管理層發言
Thank you for joining us. Welcome to Elanco Animal Health's earnings conference call for the second quarter of 2025. I will now turn the call over to Tiffany Kanaga, Head of Investor Relations. Please go ahead.
Good morning. Thank you for joining us for Elanco Animal Health's Second 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 include 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. I'd like to begin with a thank you to the global Elanco team for these strong results and in recognition of many years of loyalty and steadfast hard work across the business. Our priorities have been consistent and clear, growth, innovation and cash. By focusing on our customers and delivering a diverse portfolio of innovative solutions, we accelerated growth and achieved strong cash generation in the second quarter. As highlighted on Slide 4, Elanco continues to deliver, growing 8% organic constant currency in the quarter and exceeding the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was driven by both price and volume and led by the U.S. Pet Health, up 11%. This marks 8 consecutive quarters of underlying growth. Innovation is outperforming expectations, achieving $420 million in first half revenue. We are once again raising our full year expectations by an additional $60 million, to $720 million to $800 million.
The consistent outperformance reflects a diverse basket of current and potential blockbusters in major markets with meaningful differentiation, bringing added value to the marketplace. And importantly, this portfolio of innovation is also driving more stability in our base business. Also, we are deleveraging faster than planned with our commercial and operational outperformance and strong focus on cash. Our quarter end net leverage ratio improved to 4.0x, reflecting the strong second quarter results and working capital discipline as well as the proceeds from the lotilaner royalty monetization. With this momentum, we are improving our net leverage target for year-end to 3.8 to 4.1x. On tariffs, our intervention actions and FX tailwinds are mitigating potential impacts and risks. We now estimate a 2025 net impact of $10 million to $14 million, which is less than our prior assumption and more than offset by the first half outperformance.
We believe any likely tariff risk scenarios are covered in our 2025 guidance. With our consistent execution and good momentum to date, we've arrived at the midpoint of 2025 in a strong position to raise our top and bottom line outlook. For the full year, we now expect organic constant currency growth of 5% to 6%, adjusted EBITDA of $850 million to $890 million and adjusted EPS of $0.85 to $0.91. This guidance raise takes a prudent and disciplined approach with a strong balance between opportunities and business momentum while considering the dynamic environment. Overall, entering the second half of 2025, we believe we are well positioned to navigate external uncertainty and execute our long-term growth strategy. By delivering our diverse portfolio of innovation and building on our leadership in Pet Health retail and Farm Animal, we are on a clear path to becoming a company with consistent competitive revenue growth, a higher-margin profile, a stronger balance sheet with stronger cash flows and higher returns on invested capital.
Turning to the second quarter revenue performance on Slide 5. We break down the 8% underlying organic constant currency revenue growth. This chart highlights the broad strength we're seeing across our global business with all 4 quadrants growing nicely. U.S. Pet Health led the quarter, up 11%, driven across both vet clinic and U.S. retail. Credelio Quattro and Zenrelia provided substantial contributions, which I will review in more detail shortly. Our innovation lessens the impact of vet visit volume declines and benefit the greater portfolio with vaccines and pain also both positive in the quarter. At retail, our OTC parasiticide portfolio performed well with Seresto and A Family sales, both recovering to double-digit growth. We are pleased with our performance and a delayed peak season as we continue to build on our leadership position and expand our physical availability. Moving to international Pet Health, we delivered 7% organic constant currency revenue growth, driven by AdTab, Zenrelia and Credelio.
We see meaningful tailwinds for our innovation through geographic expansion, including AdTab's successful launch in the U.K. in April and Zenrelia's positive performance in Brazil, Canada and Japan. The U.S. Farm Animal business delivered another solid quarter, up 5% and reinforcing our market leadership. Our recent data shows market leadership in beef, poultry and swine, reflecting the strength of our portfolio, our customer-centric approach and our continued commitment to this space. Experior leads the way with rapid adoption in heifers since we received FDA combo clearance in late 2024. Experior is also driving portfolio benefits with other cattle products like Rumensin, partially offset by a difficult comparison from vaccine resupply in the second quarter of last year. Finally, international Farm Animal was up 6% in organic constant currency with growth coming from poultry and swine.
We did observe some pre-tariff buying to satisfy customer demand primarily in China. Importantly, underlying growth was healthy even when excluding this timing shift. We are encouraged by the continued durability and growth of global farm animal markets supported by increased demand from animal protein. Looking at Slide 6, we delivered $420 million of innovation revenue in the first half. This continued outperformance is driven by our broad basket of innovation, namely Credelio Quattro, Experior, AdTab and Zenrelia. We're increasing our expected innovation contribution for 2025 by $60 million at both ends of the range to $720 million to $800 million, representing our success in bringing multiple products to big markets around the world. You'll remember this target does not include IL-31, which remains on track for approval in the fourth quarter of this year with commercialization in the first half of 2026.
Let's further discuss the progress on our major innovation products on Slide 7, starting with Credelio Quattro. We believe this is a best-in-class product in the fastest-growing animal health market and we're very encouraged by how it is resonating with vets and pet owners. Share capture continues to track ahead of expectations and we're also seeing Quattro grow the market. The U.S. broad spectrum endecto market is $1.3 billion and growing substantially at almost 40%. In June, we achieved approximately 14% dollar share of broad spectrum sales out of vet clinics directly to pet owners. Sell-in and sell-out rates were at relatively consistent levels to each other at quarter end, reflecting healthy inventory dynamics and standard distribution fill effects typical of new launches. Strong clinic buy-in demonstrates veterinary confidence in Quattro and sell-out levels reflect growing consumer demand with our increased DTC investments showcasing the 3 dimensions of differentiation.
Quattro has broad coverage, including multiple species of tapeworms, speed of tick kill and heartworm coverage from month 1. We're also pleased with the continued consistent feedback from vets and pet owners really appreciating the great palatability with Credelio Quattro. And although still early, we're quite encouraged by the performance of our DTC campaign for Quattro. We've seen dispensing sales increase as we continue to ramp investment. We are leaning more into DTC based on the long-term ROI and the growing potential we see in this product. We also remain pleased with the limited cannibalization impact, as approximately 70% of Quattro's share capture has come from competitive product switches or new starts. Additionally, it's bolstering the broader portfolio in the clinic. For example, 2,200 clinics that bought Quattro for the first time, bought another Elanco product for the first time.
Of those 2,200 clinics, 500 had never bought any Elanco product before. This innovation is also improving our presence with corporate accounts, where we've historically underindexed. This successful launch to give dogs Quattro-level protection is a credit to our expanded sales team, our well-informed veterinarian customers and our distribution partners. Finally, we're preparing to take Quattro global with numerous submissions made in Australia, Canada, the EU, the U.K. and Japan, setting up what we expect to be a nice geographic expansion starting in 2026. Turning to Zenrelia. This has been a robust quarter. Our best quarter so far, operationally, strategically and globally. We're making steady progress, gaining share in the $1.9 billion rapidly growing dermatology market. As we moved into peak allergy season during the quarter, we achieved growth ahead of our expectations with more first-line treatment use and willingness to use.
This is a testament to Zenrelia's efficacy, convenience and value with our multifaceted approach to building awareness and appreciation for these key points of differentiation. In the U.S., we have approximately 10,000 clinics buying the product with a reorder rate of almost 80%, up from 70% shared in May. Zenrelia's real-world experience coupled with our strong tech-to-tech selling is driving greater adoption and product usage. We've seen our patient market share in the U.S. derm market double from 2% in March to 4% in June and U.S. Zenrelia sales more than doubled in Q2 versus Q1. The patient share adoption growth has been very balanced with both average sales per clinic and the number of clinics buying, growing at double-digit rates month-over-month in the quarter. Our market research data shows that approximately 50% of Zenrelia users are now using the product as the first-line treatment, primarily for new patients or seasonal restarts versus just a second-line treatment option.
We'd like to share a very recent positive update regarding the Zenrelia label. Zenrelia achieved a milestone with the receipt of FDA CBM's complete letter for its safety supplement. This supplemental NADA included additional published data to address CBM's concerns for the risk of fatal vaccine-induced disease. The 60-day administrative supplemental NADA process is now underway, which is expected to result in removal of this risk language from the box warning section of the label. Once the supplemental NADA is fully approved, the revised label is expected to be made public in Q4. We're pleased with this progress and continue to actively pursue the generation of additional data to further improve the label even more. Our goal is a U.S. label that is more consistent with our international approvals. On the international front for Zenrelia, we recently received approval in the European Union and in Switzerland.
We're encouraged that the labels are consistent with less restricted labels in other markets outside the U.S. where product has already been approved. You remember, we have done a head-to-head noninferiority study in Europe versus the marketplace incumbent as part of the EU approval process. We are very pleased with the results confirming Zenrelia's strong efficacy profile and reflecting what we're seeing in the global market, with more than 0.5 million dogs treated with Zenrelia. The launch in Europe began immediately with approval last month, orders being taken now and product in the market before the end of the third quarter. This follows a strong start in Brazil, Canada and Japan. Additionally, we continue to expect approvals in the U.K. and Australia this year, creating a significant foothold in a $600 million to $700 million international derm market. Also in Europe, we continue to see very robust growth for AdTab, a leading oral OTC flea and tick product for both dogs and cats.
Sales increased over 60% in the quarter, supported by strategic DTC investments. AdTab anchors our comprehensive portfolio of OTC parasiticides, including oral, collar and spot-ons and is the only oral OTC isoxazoline for cats in the EU market, which is a key differentiator. AdTab also was approved and launched in the U.K. in April with good early traction. Finally, our Canine Parvovirus Monoclonal Antibody remains an important treatment for the deadly parvovirus. We're excited for the prophylactic claim extension to help more pets fight the disease. We're working through strategic interventions to address the cost of treatment and to accelerate clinic penetration across all channels. In Farm Animal, Experior had another outstanding quarter, continuing to grow rapidly in an estimated potential market of over $350 million in the U.S. and Canada. We're also pursuing other international expansion opportunities.
We are pleased to see U.S. cattle showing the first signs of rebuilding the herd. This herd growth and strong cattle producer economics, combined with growing share, sticky customer retention at over 90% and geo expansion, should all form a nice backdrop for what we expect to be strong Experior growth ahead. Overall, we see a significant runway for Experior's continued robust growth, up over 80% in Q2 despite a tougher compare, while additionally driving portfolio synergies. Lastly, on Bovaer. We are encouraged by sustained strong demand and accelerating adoption, reflecting its economic value to dairy farmers and brand value to consumer packaged good companies. Notably, CPGs have demonstrated robust demand for Bovaer. With approximately $20 per head return to the farm, Bovaer can add 5% to 10% to the dairy's cash flow. Since February, we've quadrupled the number of cows on Bovaer to approximately 150,000.
Customer retention is likewise very high at over 90%. We expect the entire ecosystem around Bovaer to support long-term use as we continue to see the product as our next farm animal blockbuster. This innovation also further establishes Elanco as a pioneer in strengthening CPG brand value all the way back to the farm. Moving to Slide 8, we provide some recent highlights across all 3 elements of our IPP or Innovation, Portfolio, Productivity strategy. As innovation accelerates our growth, it also stabilizes our base portfolio. In U.S. Pet Health, we continue to gain share in parasiticides, NSAIDs and derm. Our recently approved canine influenza vaccine enhances our extensive line of true portfolio vaccines, providing a lift across the full offering. We began shipping the product last month. In June, the EPA approved our Advantage collar for dogs. With Seresto already available as a premium 8-month product on the market, our Advantage collar will provide pet owners and veterinarians with a 4-month collar for protection under the trusted Advantage brand.
We anticipate this innovation to strengthen our retail leadership with an expected U.S. launch in the first half of 2026. All of this in innovation, while Ellen and our R&D team continue to progress the next era of blockbuster innovations. Finally, on productivity, we are delivering substantial progress in strengthening our balance sheet and optimizing our operations. We've improved our net leverage ratio by 1.5 turns in just 6 quarters, through a disciplined focus on cash generation. On the manufacturing front, we're on track for our strategic expansion in our facilities in Fort Dodge, Iowa; and Elwood, Kansas with the latter supporting our monoclonal antibody platform. We continue to expect CapEx to step down next year. As I close, I want to highlight an important program we have launched in Q2 called Elanco Ascend. This is a company-wide initiative that we expect will drive additional productivity and capabilities in key areas.
As we have stated before, we expect to grow adjusted EBITDA in 2026, all while investing behind our launches and positioning Elanco for improved productivity and efficiency over the rest of the decade. We expect Elanco Ascend to create a key platform to enable sustained and consistent value creation while making Elanco more competitive and innovative going forward. With that, I'll pass it to Bob to provide a few comments on where he's focused, his initial reflections and review our second quarter results and financial guidance. Bob, welcome to your first Elanco earnings call.
Thanks, Jeff and good morning, everyone. I'm thrilled to be part of the Elanco team as the company enters its next era of growth. I'm eager to work alongside the leadership team and build on our existing momentum in growth, innovation and cash generation. Over the past month, it's already evident to me that the talent here is world-class, grounded in a purpose-led vision with a culture that is uniquely collaborative. Our people are truly the foundation of our accelerating performance and the long-term positive trajectory I see ahead. My goal is to build and support the current team and momentum while bringing a fresh perspective to key opportunities. I'm confident in our ability to execute on our plans and I'm focused on driving value creation through a continuation of our productivity and cash generation efforts. More specifically, I have 2 priorities going forward. First, Elanco Ascend.
Building on Jeff's comments, this key initiative is expected to proactively accelerate efficiencies across our organization in 2026 and beyond. We are looking beyond the margin benefits we can naturally capture through better mix and consistent growth. There's more we can do in digital. We are leaning into automation and AI to leverage those capabilities across the business. Procurement is working to identify opportunities with suppliers and we have fresh eyes with an early priority on general and administrative expenses and manufacturing. With Ascend, we'll look for opportunities across the company while continuing to invest in the muscle behind our no regrets launches and R&D. Ultimately, we want to create the most innovative, efficient and competitive animal health leader that delivers consistent shareholder value. This is my top priority. And second, we're examining how we can further improve cash flow generation, including working capital and CapEx initiatives.
I appreciate the importance of continued debt paydown, which remains our top capital allocation priority. We are also beginning to evaluate refinancing possibilities for our 2027 bonds, with ample time and optionality for this transaction. In my view, these priorities lead to a significant opportunity for sustainable value creation. After 1 month with the company, I'm even more confident in the momentum and trajectory of our business. The finance team is partnering closely across the organization to enable a long runway of durable growth with our diverse portfolio of innovation, growth in the vet clinic and leadership in pet retail and Farm Animal. I'm excited to help the Street see what I see through consistent execution and transparent communication and I look forward to connecting across the investor community in the days and months ahead. Now let's turn to second quarter results. 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 10. We delivered $1.241 billion of revenue, representing an increase of 5% on a reported basis. Organic constant currency growth was 8%, driven by a 5% increase in volume and a 3% contribution from price. Slide 11 provides revenue by the 4 quadrants of our business. Total Pet Health revenue increased 10% in constant currency in the second quarter, with price contributing 4%. In the U.S., Pet Health delivered 11% growth, driven by demand for our key innovation products and contribution from the vaccine portfolio. Improving retail dispensing trends resulted in increased sales for our Seresto and A Family brands. Outside the U.S., our Pet Health business grew 7% in constant currency, led by continued demand for AdTab across Europe and sales of Zenrelia in 3 international markets.
Globally, our Farm Animal business achieved 6% growth in organic constant currency. The U.S. Farm Animal business grew 5%, driven by the strength of Experior. Outside the U.S., our Farm Animal business contributed 6% in organic constant currency, driven by higher demand in poultry and swine across multiple geographies. I'd like to highlight, we also experienced pre-tariff customer buying primarily in China, that we estimate at approximately $50 million in revenue. Continuing down the income statement on Slide 12. Gross margin decreased 90 basis points to 57.3% due to inflation and the higher manufacturing costs associated with owning the Speke facility, partially offset by favorable price, volume and beneficial product mix driven by the U.S. Pet Health performance. Operating expenses increased 11% compared to the same period last year, driven by our global Pet Health product launch investment and the Q1 to Q2 timing shift as we adapted to a weather-delayed parasiticide season.
While these investments are currently impacting adjusted EBITDA flow-through, we believe they are yielding strong returns and are critical for long-term brand success and value creation. Interest expense decreased $27 million year-over-year to $38 million driven by the significant debt reduction from last year's aqua divestiture. On Slide 13, we have provided walks to illustrate our year-over-year performance in adjusted EBITDA and adjusted EPS. Adjusted EBITDA was $238 million, a decrease of $37 million. Adjusted EPS was $0.26 in the quarter, a decrease of $0.04 year-over-year. On Slide 14, we provide an update on our cash, debt and working capital. Cash generated from operations was $237 million in the quarter compared to $200 million in the same quarter last year. We ended the quarter with net debt of approximately $3.4 billion at a net debt leverage ratio of 4x. Now I'd like to say a few words on capital allocation.
Elanco has consistently emphasized the importance of deleveraging and has made substantial progress towards reducing debt and achieving the 2025 target. Investors can expect a consistent capital allocation strategy going forward. As outlined on Slide 15, debt paydown will be the primary use of free cash flow. Longer term, we aspire to be under 3x levered and anticipate capital allocation flexibility once these levels are reached. Now let's move to our guidance on Slide 17. Driven by the strength of our innovation portfolio, on a stabilizing base, we are raising the bottom end of our organic constant currency revenue growth range, now expecting 5% to 6% top line growth. We are increasing reported revenue guidance to $4.57 billion to $4.62 billion, inclusive of approximately $35 million from the favorable impact of foreign exchange rates since the May earnings call. To further fuel the trajectory of our innovation launches, we are increasing DTC spend.
Operating expenses are now expected to increase by 7% in constant currency for the full year versus the previous outlook of 6%. Adjusted EPS is expected to be between $0.85 and $0.91, which includes $0.01 for improved expectations for interest expense. We are also updating our cash and balance sheet expectations for 2025. With the proceeds of the lotilaner U.S. royalty monetization combined with cash generated from the business, we now expect between $500 million and $550 million of cash available for debt paydown this year. As a result, we now anticipate end-of-year leverage improving to 3.8x to 4.1x. Slide 18 provides walks from our May to August guidance for adjusted EBITDA and adjusted EPS. And Slide 26 in the appendix provides several additional assumptions to help support your modeling efforts. We are increasing adjusted EBITDA guidance by $20 million to reflect our $28 million outperformance in Q2.
This was partially offset by approximately $10 million of increased investments in our recent launches and a normalization from pre-tariff customer buying with a Q3 impact of approximately $10 million. You'll remember in May that we previously held back $25 million in FX tailwinds for adjusted EBITDA, given the macro uncertainty and 3/4 of the year left to go. Today, we are flowing through $15 million while holding back $15 million. Let me share how we are continuing to navigate our expected tariff exposure in 2025 on Slide 19. With mitigating strategies implemented and pauses in trade deals announced since our previous assumptions, we believe the total net impact to adjusted EBITDA as of August 5 is now an estimated $10 million to $14 million. This range is slightly down from our prior expectation and includes tariffs imposed by the U.S., China and the EU. We have maintained a balanced profile of risks and proactive opportunities.
In recognition of an evolving situation, our potential risk scenarios for 2025, including tariff escalation and economic slowdown are offset by that $15 million potential foreign currency exchange favorability that we have not flowed through in guidance. Overall, our mitigation plans, the weaker dollar and our strong execution allow us to cover the potential 2025 tariff impacts and macroeconomic challenges. We remain confident we can execute and achieve our targets in multiple scenarios. Our tariff-related actions are now focused on 2026, which should benefit from several mitigating strategies, including supply chain optimization, inventory management, tactical pricing in select geographies and strategic API sourcing. We have the right teams and the right portfolio to deliver for our shareholders and our customers and the global communities we serve. On Slide 20, you'll see our guidance for the third quarter.
We expect organic constant currency revenue growth of 4% to 6%, largely driven by the positive momentum in both our pet and farm businesses with 1 percentage point of impact from accelerated customer purchases in advance of expected future tariff increases. On a reported basis, we expect $1.08 billion to $1.11 billion in revenue. The year-over-year increase in operating expenses is expected to be approximately 8% in constant currency, including the incremental DTC investment. Putting it all together, we anticipate adjusted EBITDA of $160 million to $180 million and adjusted EPS of $0.12 to $0.16. Now with that, I'll hand it back to Jeff for closing comments.
Thanks, Bob. We entered 2025 knowing our customers and our investors expect consistent delivery. And I'd like to once again congratulate our team on not just delivering results but in true Elanco spirit, going beyond. Our innovation portfolio is accelerating growth and our focus on cash generation is driving rapid debt paydown. Given our strong first half performance, we are well positioned to raise our full year outlook even in a highly dynamic landscape mixed with opportunity and challenge. With employee engagement at a 5-year high, we are all energized to execute on the back half of 2025. But speaking to my global Elanco team members, our work is not done. The last 8 quarters of growth are setting up the next 8 quarters of opportunity. Elanco is an execution story and the outcomes of that execution will drive the value to our customers, to our shareholders and yes, to our futures. This is a long-awaited moment in our strategic trajectory and I have never been more confident in Elanco's opportunity to deliver long-term shareholder value and transform animal care. With that, I'll turn it over to Tiffany to moderate the Q&A.
Operator, please provide the instructions for the Q&A session and then we'll take the first caller.
分析師問答
Your first question comes from the line of Jon Block with Stifel.
Jeff or Bob, can you talk about some of these accelerated investments that you're making in the business? I think there was a slide pointing to an incremental $10 million. Is this around or specific to Credelio Quattro that seems to certainly be doing well. And then maybe just a bit to tag on to that first question would be, at a high level, do we think about the business leverageable in '26 ex Ascend? And then is Ascend initiatives margin accretive, call it, day 1? And then I'll ask my follow-up.
Thanks, Jon. Thank you. Yes, it was a great quarter. And to answer your question on expenses, they really will fall into 2 areas and it's first around the DTC. So listen, Quattro and I'll just make a couple of comments on Quattro to start, Jon and we can go deeper there. But a special product, off to a tremendous start. As we've said, it's early. No conclusions at this point. But in our opinion, Quattro is acting like best medicine and is fast-growing 40% growth, broad-spectrum endecto market, it's not acting like a third to market. And because of that, then even if we look at market archetypes, I mean the share that it's taken so far, we've had it in the marketplace for 5 months, media on for 4 months, we see a real rate opportunity with the backdrop of a very fast-growing market. And I think what's doing it is the 3 points of differentiation. We're kind of calling it the Quattro effects.
So what we've done is, hey, what we're doing is we're building the biggest brand family Elanco has ever had, building the Credelio brand family, Jon. And so we're going to lean into this. This family will be anchored by Credelio Quattro. And as we look at it, the way the media response we've seen, as we've increased it through the end of Q1 and into Q2, we've seen dispensing grow. We did run an A/B test and we saw positive results. So we've made a decision to lean in on that. So that's one of the drivers. I think the other one is a little bit of R&D. I mean, Ellen has had a great quarter with lots of milestones with her and her team and we are progressing nicely. The next blockbuster is coming through the pipeline and we made a decision to lean in a little bit on the R&D expenses as well. So as we go to '26, I'll have Bob chime in here as well. The launching of Ascend, let me be very clear.
It's a company-wide initiative that's going to drive better capabilities, the AI, the digital that Bob mentioned, as well as productivity and there'll be drivers. We're not giving '26 guidance today. But I think as you look at '26, we've said EBITDA will grow and will grow from the innovation growth and the EBITDA growth. And it will also, as we introduced today, it will come also from productivity. We want to do both points. And Bob has put a lot of time in his first few weeks here on this. Maybe a few comments from you, Bob, on Jon's question.
Yes. Thanks, Jeff. And Jon, I'll just give you my perspective on 2026 as well as the years beyond. We are going to continue to build on the momentum that we've seen so far. Obviously, very excited for the sustainable revenue growth that we're going to achieve through the portfolio of our innovative products that we brought to the market and a stable base. And obviously, as innovation scales, these innovations have higher margins than our total average and so we're going to see some benefit and profitability there. But we are going to continue to invest in the muscle behind our no regrets approach to launches in R&D. And with that, we're going to continue to leverage our existing cost base. But again, that's where Ascend will come in and continue to provide additional capabilities through leveraging AI and digital as an example. But we'll proactively accelerate efficiencies across the organization as well, primarily focused on manufacturing and G&A functions. And then the last thing I'd leave you with on 2026 is, we're going to continue to focus on cash and focusing on the fundamentals around trade working capital and using that cash to pay down debt.
Follow-up, Jon?
Yes. Very helpful. I guess the follow-up, Jeff, at a high level, like the innovation revs are now up $300 million year-over-year at the midpoint. It sort of implies the base is down around 1% and change this year. There's some moving parts, right, behind that with like CMO, et cetera. But this is not a '26 question but at a high level, just your thoughts on the sustainability of like this mid-single-digit growth for the company. And more importantly, maybe the crux of the question is like what does that algo look like? In other words, is it a flattish base and then you have innovation driving 400 to 500 basis points with what you and Ellen and Bob have in the pipeline? Or do you actually see an opportunity to maybe further stabilize the base, get a little price and maybe that can improve and help the overall dynamic?
Yes, that's a great question, Jon. We've consistently emphasized the importance of our base, and our formula is effectively working across all major portfolios that are seeing some innovation, even those that aren't blockbusters are stable. We also don't have significant declines. So our projections are showing flat to minus 1. Our price growth indicates that we are adding value in the marketplace. As we approach our business planning for 2026, we are assessing how each portfolio is being strengthened. If I review what has occurred on Ellen's list, it's not only about the major innovations. We recently received EU Zenrelia approval, and just this morning we got approval in the U.K. for Zenrelia as well. Additionally, introducing the Advantage collar and the 4-month collar with the Advantage brand will be advantageous. Bobby's acquisition of a CIV vaccine and flu vaccine will contribute too. The IL-31 is progressing as expected. I believe the key will be adding innovation to our portfolios. What significantly influences our progress, as Bob pointed out, is the ramp-up. We will have no regrets about this approach. Our collection of innovations is quite extensive, unlike other companies that may only have one or two. We must maximize our offerings, enhance the ramp, reach the peak, and ensure it's as high as possible. So, there will be more updates regarding 2026, Jon.
Your next question comes from Daniel Clark with Leerink Partners.
Great. I wanted to ask another question initially on the innovation sales target raise. I know you're not going to break out kind of on a product-by-product basis, like what drove the $60 million increase. But can you just give a little color directionally on like what the main contributors were? Was it Quattro? Or were there others that really helped drive that?
Yes. So I'll give you a little bit of color from my perspective, Daniel, thanks for the question. So as you know, we did increase our expectations for the year, up now to $720 million to $800 million. We feel great about the growth in all the launches. But I do want to remind you there is a bit of seasonality in that as well. So parasiticides, for instance, are more weighted towards the first half. AdTab in Europe is especially seasonally weighted towards the first half. But the growth is being led, quite honestly, about almost the entire basket but especially Quattro. That's where we're really seeing some activity there. And one of the reasons we're leaning in on the DTC spend because we are seeing the data that supports it.
Great. And then just another question on how you're thinking about expenses. Like if there is upside in a given quarter, how much of that do you sort of expect to reinvest into sales and marketing or R&D versus delevering? Like what's your philosophy there?
Yes. As Jeff mentioned, right, the data is supporting that the investment in DTC spend and R&D is supporting that top line growth and we're seeing dispensing levels increase. And so we'll obviously monitor the effectiveness on an ongoing basis. But as we continue to see the effectiveness of that spend and that top line growth, we'll continue to invest. And as we see that at some point taper off, that's where we'll ratchet down. But I would highlight, we did increase year-over-year OpEx spend in our guidance in DTC and a bit in R&D for that next basket. But in total dollars, we are down sequentially from Q2 to Q3. So it's something we're actively monitoring and we're using data to make those decisions.
Your next question comes from Michael Ryskin with Bank of America.
Bob, I want to touch on something you mentioned just a little bit earlier in Q&A when you were talking about the margin uplift from innovation gaining scale. If we just sort of look at some of the comments you gave in terms of clinic share and wallet share in 2Q, it looks like Zenrelia was sort of in that $10 million range. Quattro was $50 million, if not $50 million plus. Those are really solid numbers after just a couple of quarters if we sort of think about what it could mean for the year. When we think about some of these innovative products, you talked about, obviously the margin accretion as they gain scale, you're gaining that scale earlier than anticipated, right? So can you talk about the benefit to gross margin and sort of what the threshold levels need to be when a new launch goes from being dilutive to breakeven to really accretive, either from a volume or a revenue perspective? Just talk us through that ramp and the margin benefit there.
So 2 things on margin, right? So again, as I've highlighted and you've highlighted as well, we are going to see margin accretion through these launches continuing still with a stable base. But if you think about the entire gross margin profile, we are going to make the right decisions for the long-term health of the business. And so again, we're going to use data to support when we are investing to get that top line growth. We do have price of approximately 2%. We'll continue to work on operational improvements within our 4 walls and that will include absorption. But longer term, as these continue to move forward and these launches accelerate, we're going to be able to get that mix margin over a trend of several years. And then Elanco Ascend will come in on top of it and help us think through how we use AI and automation as well as being cost-effective and reinvesting in growth. So I think it's safe to say we'll continue to see improvements in both margins and EBITDA margins over time at this point. But that's where I'd leave you with where we are today.
I'll take it from here, Michael. As you know, our oral dose plant is located in Huningue, France. The good news is we've been producing Credelio there for quite some time. We have since added Zenrelia and now Quattro. Grace and her team are currently focused on optimizing production, and we plan to continue scaling our operations. We are also investing in capital expenditures for that plant given the growth potential we see with Quattro and Zenrelia. Overall, we are achieving synergy across the board in our comparisons.
Okay. Great. And then Jeff, while I got you, I want to follow up on Zenrelia and some of your comments on the label change. Encouraging update on getting the fatal vaccine response taken off. I know there's not a lot of data on this. In terms of your launch in external markets, OUS is still relatively early. But how should we think about the benefit of that? I mean anything you can say in terms of how it's ramped in Brazil, in Canada, in Japan versus how it's ramped in the U.S. And therefore, as the U.S. label moves closer to the international labels, anything you could say in terms of how that could benefit the uptick in the acceleration in the U.S.?
Thank you, Michael. It’s great news that after nine months, Ellen’s team and the FDA have accepted the science. To clarify, we are currently in a 60-day administrative supplemental review. The FDA has accepted the PCR data we submitted and will remove the fatal vaccine-induced disease risk from the label within that 60-day timeframe, which means we are likely to see the new label in Q4. This increased clarity will lead to greater confidence, which should result in more clinics and an increase in our dog penetration. I believe this will occur. Looking back at Zenrelia, it has been our best quarter to date in terms of operations, strategy, and global performance. The market is experiencing double-digit growth, which contributes to our positive outlook. Zenrelia is helping us gain market share, and first-line usage is on the rise in the U.S., as well as in Brazil, Japan, and Canada where we have non-restrictive labels. We are currently launching in Europe, targeting the second-largest market, and entering a $600 million to $700 million market with a product that stands out, particularly in terms of efficacy. As we enter this important derm season, our product is demonstrating differentiated efficacy. We see the label changes as a positive sign, and we are committed to generating more data to align the U.S. label with our international labels.
Your next question comes from Andrea Alfonso with UBS.
So the 6% organic volume growth in the second quarter was really quite impressive. And I'm Just curious how much of that you think was some sort of an impact from delayed visits in 1Q due to weather issues. And as you think about the back half, how do you see those volumes trending? And I guess separately on the 10% constant currency that you reported in Pet Health, where do you see that figure stacking up versus the 5% to 6% organic revenue growth that's within your full year expectation? Should we still expect more of a skew towards volume over price?
Yes. Thank you, Andrea. It was a little difficult to hear. But I think at the highest level, you're right, we did have a slower start, especially on the retail side on the season but we saw the rebound as we went into Q2 with nice double-digit growth on our retail side with Seresto, the A Family as a whole. And then, of course, the innovation growth on Bobby's team here in the U.S. Pet Health. Look, I think as we look at it, innovation is the key driver and I think we're insulated from that vet visit, no question. And then I think as you look at the compliance, the globalization on the pet side, all of these things really create a nice backdrop, we believe. And then if you just study the animal health industry in the first half, my belief is these pet trends on willingness to spend, compliance, globalization, a market, growing double digit, a derm market growing double digit, I think we're set up well. So we'll continue to watch. We want visits to recover. But I think Elanco is insulated from that and well positioned as we go forward. Thank you.
Your next question comes from Chris Schott with JPMorgan.
This is Ekaterina, on for Chris. So first question is just on Credelio Quattro. I think you've touched upon this but can you maybe elaborate a bit in terms of where share is coming from for the product? How much of this is triples versus doubles versus cannibalization versus kind of dogs newer to the category? And kind of any surprises as you're kind of looking at those share numbers? And then second question is just around Experior. The product has obviously had a number of strong quarters. Can you maybe talk a bit where incremental uptake is coming from? And then also maybe elaborate on the potential for international expansion for the product? Which geographies do you think make the most sense there just in terms of Europe or South America?
Thank you, Ekaterina. It was an excellent quarter for Quattro, exceeding our expectations in overall uptake. As we mentioned, 70% of our growth is attributed to new starts or competitors entering the market. We are not diving deeper into that right now, but we can say that the existing players in this space, along with new entrants, are contributing. In the broader endecto market valued at $3.9 billion, it currently stands at $1.3 billion. We are seeing good activity, with 30% from new starts, and I like the direction it's heading. Quattro is helping this market continue to grow at 40%. Additionally, cannibalization is lower than we anticipated at this stage. To strengthen our position, we plan to focus more on media and commend our sales team, distributors, and veterinary relationships for their efforts. Regarding Experior, it was another solid quarter for Farm Animal. Briefly, our growth plan includes rebuilding the herd, which will benefit us through increased numbers for both steers and heifers. Producer economics are positive, which is promising for Experior. Customer retention is over 90%, and we're considering value-based pricing moving forward, with plans for geographic expansion as we approach 2026. Overall, Experior has a strong future ahead.
Your next question comes from Brandon Vazquez with Elanco.
This is Russell, on for Brandon. I wanted to first start at a high level. You have reported strong growth in Pet Health in the U.S. specifically. Could you kind of talk to your confidence in the sustainability of your growth with the ramping of innovation and talk about underlying market growth trends and how you would characterize the health and demand of the underlying pet market right now?
Thank you for the question, Russell. The U.S. Pet Health team will address our specific performance and also touch on industry trends. Our strategy has been methodical over the years, focusing on bringing in top industry expertise to enhance our capabilities and execution. We've invested in expanding our sales force and digital initiatives, resulting in an energetic sales team and strong distribution partnerships. Our omnichannel strategy integrates both retail and veterinary clinics effectively. Overall, we're in a strong position. While innovation is crucial, it’s also important that our team is expanding our product offerings, from vaccines to pain management, as well as continuing to support our blockbuster products. We anticipate solid growth for Pet Health this year and into 2026, and we plan to invest accordingly. Looking at Animal Health, although consumer visits have declined, there’s a substantial and lasting demand in the pet and protein sectors.
Pet ownership is on the rise, and we are making it easier for pet owners to access medication, which will stimulate growth. Additionally, international markets are expanding more rapidly than the U.S., contributing to double-digit growth, and the younger generation is increasingly willing to spend on their pets. These three trends, combined with good innovation, create a favorable environment for us. On the protein side, we're witnessing a shift towards a protein-focused diet, and our Farm Animal business is adapting to this change with innovative products. Hence, we foresee a positive landscape for both pets and protein, positioning Elanco well for the future.
Your next question comes from Umer Raffat with Evercore.
This is Mike DiFiore, in for Umer. Congrats on a great quarter. Two for me. And I may have missed this...
A little louder, Mike, if you could, that would be great. I'm just...
Sure. Two for me, and I may have missed this in the opening comments. But for Credelio Quattro, now that it's been 6 months into launch, I was wondering if you'd be able to break down how much is coming from new puppy starts versus switches from other products. And the second one is on the Farm Animal business. As we think about how to model this segment for the balance of the year, could you perhaps break down the current status and trends of the macro factors affecting each species in the U.S. versus ex U.S.?
Yes, Mike, briefly on the first point, we're estimating around 70%. We're not planning to go deeper than that at this moment. We're currently analyzing the data after being in the marketplace for about 5 months, with media support for around 4 months. Approximately 70% of our results are coming from competition and product switches. Regarding the Farm Animal markets, we see continued trends from the first quarter. In cattle, there's a low supply coupled with high demand, resulting in strong producer economics for beef, which is positively impacting our portfolio and the value we provide. The situation with swine is a shift; there are definitely improved economics in the U.S. with lower supply and higher prices, which we anticipate will lead to a strong finish this year in that sector. Additionally, we've observed that rising beef prices have positively influenced global poultry demand, both domestically and internationally, leading to robust economics in our global poultry business due to significantly increased demand. Overall, the dairy sector is experiencing a transformation with new products, with $10 billion being invested in the U.S. We anticipate a more stable dairy industry in 2025 than we've seen for a long time.
Your next question comes from Navann Ty with BNP Paribas.
Maybe on Bovaer, if you could discuss the progress on the government incentive. And also interested to hear how you will position the Advantage collar versus Seresto? And maybe a longer term question. So Elanco progressed very well on deleveraging. So I don't know if it's too early to discuss your capital allocation once you reach that 3x leverage?
Thank you for the question. I will address the first two regarding Bovaer and Advantage briefly. At a high level, it was a great quarter for Bovaer. We've shifted our focus from grants and sustainability to prioritizing farmer value, economic value, and CPG brand value, and I think it's paying off. Although it's early, we are seeing strong CPG value. Our vision is to enhance CPG brand value with Bovaer, ultimately benefiting farmers by adding 5% to 10% to their cash flow. Right now, it's largely about logistics, similar to our early days with Experior. The key is execution on the ground, and Elanco is well positioned as a leader in feed additives. We have a strong portfolio and the only digital mechanism on farms that can translate this into value for farmers. It was a great quarter with significant momentum, featuring four times the number of cows on Bovaer. Regarding Advantage, we are implementing a 4-month collar. We will continue leveraging the Advantage brand to increase accessibility for pet owners by offering more forms at various price points. We know that introducing innovation in retail and e-commerce drives overall portfolio growth, which is our goal for 2026, with a solid collaboration between Ellen and Bobby's teams.
Yes. And then I'll take the capital allocation question, Navann. So first off, no change in the capital allocation strategy as we sit here today. Debt paydown is absolutely going to be the primary use of cash. We look to continue to focus on fundamentals around trade working capital and improve cash flow over time. As we stated, we do expect our leverage to get to 3.8% to 4.1% by the end of the year. But longer term, we aspire to get under that 3x levered, which will allow for capital allocation flexibility once those levels are reached.
Your next question comes from Erin Wright with Morgan Stanley.
Great. So the implied growth for the second half, I want to pick that apart a little bit in terms of like particularly what's implied in the fourth quarter, it does anticipate that slowdown. I get it there's seasonality, particularly across that parasiticide business. But what's driving kind of the more meaningful kind of step down as you continue to ramp in new and existing markets across the new products? How do we think about stocking dynamics, both at distributors and at retail? And anything to call out on that front in the quarter? And is there just conservatism? Like why wouldn't the momentum continue here? Should Credelio Quattro continue to build? Should Pet Health continue to see double-digit growth in the second half? If you could provide some detail there. And then my second question, which I'll ask upfront is on IL-31. I think you mentioned it's on track, which is great. Where do we stand now in terms of your conversations with the regulators? When will we expect to hear something more material in terms of an update on that front? And yes, your confidence in that product?
Thank you very much, Erin. So let me be very clear. I think Elanco inventory levels overall as a company are at or below all-time lows or at least 5-year lows and we see nice demand in and nice pull-through out from vet clinics to even on our Farm Animal business. So nothing out of the ordinary that we have to date or we see for the rest of the year on sell-in, sell-out and inventory levels, nothing more than what's normal when you launch a new product. So that I want to be very clear, none of those dynamics or any of the guidance at all and nothing is expected. So that's one. And then I think on your second question is, the fourth quarter, I would just say, you've got your normal pushes and pulls. You've got a competitive environment out there. You've got competitive innovation that we have in our guidance as well. We're trying to take a prudent disciplined approaches of the pushes and the pulls.
You've got a dynamic environment. I don't think it's volatile. I think it's mixed with challenges and opportunities for us but that's being considered. And then you've got that FX factor in there as well that's a little bit of up and down week-to-week. So I think that's our approach. Yes, there is seasonality but we continue to and will take advantage of leaning in on this basket of innovation. Look, on IL-31, let me be real clear. We're excited about this. We're excited about bringing another derm product into this great derm market. It continues to be differentiated. We've had no real change in the USDA relative to any of the dialogue. We've hit a few key milestones that needed to be achieved to keep us on track. And again, we're on track for an approval for Q4 of 2025 with a commercial launch in the first half. You know this Erin, we don't have ADUFA inside the USDA. So there's always that variable. But we feel as strong or stronger than we did at the last quarter relative to our tracking on the IL-31.
There are no further questions. I turn the call back over to Jeff Simmons, CEO, for closing remarks.
Thank you. I want to express my gratitude to our Elanco colleagues and emphasize the importance of continuing to act like owners. I appreciate our customers for their trust and commitment during this dynamic time of innovation; our success depends on them. Most importantly, I want to thank you, our investors, for your belief, trust, and time. Our story is about delivering rather than just promising. We are focused on execution and will maintain your trust by doing what we say, providing quarterly guidance, and ensuring high transparency and clarity. We believe we are well positioned for the remainder of 2025 and are preparing for 2026 and beyond, with a focus on growth, innovation, and cash. Engagement remains high, as does our determination and execution. We look forward to collaborating with you in the upcoming quarters. Thank you very much, and have a great day.
This concludes today's conference call. You may now disconnect.