Elanco Animal Health Inc

Revenue

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 each of the three months ended March 31, 2025 and 2024, approximately 52%of our revenue was denominated in foreign currencies.

Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our periodic 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.

Our revenue by product category for the three months ended March 31, 2025 and 2024, was as follows:

Note: Numbers may not add due to rounding.

(1)Represents revenue from arrangements in which we manufacture products on behalf of a third party and royalty revenue.

The effects of price, foreign currency exchange rates, volume and the impact of the prior year divestiture of our aqua business on changes in revenue for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, were as follows:

Pet health revenue decreased $4 million, or 1%, for the three months ended March 31, 2025, compared to the same period in 2024, driven by the negative impacts from foreign currency exchange rate movements and lower volumes, partially offset by a 2% increase in pricing. Contributing to the lower volumes were the impact of an initial stocking of certain legacy Bayer Animal Health products into the U.S. distribution channel in the prior year that did not repeat in the current year, a challenging U.S. retail environment during the first quarter of 2025 and decreased vaccine sales in the U.S. compared to the three months ended March 31, 2024. These decreases were largely offset by increased revenue from new products and strong demand for parasiticide products in Europe.

Farm animal revenue decreased $10 million, or 2%, for the three months ended March 31, 2025, compared to the same period in 2024, driven by the divestiture of our aqua business on July 9, 2024, and the negative impacts from foreign currency exchange rate movements. Partially offsetting these declines were a 4% increase in volumes, largely driven by strength in U.S. cattle, led by Experior, and a 3% increase in pricing.

Gross Profit

Gross profit decreased $6 million for the three months ended March 31, 2025, while gross profit as a percentage of total revenue was flat at 57% compared to the three months ended March 31, 2024. The decrease in gross profit was impacted by the sale of our aqua business in July 2024. The favorable impacts to gross profit as a percentage of revenue from increased pricing, favorable manufacturing performance and product mix were offset by the impacts of inflation and foreign currency exchange rate movements.

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Research and Development

Research and development expenses increased $7 million for the three months ended March 31, 2025, as compared to the same period in the prior year, primarily driven by higher employee-related expenses and project costs.

Marketing, Selling and Administrative

Marketing, selling and administrative expenses increased $4 million for the three months ended March 31, 2025, as compared to the same period in the prior year. The increase for the three months ended March 31, 2025, was primarily driven by higher employee related expenses and investments supporting our U.S. pet health business. These increases were partially offset by cost savings associated with the restructuring plan that was initiated in the first quarter of 2024.

Amortization of Intangible Assets

Amortization of intangible assets decreased $5 million, for the three months ended March 31, 2025, as compared to the same period in the prior year, primarily driven by changes in foreign currency exchange rates.

Asset Impairment, Restructuring and Other Special Charges

Amounts recorded during thethree months ended March 31, 2025, primarily consisted of upfront payments made in relation to new licensing arrangements. Amounts recorded during the three months ended March 31, 2024, consisted of $39 million of restructuring costs associated with the restructuring plan announced in February 2024 and $7 million of divestiture-related charges preceding the July 2024 divestiture of our aqua business.

Interest Expense, Net of Capitalized Interest

Interest expense, net of capitalized interest decreased $26 million for the three months ended March 31, 2025, as compared to the same period in the prior year, primarily due to lower average outstanding debt balances.

Other expense, net

Other expense, net for the three months ended March 31, 2025 and 2024, primarily consisted of foreign currency exchange losses.

Income tax benefit

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We recognized an income tax benefit of $7 million and $20 million for the three months ended March 31, 2025 and 2024, respectively. Our effective tax rate of (12.2)% for the three months ended March 31, 2025, differed from the statutory income tax rate primarily due to the tax impact from the jurisdictional mix of projected income and losses in non-U.S. jurisdictions and the utilization of net operating losses and a valuation allowance release in the U.S. Our effective tax rate for the three months ended March 31, 2024, was primarily driven by the partial release of a valuation allowance attributable to the anticipated sale of our aqua business, which closed on July 9, 2024, and a benefit related to the recognition of certain state tax credits.