Elanco Animal Health Inc

Results of Operations

The following discussion and analysis of our results of operations should be read along with our condensed consolidated financial statements and the notes thereto. Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the future due to many factors, including but not limited to the factors identified above.

Certain amounts and percentages may reflect rounding adjustments.

NM – Not meaningful

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Revenue

As a global company, our products are sold in more than 90 countries, and as a result, a significant portion of our revenue is recorded in currencies other than the U.S. Dollar. Because of this, our revenue is influenced by changes in foreign currency exchange rates. During the three months ended March 31, 2024 and 2023, approximately 52% and 53% of our revenue was denominated in foreign currencies, respectively.

Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our quarterly revenue results, leading to variations in revenue. This can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control. For example, in connection with the integration of the Bayer Animal Health business into our ERP system, we communicated commercial shipping blackout periods that occurred in April 2023. Given this timing, we believe certain customers modified purchasing habits, which we estimate caused a shift of revenue from the second quarter of 2023 to the first quarter of 2023 of approximately $90 million to $110 million. While first quarter 2023 revenue benefited from this shift in purchases, this resulted in a corresponding decrease in revenue during the second quarter of 2023. This estimated shift of quarterly revenue in the prior year is a principal contributor to the year-over-year volume declines experienced during the three months ended March 31, 2024.

On a global basis, our revenue by product category for the three months ended March 31, 2024 and 2023, was as follows:

Note: Numbers may not add due to rounding

(1)Constant Currency (CC), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange rates. The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods.

(2)Represents revenue from arrangements in which we manufacture products on behalf of a third-party.

On a global basis, the effects of price, foreign currency exchange rates and volume on changes in revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, were as follows:

Note: Numbers may not add due to rounding

Pet health revenue decreased $36 million, or 5%, for the three months ended March 31, 2024, compared to the same period in 2023, driven by lower volumes and partially offset by a 3% increase in pricing. The primary driver of the lower volumes was the impact of the ERP system integration commercial blackout periods in the prior year, which we believe shifted an estimated $65 million to $80 million in pet health revenue from the second quarter of 2023 to the first quarter of 2023. This impact to volumes, in addition to the slow start to the U.S. parasiticide season and continued competitive pressure on certain products in the U.S. veterinary channel, were partially offset by increased vaccine sales due to easing of supply constraints, improved demand for retail parasiticide products in certain European markets, including Spain, and the impact of an initial stocking of certain legacy Bayer Animal Health products into the U.S. distribution channel.

Farm animal revenue decreased $17 million, or 3%, for the three months ended March 31, 2024, compared to the same period in 2023. The primary driver of the lower volumes was the impact of the ERP system integration commercial blackout periods in the prior year, which we believe shifted an estimated $25 million to $30 million of revenue from the second quarter of 2023 to the first quarter of 2023. This impact to volumes, as well as market weakness impacting the swine business in China, was partially offset by increased revenue from new products, led by Experior, and strength in poultry sales globally.

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