Animal health company Elanco (NYSE:ELAN) reported Q4 CY2024 results exceeding the market’s revenue expectations , but sales fell by 1.4% year on year to $1.02 billion. On the other hand, the company’s full-year revenue guidance of $4.48 billion at the midpoint came in 1.2% below analysts’ estimates. Its non-GAAP profit of $0.14 per share was in line with analysts’ consensus estimates.

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"Elanco delivered a strong finish to 2024, achieving our sixth consecutive quarter of organic constant currency revenue growth — with the fourth quarter up 4% — and building momentum as we head into 2025," said Jeff Simmons, President and CEO of Elanco Animal Health.

Company Overview

Founded in 1954 as part of Eli Lilly, Elanco (NYSE:ELAN) develops, manufactures, and markets products for both pets and livestock, focusing on medicines that prevent and treat disease, improve productivity, and ensure animal welfare.

Specialty Pharmaceuticals

The specialty pharmaceutical industry relies on a high-cost, high-reward business model, driven by substantial investments in research and development to create innovative, patent-protected drugs for niche diseases. Successful products can generate significant revenue streams over their patent life, and the larger a roster of niche drugs, the stronger a moat a company enjoys. However, the business model is inherently risky, with high failure rates during clinical trials, lengthy regulatory approval processes, and competition from generic and biosimilar manufacturers once patents expire. These challenges, combined with scrutiny over drug pricing, create a complex operating environment. 

Looking ahead, the industry is positioned for tailwinds from advancements in precision medicine, increasing adoption of AI to enhance drug development efficiency, and growing global demand for treatments addressing chronic and rare diseases. However, headwinds include heightened regulatory scrutiny, pricing pressures from governments and insurers, and the looming patent cliffs for key blockbuster drugs. Patent cliffs bring about competition from generics, forcing branded pharmaceutical companies back to the drawing board to find the next big thing.

Sales Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Elanco’s sales grew at a decent 7.6% compounded annual growth rate over the last five years. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Elanco’s recent history shows its demand slowed as its revenue was flat over the last two years.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 2.6% year-on-year growth. Because this number is better than its normal revenue growth, we can see that foreign exchange rates have been a headwind for Elanco.

This quarter, Elanco’s revenue fell by 1.4% year on year to $1.02 billion but beat Wall Street’s estimates by 1.1%.

Looking ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months, similar to its two-year rate. Although this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.

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Operating Margin

Although Elanco was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 6.7% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

On the plus side, Elanco’s operating margin rose by 26.8 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its past improvements as the company’s margin was relatively unchanged on two-year basis.

This quarter, Elanco generated an operating profit margin of 13.5%, up 16 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was recently more efficient because it scaled down its expenses.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Elanco, its EPS declined by 3.2% annually over the last five years while its revenue grew by 7.6%. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

We can take a deeper look into Elanco’s earnings to better understand the drivers of its performance. A five-year view shows Elanco has diluted its shareholders, growing its share count by 31.9%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Elanco reported EPS at $0.14, up from $0.08 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Elanco’s full-year EPS of $0.91 to shrink by 2.5%.

Key Takeaways from Elanco’s Q4 Results

We were impressed by how significantly Elanco blew past analysts’ constant currency revenue expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its full-year EPS guidance missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 1.1% to $11 immediately following the results.

Elanco underperformed this quarter, but does that create an opportunity to invest right now? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.