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 the six months ended June 30, 2025 and 2024, approximately 52% and 54%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 periodic revenue results, leading to variations in revenue. This can be a result of various factors, such as end customer demand, new customer contracts, initial stocking of new products, 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 and six months ended June 30, 2025 and 2024, was as follows:

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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. In May 2025, we entered into an agreement to sell certain qualifying royalties, among other potential future cash flows, to Blackstone for proceeds of $295 million in cash. While we are no longer entitled to these qualifying royalties, we are required under GAAP to continue recognizing them as revenue. For the three months ended June 30, 2025, royalty revenue associated with this arrangement, which is reflected within the Contract Manufacturing and Other line in the table above, totaled $4 million. See Note 10. Liability for Sale of Future Revenue to the condensed consolidated financial statements for additional information.

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 and six months ended June 30, 2025, compared to the three and six months ended June 30, 2024, were as follows:

Three months ended June 30, 2025

Six months ended June 30, 2025

Note: Numbers may not add due to rounding.

Pet health revenue increased $64 million, or 11%, for the three months ended June 30, 2025, compared to the same period in 2024, driven by higher volumes, the impacts from foreign currency exchange rate movements and a 4% increase in pricing. Higher volumes were primarily driven by new products, including Credlio Quattro, AdTab and Zenrelia.

Pet health revenue increased $60 million, or 5%, for the six months ended June 30, 2025, compared to the same period in 2024, also driven by higher volumes and a 3% increase in pricing. For the six months ended June 30, 2025, volume growth driven primarily from new products, including the impacts of initial stocking, was partially offset by the impact of an initial stocking of certain legacy Bayer Animal Health products into the U.S. distribution channel in the first quarter of 2024 that did not repeat in the current year.

Farm animal revenue decreased $11 million, or 2%, for the three months ended June 30, 2025, compared to the same period in 2024, driven by the divestiture of our aqua business, which generated revenue of $49 million during the three months ended June 30, 2024. The impact of this divestiture was mostly offset by a 4% increase in volumes across our remaining species, led by Experiorin U.S. cattle, a 2% increase in pricing and the impacts from foreign currency exchange rate movements. Additionally, while we have experienced recovering demand for our international swine products, and demand in the international poultry market remains strong, we believe approximately $10 million to $20 million of our current quarter international farm animal revenue was driven by accelerated customer purchases, primarily in China, in advance of expected future tariff increases.

Farm animal revenue decreased $21 million, or 2%, for the six months ended June 30, 2025, compared to the same period in 2024, driven by the divestiture of our aqua business, which generated revenue of $80 million during the six months ended June 30, 2024, and the impacts from foreign currency exchange rate movements. These decreases were largely offset by higher volumes, led by Experiorin U.S. cattle, and a 3% increase in pricing.

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Gross Profit

Gross profit increased $24 million for the three months ended June 30, 2025, corresponding to increased revenue, while gross margin percentage (gross profit as a percentage of total revenue) decreased to 57%, compared to 58% the three months ended June 30, 2024. Gross profit increased $18 million for the six months ended June 30, 2025, corresponding to increased revenue, while gross margin percentage also decreased to 57%, compared to 58% for the six months ended June 30, 2024. The decreases in gross margin percentage for the three and six months ended June 30, 2025, as compared to the same periods in the prior year, were due to the impacts of inflation and the higher manufacturing costs associated with owning Speke. These decreases were partially offset by favorable impacts from increased pricing and volumes and favorable product mix.

Research and Development

Research and development expenses increased $3 million and $10 million for the three and six months ended June 30, 2025, respectively, as compared to the same periods in the prior year, primarily driven by higher employee-related expenses and project costs.

Marketing, Selling and Administrative

Marketing, selling and administrative expenses increased $46 million and $50 million for the three and six months ended June 30, 2025, respectively, as compared to the same period in the prior year. These increases were driven by strategic investments in the global launches of new products and increased selling costs, corresponding to increased revenue.

Amortization of Intangible Assets

Amortization of intangible assets increased $5 million for the three months ended June 30, 2025, and was flat for the six months ended June 30, 2025, as compared to the same periods in the prior year. These fluctuations were primarily driven by changes in foreign currency exchange rates.

Asset Impairment, Restructuring and Other Special Charges

Asset impairment, restructuring and other special charges decreased $79 million and $116 million for the three and six months ended June 30, 2025, respectively, as compared to the same periods in the prior year. Amounts recorded in 2025 primarily consisted of upfront payments made during the first quarter in relation to new licensing arrangements.

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) and $10 million of transaction costs associated with the divestiture of our aqua business, which closed on July 9, 2024. 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.

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Interest Expense, Net of Capitalized Interest

Interest expense, net of capitalized interest decreased $17 million and $43 million for the three and six months ended June 30, 2025, respectively, as compared to the same period in the prior year. These decreases were driven by lower average outstanding debt balances during the current year, given recent debt paydown activity. Imputed interest on our new liability for sale of future revenue during the second quarter of 2025 of $7 million partially offset these decreases (see Note 10. Liability for Sale of Future Revenue to the condensed consolidated financial statements for further information).

Other expense, net

Other expense, net for the three and six months ended June 30, 2025 and 2024, primarily consisted of foreign currency exchange losses.

Income tax expense (benefit)

We recognized income tax expense of $14 million and $18 million for the three months ended June 30, 2025 and 2024, respectively. Our effective tax rate of 55.4% for the three months ended June 30, 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 impacts of discrete tax expenses during the second quarter of 2025, including the remeasurement of certain deferred tax positions due to a foreign tax rate change. 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.

We recognized income tax expense of $7 million and an income tax benefit of $2 million for the six months ended June 30, 2025 and 2024, respectively. Our effective tax rate of 7.6% for the six months ended June 30, 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., partially offset by the impacts of discrete tax expenses during the second quarter of 2025, including the remeasurement of certain deferred tax positions due to a foreign tax rate change. 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, which closed on July 9, 2024, and a benefit related to the recognition of certain state tax credits.

On July 4, 2025, the One Big Beautiful Bill Act (Act) was enacted into law in the U.S. The Act includes significant provisions, including tax cut extensions and modifications to the U.S. and international tax frameworks. We are currently evaluating the Act's expected impact on our consolidated results of operations and will recognize the related tax impacts, including on our U.S. valuation allowance position, in the period of enactment.