Elanco Animal Health

Elanco delivered second-quarter results that included organic revenue growth and operating margins of 8% and 8.6%, respectively. The pet segment grew 11%, while the farm animal division was up 5%. Management raised its revenue and earnings-per-share outlook for the full year.

Why it matters: The positive impact of adoption of Zenrelia (dermatology) and Credelio Quattro (broad-spectrum parasiticide) initially accelerated in the first quarter and seems to have remained robust in the second. We continue to weigh whether the outsize growth and market share gains are mostly permanent conversions of clients, or the result of marketing and promotional support in the early days of these products that might wane over the longer term. While management highlighted inroads with corporate accounts in the first quarter, there was little mention of this category in the second. This could be a timing issue with contracts, or it could also suggest Zoetis is working aggressively to hold on to its corporate accounts.

The bottom line: We're leaving our $28 fair value estimate unchanged for no-moat Elanco, as slightly stronger top-line growth has been offset by higher-than-expected SG&A spending. Elanco has already indicated it would continue to invest in direct-to-consumer marketing to support its new products, including the upcoming full commercialization of Befrena. Our 2026 estimates fall within the range of Elanco's revised guidance. But until we are more confident that share gains are permanent, we hold tempered longer-term expectations through our explicit forecast period.

Coming up: It's not yet clear how Merck's launch of Numelvi might change the competitive dynamic in the increasingly crowded dermatology market. In the second quarter, Merck's companion animal segment revenue grew a mere 5%. However, it may be too early to see the effect Numelvi could exert. We're keeping an eye on this competitive situation, which could shift substantially over the next few quarters.

We're holding steady on our fair value estimate for Elanco at $28 per share. We have baked in relatively optimistic expectations for recent product launches that have gained adoption and displayed accelerated growth thanks to gains with corporate companion animal and retail customers. We project average annual consolidated revenue growth to 6% through 2030, on the strength of new companion animal products including Credelio Quattro, Zenrelia, Experior, and the addition of Befrena. With cattle and hog production gradually recovering from cyclical headwinds over the next few years, we expect Elanco’s farm animal product revenue to regain its momentum, reaching 4% annual growth through our explicit forecast period.

We project more optimistic adjusted operating margin expansion of roughly 11 percentage points between 2025 and 2030 mainly driven by decreasing amortization and improvements in pricing, manufacturing efficiencies, and salesforce productivity. With the addition of Elanco’s new companion animal products, we estimate gross margin should improve somewhat to 58% by 2030.

We assign Elanco a Morningstar Economic Moat Rating of none because the company has yet to establish any competitive advantage that we think can be maintained since its spinoff from Eli Lilly in 2018. Unlike rival Zoetis, which has amassed a base of intangible assets and proven its innovation mettle, Elanco’s less productive R&D has led to launches of me-too products years behind those of its competitors. We aren't confident Elanco has developed the ability to introduce novel therapies with meaningful benefits that command premium pricing, which helps to explain the ongoing gross margin gap between the two animal health pure-plays. As we consider Elanco's product mix between companion and farm animals, our outlook for farm animal growth in the medium term, the firm’s competitive position relative to Zoetis, and the firm's apparent lack of pricing power and failure to earn returns in excess of its cost of capital; we view a no-moat rating as appropriate.

For animal health companies, product mix can heavily influence margins. Companion animal products usually enjoy higher margins than production animal products, as many customers view their pets as full-fledged household members. On the other hand, meat producers are usually more sensitive to input costs when it comes to feed additives. Following the Bayer Animal Health acquisition in 2020, Elanco has improved its product mix thanks to Bayer’s reputable flea and tick prevention products for pets. Currently, about half of Elanco’s revenue comes from companion animal products, with the other half from farm animal products. In contrast, Zoetis’ overall mix is split between roughly 70% of total revenue from companion animals and only 30% from farm animals.

Even if we hold product mix constant and examine profitability when the split is 35% to 65% between companion and farm animals for both firms (derived from Zoetis’ 2014 income statement and Elanco’s in 2018), Zoetis’ gross margin was still approximately 1,200 basis points higher. We suspect that the different dynamics between pork and beef production contribute to this gap. We surmise American farmers are usually more willing to invest in beef production, as the US Department of Agriculture has three distinct grades for beef that could affect customer choices and product pricing. We suspect the uncertainty of beef grading could raise perceived risk among ranchers when faced with switching to new or lower-cost medications for cattle. This could play in Zoetis’ favor because its production animal portfolio skews toward cattle. For Elanco, a higher proportion of its revenue comes from pork producers that are not subject to a grading system.

Despite the secular growth of protein demand around the world, the cattle and hog markets experience production cycles with average lengths of 8-12 years for cattle and 3-5 years for hogs. This is another factor that influences the overall market of farm animal drugs. In the US, cattle inventory has been hovering at a decades-low at around 94.2 million, which is largely flat with the 94 million in 2025. We expect the market tension to persist over the next couple of years because heifer retention, the initial step of herd rebuilding, hasn’t picked up substantially yet due to continued droughts. Things are slightly better for the US hog market, with inventory fluctuating around 74 million since 2021, but still about 6% lower compared with the peak inventory levels in 2019. Moreover, Elanco’s biggest international market, China, currently has its own hog surplus, and Trump administration tariffs have also contributed to declines in hog purchases by China.

For companion animal products, Elanco owns a well-respected flea and tick prevention portfolio that comes in all kinds of administration methods, including topical (Advantage/Adventix), collar (Seresto), and oral (Credelio). We see traces of intangible assets across Elanco’s flea and tick prevention lineup, as we observe moderate pricing power over competing products thanks to the decades-long reputation among customers and veterinarians. However, pet owners have generally been migrating to combination therapy in the form of an edible chew, and away from topicals and collars.

In 2025, Elanco rolled out Credelio Quattro, its own all-in-one combination oral parasiticide and heartworm preventative for dogs. We’ve seen that this new class of broad-spectrum parasiticides and heartworm preventative can command higher margins as consumers are willing to pay a premium over the total price of the two or three products it is replacing for their efficacy and ease of usage. We're skeptical that Elanco can do much to dislodge Zoetis’ Simparica Trio from its top-dog position, but expect it can nibble away at Zoetis' share.

We see a similar competitive dynamic in canine dermatology between Elanco and Zoetis. Currently, Zoetis is the dominant player in this $1.6 billion market with two flagship products, Apoquel and Cytopoint, both of which have been selling in the US for more than eight years. Elanco is trying to catch up with its two competing therapies, Zenrelia and Befrena. We think Elanco can eat into Zoetis’ leadership position, but it’s not clear it can supplant Zoetis.

We do not think Elanco enjoys any moat from switching costs because customers often have the choice to switch to another product under the veterinarian’s directions if an alternative is available from a generic manufacturer. We also don’t see any cost advantage for Elanco given that the company is significantly smaller than wide-moat Zoetis, its main competitor.

Secular growth of global pet ownership should provide a continuous tailwind to the demand for Elanco products.

Expansion of e-commerce and retail channels may increase customer access to Elanco’s primary care portfolio.

New technologies including monoclonal antibodies enable entry into additional therapeutic areas that bring higher profitability.

Regulatory scrutiny on antibiotics used in meat production may limit the total market of Elanco’s feed additive products.

If recessionary conditions set in and pet owners feel the financial pinch, this could damp demand for Elanco's pet therapies.

Historically, poor research and development productivity and significant integration challenges have dogged Elanco, leaving it trailing significantly behind Zoetis.