Elanco Animal Health Inc

Cost of Sales

Cost of sales increased $61 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, while cost of sales as a percentage of revenue increased to 42%, compared to 41% for the prior year period. Gross margin was unfavorably impacted during the three months ended June 30, 2024, compared to the prior year, by a combination of inflation and planned reduced throughput at certain manufacturing sites in support of efforts to reduce inventory balances and improve cash conversion. These factors were partially offset by favorable product mix due to the larger impact of the ERP system integration commercial blackout periods during the prior year on higher margin products and increased pricing.

Cost of sales increased $82 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, and cost of sales as a percentage of revenue increased to 42%, compared to 40% for the prior year period. These increases were due to a combination of inflation and planned reduced throughput at certain manufacturing sites in support of efforts to reduce inventory balances and improve cash conversion, partially offset by increased pricing.

Research and Development

Research and development expenses increased $8 million and $14 million for the three and six months ended June 30, 2024, respectively, as compared to the same periods in the prior year, primarily driven by higher employee-related expenses and timing of project costs.

Marketing, Selling and Administrative

Marketing, selling and administrative expenses increased $1 million and $11 million for the three and six months ended June 30, 2024, respectively, as compared to the same periods in the prior year. These increases were primarily driven by increases in marketing and promotional spend supporting our global pet health business and higher employee-related expenses and were partially offset by cost savings associated with the completion of our ERP system integration in the second quarter of 2023.

Amortization of Intangible Assets

Amortization of intangible assets decreased $5 million and $6 million, for the three and six months ended June 30, 2024, respectively, as compared to the same periods in the prior year. These decreases were partially driven by changes in foreign currency exchange rates, as well as our determination that the assets to be sold as part of our aqua business divestiture qualified as held for sale on February 1, 2024, at which date we ceased the amortization of the finite-lived intangible assets included within this disposal group. See Note 4. Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for further information.

2024 Q2 Form 10-Q | 24

Asset Impairment, Restructuring and Other Special Charges

Asset impairment, restructuring and other special charges increased $45 million and $51 million for the three and six months ended June 30, 2024, respectively, as compared to the same periods in the prior year. Amounts recorded during the three months ended June 30, 2024, principally reflected a $53 million impairment charge related to a pet health IPR&D asset that was acquired from Kindred Biosciences, Inc. in 2021 (IL-4R). In June 2024, we completed required studies for IL-4R, and while no adverse events were reported, the performance of the product did not meet efficacy expectations to attain commercial viability. Due to this, future R&D activities were terminated, and the IPR&D asset was written off. Asset impairment, restructuring and other special charges during the three and six months ended June 30, 2024, also included $10 million and $17 million, respectively, of transaction costs associated with the divestiture of our aqua business. Amounts recorded during the six months ended June 30, 2024, also included $43 million of costs associated with our restructuring plan announced in February 2024.

Amounts recorded during the three and six months ended June 30, 2023, primarily represented costs associated with the implementation of new systems, programs, and processes due to the integration of Bayer Animal Health. For additional information regarding our asset impairment, restructuring and other special charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges to the condensed consolidated financial statements.

Interest Expense, Net of Capitalized Interest

Interest expense, net of capitalized interest decreased $9 million and $7 million, respectively, for the three and six months ended June 30, 2024, as compared to the same periods in the prior year, primarily due to lower average outstanding debt balances.

Other expense, net

Other expense, net for the three and six months ended June 30, 2024, primarily consisted of foreign currency exchange losses. Other expense, net for the three and six months ended June 30, 2023, primarily consisted of foreign currency exchange losses and a settlement provision of $15 million related to the Seresto class action lawsuits recorded during the second quarter of 2023 (see Note 13. Commitments and Contingencies for further information).

Income tax expense (benefit)

We recognized income tax expense of $18 million for both the three months ended June 30, 2024, and 2023. Our effective tax rate of (61.3)% for the three months ended June 30, 2024, differed from the statutory income tax rate primarily due to jurisdictional earnings mix of projected income in lower tax jurisdictions and losses in the U.S. and various foreign affiliates for which there was no tax benefit, as valuation allowances had been established in those countries. Our effective tax rate of (23.0)% for the three months ended June 30, 2023, differed from the statutory income tax rate primarily due to jurisdictional earnings mix of projected income in higher tax jurisdictions and losses in the U.S. and various foreign affiliates for which there was no tax benefit, as valuation allowances had been established in those countries.

We recognized an income tax benefit of $2 million for the six months ended June 30, 2024, compared to income tax expense of $23 million for the same period in the prior year. The income tax benefit during the six months ended June 30, 2024, was primarily driven by the partial release of a valuation allowance attributable to the anticipated sale of our aqua business and a benefit related to the recognition of certain state tax credits. Our effective tax rate of 79.9% for the six months ended June 30, 2023, differed from the statutory income tax rates due to jurisdictional

2024 Q2 Form 10-Q | 25

earnings mix of projected income in higher tax jurisdictions and losses in the U.S. and various foreign affiliates for which there was no tax benefit, as valuation allowances had been established in those countries.