ANIMAL HEALTH : Highlights from our 3rd annual Animal Health Conference

Research evidence excerpt

ANIMAL HEALTH : Highlights from our 3rd annual Animal Health Conference

Investment case, valuation and risks

Elanco Animal Health (Outperform, Target Price USD29)

Investment case

We rate Elanco (ELAN) as Outperform as Elanco is catching the innovation wave after

lagging for years with strong innovation momentum to date. We expect innovative

products (Quattro, Zenrelia, Experior) to continue to drive momentum, while the base

business stabilizes. We also like Elanco's deleveraging story, which may well attract

new long-term investors with leverage at or below 3.0x.

Valuation methodology

We value ELAN at 18.25x EV/2026E EBITDA, above its 5y average, on innovation

growth momentum and a de-risked and deleveraging story since the aqua sale. In our

view however, ELAN should still trade at a discount to ZTS, due to Elanco's lower

margins and higher leverage.

Risks

To the upside:

Zenrelia label improving further (or removal of boxed warning, rare) after Elanco

generates more data. Faster and materially better-than-expected uptake of Befrena.

Bovaer benefiting from a productivity claim and government incentives. Vet visits

returning to growth in the near-term and persistent ability to raise prices. Favorable

livestock producers' economics persisting in the long-term, FX and rates.

To the downside:

Very limited uptake of Befrena due to Zoetis' successful launch of LAI Cytopoint. Merck's

Numelvi taking material share from Zenrelia in Europe and in the US once approved.

Worsening macroeconomic environment to the extent pet owners materially modify their

purchasing behavior, significantly higher intensity of competition among the Big 4,

unfavorable corn & wheat prices and producers' economics, weather, major diseases

outbreaks, FX, and rates.