ELANCO ANIMAL HEALTH INC (ELAN) Q1 2021 Earnings Call Transcript

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ELANCO ANIMAL HEALTH INC (ELAN -0.54%)
Q1 2021 Earnings Call
May 7, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Elanco Animal Health Incorporated Q1 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Tiffany Kanaga. Please go ahead.

Tiffany Kanaga -- Head of Ivestor Relations

Good morning. Thank you for joining us for Elanco Animal Health first quarter 2021 earnings call. I am Tiffany Kanaga, 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 Katy Grissom from Investor Relations.

As always, during this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. You can find our press and the slides referenced on this call in the Investors section of elanco.com. The slides and press release also contain further information about the non-GAAP financial measures that we will discuss today during this call.

After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff to provide the highlights.

Jeffrey Simmons -- President and Chief Executive Officer

Thanks, Tiffany. Good morning, everyone. Before moving to Q1 results, I want to acknowledge our team and the challenges that they have overcome in the last two years through both the COVID and the African Swine Fever pandemics, the completion of our separation and independent system stand up and the integration of Bayer Animal Health in what remains a difficult environment. They've stayed focused on accelerating sustainable long-term value for customers for yourselves, the shareholders, and each other.

As you all know, over the past two years in Elanco, we have made several hard strategic decisions. Four of these decisions stand out to me. First, the Bayer Animal Health acquisition, not long after the IPO, also transforming our distributor strategy as well as changing commercial leadership, and accelerating our restructuring. Today, we are seeing the payoff from those choices and from the disciplined execution that I believe truly sets Elanco on a path to be a global Animal Health leader. Elanco started 2021 with better-than-expected sales, profits, and EBITDA, building on the strong momentum our business has shown since we closed the Bayer acquisition in August of 2020.

Turning to Q1 results on Slide 3, our first quarter revenue of $1.242 billion surpassed the midpoint of our guidance range by over $80 million, with broad-based outperformance across many categories and geographies. Our adjusted EPS of $0.37 landed $0.15 above the midpoint of guidance with expense leverage and synergy execution driving strong flow through to bring adjusted EBITDA to $343 million. Our expectation for continued sales momentum and operational execution is reflected in our increased full-year guidance for revenue, adjusted EBITDA, and adjusted EPS. This includes the eight innovation launches in 2021 which remain on track to contribute $80 million to $100 million in revenue this year. Our raised outlook demonstrates execution against our strengthened and expanded IPP strategy and continues to be in line with our long-term growth algorithm.

I'd like to take a moment to address Seresto on slide 5 and 6 before progressing to a more detailed review of our performance in the first quarter. Today, in a separate 8-K filing, we released additional scientific data to correct the misinformation spread through media reports regarding our Seresto flea and tick collar. The filing includes conclusions from a comprehensive review of adverse event data, which we have also provided directly to regulators and legislators.

First and foremost, let me emphasize, the health and the well-being of pets and their ability to enrich the lives of people through companionship is core to what we do and who we are at Elanco. One of our greatest concerns from these stories is that pet owners stopped using safe proven products to protect their pets from potentially harmful fleas and ticks which can transmit dangerous disease, and impact pet's quality of life. The potential danger around non-use present a risk to pets owners -- pets and their owners. That's why our team has worked tirelessly to clarify the science and safety around this trusted brand.

So let me summarize and be clear on Seresto. First, the product's strong safety profile is supported by registrations from more than 80 regulatory bodies around the world and our robust pharmacovigilance process. Also, there is no scientific evidence and clinical studies or pharmacovigilance reporting to substantiate that Seresto's active ingredients cause pet deaths. We are providing additional product surveillance information on Seresto to the EPA and we've shared information with the House of Representatives Subcommittee on Economic and Consumer Policy to set the record straight. We continue to actively cooperate with both on any supplemental request for facts.

Our proprietary market research indicates high levels of confidence among consumers and veterinarians bolstered by our proactive efforts to share the facts with pet owners, retailers, and veterinarian clinics. Importantly, in terms of revenue in the first quarter, we saw no deviation in two-year growth for global Seresto compared to historical trends. April revenue in the U.S. is ahead of our original expectations from the start of 2021. And we are on track toward full year expectations for the Seresto brand.

I'd like to highlight a few details I think are particularly noteworthy. Since the launch of Seresto in 2012, more than 28.5 million collars have been distributed across the U.S. Through our robust pharmacovigilance investigation process, 12 pet deaths have been classified as probably or possibly caused by the Seresto collar, using an internationally recognized classification system known as the ABON Coding. As a percentage of total Seresto collars sold, this results in an incident rate of 0.000042%, and very importantly, as recently reinforced by an independent third-party review, none of those 12 cases since 2012 were deemed causally linked to the active ingredients in Seresto.

The cases reflect other highly unlikely but unfortunate situations such as a collar getting caught on an object, and resulting in harm. We're deeply disappointed when any adverse event or reaction occurs associated with the product. Our entire Elanco team is dedicated to ensuring the quality, safety, and efficacy of our products. In the light of the misinformation around Seresto over the last two months, we've taken proactive steps to ensure consumer understanding of the product's strong safety profile.

We've offered educational materials across 20,000 veterinary clinics through enhanced in-store and online retailer advertising and directly to consumers through targeted social and online channels. In turn, our recently completed proprietary market research indicates that veterinarian and consumer confidence in Seresto remains high. Of the approximately 1500 U.S. pet owners surveyed the week of April 23rd, 98% of Seresto users intended to repurchase the product, aligning with the loyalty data cited with the Bayer acquisition.

A representative national sample of 246 veterinarians found that while about half of those veterinarians are familiar with the negative press coverage of Seresto, their reported use of the product and intent to recommend has not changed.

Slide 6 shows first quarter Seresto global revenue of $152 million. Recall that in Q1 2020, the brand achieved very robust 49% growth with the strongest sales gains in the U.S., benefiting from the retailer-driven stock-in due to increased consumer demand related to the pandemic. Last year also saw a meaningful increase in points of distribution in certain major retailers. In the first quarter of 2021, Seresto declined 9% versus tough comparisons and with colder February in the U.S., resulting in what are still very healthy and consistent multi-year trends.

Looking at two-year global Seresto growth, first quarter 2021 revenue was up 35% versus the first quarter of 2019. U.S. retail and veterinary dispensing data from Kynetec, Nielsen, and 1010data represents our closest view of pet owner purchasing. Two-year growth trends in March were well above a weather-impacted February and closer to January. While we do not intend to report dispensing data on a regular basis, we believe that provides important context in this case.

Additionally, let me share that we have not seen any material increases in Seresto returns. Looking forward, we continue to see a long runway for this trusted brand. To fuel that growth, we're investing in omnichannel efforts and digital engagement to deepen our relationship with current customers and reach new pet owners, including additional investments in the U.S. in the second quarter. Continued expansion in market building in key emerging markets including China, as well as a lifecycle management plan and connected care initiatives, creates ample opportunity overtime for this unique platform and trusted brand.

Moving now to overall pet health for the quarter on slide 7, the global business drove approximately half of the upside versus the midpoint of guidance, reaching $646 million for the quarter with good execution in a competitive but favorable industry backdrop. The Advantage family performed well in the quarter, posting global revenue of $143 million, up 14%. Growth reflected our targeted consumer retention efforts in the U.S. and particular strength in international markets, including China.

Pet health vaccines also remained strong in the quarter in a beneficial vet clinic backdrop and reflecting operational discipline under new leadership installed last August. U.S. pet health including vaccines was a key driver of the 2% increase in price achieved for total Elanco. It reinforces that our channel strategy is working and creating real demand. In the U.S. and across the global business, our aggregate channel inventory levels of distribution remain consistent with prior quarters.

In parasiticides, Credelio saw robust double-digit revenue growth. EDI accelerated from the fourth quarter and trends were especially strong at retail. Our omnichannel leadership as one of our five key growth enablers positions us well as the retail channel outgrew this industry in the first quarter despite beginning to cycle difficult comparisons from the consumer-driven demand. Credelio and Interceptor Plus revenue were in line with our expectations for the quarter as the pairing opportunity continues to resonate with veterinarians and pet owners offering comprehensive flea, tick, and worm coverage.

Meanwhile, our defend brand Trifexis continues to see share erosion by industry innovation. We're managing declines and optimizing profitability for this older brand through targeted omnichannel efforts with Trifexis growth at retail once again acting as a partial offset to decreases in the clinic. In therapeutics, Galliprant had robust double-digit growth in the first quarter with share gains in the U.S. and said market, according to the Kynetec data. Galliprant is also running a bit ahead of our expectations in Europe. We're working to grow the brand to be our 10th blockbuster through our positioning strategy as first-line treatment with easy at-home dosing and through its continued global expansion.

Overall, I'm encouraged by our commercial execution in pet health in the first quarter, exceeding our expectations from our last earnings call in February. We head into the remainder of the year with an optimistic but balanced view for the pet health business. Our increased full year guidance incorporates growth from upcoming and recent innovation, omnichannel leadership, leveraging our digital ecosystem, optimizing our selected channel partners, and expanding in new geographies, including the fast-growing Chinese market while recognizing the highly competitive nature of the pet health industry.

Turning now to the Farm Animal business, in the first quarter, we saw stabilization in our U.S. cattle and swine businesses as the backdrop has normalized from the COVID pressure we saw in 2020. Elevated fee costs continue to pressure producer economics. However, they enhance the value proposition for our efficiency products like Optaflexx and Rumensin, which outperformed our forecast in the quarter. With the Rumensin, we continue to navigate generic competition, and our share assumptions remain in line with our expectations.

Finally, we benefited from competitor stock-outs in U.S. cattle vaccines and implants, a tailwind we do not anticipate extending into the second quarter. Outside, the U.S. poultry and aqua continue to be negatively impacted by unfavorable macroeconomic conditions and reduced consumption. As we shared previously, international poultry challenges are concentrated in mid-sized emerging markets. While the outlook for global poultry industry is gradually improving, significant differences remain between countries and the global poultry trade is still very competitive. In aqua, we were encouraged to see salmon prices inflect positive year-over-year to end the first quarter. We continue to look for trends in our international poultry and aqua businesses to improve mid-year with reduced pandemic and economic related headwinds. Both species again remain important growth drivers for Elanco over time.

And then finally in China swine, we saw another quarter of strong recovery from African Swine Fever headwinds while remaining vigilant around the potential impact of new outbreaks. Chinese producers are under pressure with hog prices down 40% over the course of the quarter, driven by sow herd reduction from new ASF spikes as well as higher ASF related costs and more expensive feed. The sow herd reduction is likely to impact the second quarter and third quarter. We continue to expect China across swine, poultry, and pet health to contribute 4 percentage point of growth to total Elanco revenue in 2021.

Our first quarter results reflect progress in several key areas including the Bayer acquisition changing our revenue mix from 30% pet health and 70% farm animal to a 50-50 split, the commercial execution that our new leadership is bringing across U.S. pet health, U.S. farm animal, Europe, and international, our accelerated pace of synergy capture, and finally, the underlying demand that our teams are generating as part of changing our distribution strategy in 2020.

As you'll see on Slide 8, our outperformance in the first quarter comes as we continue to execute against our strengthened and expanded innovation, portfolio, and productivity strategy or IPP. Turning to Slide 9, I'd like to provide a status for the eight launches planned this year with 11 of the 13 geographic approvals received and the focus now turning toward launch execution and excellence.

On the farm animal side, Increxxa is meeting our expectations in the competitive EU market and is performing well as part of the first tranche of launches in the U.S. Experior, a first of its kind product indicated to reduce ammonia gas emissions per pound of carcass weight in cattle shipped to its first feedlot customers in the first quarter and is being fed to cattle today.

We are introducing two products to support the raised without antibiotics or RWA market, Clinacox, which launched in the first quarter, and ZoaShield which we sourced externally to build our portfolio in this key space. These two products join Cosabody in a nutritional supplement, which has now achieved the necessary heat-stable formulation.

Moving to pet health, as we shared in February, Credelio Plus launched in Japan at the beginning of the year. We have now received the marketing authorization in the EU, clearing the way for a second quarter launch, while Australia remains on track for the third quarter in time for the local parasiticide season. And finally, Credelio CAT and Elura have launched in the U.S., adding to our growing feline portfolio.

With that, I'll turn the call to Todd to provide more color on our results, the rapid progress being made on Bayer Animal Health Integration, and our independent stand-up as well as our outlook.

Todd Young -- Chief Financial Officer

Thanks, Jeff. Slide 10 summarizes our financial performance highlights including our reported net income and earnings per share. On slides 27 to 34 in the appendix, you can find a summary of the adjustments made to the reported results to arrive at our adjusted presentation. I'll focus my comments on our first quarter adjusted measures in order to provide insights on the underlying trends in our business. So please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results.

Looking at the adjusted measures on Slide 11, you will see that total Elanco revenue increased 89% in the quarter on a reported basis with a neutral impact from foreign exchange for legacy Elanco. I'll break down the effect of Bayer on our revenue growth in a moment. On Slide 12, there is a visual representation of our revenue outperformance versus the guidance range that we provided in February. The key drivers of the better than anticipated results in order of magnitude were commercial execution in our international pet health business, stabilization in U.S. cattle and swine, recovery in China swine, execution in a favorable backdrop in U.S. pet health vaccines as well as currency tailwinds. Adjusted gross margin as a percentage of revenue was 59.2%, an increase of 920 basis points compared to the first quarter of last year. As Jeff mentioned earlier, the Bayer acquisition dramatically increased our exposure to the rapidly growing pet health side of the industry. This higher margin portfolio driven by Seresto, the A family, and the first half seasonality of the northern hemisphere's flea and tick season had a very positive impact on our gross margin. In addition, we saw the benefit of positive price on Elanco's legacy portfolio, some shift in the expenses into the second quarter with the legacy Elanco ERP cutover and continued productivity gains.

Total operating expense increased 75% in the first quarter, including the addition of the Bayer Animal Health business. Compared to our guidance from February, we experienced an approximate $30 million shift of investments from the first quarter into the second quarter or approximately $0.05 per share of earnings. The delayed expenses include more opportunistic and effective phasing for direct-to-consumer and digital advertising with the cooler weather delaying the early parasiticide season, and with the timing of R&D project spend.

Operating income increased 271% reflecting the Bayer Animal Health acquisition, the shifted operating expenses that I just described, the broad-based outperformance in revenue and gross margin, expense leverage, and synergy execution. At the bottom line, Q1 adjusted net income increased 239% to $182 million. The Q1 effective tax rate was 21.3% and with our adjusted EBITDA at $343 million, our adjusted EBITDA margin for the quarter was 27.6%.

Now let's discuss our revenue performance more closely. On Slide 13, you will see a breakdown of the contribution from legacy Elanco and legacy Bayer portfolios by category. Legacy Bayer products contributed $559 million in the quarter. As previously discussed, with the first quarter results, we have transitioned to reporting revenue by species to provide greater transparency. Pet health had $645 million of revenue or 52% of total Elanco, marking our first quarter ever with more than half our business attributed to pets. Cattle contributed $267 million or 20% -- 21% of total Elanco revenue in the quarter. Poultry added $166 million, representing 13%, swine $123 million or 10%, and aqua $22 million or 2%.

On Slide 14, you can see the effect of price, rate, and volume on revenue performance. The benefit of the Bayer acquisition is reflected in volume. As is typical with acquisitions, we will continue to report the addition to the Bayer business in volume through the third quarter of 2021, when we begin to lap the closing of the acquisition. For the legacy Elanco business, price was up 2% for the quarter, demonstrating the value of our innovation, the ongoing discipline we are applying despite competitive pressures, improved commercial execution, and evidence that our channel strategy is working.

Slide 15 provides a breakdown of our overall performance between the U.S. and our international operations. We have further outlined our geographic performance by pet health and farm animal as well as contract manufacturing, all of which benefited from the addition of Bayer. We expect to file a 10-Q shortly.

But moving to Slide 16, let me offer a few words on working capital, cash, and our debt leverage. In the U.S., consistent with the prior three quarters, we held all distributors at 60 day payment terms. In the first quarter, days sales outstanding stood at 69 days, up slightly from 66 in the fourth quarter, but well below the peak of 103 in the first quarter of 2020. The three-day increase in Q1 reflects a $102 million of additional sales compared to Q4 2020, including $75 million more in our international business, where we generally have slightly longer terms than in the U.S.

We ended the first quarter with $515 million in cash and cash equivalents on our balance sheet. With gross debt of $6.25 billion, our net debt is $5.74 billion. As a result of system cutovers, we exited the quarter with $50 million drawn on our revolver to manage intercompany-related liquidity. This drawdown has already been repaid in full. We continue to anticipate gross debt pay down of $500 million in 2021 and we now expect in 2021 with net leverage of approximately 5 times compared with our prior year-end target of approximately 5.5 times, reflecting our increased adjusted EBITDA outlook.

Now I will transition to our full-year and second quarter 2021 outlook, starting on Slide 18. Today we are updating full-year '21 guidance by increasing and tightening the ranges for total revenue, adjusted EBITDA, and adjusted EPS to reflect the good momentum to start the year. We now anticipate 2021 revenue of $4.68 billion to $4.73 billion, adjusted gross margin of 56.75% to 57.25%, and opex of $1.78 billion to $1.8 billion leading to adjusted EBITDA of $1.055 billion to $1.095 billion.

Our full year spend as a percentage of revenue is expected modestly higher to previously forecasted as we lean into strategic commercial opportunities and with increased legal expenditures and the impact of foreign exchange. Our interest expense and tax rate assumptions are unchanged, while we now expect depreciation of approximately $195 million and weighted average diluted shares of $488.7 million. Then the flow through from our higher revenue guidance is driving our increased adjusted EPS outlook of $1 to $1.06. We also continue to anticipate approximately the same capex, net cash outlays, and cash taxes as discussed in February.

Slide 19, offers a refreshed view of the bridge from our 2020 combined revenue to our raised 2021 guidance. In comparison to our February update, the anticipated currency headwinds has shifted to a $20 million to $30 million tailwind. COVID recovery is occurring at a faster than expected pace and we are reflecting the strength we saw in our portfolio growth in the first quarter.

Importantly, we continue to expect innovation to contribute $80 million to $100 million in new revenue, which combines with our base portfolio to deliver approximately 4% to 5% underlying growth for the year. Our guidance remains balanced and grounded in the reality of ongoing headwinds from competitive pressures, generic entrants as of the outbreaks in China, and macroeconomic challenges in the international poultry and aqua.

Moving to Slide 20, we are providing guidance for the second quarter of 2021. We expect revenue of $1.225 billion to $1.255 billion, adjusted EBITDA of $250 million to $275 million, and adjusted EPS of $0.22 to $0.27. Our outlook reflects a sequential increase in opex in terms of dollars and as a percent of revenue with the delayed timing of investments from the first quarter. We are also increasing investments to drive Seresto.

I want to spend a moment on the seasonality of our combined company and the resolving quarterly cadence as detailed on slide 21. Our full year guidance currently anticipates in the first half of the year we'll represent approximately 53% of full year revenue, and approximately 60% of full year adjusted EPS in 2021. This dynamic is reflected of typical seasonality in our higher margin parasiticide products more than offsetting innovation gaining traction in the second half of 2021.

For reference, on Slide 22, historically just over 70% of Seresto revenue and just under 60% of Advantage Family revenue incurs in the first half of the year on average. Combined Seresto in the A family had $578 million of revenue in the first half of 2020 compared to $320 million in the second half, equating to $258 million more of this higher margin revenue in the first half. Given the relative scale of these products and their margin contribution, the revenue timing translates to an outsized first half contribution to EPS, as well.

Additionally, this year we have discussed the shift of $30 million or $0.05 of earnings from the first quarter into the second, impacting the cadence of EPS. This push back of operating expense creates a pull forward of $30 million in adjusted EBITDA. While seasonality may create shifts in any given year, like this $0.05 push of expenses in 2021, we would expect EPS between Q1 and Q2 to be more similarly sized assuming normalized weather conditions.

Before I conclude, let me provide an update on the Bayer Animal Health integration and our independent Elanco stand-up. We are progressing toward the synergy capture targets that we accelerated with the December Investor Day contributing to our margin expansion in the quarter. We continue to expect $160 million to $175 million in synergies this year, on the path toward $300 million by 2023.

Meanwhile, our cost to achieve in 2021 has come down by $30 million to $35 million resulting in a forecast of $125 million to $130 million in cash costs for the year compared to $160 million that we anticipated at our December Investor Day. Our team has managed the complexities of an acquisition of this size while completing our separation from Lilly on time in the first quarter. While we are saving $30 million to $35 million on the cost to achieve the Bayer synergies, the separation standup from Lilly is projected to cost $15 million to $25 million more than we forecasted last year as continued hyper-care is needed to manage through the transition to our new ERP system, business process changes, and the start-up of our new shared service centers in Poland and Malaysia.

To close, I would like to echo Jeff's comments at the beginning of the call and thank our global team for their dedication, resilience, and execution as we went live on our stand-alone Elanco ERP system during the quarter. The efforts to establish new legal entities across the world; transition significant IT infrastructure, applications, and data; open two regional shared service centers; and exit the nearly 1300 Lilly TSAs was a significant effort. I am grateful to all those who contributed to make this achievement possible. While we are not finished in making these changes efficient in their execution, our team continues to work through a hyper-care support model to ensure we are taking care of our customers, vendors, and team members.

Now, I'll hand it back to Jeff.

Jeffrey Simmons -- President and Chief Executive Officer

Thanks, Todd. Before questions, let me just briefly summarize. Elanco started 2021 with strong results, building on the good momentum to end last year. Our team is now executing and we're clearly beginning to see the payoff from those hard decisions that I discussed that we've made since our IPO. We expect momentum to continue in the second quarter and the balance of the year as evidenced by our raised guidance ranges today. We're demonstrating commercial competitiveness in pet health with the benefit of a favorable industry backdrop and we're successfully mitigating the misinformation around Seresto with both April and full year revenue on track for our original expectations for 2021 with Seresto. Our U.S. Farm Animal fundamentals have stabilized, while China swine was ahead of our expectations, although ASF outbreaks and animal numbers must be watched closely.

Our forecasts are balanced, as Todd said, as we recognize a highly competitive pet health environment as well as the headwinds from generics, particularly in the farm animal side. Overall, we are confident that our strengthened and expanded IPP strategy will continue to drive long-term value creation for our shareholders and society. Elanco's healthy purpose or our 2030 sustainability pledges continue to fold into our business objectives and we are focused on the opportunity to partner across industry players as we strive to create a better future for society.

As a part of our separation from Lilly and the integration with Bayer Animal Health, we are building a fit-for-purpose organization with the governance controls and initiatives in place to create a global animal health leader. We look forward to sharing our first Environmental, Social, and Governance or ESG report in the coming weeks as further reflection of our commitment to a healthy enterprise.

With that, I'll turn it over to Tiffany to moderate the Q&A.

Tiffany Kanaga -- Head of Ivestor Relations

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. Diandra, please provide the instructions for the Q&A session, and then we'll take the first caller.

Questions and Answers:

Operator

[Operator Instructions] Your first response is from Nathan Rich with Goldman Sachs. Please go ahead.

Nathan Rich -- Goldman Sachs & Co.LLC -- Analyst

Good morning, thanks for the questions. And Jeff, thanks for all the additional details on Seresto. I have a few questions on that and maybe I'll throw them out to you all upfront. On the survey of vets that you referenced, it sounds like there is no in -- change in intent to recommend the product. I just wonder if there is any additional feedback or color that you can share from vets on how they view the efficacy and the safety of the product? And then in terms of the conversations you've had with the house subcommittee, can you maybe talk about the nature of those discussions, and are there any timelines that we should be watching here? And then lastly, can you share your expectations for global Seresto revenue this year? Is that kind of two-year growth of 35% maybe without putting to fine a point on it? Is that how we should be thinking about growth for the full year for Seresto? Thanks a lot.

Jeffrey Simmons -- President and Chief Executive Officer

Yes, let me cover the first couple of questions, and then, Todd, you can add on. So thank you, Nathan, for the questions. Yes, a lot of effort, again on Seresto and my comment upfront I think it's very important as this misinformation -- it's very important to clarify. That's why we've worked tirelessly against this. That's why we filed the 8-K because we believe that non-use or the removal of a collar with non-use presents significant risk. So with that said, just to answer, we saw in the surveys very much what we saw when we did the diligence on Bayer relative to loyalty, loyalty by pet owners, as well as the veterinary community. We've engaged very closely with the veterinary community, of course on the science, on the pharmacovigilance data, and all I can say Nathan is there is no change in their intent to recommend the product, and again it's being used differently around the country in the U.S. with vets and with the retail. But again overall support has been reinforced in a significant way and the veterinary community has been outspoken and supportive and we're very appreciative of them relative to the regulatory process that the EPA has, pharmacovigilance process, and the science. So that's important. And then when we look at the subcommittee, what I would say is we've engaged with them, we have presented them information, and we will continue to engage with them, Nathan. There is no timeline or next steps that I can report here other than to say that we're being collaborative. The information that was in the 8-K was a representative sample of what we've shared with them and we'll continue to engage with them as well as the EPA as we go forward.

Todd Young -- Chief Financial Officer

Nate, with respect to guidance for Seresto, we're not guiding on any specific brand or product on a full year basis. We'll say that we're pleased with how Seresto has held in in the face of this miss information campaign and the dedicated loyal users of this trusted brand and why we've sold over 75 million collars since its launch on a global basis. That being said, we talked about the tough compare from COVID. As you can see on our Slide 19, in the revenue bridge, we do expect a $40 million to $50 million headwind this year on the Bayer OTC products from the COVID lift they got a year ago, and as Jeff said, generally tracking with our expectations for a full year Seresto in 2021.

Jeffrey Simmons -- President and Chief Executive Officer

And we'll continue to invest in the second quarter, as we mentioned, on digital and omnichannel efforts to sustain the momentum need as well.

Tiffany Kanaga -- Head of Ivestor Relations

We'll take the next question.

Operator

Thank you. Your next response is from Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Hey, thanks for taking the question, guys. Jeff, one for you to start. You had a couple of comments in your prepared remarks on China and obviously good growth in the quarter, but then also, there were some concern and thoughts on ASF resurgence and herd reduction. I was just wondering if you could quantify that a little more? How much of that are you seeing already? How much of a risk is at the China revenues for the year? You had mentioned solid contribution of 1% for full year growth, but just want to go a bit more to the ASF -- where to look? How you think that that could play out? And then for Todd, on the gross margin line, really great result this quarter, 59%, well ahead of constant expectation and it seems like for the full year guide that's where most of the EBITDA margin gains have come from. I was just wondering if you could clarify where you're seeing the gross margin improvements over the last couple of quarters? Is it on product mix? Is it some of the operational initiatives? Is it Bayer integration? So where are you seeing the gains and how is that going to continue going forward?

Jeffrey Simmons -- President and Chief Executive Officer

Yes, Michael, relative to ASF, thank you for noting that. Again, a really strong first quarter for China overall, I will note that we continue to reiterate that that represent still believe a full percentage point of growth for Elanco. I see all three dimensions of the business doing really well with perhaps in poultry, complementing a very big pig business and even our warm water fish business that we got from Bayer. So China is doing extremely well, but we do note a few things that have happened here during the quarter. We've seen a new wave of ASF resurgence. It's impacted prices, as I mentioned in animal numbers, we've seen, Michael, largely fell in the northern provinces with reports showing 20% to 30% of the sows lost. So that's going to impact pig numbers as we go forward in the second and third quarter. Price is also pressured so they've seen really three impacts on their P&L. They've seen the impact of prices, the economics of the pigs coming out, increased fee cost, and then ASF costs. So there is some economic pressure. But I think as we look at our customer base again the industrialized customers are getting hit by some of this, but are more prepared to weather this change. They've got stronger biosecurity and are probably being impacted much less than the other parts of the industry and still experiencing high profitability. So again we feel strongly that China swine will be a major contributor for us for the year, but we're noting to watch out as we go into the second and third quarter relative to these resurgents. We'll give you more updates as we go forward.

Todd Young -- Chief Financial Officer

Michael, thanks for mentioning the 59-plus percent gross margin here in Q1. Very pleased on the productivity initiatives. Dave Urbanek and his manufacturing quality team continue to execute on our broad-based productivity initiatives in order to hold cost flat as we grow revenue. You combine that with the mix that we see with the high margin parasiticides in the first half of the season and we get this dramatic increase in Q1 in gross margin. Noting it sequentially, we actually increased margin in Q1 more than we increased sales and that's purely that product mix that happens. It's why we told out today of the seasonality and provided the slides as part of the earnings presentation. This change that we now have at Elanco with the 50 plus percent pets here in the first half and that high margin that comes with it. We continue to take price as we called out. We apologize for not being able to provide greater price transparency in the Bayer business but that's the nature of the acquisition and next year in this time, we'll be providing price on the total business versus just on the legacy Elanco side. So again just great effort by the team along with great sales execution and the mix benefit that comes from that.

Tiffany Kanaga -- Head of Ivestor Relations

Next caller, please.

Operator

Thank you. Your next response is from Erin Wright with Credit Suisse. Please go ahead.

Erin Wilson Wright -- Credit Suisse Securities LLC -- Analyst

Great, thanks for taking my question. So the first one is on the broader livestock business, can you give us a breakdown of the US and international performance at legacy Elanco and legacy Bayer anecdotally? How maybe Rumensin competition is playing out relative to your expectations there and how we should be thinking about the quarterly progression of the livestock segment? And then on Advantage, can you give it's strength across that Advantage portfolio in the quarter? Were there any stocking dynamics we should be aware of for that product line or did you see any sort of shift to Advantage from Seresto for instance, or how should we be thinking about the quarterly progression there? You did mention obviously the seasonality but will this be promptly going forward? Thanks.

Jeffrey Simmons -- President and Chief Executive Officer

Thanks, Erin. Let me take--let me start with just briefly on Advantage and then I'll jump to Farm Animal and, Todd, if you want to share anything on the breakdown. But real quick, yes, the Advantage families performed very well in the quarter, as we mentioned, posting a 14% growth even with challenging weather in February. Erin, this really -- it plays back to what we shared a little bit in our diligence with the Bayer acquisition. First of all, we're benefiting from that shift out of the vet clinic and into retail. We also have put a very increased effort on digital and marketing efforts that we really acquired with Bayer, that really is targeted around customer retention coming from last year's COVID, that people had have moved to Advantage maybe for the first time or have come back to the brand. So with digital marketing efforts in the U.S., particularly, we're increasing that. And then I think the third contributor is it's doing extremely well in China. It is a well-known brand, and multinational brands do well there. We have a large team focused on this and Advantage is exceeding our expectations in China at this time. And then again, it's a defend brand. We'll continue to look at it in a balanced way. But we do have some new opportunity here that we see between COVID, China, international markets. And then we'll put lifecycle management behind that. On the farm animal side, I'll say at a high level and, Todd, if you'd like to elaborate any more on the breakdown, but look, we have seen a stabilization coming through COVID. We've seen increased feed cost, which means our value products continue to do very well. We've seen particularly the U.S. swine industry looking at growing 6%, cattle, beef yards are as full as they've been. That's continued from fourth quarter of last year into this quarter. So cattle on feed is up as well and so what we see is in a maybe low single-digit marketplace. We're looking to grow low to mid-single digit with a combination of these dynamics, with the performance products, with our Rumensin generic strategy working very well with the broadest portfolio, the Bayer addition that was in the cattle industry out traveling last week, our enhanced and expanded cattle portfolio with products like Cydectin and Baytril have helped our offer. And then we're introducing, as you know, five new products on the farm animal side. So, we do expect to take market share this year on the farm animal side and have a balanced approach as we've put that into the guidance.

Todd Young -- Chief Financial Officer

Erin, just to add on the first part of Jeff's answer on stocking. No stocking issues at all on Advantage, we'll benefit from that in the Q1 results. With respect to legacy Elanco farm animal growth, as reported, it was down 7% in the quarter that did include -- last year we had a pretty significant OUS buy-in on COVID that affects that as well as a few of the divestitures from the Bayer deals. That gets us closer to flat in Q1 from a growth standpoint with the China swine being the big driver, while aqua and international poultry continue to pressure things. On the legacy Bayer side, as we mentioned in Q4 results, there was the timing of the price increase. Year-over-year we had moved that from January 1 out into February to be aligned with when we do the prices in the middle of the quarter. So there is no timing elements on pull forwards or push outs of revenue. That change did drive increase in sales for the Bayer portfolio on a year-over-year basis here in Q1 that we've reflected in our guidance given we'd expected a lower amount in Q4 of last year.

Tiffany Kanaga -- Head of Ivestor Relations

We'll take the next caller please.

Operator

Thank you. Your next response is from Jon Block with Stifel Please go ahead.

Jonathan Block -- Stifel Financial Corp. -- Analyst

Thanks, guys. Good morning. First question is just on Seresto spend. If you can talk on just what the plan is with the outreach? In other words, Jeff, did you get further increased overall awareness of the collar or actually, do you want to proactively highlight the perceived safety issues because I think there is actually a good number of consumers that aren't in the read, and aware of the details. And then just to shift gears, Todd, the innovation of $80 million to $100 million, I believe that's unchanged. Is there a way to wait the 1H versus 2H contribution just as we think about and try to frame the year-over-year growth rates of the innovation bucket? Thanks, guys.

Jeffrey Simmons -- President and Chief Executive Officer

Yes, Jon. Great question. So the first thing we did right out of the gate, was in addition to the market research to understand the status and the impact of the misinformation, we looked at that first immediately as well as working with our pet retailers. Again, a good share of use also is with these major retailers. So that was -- the first thing we did was we looked at this and as I noted and as you even comment the awareness was very low. So we balanced really three segments users, pet retailers, and the veterinary community. What we did was, we've increased our share of voice, we have moved safety up as you look at staging messages, no question efficacy, and the benefits to the overall product still remain as message one but we moved with our new expertise in marketing and digital capabilities. We moved safety up as just a key message as part of our messaging. What we're planning to do as we go into Q2 is to build on the momentum, similar to what we have with Advantage, and to reach more pet owners, as well as continue to assure that we get the loyal users that we've had in the past, going into the new season. So those are the things that we're doing. Then I would also say we're continuing to be very aggressive in international markets as well. It's still a very strong brand in Europe and it's meeting our expectations in Europe. And again, being launched and still in the early stages in China as well.

Todd Young -- Chief Financial Officer

John, thanks for the question on our innovation portfolio. As we have called out, we still expect the $80 million to $100 million of revenue for the full year. I would say on a first half, second half basis, it was closer to 70% weight into the second half.

Tiffany Kanaga -- Head of Ivestor Relations

Next caller, please.

Operator

Thank you. Your next response is from Chris Schott with J.P. Morgan. Please go ahead.

Chris Schott -- JPMorgan Securities LLC -- Analyst

Great, thanks so much for the questions. Just would like to -- to Seresto -- I guess just bigger picture, do you feel you're out of the woods from a commercial standpoint? So if there were going to be some impact from the headlines you saw in 1Q, you would have already seen it and now it's more about going on offense. I'm just trying to get sense of -- are you still kind of worried about this lingering issue playing out? Or is that more in the rearview mirror at this point? And then I think you touched on some of the individual products. But just bigger picture on international pet health dynamics. You highlighted that's your biggest upside driver versus the 1Q guide. I guess it's -- just how much of this is execution versus just the broader markets being a bit healthier than expected? And are there any particular products or markets that are standouts relative to the -- that broader business? Thanks so much.

Jeffrey Simmons -- President and Chief Executive Officer

Thanks, Chris. Look, we're going to be diligent and execute with excellence here on Seresto. As Todd highlighted, it is a seasonal product. We are into May. We highlighted that April was a strong April. So what I would say is we are feeling very good where we stand today. But again, we won't take anything for granted. The other is we'll continue to work very closely with EPA and the legislators to answer their information, but we are not letting up on this brand. This brand is a significant -- it is the fifth largest brand of all time in animal health. It has a loyal customer base. It has a much bigger platform for us globally as well as with Connected Care. So what I would tell you is it's probably created another level of intensity, Chris, in our organization to lean in. We're not going to make noise, wrong noise to other people on this. What we're going to do is just continue to build what we saw when we acquired Bayer. So look for us to be vigilant, balanced, execute with excellence, and we've got again a couple more months here that this brand has still a big seasonal aspect to it, that we'll execute. More to report probably after the second quarter on that answer. And then I think on international, yes, so our international business in pets as you know, went up three times in size. I think this is the first quarter ever in Elanco's history where we had more pet sales in a quarter than farm animal sales. International contributed a big part of this. So what I would say is a couple of things to look at. One is a international marketplace as we divided Europe and international, international a lot more growth, a lot more capabilities, the combining of Elanco's portfolio with Bayer's portfolio in markets like China and Brazil. So international pet, we've got a great team that's focused on a lot of growth initiatives. But that's on a smaller base. Then I think on Europe, look for Europe to really take advantage of a Credelio Plus, plus a Galliprant, Credelio CATS. So some launches to expand that portfolio, Chris, that I think will be also a big driver. And then again continued innovation as we've mentioned, one new parasiticide a year going forward and new products that we continue to rollout. So, we're in a good position internationally with the pet business.

Tiffany Kanaga -- Head of Ivestor Relations

We'll take the next caller.

Operator

Thank you. Your next response is from David Risinger with Morgan Stanley. Please go ahead.

David Risinger -- Morgan Stanley -- Analyst

Yes. Excuse me. Thanks very much and congrats on the phenomenal performance here. So, could you please provide more color on the next Seresto steps to be taken with both the congressional committee and with the EPA? And also are there any actual enquiries which have been initiated since the USA TODAY article was published earlier this year and kicked off this misinformation debacle? Thank you.

Jeffrey Simmons -- President and Chief Executive Officer

Yes, Chris, just real quick like to answer your second question, no, we are unaware of any others, we're monitoring and managing the public affairs side of this, again engaging with both the subcommittee, as well as with the EPA, and nothing new to report here on next steps. We're continuing to work closely with the EPA. There is normal reregistration processes and providing pharmacovigilance and scientific data, which we have and we'll continue to engage with them. But from a legislative next step perspective, we again have provided the information and we'll continue to stay engaged with them. So, that's really it and again I think it's heavily around the pharmacovigilance process, the science, and the recent actions we've taken, Chris, that I think to be noted are the independent reviews that we had done on the data as well to provide further substantiation and then outside look at the way we're looking at it as well. So nothing new to report on next steps. We'll continue to keep you updated and nothing new beyond the USA TODAY story that was noted.

Tiffany Kanaga -- Head of Ivestor Relations

We'll move to the next caller.

Todd Young -- Chief Financial Officer

Next, please.

Operator

Thank you. Your next response is from John Kreger with William Blair. Please go ahead.

John Kreger -- William Blair & Company -- Analyst

Hey, thanks. A couple of questions. Jeff, I'm curious, so about a year ago companion animal spend seemed to really jump with the pandemic, and now that we're lapping that in the second quarter, it'd be interesting to hear if you think those trends are sustainable, or would you expect them to kind of ease with the tougher comparison? That's the first and the second is, with the eight launches that you've laid out for this year, would you consider those to be sort of normal given the pandemic or will your access to customers be somewhat constrained? And should we think about these launches is a little bit more gradual over the next few years? Thanks.

Jeffrey Simmons -- President and Chief Executive Officer

Great question. So look, as we look at the pet health trends, I think there's three or four things that are happening in a real positive way and I do believe there'll be some lessening, but there'll be a lot of persisting as well. So pet numbers are up about 5%, visits are up, wellness with inside those visits, wellness visits compared to past wellness visits are up 15%, which is driving things like surgery, vaccines, and other things.

And then I think the globalization is the other trend that perhaps are becoming more important to families internationally than ever before. And that's a real growth market. Remember, half the pets globally are unmedicalized or are unreached. So when I step back, I think the trend that's going to matter the most is access, not adoption from shelters, or these. But I think getting to pet owners where they want to shop, allowing to build and as they go back to work and reenter into the workplace, us to be able to sustain that relationship, and most importantly bridge the veterinarian into it, I believe this is going to allow the overall market to rise.

Will it lessen? Maybe from the peaks that we've seen in COVID, yes. But I think what we're seeing here in Q1 is they're not lessening to maybe what some of the past expectations were. And I think some of this persisting is we have enabled capabilities as an industry to reach pet owners and influence them and make actually purchasing even easier for them and their relationship with the veterinarian. So that's what I see.

As you look at the launches, I don't think that access has been restricted to any material way. That's why we're not backing off from our $80 million to $100 million. I do think that if it will, it would probably impact our Pet business more than our farm animal business and, but we don't, we don't see that at this stage. Again, we believe that this is -- we've moved from a regulatory challenge coming out of the gate to now all the major products being approved, our focus now is on launch excellence and we'll keep you updated. It will be a big quarter here in the second quarter on launch and then the sales will start to deliver in the second half.

John Kreger -- William Blair & Company -- Analyst

Thank you.

Tiffany Kanaga -- Head of Ivestor Relations

Next caller?

Operator

Your next response is from Elliot Wilbur with Raymond James.

Michael Parolari -- Raymond James -- Analyst

Hi guys, this is actually Michael Parolari on for Elliot. Thanks for taking my questions. Two quick modeling questions for you. First of all, obviously understand that gross margin positive impact in the first half of the year due to product mix and shift in the health -- pet health but if you could just speak to the cadence over the rest of the year, obviously expecting a step down in the second half of the year, but just any specific details as to how we can think about that? And then timing of that toward your longer-term target of 60% if the strong margin quarter is expected to move up that timing or not? And then if you have it on hand, if you could provide us with a cash flow from operations number and kind of talk to the cadence around that for the rest of the year, that would be helpful. Thanks.

Todd Young -- Chief Financial Officer

Sure, Michael. As we guided for the full year, we're expecting gross margin at 56.75% to 57.25%. The seasonality of the first half to second half as we talked is pretty similar between Q1 and Q2 on the gross margin side. We are filing our 10-Q here shortly. It'll show operating cash flow of a positive $22 million for the quarter, and we'd expect that to continue to improve over the course of the year as we continue to expect to pay down $500 million of gross debt by the end of the year.

Tiffany Kanaga -- Head of Ivestor Relations

We'll move to the next question.

Operator

Thank you. Your next response is from Umer Raffat with Evercore ISI.

Umer Raffat -- Evercore ISI -- Analyst

Hi, thanks so much for taking my question. In the house letter, they said Seresto was quote-unquote associated with 1700 pet deaths and I thought that was very interesting because in your 8-K you're pointing out Seresto was mentioned quote-unquote alongside pet death. And I guess I am so confused, did they not look to establish causality? Or perhaps in the media reports or in the house letter, because that's a material misinterpretation the way it reads based on your causality analysis? And secondly, I did want to also touch up on your pharmacovigilance evaluation and perhaps extend beyond pet deaths. So I know the 8-K today focuses specifically on the 12 cases that were probable or possible deaths, but what about cases of tumors? Is it safe for us to assume there is no causality with any other serious adverse events? Thank you.

Jeffrey Simmons -- President and Chief Executive Officer

Yes, Umer. I think what's really important to note and it's even highlighted in the independent review that we know in the 8-K is that -- and I think this is really important where the 1700 comes is, case does not equal cause. So what we've done is we've actually articulated and gone through and reviewed each one of those, so if somebody calls in with a Seresto problem and there is an affiliation with the death and Seresto is mentioned then that's part of the 1700. When you pull out probably or possibly again in this system that I noted, internationally known pharmacovigilance system, there were 12 dogs further review of those 12 dogs where there was a direct linkage, it was typically an accident that was caused, but there has been -- and I think what's really important is there is no linkage to the ingredients, the two active ingredients in Seresto with pet death. So that's -- that to me is a very important articulation. That's the biggest point of misinformation and again that's why independent regulatory body overseeing this is so important, as well as the pharmacovigilance process.

Tiffany Kanaga -- Head of Ivestor Relations

Thanks. Umer. We'll move to the next question.

Operator

Thank you. Your next responses from Kathy Miner with Cowen and Company. Please go ahead.

Kathy Miner -- Cowen & Co. LLC -- Analyst

Great, thank you. Just again, one more question on Seresto but it's been such a tremendous product, very resilient. Can you just remind us why customers are so loyal to this collar? And would you expect this to continue or there might -- would do see market dynamics that may encourage people to use different formulation going forward? And my second question also on parasiticide, as you talk about the success of the combination of Credelio and Interceptor Plus, can you give us any percentage or any sense of how much of the sales in the first quarter were as a combined entity, if you will? Thank you.

Jeffrey Simmons -- President and Chief Executive Officer

Thanks, Kathy. Yes, Seresto you know continues to grow every year. And I think part of this is the unique offering that this provides. So eight months of coverage, a strong price point, great efficacy, great safety have all been contributions to this. And then as we've globalized it, this continues to hit a demographic from the standpoint of both price, convenience, and safety, and efficacy. It provides something unique when you look at eight months of coverage. And then again, I believe that what Bayer has done and now what we're doing together is building the brand with this and the loyalty that the pet owner has with the brand. Look for us to continue to expand and build on this as we go forward with lifecycle management as well. We won't note any specifics here on the pairing. But what I would say, Kathy. Let me one last thing and Seresto too is -- again April revenue in the U.S. is ahead of our original expectations. And I want to just solidify with all these questions on Seresto that as we collaborate with the EPA and the legislative bodies, we feel strongly that the product is on track for our full year expectations as a total brand globally. As we look at the broader parasiticide market, if you want full coverage out there today, you're going to need two products, no matter which product you're using either new innovation or others. Credelio Plus -- excuse me, Credelio and Interceptor Plus provide that broadest coverage and we continue to see that pairing is something that's occurring in the marketplace and we saw again very strong growth, especially with Credelio as we go forward. So that's the strategy we'll continue to execute against that.

Tiffany Kanaga -- Head of Ivestor Relations

Thanks, everyone, for the questions today, Diandra, we'll end the call here.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Tiffany Kanaga -- Head of Ivestor Relations

Jeffrey Simmons -- President and Chief Executive Officer

Todd Young -- Chief Financial Officer

Nathan Rich -- Goldman Sachs & Co.LLC -- Analyst

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Erin Wilson Wright -- Credit Suisse Securities LLC -- Analyst

Jonathan Block -- Stifel Financial Corp. -- Analyst

Chris Schott -- JPMorgan Securities LLC -- Analyst

David Risinger -- Morgan Stanley -- Analyst

John Kreger -- William Blair & Company -- Analyst

Michael Parolari -- Raymond James -- Analyst

Umer Raffat -- Evercore ISI -- Analyst

Kathy Miner -- Cowen & Co. LLC -- Analyst

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