Elanco Animal Health Inc

Introduction

Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operation and financial position. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying footnotes in Item 1 of Part I of this Form 10-Q. Certain statements in this Item 2 of Part I of this Form 10-Q constitute forward-looking statements. Various risks and uncertainties, including, but not limited to those discussed in “Forward-Looking Statements” of this Form 10-Q, in Item 1A, “Risk Factors” of Part II of this Form 10-Q and in Item 1A, “Risk Factors” of Part I of our 2024 Form 10-K, may cause our actual results, financial position and cash flows to differ materially from these forward-looking statements.

Business Overview

Elanco is a global leader in animal health, dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets. Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and, prior to the divestiture of our aqua business in July 2024, aqua (collectively, farm animal). With a heritage dating back to 1954, we consistently innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees. We operate our business in a single segment, directed at advancing the well-being of animals, people and the planet, enabling us to realize our vision of Food and Companionship Enriching Life.

Our diverse product portfolio of approximately 200 brands helps make us a trusted partner to pet owners, veterinarians and farm animal producers. Our products are generally sold worldwide to third-party distributors and independent retailers and directly to farm animal producers and veterinarians. Our omnichannel presence extends to both the veterinary clinic and retail markets, including e-commerce.

Product Development and Regulatory Update

A key element of our targeted value creation strategy is to drive revenue growth through portfolio development and product innovation. We continue to pursue the development of new chemical and biological molecules, as well as additional registrations and indications for current products. Our future growth and success depend on both our pipeline of new products, including new products we develop internally, develop with partners or that we obtain through licenses or acquisitions, and the life cycle management of our existing products. We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. New product development, regulatory and product launch highlights throughout 2024 and 2025 include the following:

Bovaer: In May 2024, the U.S. Food & Drug Administration (FDA) completed its comprehensive, multi-year review of Bovaer® (3-NOP), a first-in-class methane-reducing feed ingredient for use in lactating dairy cattle. Producers began feeding the product to cattle in the U.S. during the third quarter of 2024.

Zenrelia: We received final FDA approval for Zenrelia®, a JAK inhibitor targeting control of pruritus and atopic dermatitis in dogs, in September 2024. We launched Zenrelia in the U.S. shortly after final approval and have also received approval for Zenrelia in Brazil, Canada, Japan, and most recently in the European Union (EU) in July 2025. Additional reviews are ongoing in other key markets.

Credelio Quattro: In October 2024, we received final approval from the FDA for Credelio Quattro™, a monthly chewable tablet for dogs that protects against fleas, ticks, heartworms, roundworms, hookworms and three different species of tapeworms. Credelio Quattro was launched, with the first commercial sale occurring in January 2025. Regulatory submissions have now been made in other key markets, including Europe, Australia, Canada, Japan and the U.K.

Experior: In October 2024, we received multiple combination clearance approvals from the FDA for Experior® to be used in combination with other farm animal products, allowing for broader use in heifers, which represent nearly 40% of the fed cattle population in the U.S.

AdTab: In April 2025, AdTab™, a chewable flea and tick treatment for dogs and cats, was approved and launched in the U.K.

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Other Key Trends and Factors Affecting Our Results of Operations

Trade Environment and Other U.S. Government Initiatives: Changes to U.S. trade policy throughout 2025 have resulted in new or higher tariffs on goods imported from numerous countries, and some countries have imposed retaliatory tariffs on imports from the U.S. As disclosed in Item 1A, "Risk Factors– Tariffs, trade protection measures or other modifications of foreign trade policy may harm us or our customers", of our 2024 Form 10-K, our business is subject to risks related to, among other factors, tariffs, trade and monetary policies and economic conditions and events. While pharmaceutical products are largely exempt from the recently imposed U.S. tariffs, it remains uncertain if this will continue to be the case, and pharmaceutical products are not exempt from all tariffs recently imposed outside of the U.S. We do believe that some customers accelerated purchases of certain of our farm animal products internationally during the second quarter of 2025, in anticipation of future tariff increases. Aside from this, we do not believe these new and increased tariffs had a material impact on our results of operations for the six months ended June 30, 2025. We will continue to closely monitor the trade policies in the countries in which we operate and/or from where we import products and are taking actions, where possible, to mitigate the impacts on our business.

Further, throughout 2025, the U.S. presidential administration has sought to implement significant changes to the size and scope of the federal government. Included in these changes was a freeze in certain previously authorized government incentives focused on the adoption of new products for the sole purpose of sustainability. As disclosed in Item 1A, "Risk Factors– If the acceptance and/or adoption of our farm animal sustainability initiatives do not continue, our future results may be materially impacted", of our 2024 Form 10-K, we have made significant progress in recent years in gaining acceptance of farm animal sustainability products. However, the expanded use of certain of our farm animal sustainability products may be negatively impacted in the absence of government incentives focused on such adoption, perhaps materially so. We continue to monitor the impact these changes may have on the adoption of certain of our farm animal sustainability products, although the potential impact to us remains uncertain.

Sale of Future Revenue: In May 2025, we executed a Purchase and Sale Agreement (PSA) with affiliates of Blackstone, pursuant to which we received proceeds of $295 million in exchange for the rights to the proceeds from qualifying future royalties and sales milestone payments owed to us by Tarsus based on their net sales of XDEMVY® (lotilaner ophthalmic solution) 0.25%, a medical treatment for Demodex blepharitis in humans. Rights to qualifying royalties sold to Blackstone apply to net sales of XDEMVY in the U.S. from April 1, 2025 through August 24, 2033. We retain the rights to all royalty payments on net sales outside the U.S., and ownership of any royalties due on U.S. net sales after August 24, 2033, will remain with us. These net proceeds were utilized to repay previously outstanding debt.

Under GAAP, the $295 million in proceeds received from Blackstone, net of transaction costs of $5 million, was recorded as a liability for sale of future revenue on our condensed consolidated balance sheet. Although we will no longer receive the proceeds from the qualifying future royalties and milestones, we are required under GAAP to continue recording these amounts as revenue and other income (expense), respectively. See Note 10. Liability for Sale of Future Revenue to the condensed consolidated financial statements for further information.

Corporate Headquarters Lease: In June 2025, we commenced a five-year lease for our new corporate headquarters in Indianapolis, Indiana. This lease contains both an option for Elanco to purchase the headquarters facility and a put right for the landlord to put the facility to us, both of which, if exercised, would occur at the end of the five-year lease term for $250 million. It is our current expectation that we will exercise our purchase option at the end of the lease term. Based on our review of the terms of this lease, we determined classification as a finance lease to be appropriate. Minimum lease payments over the next five years under this lease arrangement will be due monthly, and along with the purchase option amount, resulted in a total finance lease liability of $255 million as of June 30, 2025, with a corresponding right-of-use (ROU) asset of $234 million. This finance lease liability was included within long-term debt, split between current and long-term based on the timing of expected minimum lease payments, while the corresponding ROU asset was included within property and equipment, net in our condensed consolidated balance sheet at June 30, 2025. See Note 7. Debt to the condensed consolidated financial statements for further information.

Aqua Business Divestiture: On July 9, 2024, we closed the sale of our aqua business to a subsidiary of Merck Animal Health, for $1,294 million in cash proceeds, which was paid at closing. Assets sold included inventories, real property and equipment, including our manufacturing sites in Canada and Vietnam, and certain intellectual property, technology and other intangible assets, including marketed products. Along with these assets, approximately 280 commercial and manufacturing employees were transferred to Merck Animal Health as part of this divestiture. We recorded a pre-tax gain on divestiture of $640 million during the third quarter of 2024. Income tax expense associated with this gain on divestiture was $170 million. See Note 4. Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for further information.

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Acquisition and Integration: In November 2024, we acquired a manufacturing facility in Speke, U.K. (Speke), including its workforce and related assets such as inventory and property and equipment, from a former contract manufacturing supply partner, TriRx Speke Ltd. (TriRx Speke), for $36 million.

Seasonality: While many of our products are sold consistently throughout the year, we do experience seasonality in our pet health business due to increased demand for certain parasiticide product offerings in the first half of the year. For example, in 2024 approximately 70% and 55% of total annual revenue generated by our higher-margin parasiticide products Seresto and Advantage Family, respectively, occurred during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere.