Elanco Animal Health Inc
NYSE:ELAN
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Elanco Animal Health Inc
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Good morning. My name is Jessa, and I will be your conference operator today. At this time I would like to welcome everyone to the Elanco Animal Health Inc. Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions].
Mr. Jim Greffet, Head of Investor Relations, you may begin your conference.
Thanks, Jessa. Good morning. Thank you for joining us for Elanco Animal Health's Q4 2018 Earnings Call. I'm Jim Greffet, 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. Katy has returned from maternity leave. Welcome back, Katy, and congratulations on the birth of your daughter.
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, those outlined in our most recent 10-Q filing and the prospectus relating to our initial public offering filed with the Securities and Exchange Commission on September 21, 2018. Also, our financial statements for the first half of 2018 and prior years have been derived from the consolidated financial statements and accounting records of Eli Lilly and Company. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions.
You can find our press release, the slides referenced on this call and an investor workbook on elanco.com. We will continue to use our site to distribute important and time-critical company information. The slides and the press release also contain further information about the non-GAAP financial measures that we will discuss during today's call.
In addition to providing our financial results, we intend to use our quarterly earnings calls to highlight key events and achievements as well as to comment on environmental factors relevant to the animal health industry and Elanco. After our prepared remarks, we'll be happy to take your questions.
I'll now turn the call over to Jeff to provide the highlights.
Thanks, Jim. As we complete our first calendar year as a publicly traded company, we are excited to share results and provide a view on what is in store for 2019. We believe that quality of the results underscore that we have the right strategy and that we're executing and delivering to our expectations since the IPO in September. Operationally, we are ready, and we are excited to take on the next phase in our journey to becoming a fully independent company from Lily. As Lily stated earlier today, they intend to divest their remaining ownership in Elanco through an exchange offer in the first half of this year, which could begin as early as the coming days.
Let's focus now on 2018 performance, and I'd like to start by highlighting our key messages for the year and they are on Slide 3. First, we are delivering on our financial goals. In 2018, our core revenue grew 8%, and our adjusted EBIT margin, earnings before interest and tax, was 18%, that's a 400 basis point improvement in 1 year. Adjusted EBIT margin is our adjusted net income less interest and tax expense as a percentage of sales. This sales growth and margin improvement resulted in our operating income increasing 35%.
Productivity is coming in from all facets of the business, manufacturing, selling and general and administrative. Our gross margin improved and our operating expenses declined year-on-year. This performance enabled us to deliver adjusted earnings per share of $1.18 for the year, above our guidance range. Our operational EPS was $1.16 and in addition, we achieved onetime tax benefits that drove our EPS $0.02 above the range.
A second highlight is we continue to deliver new innovation using an approach that should deliver a sustainable flow over time. 2018 was the fourth year in a row with three product approvals: Prevacent, Correlink and Experior. Finally, our new products are launching well. Sales in 2018 from the group of products launched over the past 3 years nearly doubled compared to 2017. This portfolio now represents 9% of total sales. Remember, it typically takes 5 to 7 years for a product in animal health to reach peak sales, so we're excited for the continued potential in this portfolio of products. I'll note, Interceptor Plus, our oral product for heartworm and other worms, reached blockbuster status, achieving more than $100 million in sales in 2018, a fourth year on the mark. We also continue to expand indications for our products, and an example of this is, we launched Credelio for cats in Europe in 2018. I think in summary, our strategy we believe strongly is delivering, and we're tracking to our goals. Elanco is focused, and we're very much in execution mode.
Slide 4 highlights the 3 pillars of the Elanco targeted value-generating strategy that we've discussed before, where it's driving growth of our marketed portfolio products, delivering on a sustained flow of innovation, and we're executing on our productivity agenda. Here are a few of the key Q4 highlights starting with the portfolio. Our portfolio drove top line revenue of $799 million, an increase of 6% or 8% without the impact of foreign exchange. And with a continued decline in Strategic Exit revenue, our core revenue, excluding these exits, is more indicative of our overall performance, accounting for $775 million in sales, and again, core revenue growing 9% at constant exchange rates. Our targeted growth categories, which again our Companion Animal Disease Prevention, companimal animal therapeutics and Future Protein & Health now represent 60% of sales and are leading our growth.
As we move to the innovation side of our strategy, our portfolio of innovation launch since 2015 grew 74% over Q4 2017 to $69.8 million in revenue, continuing to track to our expectations. You can see the growth trajectory of these products on Slide 5. In 2018, this portfolio contributed almost $275 million to our sales. We received approval for Experior, which was our third product approval in 2018. We met with the regulatory authority in Norway and have aligned on a path forward for a submission of Imvixa. We'll be executing the necessary work during 2019 and are committed to bringing this novel treatment for sea lice in salmon to producers in Norway. I will note, Imvixa sales in Chile, which grew almost 70% in 2018, show the value of this product to the salmon industry. And finally, we launched Credelio for cats in Europe in Q4 after receiving approval in September. This is a first-in-class oral therapy for cats.
Turning to our third strategic pillar, productivity. Our efforts continue throughout the organization with additional progress in Q4. In December, we completed the sale of the Cali, Colombia site. This completes our planned internal footprint rationalization. And typically as we discussed, you can expect at 12- to 18-month tail of remaining costs after a site exit as the technology transfer activities are completed.
In December, we also announced a restructuring that will replace our physical presence in 16 countries with other go-to-market models, and we will streamline and delayer our international operations. So for the full year 2018 in productivity, we reduced operating expenses by 5%; we exited 4 manufacturing sites; we reduced contract manufacturing organizations by 18, finishing the year with 100 CMOs and on track to our goal of 80; and we rationalized another 15% of low volume, low margin, stock keeping units, or SKUs. Our overall productivity agenda continues to progress to our expectations and is delivering the financial results I summarized earlier.
Transitioning to Slide 6, this summarizes the constant currency growth for our product categories for the quarter and year-to-date. In our Q3 call, we highlighted the quarterly seasonality and variability of our business and thus the importance of looking at our sales trends over a longer horizon to gauge the overall health of the business. Our overall results for the quarter and full year are tracking to our expectations. But in Q4, you can see that there is variability across our 4 main categories. Todd will provide more detail in a moment, but let me highlight 3 main considerations to this point. First, as we noted in our IPO filings, there was a reduction in Companion Animal channel inventory in Q4 of 2017 of approximately $35 million. This provides a favorable year-on-year comparison particularly for the Companion Animal Disease Prevention category. Second in companimal therapy, the demand for Galliprant continues to grow, exceeding our supply capacity at the end of the year. And as we discussed in the 2019 guidance call, we've increased our sales projections for Galliprant and are working diligently to expand production. We had backorders of Galliprant at the end of 2018. We expect to clear them by late Q1 or early Q2. These backorders impacted the growth of Companion Animal Therapeutics. And then thirdly, in Ruminants & Swine, growth in our cattle feed additives was offset by a softness in swine antibiotics, particularly in Asia and a stock outage of Micotil. Importantly -- very importantly, the underlying trends in our categories are solid, and we're on track for our projected 4% to 6% core revenue growth for 2019. These results also highlight the benefit of our approach as a portfolio innovator.
Now I'll turn the call over to Todd to review our Q4 results in more detail and discuss our financial guidance for 2019.
Thanks, Jeff. Slide 7 summarizes our presentation of GAAP results, while Slide 8 describes the items considered in the adjusted financials. Slides 16 to 21 in the appendix provide a summary of the adjustments made to the GAAP results to arrive at our adjusted presentation. I'll focus my comments on our adjusted results to provide insights into the underlying trends in our business. So please refer to today's press release for a detailed description of the year-on-year changes in our fourth quarter GAAP results.
Looking at the adjusted measures on Slide 9, you will see total Elanco revenue grew 6% in quarter or 8% at constant exchange rates. As Jeff mentioned earlier, core revenue increased 9% at constant exchange rates. Core revenues excludes Strategic Exits, which are businesses we have exited or have made the decision to exit. Our focus is core revenue. Revenue growth this quarter was driven by favorable comparisons from prior year channel inventory that Jeff mentioned. Continued uptake of our new Companion Animal Disease Prevention products as well as our Future Protein & Health portfolio that more than offset the quarterly headwinds in the other 2 categories. Gross margin as a percentage of revenue was 48.4%, an improvement of approximately 70 basis points over last year and in line with our expectations. This increase was primarily due to a favorable product mix, offset by 200 basis points of foreign currency headwinds. Without this headwind, gross margin would have been approximately 50%.
Total operating expense decreased 5%, reflecting our actions to improve our cost structure. Marketing, selling and administrative expenses decreased 6% due to continued productivity initiatives, cost control measures across the business and timing of marketing investments. R&D expenses decreased 1%. The combination of sales growth and operating expense savings produced an operating income increase of $39.7 million or 39% compared to Q4 of 2017, resulting in an operating margin of roughly 18% for the quarter.
Our tax rate for the quarter was 16.2%, which was lower than we had forecasted when providing guidance at the end of Q3. As Jeff mentioned earlier, the lower tax rate drove adjusted EPS for the full year from $1.16 a share to $1.18 a share. The lower rate was driven by international tax reform benefits that were the result of us being part of Lily's consolidated tax return. Thus, we do not expect to receive these benefits in 2019.
At the bottom line, Q4 adjusted net income increased 148% to $105.4 million. We achieved this significant earnings growth by delivering strong revenue growth, while improving our margins and reducing our operating expenses. The right side of the slide details these same adjusted measures for the full year.
Moving to Slide 10, let's take a look at the effect of price, rate and volume on revenue growth. This quarter, the effective foreign exchange on core revenue was a 3% headwind overall. Excluding this, our revenue growth on a constant exchange rate basis was 9%, volume growth was 8% and price growth was 1%. On the slide, you can see the breakdown of revenue across our 4 categories. I will focus on the constant exchange rate growth column. Companion Animal Disease Prevention, which includes parasiticides and vaccines grew 45% in the quarter, 39% from volume and 6% from price. These results were driven by the comparison benefit from the decline in channel inventory in 2017, the continued uptake of Interceptor Plus and Credelio, increased sales of certain vaccines from new customer agreements and sales of Parastar, a topical flea and tick treatment for dogs. We entered into a distribution agreement to sell our remaining inventory of Parastar as we focus on newer generation treatments. The 6% price benefit reflects an accrual adjustment made in Q4 2017, which creates a favorable year-on-year comparison. Without this adjustment, the price increase would be less than 3%. Normalizing for the favorable year-on-year comparison items, results in Q4 growth of approximately 13% and full year growth of approximately 10%.
Companion Animal Therapeutics declined 4% in the quarter, 9% from volume, offset by a 5% increase from price. While the full year growth of 7% is in line with expectations, Q4 was impacted by both timing and availability of Galliprant shipments. A planned shipment in late 2018 was delayed until early 2019 to appropriately complete the quality release process. In addition, the demand for Galliprant continues to grow exceeding our supply capacity at the end of the year. As we discussed in the 2019 guidance call in mid-December, we have increased our sales projections for Galliprant and are working diligently to expand production. We are working closely with the Galliprant contract manufacturers to expand capacity. We have already significantly increased capacity in the active pharmaceutical ingredient and formulation sites. We are now working to increase capacity and throughput at the packaging site. The 5% price benefit reflects Galliprant promotions run in 2017 as part of the launch. These have not been continued in 2018. In addition, a change in the mix of SKUs on Osurnia provides a pricing benefit in 2018. Normalizing for backorders at the end of year, category growth would have been over 9% in Q4 and over 11% for the full year, reflecting the strength of our therapeutics portfolio.
Future Protein & Health grew 13% in the quarter, 7% from volume and 5% from price, driven by growth in animal-only poultry antibiotics, vaccines and aqua. Poultry antibiotics and vaccines growth reflects the strength of our anticoccidials and Salmonella products, increased rotation to Elanco, animal-only anticoccidials in 2018 compared to 2017 and some international purchasing patterns ahead of anticipated price increase in 2019. ARPU growth is driven mainly by continued Clynav uptake.
Ruminants & Swine declined 6% in the quarter, 5% from price and 1% from volume. Changes in program structure for some cattle products in the U.S. drive a decrease in price and an increase in volume. Program tiers on these products were adjusted in 2018 to reflect market conditions. The volume increase in cattle products was more than offset by volume declines in swine antibiotics in Asia and the stock outage in Micotil that Jeff mentioned. The contract manufacturer for Micotil encountered a quality issue that halted production. The issue has now been resolved and production resumed in January. For the full year, Ruminants & Swine sales were flat compared to 2017.
Turning to Slide 11. There is a summary of our performance in the U.S. and internationally. Overall growth in the quarter is driven from the U.S. International results reflect the softness in swine antibiotics as discussed earlier. Double-digit international growth in Companion Animal Disease Prevention and Future Protein & Health is offset by the decline in Ruminants & Swine.
Turning to our financial guidance for the full year 2019 on Slide 12. We are confirming the guidance we provided in mid-December. We continue to project full year core revenue to be between $3.04 billion to $3.10 billion. We expect Strategic Exit revenue to be approximately $0.06 billion. This translates to earnings per diluted share calculated on a GAAP basis to be between $0.36 to $0.48 and on an adjusted basis between $1.02 and $1.12. Keep in mind that Elanco will have a full year of interest expense in 2019. The year-on-year EPS growth is impacted by this interest expense in 2019 and a higher expected tax rate as mentioned earlier.
Now I'll turn the call back over to Jeff to review some macro trends and issues we are monitoring.
Thanks, Todd. Continuing our practice on earnings call, we would like to provide thoughts on a couple animal health topics. The intent is to share our perspective on relevant themes in our industry. This quarter, I'll comment on 2: one what we're seeing with antibiotics; and number two, Elanco's view on African swine fever. Let me offer a quick update on the antibiotic trends, and first, let me reiterate our tiered approach to antibiotic stewardship and our intentional shift that we've driven in our business since 2015. First on this tiered approach. It begins with best practices on the farm to keep animals healthy. Second, we're focused on delivering alternatives to antibiotics from vaccines to nutritional health products, like enzymes and probiotics. Elanco has intentionally built these capabilities over the past 8 years to offer alternative solutions. We have entered 24 of the committed 25 alternatives to antibiotics into our pipeline or we've launched some of those as well, and we're on track to meet this goal of 25 by 2020 with more than a dozen candidates still in assessment.
We've commercialized two such alternatives in 2018, including Prevacent vaccine for respiratory disease in pigs and Correlink, a tailored probiotic in poultry. Third on this tiered approach, when an antibiotic is needed, we recommend animal-only antibiotics where possible. These antibiotics have been developed to only treat animals and their use does not create the human health risk. Finally, we believe shared-class antibiotics should be used as a last alternative and under the oversight of the veterinarian. That's why we've changed nearly 100 product labels around the world to remove growth promotion regardless of local regulations.
Our sales of medically important antibiotics declined 2% in 2018 and at a CAGR of 6% since 2015, excluding the impact of foreign exchange. These trends align with our expectations and our antibiotic stewardship efforts. Further, the broader industry is also making progress. The FDA recently published the year-on-year antibiotic sales trends for the industry, which showed a 33% decline in medically important antibiotic use between 2016 and 2017. Elanco has and will continue to be a leader in reducing the need for medically important antibiotics, investing significantly in research to replace antibiotics with alternatives and developing an aggressive plan to safeguard antibiotic efficacy.
Finally, regarding African swine fever. This is a virus that causes high mortality rates in pigs, but it does not affect humans. While it's highly contagious in close proximity, it's not widely transmissible between animals like a number of other animal diseases. African swine fever is one of the highest risk and most fluid issues faced in the swine market globally, particularly in China. I had an opportunity to spend 10 days in Asia at the end of January visiting with customers and experts on the ground. While the Chinese swine sector has been affected, it varies widely by province. Customers are focused on stringent biosecurity measures and restricting transportation to within provinces as well as calling protocols when necessary to control the outbreak.
Continued improvement of animal husbandry fundamentals are occurring, accelerating new standards and ultimately advancing the industry, I believe. We do see improving China swine economics in the second half of the year and the potential for increasing animal numbers to rebuild impacted populations. We do see -- we do expect to see an impact on our local business in China as I've noted, as farm access is affected and areas are limited. However, it doesn't change our overall expectations for the year. We'll continue to monitor the situation in China closely, while we also watch a small outbreak in EU. We're hopeful these 2 topics -- this information is helpful to you.
In summary, I'll close by saying there are a few key themes that I hope you see in our results. First, as we close our first year as a public company, we're delivering the top line growth and margin expansion that we expect. This is a long journey, and we're tracking where we want to be. Our targeted value generating strategy also is working. Our newly launched products continue to grow, new products are being approved and our pipeline is solid.
This quarter, you again see the dynamics in our business and the fluctuations that can occur over the near term. We look at our business in a long-term view, and we encourage you to do the same. We'll be as transparent as possible so that you understand the drivers impacting our results each period.
Finally, much work remains. We are laser-focused on our customers and the execution and the acceleration of our strategic plan.
This concludes our prepared remarks. And now I'll turn the call back over to Jim to moderate the Q&A session.
Thanks, Jeff. We'd like to take questions from as many callers as possible. So as usual, we ask you to limit your questions to two or a single question with two parts. Jessa, if you have the queue, we're ready to take the first caller -- the first question, please.
[Operator Instructions]. Your first question comes from the line of David Risinger from Morgan Stanley.
So my first question is on heartworm and the second question is on the potential for a generic Rumensin. So could you help educate us about the FDA's ongoing assessment of heartworm product efficacy and resistance? We hosted an expert who suggested that the FDA has delayed approvals of generic versions of heartworm medicines because of its concerns and implied that, that's possibly why there has never been a generic version of the original Interceptor approved by the FDA. Now obviously, you've migrated the franchise and continue to migrate the franchise to Interceptor Plus, but just wanted to understand that. And also, will the FDA's concerns delay approval of future triple combos of flea, tick and heartworm product? And then my second question is pretty simple. What is your latest expectation for the potential timing of a generic Rumensin for livestock? Is there indication that a generic could be coming in early 2020? Or has there been no buzz at all about any generic Rumensin potentially launching?
Great. Thanks, Dave. Jeff, those are questions that we answer from time to time.
Yes. Great questions, David, and I appreciate the perspective of the expert and would align directionally with your comments of what you said. I think heartworm continues to be -- and remember, I kind of back up and say this, companion animal parasiticide market, one of the larger companimal markets, we've got 7 parasites, tick, flea and then there's 5 worms: tapeworm, roundworm and there's others. So heartworm is one of those, one that's probably one of the -- one that's most talked about. No question, resistance and efficacy against that heartworm has become an increasing concern, not just in the U.S., but as well in Europe. So I don't want to speak for regulatory bodies, but as we look at putting our packages together, this becomes a key criteria. I think then you have to look at it overall in terms of efficacy against all seven of those parasites. You have to look at the efficacy of controlling them and preventing them and then I think the others is any safety to the dog and any side effects that may occur. So I think that's -- you got to look at that whole package when you look at the next generation of innovation.
Of course, we've got to look at not just resistance impact, but also that total package and what value it brings to the pet owner on a relative to what they have today. So that's the profile. We don't see that criteria has changed at all in anytime here recently relative to our pipeline. So that continues to progress nicely, and we know what the criteria is to succeed. So that's -- and I would say really nothing more rather than to say, as I noted in my comments, Interceptor Plus continues to do extremely well, it's hit blockbuster status, and we continue to see it have a very differentiated offer to the pet owner. I think secondly, relative to generic Rumensin, I -- no new commentary. We've continued to look at this in our strategic plan as a potential entry in 2020. And I would leave it at there to say do we have anything that's new relative to what we've heard since our last call, our last discussions and the answer would be, no, there's no new information. We'll continue to prepare for that. We've continued to innovate around that and I'd even point to our deal with Novozymes as an example of we'll continue to innovate in this space with Rumensin and around Rumensin as well in the cattle space.
Your next question comes from the line of Erin Wright from Crédit Suisse.
You proactively mentioned African swine fever, but what percentage of revenue does -- is really exposed here and if it's contained to China alone? And is it significant in terms of your overall results in the quarter as well as in 2019? And then my second question is, if you could speak to the growth you're seeing across the alternative channels, that's including online, big box and specialty retailers, can you remind us of your strategy when it comes to the alternative channel outside of the veterinary clinic? And how big is that business for you today? And did it help to bolster Companion Animal Disease Prevention business in the quarter?
It's great. Thanks, Erin. On the -- I'll answer the first one on numerical things and then, Jeff, I think, you've got commentary on the other questions. So we've said that our total exposure in China is less than 3%. Our swine business is a portion of that 3%. So as Jeff had mentioned, the issue of African swine fever is important for us to monitor. We want to make sure that the biosecurity measures remain in place. If it's contained within China, the ultimate exposure to Elanco isn't material to the overall size of our business in total, but it's an important issue to monitor for contagion and it's potential spread, so it's something that we're watching closely. Jeff?
I'd fill on that just to say that the African swine fever had no impact on our 2018 results. We did note that antibiotics and swine in Asia were down and that was primarily and maybe just be very clear that was medically important feed antibiotics, not as much even in China, it's the ASEAN area that I would state and it was a real movement from taking medically important antibiotics out of commercial feed mills, so similar to the VFD here in the U.S. Then what I would emphasize here on our alternate channel, let me just make a few comments, Erin, just to emphasize this. First of all here, when we look at the pet owner and we look at animal health companies and Elanco, the vet continues to be in the center of the animal health business model for Elanco, they're critical to us, they will be in the future. We believe that as pet owners look at alternative channels to purchase products, we should be present where they want to be and that also can benefit the veterinarian as well, we believe, by us being in the center of that.
As we've noted, there's three key elements to this strategy: having the right portfolio; it's a mix of having OTC products and vet-scripted product; it's having people that understand how to deal with digital, retail, big-box stores, online and then having partners along the way. So the business is new. I'm not going to speak specifically to numbers and trends in this space because we don't go there, but what I would say is, it is outgrowing the core companion animal marketplace, but there is elements to that, that you have to really look at carefully by portfolio each year. So we're moving in this area in a very careful way and a pragmatic way, but again, the mass majority of our business continues to be through the veterinarian and that will continue to be our primary focus in our companimal strategy.
Next question comes from the line of Chris Schott from JPMorgan.
Just two for me. I guess, the first one, can you just talk about your key priorities and next steps on your productivity initiative as we enter 2019? I guess, what are you most focused on as we think kind of the progression of some of these initiatives you put forward this year? My second question was on FX and the 200 basis point headwind you saw in gross margins. Just elaborate a little bit more on the dynamics there and specifically, should we think about that headwinds continuing as we look into 2019 on the gross margin line?
Thanks, Chris. Jeff, do you want to start and then Todd you can fill in?
Yes, I will turn it to side. Great questions, Chris. I think without question productivity is key, and I think a lot of what we've mentioned, the footprint we need is in place. The restructuring that we've talked about in international's in place. So a lot of this is executing, all of the decisions and the actions that we've already taken is essential. I want to also emphasize as you look at productivity, it's critical we continue to launch our products well. I think that our mix matters, new products matter to help us drive that mix as well, which will also drive the bottom line earnings. Those are a few of the points. Maybe, Todd, you can talk specifically about a few others?
Sure. Thanks, Jeff. Well, we had a very good year in 2018 on the manufacturing side of driving our productivity agenda. Part of the challenge always in the P&L was timing as we see inventory produced in earlier periods sold and then inventory produced in 2018 that will be sold in 2019 that provides gross margin benefit. Overall, we made investments as we've talked about previously on exiting large ones. There'd be some technical costs that hit, but that will be positives, the reduction of contract manufacturers by 16 in 2018 that then will provide benefits in 2019 and going forward. So overall, we feel very good about the productivity agenda and what the team has delivered on that on the manufacturing side. We'd always expected that in 2018 the margin improvement was really going to be a bottom line operating improvement from the decisions that we made in '17 regarding our cost structure on the SG&A side of the business. So feel good about where we stand, both from the results in '18 as well as the expectations in 2019. With respect to the foreign exchange impact on gross margin, again we have had higher FX rates historically that were built into inventory that was then sold in 2018. As we move into 2019, we've given revenue guidance with FX rate assumptions for key products. Right now, the euro is a little below. What we are -- for our forecast, but then that has a impact on gross margin as costs are billed that would then play out later in 2019. So the FX on gross margin has got a lot of moving components. We overall feel like we've got guidance in total for 2019 that we're very comfortable with, and we'll see how that plays out over time.
Something to add to that, Todd. For the full year, Chris, the FX impact on gross margin for the entirety of 2018 was largely negligible. There wasn't much of impact for the full year. Maybe one other thing to consider is the difference between currencies where we sell a lot of product, we've listed the top 5 countries where we sell and the currency exposure there compared to where we produce product. So there is not necessarily a one-for-one match between the currency impact to top line and the currency impact on the cost of the product made.
Your next question comes from the line of Mike Ryskin from Bank of America Merrill Lynch.
I want to start with the big picture one on the 2019 guide. You reiterated the prior view, but there were a lot of moving parts in the quarter with some items slipping into 1Q. So I was just hoping you could provide some color on that. For example, the Galliprant order that you said was delayed, the Parastar announcement that you agreed to sell all the remaining inventory. Was that all closed in 4Q? Or is there some benefit in 1Q as well? And the Imvixa registration moves in Norway, is there any possibility that could get approved in 2019 and sort of how that -- all of that factors into your guide? Whether the fact that you didn't update it is more just conservatism and the fact that we are still in February? Or is there anything else do we need to keep in mind that offsets those relative benefits in 1Q?
Great. Thanks, Mike. Todd, you're looking at the pushes and pulls.
Certainly. I mean, a lot of this, we understood in mid-December when we provided the guidance. And so from the standpoint of pushes and pulls, that was pretty well understood that the Galliprant order was likely going to get pushed out. We factored that in at the time we gave our guidance. The Parastar's exit of a historic Novartis product, it doesn't have any benefit or impact on the 2019 numbers. And what we've been very pleased as Jeff noticed with our conversation on Imvixa with the Norwegian authorities, we have not viewed that as something that's likely to hit in 2019.
And if I could ask a quick follow-up. You highlighted the 3 new product approvals over the last couple of years. How should we think about that in 2019 and beyond? I realize it's early and it's hard to predict some of these things, but is that approximately the run rate we should expect? Is there -- and how do you feel about some of your later-stage pipeline?
Yes. Great question, Michael. So I think we've emphasized we want to be a portfolio innovator. We've targeted a narrow set of priorities back in our pipeline, that has allowed the sustainable flow of innovation. We feel very good about the model, and we feel very good about the center of our pipeline and what's even coming this year in terms of new entries. So as we've noted, we've got about 3 dozen compounds mixed between companimal and food animal and that's Phase II, Phase III, which could be anywhere from 1 to 4 years from clearance. There'll be a call out, of course, in natural attrition with science, but we feel very good about the center of our pipeline. And I would emphasize, yes, we want to be -- multiple approvals is our target. It will vary year-to-year. But I think our track record in the past leads to the expectation as we go forward in the future, but there will be some variation year-to-year.
Your next question comes from the line of Umer Raffat from Evercore ISI.
I wanted to spend a minute on African swine fever. And really just look to understand, A, the Ruminants & Swine segment the year-over-year decline in 4Q, can you just breakdown what component of that is African swine fever versus Micotil? But then more specifically, can we understand a little better on, A, the magnitude of cullying that's happened in China already and whether you are seeing any early signs of softness in Europe swine sales as well? And if there were to be a case of swine -- of ASF in U.S., how should we really think about that in the context of 2019 guidance? Or maybe said another way, what are the swine U.S. sales baked into 2019 numbers?
Jeff, do you want to give some thoughts? I can also provide some comments on Micotil and how that might normalize Ruminants & Swine, but why don't you give some overall thoughts?
Yes. Let me emphasize, Umer, again, very importantly that as I just earlier mentioned, there is no correlation to African swine fever in our 2018 results. It had no impact on our business. And as we've mentioned, there will be some impact locally in China in 2019 on the Elanco business, but no material effect we believe on maybe overall Asia and definitely global Elanco. So right now, we don't see this issue having an impact on our business in 2019. We'll monitor it closely. So as I mentioned, I was in China for over a week. I was in Asia for more than 10 days. And what I would say is, this is probably too early to give specifics in terms of what's the number, how many pigs are being culled, there is a lot of, what I would say, pushes and pulls back and forth on this disease. But I would really emphasize, I think, that a couple things. I think time will -- we got to keep our eyes on, I think, over the next 2 to 3 months as we enter into the spring, and again, pig houses open up, these biosecurity measures, these extra measure that they've taken have that 3, 4 months of opportunity to play out. I think we're going to start to get a sense then of a size of this. And then in addition looking at other outbreaks, is it spreading in other provinces more rapidly or even outside of China. Those will be things I think we keep our eyes on. But I would say after visiting with a lot of the experts, a lot of our major customers, nobody is nodding a specific number at this stage because there is quite a bit of variation. I think the spread of this is what we want to watch and the impact of both spring and the biosecurity measures.
A couple of other kind of framing thoughts, Umer. For the full year, recall that we said that Ruminants & Swine was roughly flat for the whole company. We did some what if a little bit and said the impact of Micotil as well as the softness that we saw in swine from movements in feed mills that Jeff had talked about, if you normalize those out, you're back to about 1% growth, which when we started the year, that's about the trajectory that we saw we were on. So there are a few things there that -- the underlying trends seem right compared to the assumptions we had. Maybe one other thing to think about across the big species that we have cattle, poultry and swine, the size is in that order. So swine is the 3rd largest of the species that we deal with. So maybe some framing there with the overall magnitude to the company.
Your next question comes from the line of Kevin Ellich from Craig-Hallum.
Jeff, just wanted to get your thoughts on the consolidation you are seeing in the companion animal industry. What impact it might have on your business, both opportunities and challenges and if you think there can be any changes on how you think about going to market and using distributors? And then the second question, given your pipeline and the innovation you guys are putting out, wondering which therapeutic areas you find as most attractive over the next few years?
Thanks, Kevin. Jeff?
Yes. Thanks, Kevin. Great question. So no question, a lot happening in companimals right now in the channel and in ways to make the pet owners experience a more positive. I think, you got to look at it in that broader light that pet owner will change over time and convenience and value and that proposition will continue to change. The vet clinic will play a role, the distributor will play a role and then, of course, other mechanisms in the channel. I think a few things that we look at as we look at this thing as it concentrates. In some places, it actually also is splintering and doing other things in other parts of the channel. Here's a few things I think that are absolutely essential. One, innovation always will drive the most value for us. So continuing to do just what we've tried to do is innovate inside our portfolio and our key growth categories is absolutely essential. So parasiticides and vaccines in that companimal prevention area. In therapy, continuing to build out our pain or osteoarthritis, otitis and even other areas.
So innovation is the number one, we believe, strategic move against this. And then having a portfolio of solutions not just one product against challenges, so if that's tick, flea and heartworm or that's actually preventing a puppy from disease with the vaccine portfolio or even today, our broad pain. So second is portfolio. And then third is, just being able to add value. This is services, this is partnerships with maybe service companies and this is the right people in technical service that we offer to veterinarians, et cetera. And we're constantly monitoring and sitting down with our partners, like distributors, to be challenging them with us to add more value. So innovation, portfolio and value beyond product continue to be the 3 mechanisms as the channel changes in companimal that we'll look at it. And then we'll continue to geographically expand too globally as there is a lot of opportunities in companimal as we expand globally. So I think that's -- those are the big ones. And then what areas? I think, we've done a very diligent and a disciplined approach here preparing for this IPO since 2015, and we've moved really into kind of 3 kind of key areas in our portfolio that line up with these growth categories. So when you look at that aging pet, we continue to see plenty of opportunity there from our current positions in pain, arthritis, otitis to new places that we've been pretty public about like derm and other aging disease issues and then the whole area of prevention, preventing parasites and early emergence of diseases in pets and dogs and cats would be some. I'd -- I would also note the feline area, the cat area continues to be one as we've launched Credelio in cats and we have got a product called Cheristin and others that are designed for the cat market as well. So those are a few, Kevin, that we're focused on.
Your next question comes from the line of Liav Abraham from Citi.
Two quick questions. Just, Jeff, following on from your comments on cats, can you talk a little bit more about your thoughts on the opportunity for Credelio in the species? And then secondly, I'd appreciate if you could elaborate a little bit more on some from the supply constraints that you've experienced with Galliprant? And can you confirm that you'll be able to meet your estimates for demand for this product in 2019?
Thanks, Liav. So Jeff, you want to begin?
Yes. Liav, thank you very for the question. I can't get into all the specifics, but I'll just use an example here. I mean, no question, the cat market is a very interesting one, it's one that as you know you can assume continues to grow, I looked at the data even in Asia. I mean, globally in urban markets, the cat market continues to grow nicely. If you look at just where we're going in Credelio with its first-in-class oral product for parasites and cats with Credelio in Europe, that's about $250 million market, as an example, and we're entering into that market as what we believe is a first-in-class in the space that we're entering in. And then we're, of course, pursuing our clearance here in the U.S. and other places. So I think, that also we're doing a nice job from a segmentation perspective with vet clinics that have fear-free clinics for the feline market, et cetera. So I think segmentation's also key. So that's number one, and we'll continue to update you as we launch this product on that market. And then the second question...
Supply of Galliprant.
Was supply of Galliprant, very, very quickly. Want to be very clear here that and emphasize we expect to have these backorders cleared by late Q1 and early Q2. We expect to be able to meet the demand in the marketplace in 2019. I want to emphasize too that this is more about building a capacity for the increased demand. This is not a scientific problem on how we make the product or it's the need for a big capital to build a new plant. So -- and there is manufacturing issues, they fall in different categories. This is one that's just simply building increased capacity, but we feel very good about meeting the 2019 demand.
Your last question comes from Kathy Miner from Cowen and Company.
Just two questions. First, Lilly announced this morning their plans for the full separation of Elanco, which maybe was a bit sooner than folks were expecting. How does this impact Elanco? And are there any separation programs or other effort -- initiatives that need to be accelerated because of this timing? And second of all on just the outlook on 2019 on the 4 key -- your 4 revenue categories, can you tell us what you view is sort of the key headwinds and tailwinds that we should watch for in each of those?
Thanks, Kathy. Jeff, why don't you begin on kind of the efforts on the Lilly exit and then we can talk about 2019, and when you go too far providing details I'll stop you.
Good couple questions, Kathy. So we've been prepared as we've been very open about the news that's come out here this morning that they plan to exit with an exchange offer. We've been preparing with them and in sync with Lilly, and I think this is a vote of their confidence that we're ready for this separation, and we are ready, we've been prepared. So we've got, of course, in place very solid transitional service agreements with Lilly that will go beyond this exit. And we are prepared with our materials and with everything internally to start the process that would happen when this final notification and the tender is offered. We'll be ready to do that. And my message to all of the employees is, we're in execution mode and nothing changes for an Elanco employee, they will not cause disruption or any change to our execution. For them everything stays the same. They execute our strategy, deliver the value that we're supposed to deliver to customers and you as investors. So no change, we're ready and we'll be ready and we're working very closely with Lilly, feel very good about the TSAs and the synergy between the companies.
On the pushes and pulls, there's lots of them, and I would just emphasize the point we opened up in the call and that is continue to look at aggregate results, continue to look at year-to-date results, there will be some variation by quarter, we're dealing with lots of species of animals and animal health, with lots of geographies and lots of moving parts. We also have transitioned this business, moved it back to growth, feel very good about our long-term plans, but I would ask for understanding to look at this thing over time. And any specifics you can always ask Jim and Katy for. We want to be very transparent with all of you. I think we feel -- if you look at just the livestock industry overall, so that gets 2 categories, we feel very good overall about the beef market and just continue to see the recent big National Cattle Association Meeting last week in the U.S., cowherd expansion cycle continues to grow. In 2018, we had 500 -- we added about 500 -- 510,000 head. In 2019, that expansion is supposed to go up about another 180,000 and then level of. So beef continues to be, I think, stable, strong.
We continue to see dairy, continue to be suppressed. We don't have a big dairy business, so that's not impacting our results. We have a smaller dairy business. And then poultry and pigs, again, lots of ups and downs by demand, by trade, by things that are occurring, by geography, but overall, we feel very good that, that's stable, poultry and pigs, going forward. And then when you look at the trends behind it again, we see nothing that would materially change the trajectories. Companion animals, I would focus heavy on our innovation and our growth drivers that we've talked about, products like Interceptor Plus, Galliprant and Credelio are early in the life cycle reaching towards those peak sales, so we've got a lot of runway of growth there. And then they all fit into portfolios. Feel very good about our portfolio vaccines, parasiticides and therapeutic products, so the continuing move of that. And I think we'll continue to watch the channel emerge, but at this point in time, we see nothing there that would impact our plans.
I think that's the last of the questions. Jeff, do you have some closing comments as we close up the call?
Yes, I do. Thank you, again, I would like to say for everybody for your time, for your support as we begin this journey as a public company. We look forward to building a long-term relationship with all of you. We like the broad-based results we're seeing from our targeted strategies I've mentioned. We'll continue to drive our margin expansion agenda in a big way and execute on our strategic plan. We're pleased that we met our expectations for 2018, we're on track for 2019 in our projected 4% to 6% core revenue growth for 2019. And if you have any questions and all that we didn't answer, please reach out to Jim and Katy. Thanks, again. Have a great day.
This concludes today's conference call. You may now disconnect.