Elanco Animal Health Incorporated (NYSE:ELAN) Q1 2024 Earnings Call Transcript

Elanco Animal Health Incorporated (NYSE:ELAN) Q1 2024 Earnings Call Transcript May 8, 2024

Elanco Animal Health Incorporated misses on earnings expectations. Reported EPS is $0.06452 EPS, expectations were $0.26. Elanco Animal Health Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome everyone to the Elanco Animal Health first quarter 2024 earnings conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you’d like to withdraw your question, please press the star followed by one once again. Thank you. I would now like to hand the call over to Katy Grissom, Head of Investor Relations. You may begin your conference.

Katy Grissom: Good morning. Thank you for joining us for Elanco Animal Health’s first 2024 earnings call. I’m Katy Grissom, Head of Investor Relations. Joining me on today’s call are Jeff Simmons, our President and Chief Executive Officer, Todd Young, our Chief Financial Officer, and Scott Purucker 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 the latest Form 10-K and 10-Q filed with the SEC.

We do not undertake any duty to update any forward-looking statement. 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. After our prepared remarks, we’ll be happy to take your questions. I’ll now turn the call over to Jeff.

Jeff Simmons: Thanks Katy. Good morning everyone. Elanco is poised for a very exciting 2024. Our strong business momentum continued in the first quarter, reinforced by the diversity of our portfolio and geographic results. In the quarter, we exceeded the top end of our guidance range on our key metrics: revenue, adjusted EBITDA, adjusted EPS. We are encouraged by the strong progress of our late stage pipeline, which has advanced significantly over the last several months. The One Elanco approach to collaboration and decision making is driving positive and productive outcomes across the world. Energy, resiliency and creativity are filling our halls and permeating our conversations with customers. Our focus for the year remains on growth, innovation and cash, with many proof points to start the year.

Beginning on Slide 4, our underlying business is off to a very encouraging start in 2024. As you may remember, our quarterly results in the first half of last year were impacted by a shift in customer purchasing related to our ERP system integration from the second quarter into the first quarter of 2023. As determined last year, we estimate the shift was $90 million to $110 million. I will focus my comments on our underlying growth excluding the estimated impact of the shift. For the first quarter, underlying revenue growth continued in the mid-single digit range, estimated at 3% to 5% in the first quarter, building on the 5% constant currency growth in both the third and fourth quarters last year. We remain confident in our late stage innovation.

Based on our dialogue with the FDA and the status of the packages submitted, we have increased certainty in the expected approval timing for Bovaer, Zenrelia, and Credelio Quattro. We continue to expect to bring differentiated products to the market with revenue contribution expected from all three products in the second half of the year. On cash, in the quarter we reduced net debt and improved operating cash flow by nearly $150 million year-over-year as a result of our disciplined focus on improving net working capital and the benefit of completing our ERP system integration. We reduced balance sheet inventory even as we’ve built inventory for new products. We continue to expect the sale of our aqua business to close around midyear. Finally, we’re increasing our expectations for constant currency revenue growth for the full year, now at 2% to 3% growth.

We are updating our key guidance metrics to reflect the unfavorable impact of increased strength of the U.S. dollar since February, with constant currency expectations improving on both adjusted EBITDA and adjusted EPS. Moving to Slide 5, I’ll review our business performance in the first quarter. We delivered revenue of $1.205 billion with both sides of our business performing well in the first quarter. For pet health, we estimate constant currency underlying growth was 5% to 7% globally. This includes approximately 3% underlying revenue growth in the U.S. with improved supply and increased innovation sales partially offset by competitive and macro headwinds. Reduced consumer activity as a result of adverse weather was felt in the industry in January, and as expected, dispensing improved sequentially in both February and March as we see this momentum also carrying into the second quarter.

Our OTC retail business is performing well. Based on our market analysis of the retail channel, our Advantage classic brands for dogs and cats were both top three dollar growth brands in the quarter. Our portfolio has benefited from the increased physical availability and higher than expected overall market share for the Advantage family in retail channels. In addition, we’re encouraged by Seresto. Our investment in the bold DTC advertising campaign this season drove a five-point improvement in unaided awareness for the brand. This is an important leading indicator to share growth. Broadly across our OTC portfolio, we are leveraging our market leadership to drive growth by implementing key initiatives in-store and online across brands and retailers as we enter the heart of the North American parasiticide season.

In the U.S. vet clinic market, visits continued to be pressured primarily as a result of labor and capacity constraints. Despite this impact and continued competitive innovation, the consistent execution of our strategy has strengthened Elanco’s position, driving in line or better than expected market share performance. Our expanded vet sales force has significantly increased our share of voice, an important leading indicator expected to lift the portfolio as the year progresses. Additionally, our elevation is elevating the relevance of our portfolio. We are focused on enhancing our partnership with strategic corporate accounts while also investing in key platforms used by the veterinarians. Our canine parvovirus monoclonal antibody, or CPMA, continues to ramp with sales improving sequentially each month to start the year.

In late April, we launched a new marketing campaign geared towards both pet owners and veterinarians to raise awareness of the virus, how it spreads, the effectiveness of Elanco’s breakthrough treatment. These efforts include the first-ever online parvo tracking tool, empowering pet owners and the veterinary community with game-changing intelligence to help keep puppies safe. With expanded supply capacity, we are enhancing our targeting efforts to drive penetration. Early data shows when clinics have the product in the freezer, outcomes for puppies, pet owners and the clinic staff are improved, leading to reordering. We expect continued ramp for the product throughout the year. Now moving to international pet health, where we estimate underlying constant currency revenue growth was approximately 9% in the first quarter on a year-over-year basis.

In line with our expectations, growth was driven by improved demand for OTC parasiticide products, led by Seresto in certain European markets including Spain. Additionally, we continue to see increased demand for the Credelio family and a strong ramp for AdTab in Europe. We are meaningfully investing in the launch of AdTab, including point of sale as well as digital and traditional direct-to-consumer advertising, which is permitted for OTC products in the region. Employing the same principles as the U.S., our strategic focus on physical availability and share of voice is driving a strong launch curve with limited cannibalization of our existing leading portfolio of collars and topicals in Europe. Now shifting to farm animal, globally we estimate underlying constant currency revenue growth was 1% to 2%.

In the U.S., approximately 11% of underlying growth was driven by poultry and cattle. In poultry, we benefited from the rotations and extended use of our products in the quarter. Going forward, this year we expect increased use of ionophore as the market continues to shift from no antibiotic ever programs to no antibiotics important to human medicine programs. In cattle, while there was a slight uptick in cattle on feed in March, we continue to see increased days on feed, broadly benefiting our medicated feed additive portfolio in beef. Medicated feed additives are the cornerstone of Elanco’s diverse farm animal portfolio and innovation is enabling us to gain market share at this opportune time. We continue to be pleased with the trajectory of Experior in the U.S. Continued adoption and expected increased use in heifers in the U.S., as well as the strength in Canada is giving us increased confidence that the product will approach blockbuster status globally in 2024.

The demand for Elanco’s livestock sustainability portfolio with Experior and anticipation of Bovaer is driving sales growth for Rumensin across both beef and dairy, further insulating one of our largest brands. Finally for our farm animal business outside the U.S., we estimate a decline of approximately 2%. Continued demand growth for poultry was more than offset by volatility in China, notably in swine, and we continue to take a cautious approach with regards to our expectations in China for the year. Overall, in the first quarter for our global business, our launched innovation and base portfolio growth drivers delivered. We have raised our expectations for the full year constant currency revenue growth to 2% to 3% before the contributions of our late stage pipeline.

Moving now to Slide 6, we made progress across our innovation portfolio and productivity strategy in the first quarter. On portfolio, we saw 2% price growth and the core business continues to stabilize. Regarding productivity, operating cash flow improved and the first quarter restructuring and aqua divestiture are progressing as planned. Now let’s get into innovation, starting on Slide 7. In late 2020, we shared our expectations to deliver high impact innovation to the market by 2025. Over the last three years, we have delivered over 10 innovations in addition to numerous regional products and lifecycle management improvements. Importantly, we remain on track to generate an expected $600 million to $700 million of revenue from new product innovations in 2025.

Moving to Slide 8, launched new products led by Experior, Nutraquest, AdTab, Credelow Plus, and Credelio Cat are performing in line with or better than expectations. This portfolio delivered $275 million in 2023, more than doubling 2022. Today, we’re introducing a new quarterly disclosure of our innovation sales. In the first quarter, new product sales contributed $100 million. We now expect this basket of products to deliver $375 million to $410 million for this year, excluding any contribution from our late stage pipeline. We are encouraged by the contribution of our innovation already in the market and are thrilled that the next phase of our historic launch window is right in front of us. As we have shared previously, the U.S. regulatory process is rolling and iterative.

We have had productive engagement with the FDA Center for Veterinary Medicine over the last several years and more specifically the last several months on all three key late stage programs. Since we started submissions for these products in late 2022, the majority of the technical sections and subsections have been approved by the Agency and we continue to be very confident in the approvability of these differentiated products. Moving to Slide 9, both Zenrelia and Credelio Quattro have progressed since February, and we believe the FDA has all the data necessary to complete its review of these products. For both products, we expect that all technical sections, including labels will be approved by the FDA before the end of June. After the approval of all technical sections, each new animal drug application, or NADA undergoes an expected 60-day final administrator review, putting our full approval expectations in Q3.

Now a little more on each product specifically. Zenrelia is our JAK inhibitor targeting the control of pruritis and atopic dermatitis in dogs at least 12 months of age. We remain confident this product will be differentiated from the current market option. Our market research shows clear interest and desire for additional options as we will continue to prioritize the optimization of the label to provide the most meaningful differentiation. We expect to have a very efficient approval to launch window targeting product in the market before the end of the third quarter. Additionally, we expect approval for Zenrelia in several international markets starting late in 2024, our fastest globalization effort ever. Now moving to Credelio Quattro, our broad spectrum parasiticide targeting coverage for fleas, ticks, heartworms and other internal parasites in a single monthly dose.

As we have shared previously, we expect Quattro will be differentiated from incumbent products in the markets with broader coverage. Specifically, we expect to have coverage of tapeworms, including those known to be zoonotic or posing risk to humans that cannot effectively be prevented by eliminating fleas. We expect this broader coverage and the ability to prevent heartworms after the first monthly dose that we are seeking to demonstrate to the FDA will position Credelio Quattro uniquely in the market. For Quattro, we’re targeting launch in the fourth quarter of this year. Finally, Bovaer, our first-in-class methane reducing feed ingredient for the U.S. dairy market is in the final stage of review with the FDA with completion expected before the end of May.

We appreciate the FDA’s commitment to maintaining high standards for risk and science-based review while balancing the need to quickly bring solutions to the market. The regulatory process for Bovaer underscores the need for the FDA’s innovation agenda to modernize our regulatory process. We are continuing to help shape the ecosystem for an inset carbon market to support progression towards the opportunity for climate-neutral farming, while also creating a revenue stream for dairy farms across the country. Several large CPG companies have indicated interest in partnering with their dairies and milk co-ops to reduce on-farm greenhouse gas emissions in their supply chains. The expected U.S. clearance of Bovaer will mark a significant milestone in opening up the next major market opportunity in animal health, livestock sustainability.

We look forward to integrating Bovaer into our portfolio and expect to begin selling the product in the third quarter. These three late stage products all with blockbuster potential are very meaningful to Elanco’s growth opportunity in the near and medium term and are expected to drive adjusted EBITDA growth over time. Based on the launch timing we shared today, the expected ramp curve and peak sales for all three products continues to support our goal of $600 million to $700 million of innovation revenue in 2025, with continued growth expected in the second half of the decade. We have an exciting few quarters ahead of us from a product approval and launch perspective; meanwhile, Ellen de Brabander and her team remain focused on advancing all phases of the pipeline from refilling the early stage projects to progressing our later stage programs.

We continue to believe that our IL31 monoclonal antibody for canine dermatology will be approved in 2025, and we are progressing many differentiated assets in both research and development. We continue to see a robust pipeline supporting our ambition to deliver consistent high impact innovation. With that, I’ll pass it to Todd to provide more on our first quarter results and financial guidance.

Todd Young: Thank you Jeff, and good morning everyone. Today I will focus my comments on our first quarter adjusted measures, so please refer to today’s earnings press release for a detailed description of the year-over-year changes in our reported results. Starting on Slide 11, in the first quarter we delivered $1.205 billion of revenue, a reported and constant currency decline of 4%. Price contributed 2% in the quarter. As Jeff referenced, the year-over-year comparisons for the first quarter are impacted by the ERP system blackout that occurred in 2023. Last year, we estimated sales of $90 million to $110 million shifted from the second quarter into the first quarter, reflecting a 7 to 9 percentage detriment to growth in the first quarter of this year.

With limited impact from foreign exchange rates, we estimate the underlying business grew 3% to 5%, slightly ahead of our expectations. The estimated impacts are noted on Slide 12 for each business area. For pet health, constant currency decline was 5% with an estimated headwind to year-over-year growth of 10 to 12 percentage points from the ERP blackout. In the U.S, pet health revenue declined 8%, including a headwind to year-over-year growth of approximately 11 percentage points from the ERP blackout. The return to underlying growth was driven by price, resupply of certain vaccines that were out of stock last year, a one-time benefit related to moving certain legacy Bayer products into distribution, and sales of new products. In the quarter, the business also faced headwinds from the weather impact in January, competitive innovation and lower vet visits.

Outside the U.S., our pet health business declined 3% in constant currency with an estimated headwind to year-over-year growth of approximately 12 percentage points from the ERP blackout. Underlying growth in the quarter was driven by a return to more normalized demand patterns in Spain, ramp of innovation products led by AdTab, and higher demand for the Credelio family of products and Seresto across Europe. Globally, our farm animal business declined 3% in constant currency with an estimated headwind to year-over-year growth of four to five percentage points from the ERP blackout. In the U.S, our farm animal business grew 8% with an estimated headwind to year-over-year growth of approximately three percentage points from the ERP blackout. The growth in the underlying business was driven by expanded Experior adoption, vaccine resupply, and demand for Elanco poultry products.

Outside the U.S., our farm animal business declined 8% in constant currency with an estimated headwind to year-over-year growth of approximately six percentage points from the ERP blackout. The decline in the underlying business was driven by weakness in Asian swine markets partially offset by increased demand for poultry in Europe. The majority of the year-over-year decline in the aqua business was a result of the ERP blackout. Continuing down the income statement on Slide 13, gross margin declined 350 basis points to 57.3%, in line with our expectations. The estimated impact on the year-over-year growth of gross margin from the ERP blackout was 130 to 200 basis points as more sales of high margin legacy Bayer Animal Health products were realized in the first quarter of 2023.

The remaining decline was driven by an approximate 170 basis point headwind from slowing manufacturing output as we worked to reduce balance sheet inventory and inflation, partially offset by price growth. Operating expenses increased 4% year-over-year in the quarter. R&D expenses increased $6 million primarily driven by employee-related expenses and timing of project expenses. SG&A expense grew 3% primarily driven by the expanded U.S. pet sales force, increased promotional activity across targeted pet health brands, and employee-related expenses partially offset by IT-related savings as a result of consolidating to one ERP system. Interest expense was $66 million compared to $64 million last year. Additionally, other expenses declined from $11 million in the first quarter last year to $4 million this year, driven by our simplified operations in certain volatile markets, including Argentina.

Moving to Slide 14, adjusted EBITDA was $294 million in the quarter. The year-over-year comparison was negatively impacted by an estimated $70 million to $90 million benefit from the ERP blackout in the first quarter of last year. For the underlying business, the decline was driven by higher sales more than offset by our decision to increase commercial investments to drive long term revenue growth in pet health. Adjusted EPS was $0.34 in the quarter. The year-over-year comparison was negatively impacted by an estimated $0.11 to $0.14 benefit to from the ERP blackout in the first quarter of last year. The slight increase to underlying performance was primarily driven by a favorable tax rate. Before moving to our guidance, let me offer a few words on our cash, debt and working capital on Slide 15.

Cash from operations was $2 million in the quarter. The $147 million year-over-year improvement in operating cash flow reflects improvement in inventory and savings from the reduction in project spend from the completion of our Bayer ERP integration. We ended the quarter with net debt of $5.466 billion as we paid down $13 million of debt, enabled by improvements in both operating and investing cash flow. At the end of March, our net leverage ratio was 6.1 times as our trailing 12-month EBITDA was negatively impacted by the ERP blackout from last year, which drove an estimated 0.4 to 0.6 turns of the increase. We continue to expect between $280 million and $320 million of free cash flow available for debt pay down this year. We anticipate the year-end net leverage ratio to be between 5.2 and 5.5 times before considering the expected debt pay down from the net proceeds from the aqua divestiture.

We continue to expect net proceeds to be between $1.05 billion to $1.1 billion, which we intend to use primarily for debt pay down, leading to an expected net debt to adjusted EBITDA ratio in the mid four times range at the end of this year. Now let’s move to our financial guidance, starting on Slide 17. For the full year, we are tightening our guidance range to reflect first quarter outperformance and the impact of the strengthening U.S. dollar. We are raising the bottom end of our constant currency revenue growth to 2% and updating adjusted EBITDA and adjusted EPS to reflect FX rates as of early May. As a reminder, our guidance does not include contribution from out anticipated late stage pipeline products and does not account for the expected impacts of the aqua divestiture.

On Slide 18, we provide further details on our updated revenue expectations. The raised constant currency growth is primarily driven by the U.S. farm animal and international pet health businesses, both from higher innovation sales and the base portfolio. The improved outlook also accounts for expected reduced sales for Kexxtone, a European cattle product. We have paused sales of the product while the manufacturing process is under review by the EMA. We expect the full year impact to be approximately $20 million of revenue and $18 million of adjusted EBITDA compared with our February guidance. Regarding FX, we now expect a $35 million headwind for the full year, $30 million higher than our February guidance. On Slide 19, we provide the bridge for adjusted EBITDA and adjusted EPS compared to our February guidance.

We now expect adjusted EBITDA to be between $960 million to $1 billion, inclusive of an incremental $15 million headwind from the unfavorable impact of foreign exchange rates. Excluding the FX impact, we are increasing the bottom end of our adjusted EBITDA guidance by $15 million and the top end by $5 million. Our improved constant currency assumptions reflect the Q1 over-performance and increased confidence in the full year. For adjusted EPS, we are raising our expectations to $0.88 to $0.96 for the full year despite unfavorable FX, as a result of Q1 over-performance compared to our February guidance, and improvements in both interest expense and tax. Slide 26 in the appendix provides updates to several of our additional assumptions. On Slide 20, we provide our financial guidance for the second quarter.

We expect revenue of $1.145 billion to $1.17 billion, adjusted EBITDA of $240 million to $260 million, and adjusted EPS of $0.23 to $0.26. As we shared last year and in the first quarter, as a result of the ERP system blackout in 2023, approximately $100 million of revenue, $80 million of adjusted EBITDA and $0.13 of adjusted EPS shifted into the first quarter from the second quarter of 2023, which will impact the reported growth rates for the second quarter of 2024. As shown on Slide 21, the estimated headwind to year-over-year revenue growth from the ERP blackout in the first quarter will unwind, contributing approximately 9 to 11 percentage points to second quarter revenue growth. Excluding the estimated impact of the ERP blackout, we expect underlying constant currency revenue growth will be 1% to 3%.

The shift is also expected to positively impact year-over-year growth of adjusted EBITDA and adjusted EPS in the second quarter, as shown on Slide 22. In line with our results in the first quarter, our EBITDA expectations reflect manufacturing headwinds from slowing down the plants and increased investment in our pet health business. Overall, we are executing ahead of our initial expectations for the year and look forward to delivering on the opportunity to launch exciting new products later this year. Now I’ll hand it back to Jeff for closing comments.

Jeff Simmons: This is a very exciting time at Elanco and we have momentum across our business. Our global team is highly engaged, intensely focused, and deeply committed to building on the positive trajectory we’ve set over the past three quarters. The strategic actions taken to sharpen our focus and invest in our commercial growth drivers are delivering results. Our focus on consistent high impact innovation is driving immense progress. We have two potential blockbusters, Experior and CPMA, already in the market with three more expected in the coming months. With these and our Aisle 31 product that’s slated for next year, we are on track to deliver meaningful growth from innovation sales over the next several years. As we enter this pivotal moment in Elanco’s trajectory, the stability within our leadership team and consistency of our strategy is paying off.

Our base business is growing, operating cash flow is improving, and contributions from new products are exceeding expectations. These factors combined with the durability of our diverse portfolio and balanced geographic presence gives us the confidence to increase our expectations for constant currency growth for the full year. Elanco is on track to deliver a strong 2024, and we look forward to continuing to engage with you all throughout the year. With that, I’ll turn it over to Katy to moderate the Q&A.

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

Operator: Thank you. At this time, we will begin the question and answer session. [Operator instructions]

Katy Grissom: We can go ahead and take the first question.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Jon Block from Stifel. Please go ahead.

Jon Block: Great guys, thanks and good morning. Jeff, interesting comments on the OTC para market. Why do you think the market is weak if the consumer is seemingly under pressure? Sometimes that pressure causes a trade-down, and I just want to make sure I understand, it does seem like you’re gaining share within that market performance, even if we normalize for some of the stocking commentary – maybe if you can elaborate on that. Then I’ll just ask my follow-up, for Zenrelia, it looks like you’re going to compress the launch timing – initially you called out two to four months, it seems like it’s going to move to something shorter than that, so just what changed or what will you change? Talk to us about your confidence there, and then how do we think about the launch timing internationally for Zenrelia as well? Thanks for your time.

Jeff Simmons: Yes, thanks Jon. Let me start with that second question first. Again, Zenrelia, we’re looking at technical sections approved, as we said, in the second quarter. The administrative process is 60 days typically, and that would go into the third quarter. As you know we have been and we’ve said very clearly that the production line and process for Zenrelia very much fits into what we do with other products like our parasiticides and made in our own facilities, so we’ve been preparing. We have product that is manufactured, that is ready. Of course, we’ll wait for the labeling, but we do believe that we’ve created additional efficiencies from the time from approval to launch, and that’s why we have our current expectation is to bring that product to the market actually in Q3.

That is our current plan. Relative to OTC, just real quickly, fundamentally yes, we see strong demand for our OTC products. That market is quite resilient even in the midst of some of the dynamics. Also, I think we see a little bit of the continuum pull back after the innovation entered the market inside the vet clinic to we’re seeing the more robust demand kind of coming back to the OTC products. Our portfolio is strong and we’ve put our strategy to work, which I think that’s what’s driving a lot of this, is the expanded physical availability. We’re now in club, dollar, grocery, the share of voice. I think I really want to point to Seresto – we’ve seen probably the most jump in brand awareness on Seresto since owning the product and owing Bayer, as we’ve seen unaided awareness up 5%, and a lot of that is the bolder campaign that I mentioned in my comments, and then we’re constantly optimizing price-volume, and then just overall the innovation from the classic brands in the U.S. to even I want to note AdTab is one of the fastest ramping products we have over in Europe in the retail market.

But look, I think to your specific question, we saw the weather impact overall. We have seen some trade-down occur in the OTC space. We now have a portfolio that can handle both the trade down as well as the premium products, so that portfolio is playing out, and we’ve seen a pretty nice jump back. January weather took it down, we’ve seen sequential improvement. We saw a 10% increase in March, actually, and we see that momentum carrying into the second quarter. Again, omnichannel approach that we took when we purchased Bayer is paying off. The strategy that Bobby and Ramiro have in place is paying off, and we continue to see this diversity as a really nice tailwind as we go into the vet clinic market now launching these new products.

Jon Block: Thank you.

Operator: Thank you. Our next question comes from the line of Erin Wright of Morgan Stanley. Please go ahead.

Erin Wright: Great, thanks. Can you remind us–I’ll ask two upfront here, because they’re a little bit related, but can you just remind us on what’s embedded in the guidance as it relates to the expenses associated with the upcoming blockbuster launches, and does this sort of increase certainty around these launches, does that change how you’re thinking about those investments that you’re making ahead of those launches? Then second would be on your conversations with the FDA and what changed, or what are some of the next milestones that give you that clarity on the launch timing; for instance, could you actually see approval before those timelines and would that change your launch timeline at all? Thanks.

Todd Young: Erin, thanks for the question on the launch side. We feel very good about the timing as we’ve laid out today. The teams are preparing from training the sales force to preparing marketing materials to be ready to go. At the same time, the biggest cost is really TV ads and running those TV ads, and so we’ve not included those expenses in the guide, just like we haven’t included the sales of Bovaer, Zenrelia or Credelio Quattro into the guide. We continue to believe we’ll be EBITDA positive relative to the guidance we’ve laid out today. I’ll turn it back to Jeff for the FDA question.

Jeff Simmons: Yes Erin, I might just broaden your question a little bit, and I’ll get to it. I think it’s really important. I know innovation and these blockbuster products, specifically Zenrelia and Credelio, are important to all of us, so let me just add a little framing to the comments I made when I opened the call here. First, we are very pleased with the progress we’ve made in these key assets since February – actually, a lot of progress has happened, and that’s driven our increased certainty as we move closer to the end of this approval process. Yes, the dialogue with the FDA has been rolling and iterative. We’ve been in a productive engagement with them, Erin, it’s been fair, constructive, frequent, and really over the last several months, we’ve been responding to the questions from the agency, which is very common.

I believe the Animal Drug User Fee Act, or ADUFA is working specific on these assets, it’s been constructive. So what’s changed and what has not changed since February? What has changed is many sections and subsections of these submissions have been approved, both products have progressed. Simply, though, the back and forth interactions have taken slightly more time than we estimated this path to first half approval, thus we’re now moving the final 60 day administrative review into the third quarter. I think importantly, we have increased certainty in the timing from all of this interaction that you mentioned. I think it’s also important to say what hasn’t changed. What hasn’t changed is we continue to expect the products to be differentiated versus the current offering.

We still expect all technical inspections, including the label, to be approved in the first half or by the end of June, and we expect that revenue contribution is still expected in this second half for these two products, as well as Bovaer. Again, importantly, we believe the FDA has what they need for the approvals and the launch planning, to your question on that, and the marketing is well underway. The U.S. pet health is well positioned right where we believe it needs to be relative to the launches. We’re as competitive as we’ve ever been. A good nice lead indicator is engagement scores in U.S. pet health – they’re as high as they’ve probably been in years, and the highest, I think, in the global company, so that’s a nice lead indicator that our preparedness is ready.

We will launch as soon as possible, as we’ve noted. We expect that right now to be Q3 for Zenrelia, Q4 for Credelio Quattro.

Katy Grissom: Thanks. We’ll take the next question.

Operator: Thank you. Our next question comes from the line of Michael Ryskin of Bank of America. Please go ahead.

Michael Ryskin : Great, thanks for taking the question, and congrats on the quarter and update. I’ll ask both at the same time as well. Following up on the new product approvals, especially Zenrelia and Quattro, you’ve been very transparent with us in terms of timing, both approval and launch, in terms of expectations for label differentiation, things like that. As you get closer to the expected date, are you seeing any change in the marketplace from the existing players – Zoetis for derm, and Zoetis and BI for Simparica Trio and NexGuard Plus, are they doing anything to build inventory, are they having any different conversations with distributors or vets? I’m just wondering how the market that you’re going to be entering is evolving as you approach the go-live date in 3Q, 4Q.

Then my follow-up, which will be a little quicker, I hope, is going to be on Kexxtone, the EU update you provided. It seems like a pretty meaningful flow-through there, so obviously it seems like you’re just cutting that off. Could you give us a little bit more color on what exactly happened in the EU, is there any chance that comes back at some point, just what we should look for from that in the next six, 12 months. Thanks.

Jeff Simmons: Yes, very good questions, Jon. Thank you.

Katy Grissom: Mike.

Jeff Simmons: Excuse me – Mike, I’m sorry.

Michael Ryskin: Thanks Katy!