies. For 2026, we will continue with our prudent and balanced approach to guidance and proactive interventions as we navigate potential changes in tariff exposure. Our fourth quarter guidance presented on Slide 21 includes organic constant currency revenue growth of 4% to 6%. On a reported basis, we expect $1.085 billion to $1.11 billion in revenue. The year-over-year increase in operating expenses is expected to be approximately 10% in constant currency, including the incremental DTC investment and a shift in timing of some expenses. As a result, we anticipate adjusted EBITDA of $168 million to $188 million and adjusted EPS of $0.09 to $0.12.
Finally, as usual for this time of the year, we provide some preliminary context on our expectations for 2026 on Slide 22. We see a clear path for sustainable competitive revenue growth through our diverse portfolio of innovation, continuing to scale globally on top of a stabilizing base. This innovation helps to insulate us from macro headwinds like declines in U.S. vet visit volumes. Price should also contribute to our revenue growth. In pet health, while we recognize pressures for competitive launches, we believe we are well positioned to gain incremental share, both in the U.S., where our corporate offering benefits from our more complete portfolio and globally as we launch our innovation in new markets. We also expect to build on our OTC pet health retail leadership. On the farm animal side, while we are facing difficult comparisons, especially in the U.S., there remains a runway for continued solid growth driven by our new products in cattle and favorable producer economics.
We expect to bolster our leadership in cattle and poultry. We continue to expect EBITDA margin expansion beginning in 2026, led by general and administrative cost savings and manufacturing efficiencies under the Elanco Ascend program. This is a company-wide initiative that we anticipate will drive additional productivity and capabilities in key areas, as we're looking beyond the margin benefits we can actually capture through better mix, consistent growth, and moving past heavier launch investments in 2025. There's more we can do in digital, automation, and AI to leverage those capabilities across the organization. Procurement is working to identify opportunities with suppliers to help offset inflation. Tariffs remain a headwind and a risk but have been manageable to date with our strong execution and proactive mitigation plans. Lastly, as I shared earlier, we expect a step up in interest expense in 2026 of approximately $15 million.
From a cash perspective, we expect accelerating free cash flow to fuel additional debt paydown with net leverage improving towards our goal of under 3x. Now I'll hand it back to Jeff for closing comments.
Thanks, Bob. Elanco knows our charge, consistent, reliable delivery to our customers and shareholders. and I'd like to thank our teams for the disciplined execution and the delivery this quarter. Employee engagement is at a high in Elanco, which I believe is a strong leading indicator, demonstrating confidence in our future. We know the hard work continues in this competitive, fast-growing animal health industry and we are committed to continue to deliver for our customers. I see a durable path forward. our IPP strategy is driving results, positioning us well to raise our 2025 guidance even in a dynamic global backdrop. Elanco is clearly in a new era of growth and innovation, with significant opportunity for continued shareholder value creation. We look forward to sharing more on our strategy, our financial outlook, and our innovation pipeline at our December 9 Investor Day. With that, I'll turn it over to Tiffany to moderate the Q&A.
Thank you, Jeff. We would like to welcome questions from as many callers as possible. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.
Questions and answers
Our first question comes from Umer Raffat from Evercore.
Congrats on the quarter. I wanted to clarify something, Jeff, you mentioned, unless I heard it wrong, did you say Quattro did $100 million in 3Q? And if so, what does that mean for the innovation basket excluding Quattro on a year-over-year basis? And then secondly, to the extent Quattro is annualizing in that $300 million to $400 million range right now, what do you see as a realistic peak sales potential? I guess, thinking out loud, why can or can't it be $1 billion at peak?
Thanks, Umer. I appreciate the question. Yes, let me clarify. We announced in September that it had reached $100 million in the year up until September. So it wasn't in the third quarter. Let me clarify that. But let me put a little color, though, to the question. There's no question, we believe that this is our fastest blockbuster to date. It's only in one country and to reach that in 8 months. I think it shows a lot about the value of the differentiation of the product. A little bit more color just on the product itself. I think the differentiation is playing out in the field as well as we're not only taking share, but the broad spectrum endecto market continues to grow. It's a $1.4 billion market Umer. It's growing at 40%. So we've got the rise of the market combined with the share that we're taking. And we're only in 1/3 of the clinics at this point in time. So we're adding business inside the clinics we have with a return rate of over 80% of reorder rate.
And at the same time, we're seeing really positive indicators. And one I'd point to is actually the Kynetec data on the puppy index. I mean, today, we've got the highest puppy share overall. And when you look at that, that means that puppies are a higher percentage of our total Quattro patients compared to any competition. And this is a lead indicator of the vets confidence in this product and that this product, I've said, has been best medicine. I now believe it has the potential. And in my eyes, it is the best-in-class product and the fastest-growing animal health market. So it's set up well. There's a lot more room to grow. We'll be globalizing this product with international approvals next year. And we see really, really nice upward opportunity.
Our next question comes from the line of Jon Block from Stifel.
Jeff, I'm going to start with maybe just asking for a little bit more color on the U.S. Zenrelia, call it, like cleaner label aspirations and maybe the timing behind that initiative? I know you took a step forward. You mentioned the share gains accelerating exiting 3Q. But I mean, obviously, removing the box warning would be a big step forward. And I'm asking because you also referenced, I believe, the higher share gains in the international markets for Zenrelia despite being there for a shorter period of time. So I would love any color on what needs to get done and then maybe the timing behind that? And then I'll ask a follow-up.
Yes, Jon. I want to highlight the three markets where we first launched this product outside the U.S., which are Japan, Canada, and Brazil. We have seen double-digit market share in those regions. In my 36 years in animal health, I've never encountered a product with the efficacy and testimonials we’ve reported this past year with Zenrelia. This market is growing significantly, and it has unmet needs. Our product stands out clearly. It's also getting off to a good start in Europe. We have a comprehensive approach regarding the label. Initially, we had the PCR data that allowed us to remove the vaccine-induced disease from the label. In the past quarter, we submitted another set of peer-reviewed published data focused on the booster aspect. We believe that this combined data will meet the FDA’s requirements, along with the 13 months of usage experience in the U.S., which includes over 0.5 million dogs.
All of this will support a label update to align more with the international markets. Furthermore, since the label changes in September and October, we're adding close to 2,000 clinics per quarter, and the monthly sales per clinic in the U.S. have nearly increased by 50% since Q1. Our customer base is becoming more loyal, and we are shifting towards more first-line treatments due to the positive feedback on efficacy. There is more to come, and our regulatory strategy is on track, representing a significant milestone with the recent data submission. What would you like to follow up on, Jon?
Yes, no, that was great color. And then maybe for the follow-up, and Bob, this might be for you. But the 2025 EBITDA guidance, the midpoint is now $890 million, it's up from the initial. I think I got this right, of $850 million. But importantly, that's with a good amount of incremental OpEx investments all throughout 2025 along the way. So I'm curious where you guys are with those incremental OpEx investments. How do we think about that going into '26? In other words, does that continue to occur? Because maybe this is just a moving target. In other words, as you continue to see favorable returns do you just sort of keep your foot on the gas. So just maybe asking for some context in that regard.
Sure. Thank you for the question. You're correct that our previous EBITDA guidance was between $850 million and $890 million. We have now updated that range to $880 million to $900 million, reflecting a raise at the midpoint driven by a $28 million outperformance in Q3. I want to emphasize that this includes $8 million from foreign exchange, with an additional $7 million expected in Q4. However, we are also facing two offsets: an increase of $10 million in operating expenses and our ongoing commitment to a no-regrets approach to launches. We are very pleased with the innovation basket, which has raised expectations by another $100 million. We will continue to rely on a data-driven strategy with direct-to-consumer efforts to boost our top line. I've recently met with the team, and the data indicates our marketing is effective, leading to top line growth. Looking ahead to 2026, we will maintain our data-driven approach to guide our actions, and I expect to see growth in our top line, EBITDA, and EPS, supported by strong market fundamentals and the excellent performance of our products.
Our next question comes from the line of Andrea Alfonso from UBS.
Congrats on a nice quarter. Just a quick question on the slide outlining the early considerations for '26. We did notice that there was a call out on consumer macro pressure and U.S. debt visit declines. It seems to be a bit of a newer call out versus when you outlined considerations for 2025 a year ago. So just curious if anything has changed structurally in 3Q versus 2Q, thoughts on the makeup of the non-wellness visits and whether there's been some consumer reticence around the use of therapies. And it also does seem that third-party data is showing some improvement, at least on the non-wellness side. So curious if that mirrors exactly what you're seeing thus far.
Yes. Maybe I can answer a few of those questions. Andrea, and I'll let Jeff pipe in. But really, nothing's changed quarter-over-quarter with our considerations. We are taking a grounded and disciplined approach to guidance, and so we'll be consistent in how we guide. And so just being consistent with prior years, we're showing early considerations. And obviously, competition is something that we have our eyes on and feel very good about where we are for 2025, but we're taking a balanced approach. And obviously reflecting on not only competition but the macro environment as we think about next year.
Let me address vet visits. They are significant and provide stability, but I believe they might be somewhat overstated. We are confident that we are insulated from their impact as we move forward. This confidence stems from the robust markets we are involved in and our strong strategy. Firstly, we are operating in rapidly growing markets, with endecto up 40% and derm up 13%. Secondly, we have a unique innovation pipeline and the best medicines in our category, allowing us to gain market share with products like Zenrelia, Credelio Quattro, and the upcoming IL-31. Thirdly, our diverse portfolio sets us apart, as we are one of just two companies capable of providing such breadth. This quarter, we are witnessing both pain management and vaccines showing growth. Additionally, as we have integrated Bovaer, our omnichannel strategy is proving effective. We have the largest vet sales team we’ve ever assembled, coupled with strong media support and unique distribution agreements that give us a competitive edge.
Furthermore, we hold the position of being the leading pet retail company, allowing us to reach more pet owners at a variety of price points than any other animal health company. This positions us well to remain resilient in the face of vet visit trends and consumer behavior. We are entering this period as one of the most durable and competitive players in the animal health sector, and I view our outlook positively, not only for 2025 but certainly into 2026.
Our next question comes from the line of Michael Ryskin from Bank of America.
Great. Congrats on the quarter and the update. I want to go back to something I think that Jon touched on in an earlier question on the margins and just sort of the investments needed to sustain it, especially around the innovation component. I think you've seen really good traction with Credelio Quattro, obviously, so far, Zenrelia seems like it's accelerating very, very nicely. As we think about going into year 2 and year 3 of these, very competitive markets, you're going to see more competitive entrants from Merck. Can you talk about how you think about that no regrets approach to supporting them going forward? How should we think about incremental margins as these ramp and become over $100 million, over several hundred-million-dollar products? What should that ramp look like in year 2, year 3, year 4 launch? Because this should become meaningfully margin accretive. I'm just trying to think through the timing of that relative to the investment needed to support them.
Yes, Michael, I'd like to share a few comments on this, and then I'll have Bob provide some insights from an investment perspective. Our no regrets approach has been in the works for multiple years as we've built our capabilities by hiring expertise from across the industry and ensuring we have strong lead indicator data. We're globalizing faster than ever before, and our differentiation is substantial. Even as we enter the competitive dermatology market in Europe, early indications show that we have a unique product. Our launch capabilities are among the best in the industry, allowing us to showcase our innovation and differentiation in expanding markets. For instance, 18% of Zenrelia's usage comes from first-time users, which helps grow these markets, and we are committed to further investment, yielding significant returns. We're also structuring our organization to maximize our presence, focusing first on our team, then on distribution, and finally on omnichannel opportunities. Overall, I believe we have a strong competitive position, and our portfolio is not reliant on a single product. We have a robust range of products, and our para portfolio is among the strongest both within and outside of veterinary clinics. Now, Bob, could you share your thoughts on our investment philosophy and the data we're analyzing?
Yes. So thanks, Jeff. So listen, I would highlight that this basket of innovation already has margins above our corporate gross margins, all right? So that's the reason we continue to lean in. And again, using data to support the effectiveness of our DTC. But as I think maybe just holistically about margins, we're going to continue to see growth. And so by leveraging our existing cost base, we're going to see natural margins come through just the volume as well as the natural mix. And then I want to again re-highlight what we talked about last quarter is launching Elanco Ascend. And that's going to help us go beyond just the natural mix benefits of the innovation as well as the volumes. But really helping us be proactive in accelerating efficiencies across the organization, and that's going to be not only within our four walls and manufacturing facilities. It's going to include G&A, but also our procurement team is doing a fantastic job already leaning in and finding cost savings across the organization. So with that being said, like listen on Investor Day here in a month, really looking forward to sharing more about the direction of the company and sharing a lot more on Elanco Ascend.
All right. And can I squeeze in a quick follow-up. Really strong growth in livestock, not just this quarter in farm animal, but a couple of quarters in a row. You've also seen really strong results from Zoetis, from Phibro, and Merck on this. Like longer term, we think of livestock as a low to mid-single-digit market. It seems like '25 is a particularly good year for everybody. Could you just give us an update on sort of what's driving that? How sustainable that is? Is this a one-year cyclical event? Or is this a multiyear event? Just how do broad start I think about livestock in '26 and '27, maybe?
Yes, Michael, as we've discussed before, one of the more overlooked aspects of Elanco and our industry is that farm animal health is still larger than pet health. It's a very global market. I want to highlight a few points regarding the industry and Elanco. We are witnessing a growing demand for protein, which has rebounded significantly. For instance, the U.S. dairy industry has surpassed $10 billion in investment due to this trend, and we anticipate a new dietary guideline in the U.S. that may boost the consumption of saturated fats, dairy, and animal protein. There's a resurgence happening. I spoke yesterday with a CEO from one of the largest firms, and they are observing growth globally and expanding their operations. This context is crucial. When it comes to disease prevention, food safety, and productivity, producers are profiting, and they are willing to invest because the value of each pound of protein is more significant now than it has ever been.
This is essential. We focus on ruminants, dairy, beef, and poultry as areas where we believe we can gain a competitive edge. Our strategy is clear, and we will have José Manuel de Simas and Ramiro, who are two of the best in the industry, to emphasize our four-part strategy: innovation, a winning portfolio, value beyond products, and competitive customer engagement. This strategy is effective. It isn't solely reliant on Experior; it has also involved creating successful portfolios, particularly in ruminants and poultry, and we will provide more insights on this in December.
Our next question comes from the line of Erin Wright from Morgan Stanley.
This is Linda Bolduc speaking for Erin Wright. Considering some recent competitive launches in the market and in parasiticides, how has the situation changed for the company in the third quarter and so far in the fourth quarter? Additionally, how much competition is factored into the latest guidance, and will this increase significantly in 2026?
Yes. We have the competition in our guidance ranges for 2025, and we've got a good view on it for 2026. And specific to the para market, as I've highlighted, we've not seen any impact on competitive entries and especially the broad-spectrum endecto market that's grown 40%. We've really observed also no real material impact on new para competitors, even in the international markets. So I think in the lane that we are competing in, we see a very strong marketplace. And then again, our differentiated portfolio is allowing us to take share.
That's great. And any additional color for the topics covered in the upcoming Investor Day in addition to Elanco Ascend?
Yes. Thank you for the question. We've reached out to our investors, and what we're planning is for the content to reflect the investor feedback. We understand your desire for more clarity on our growth trajectory, margin improvement, and the Elanco Ascend opportunity. You will also see aspects of our pipeline and our leverage reduction plan. We will focus on our IPP strategy. Most importantly, you'll have a chance to meet and hear directly from the executive team. So again, December 9 in New York City, and I'm looking forward to an efficient, high-value three hours from 9 to 12.
Our next question comes from the line of Daniel Clark from Leerink Partners.
I wanted to ask on the innovation sales, obviously, target up a fair amount once again here. Can you just help break out maybe what the drivers or main products of that guide increase were? And how should we think about growth of the innovation basket as we look ahead to next year?
Yes. So thanks for the question. So again, we're really pleased with what we've seen already on the basket of innovation. We did raise the guide by $100 million, as Jeff has highlighted. I do want to highlight a bit on timing, right? So as you think about the first half of the year. We are more weighted just due to the seasonality of the business with parasiticides more weighted in the first half. And AdTab specifically in Europe is a first half-weighted product we have. But we think about this as a basket. Now, that being said, I'd tell you, in the year, we're seeing great progress with Experior, AdTab, Credelio, and Zenrelia and more specifically in Q3. But as we think about moving forward, listen, we've got a lot of momentum going into 2026. We're in growing markets, and we're seeing share improve as well.
Our next question comes from the line of Chris Schott from JPMorgan.
This is Ekaterina on for Chris. Congrats on the quarter. So first question is just on Zenrelia and any initial thoughts on the launch in Europe. Just how that's trending relative to your expectations? And any surprises as you kind of think about the competitive landscape and just level of promotional activity you're seeing? And then second question is just on Credelio Quattro. Do you have a sense of what percent of your volume is coming kind of from the vet clinic versus online? And how do you see that changing over the next several quarters? And any interesting trends you're seeing as you kind of look at both channels.
Yes, thank you. We have launched in Europe and Great Britain, and it's still early days. However, we are performing better than our launch expectations and have made a very fast start. The key point is that our head-to-head non-inferiority study against the incumbent is gaining traction in the marketplace. We are utilizing that data with customers, and early testimonials indicate that this product has a strong efficacy profile, along with convenience and overall value. As I mentioned, in earlier markets like Japan, Brazil, and Canada, we have moved into double-digit market share, and those trends are continuing. We will keep you updated. Regarding Quattro, as I mentioned earlier, there is a rapidly growing market in the U.S. We have achieved nearly $100 million in less than 8 months in one country, making it the fastest blockbuster we have observed, with much more potential for growth. We are adding close to 2,000 clinics each quarter, and approximately 75% of our growth is coming from competition switches, new starts, and repeat patients. The puppy index is a strong lead indicator supporting our growth outlook. We anticipate that this profile will also translate well into international markets. With Credelio Plus already in place, we believe that introducing Quattro to these markets will also support our growth for 2026.
Our next question comes from the line of Brandon Vazquez from William Blair.
I'll ask two upfront, a little bit related in terms of run rates into next year into 2026. So you were talking earlier about OpEx growth and no regrets kind of investment, which clearly has been coming to fruition within the sales growth and even, frankly, within profitability growth. The question being, I think you said expectations are now for 10% OpEx growth for the year. As we go into 2026. Is there a tail on some of these investments? Or should we be basing around kind of a double-digit OpEx growth into next year as well? Basically asking, can you modulate those back? And then similarly, for '26 on the top line, the follow-up that I'll just ask now is you give a helpful slide on the tailwinds and the headwinds going into next year. I think encouragingly, this is the first year in a while that there's a lot more tailwinds than there are headwinds. So is it safe to assume that we should be modeling, I think like the Street has an acceleration of the business into 2026.
Yes, let me provide a couple of key points for your consideration. The 10% figure refers specifically to the quarter, not the entire year. We will continue to base our investment decisions on data. I want to emphasize the Elanco Ascend initiative; we plan to excel operationally in general and administrative expenses. If you review our 10-Q, you'll notice our G&A costs have actually decreased year-over-year. However, we are increasing our investment in research and development, direct-to-consumer efforts, and marketing. I expect this trend of operational excellence to persist as we integrate Ascend. Regarding your inquiry about the tailwinds and headwinds for 2026, we are operating in a robust market. Our products are performing well, and we are entering 2026 with strong momentum. As we stand today, we anticipate growth in our top line, EBITDA, and earnings per share.
Our next question comes from the line of Navann Ty from BNP Paribas.
Can you discuss the pricing and promotional strategy of Zenrelia and Quattro including the extent and the length of promotional activity? And then I have one on Bovaer. Is that status quo on governmental incentives? And can you discuss the progress on pivoting to productivity focus.
Thank you, Navann. In the U.S., we initially priced Zenrelia in the market, but we've made some adjustments, now offering a 20% discount due to the label. The value profile is increasing, and we are optimistic about this trend. Over time, we will price according to its value. In Europe, the label differs and the value profiles are very strong, with more comprehensive details. For both Zenrelia and Quattro, we are increasing our investment, which includes multimedia efforts, expanding our sales force, providing sales incentives, and enhancing distribution. This multi-faceted approach aims to ensure our competitive share of voice and innovate our commercial strategy in the field. Moving forward, this will remain our focus. Regarding Bovaer, while we noted earlier that we wouldn't have incentives coming into 2025, we have observed strong demand from consumer packaged goods companies. We have repositioned Bovaer to support these brands, particularly major dairy companies that purchase milk. They are utilizing Bovaer effectively, benefiting from our inset market, with substantial funds flowing from CPG firms to dairy producers, which will continue to be our strategy going forward.
Our last question comes from the line of Andrew Dusing from Cleveland Research.
Just want to ask two quick, I'll ask them upfront. On pricing, I thought that was called out for a driver for '26, and I don't want to get too far ahead of the guide. But maybe I wanted to dig in specifically on your thoughts on the pet side of things. I think the industry the last couple of years has seen pet pricing up in the 3% to 4% range. I think you look at this year with Elanco, it's probably closer to 1.5%, if my math is right, strategically. I guess as we think about Elanco for FY '26. Can you guys get into that like normal range? Or should we even think there's potential to be above it when you throw in the innovation, lapping some of the launch promos. Any commentary on pushes and pulls or directionally, what we should think about pet health pricing would be helpful. And then on Zenrelia, great to see the progress here. I wanted to ask on go-to-market. You've mentioned the strong distribution agreement earlier today. You did have a competitor come out and give their largest derm product to distribution kind of at the end of September. I'm curious just feedback on how October has gone, if there's been any changes due to the distribution changes at a competitor.
Yes. So our strategy is to continue to align price with customer value. But what's an important factor to remember, Andrew, is that our launches are excluded from our pricing calculation. So Quattro and Zenrelia, for instance, those are excluded from pricing calculation today, and you'll see that lap in 2026. So our 2026 price will include those current year launches.
Yes. And Andrew, on Zenrelia and the change, we've been very consistent. I think it's what's put us in a really nice position with distribution. We've got great relationships. They're adding a lot of value to us. And our agreements have been very consistent. And most importantly, we offer the total portfolio. And the highlights that you just had with competitors, we've seen them be more selective to one SKU, maybe not the other SKU, year-to-year a lot of change. And we've really prided ourselves in being very consistent partners with distribution, and we believe that's paid off, and that's differentiated. Yes. Thank you, everybody, for your time. As you see, we've entered Elanco into a new era of growth and innovation, built on nine quarters, more than two years of consistent reliable delivery. Our basket of innovation is performing and beginning to globalize driving renewed opportunity in the full portfolio, while our R&D team is laser focused on delivering a consistent flow of high-impact innovation, so this will continue.
Most importantly, our Elanco team is highly engaged and driven by creating value for our customers, and our vision to make life better. And I would just say we're turning strategy into results, and I want you to be assured that we're staying very disciplined and balanced as a company. We welcome being an execution and show me story, and it is our intent to create long-term value for you as investors, not just this quarter but going forward into the rest of the decade. We look forward to seeing you all at our Investor Day on December 9. Thanks for your time today.
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