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ELAN or ZTS: Who Is Controlling Expenses Better?

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Expense guidance for fiscal 2019

In its mid-December 2018 guidance call, Elanco Animal Health (ELAN) highlighted various restructuring activities aimed at improving productivity that it implemented in the fourth quarter of 2018. These include shifting from physical presence to a distribution model in 16 countries across the world. The company has also reduced the allocation of funding as well as employees to certain business areas, thereby making resources available for higher priority opportunities. According to the guidance call, Elanco Animal Health is also working to simplify its international operations to ensure targeted and faster decision-making. The company has also written-off certain impaired and idle assets in the fourth quarter of 2018.

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In the company’s fourth-quarter earnings conference call, Zoetis (ZTS) has guided for an adjusted cost of sales as a percentage of revenues to be 31%–32% in fiscal 2019, which is a significant YoY improvement. While the company expects to benefit from rising product prices and reduced manufacturing costs, Zoetis is also anticipating an unfavorable impact from foreign currency fluctuations and Abaxis-acquisition-related costs in fiscal 2019.

In the company’s fourth-quarter earnings conference call, Zoetis expects its SG&A (selling, general, and administrative) expenses and R&D (research and development) expenses in fiscal 2019 to fall in the range of $1.47 billion to $1.52 billion and $445 million to $465 million, respectively.

Wall Street projections

Wall Street analysts have projected Elanco Animal Health’s SG&A expense to sales percentage to be 24.23%, 23.94%, and 23.63%, for fiscal 2019, fiscal 2020, and fiscal 2021, respectively. Wall Street analysts have projected Zoetis’s SG&A expense to sales percentage to be 24.04%, 23.38%, and 22.41%, for fiscal 2019, fiscal 2020, and fiscal 2021, respectively.

Wall Street analysts have projected Elanco Animal Health’s R&D expense to sales percentage to be 8.33%, 8.24%, and 8.33% for fiscal 2019, fiscal 2020, and fiscal 2021, respectively. Wall Street analysts have projected Zoetis’s R&D expense to sales percentage to be 7.46%, 7.19%, and 7.15%, for fiscal 2019, fiscal 2020, and fiscal 2021, respectively.

Elanco Animal Health is expected to dedicate a higher percentage of its total sales to SG&A and R&D activities from fiscal 2019 to fiscal 2021.

Next, we’ll discuss revenue growth drivers for Elanco Animal Health in fiscal 2019.

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