Elanco Animal Health Inc.

05/06/2026 | Press release | Distributed by Public on 05/06/2026 07:05

Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2025 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. We partner with farmers, pet owners, veterinarians and society to create value and help our customers improve the health of animals in their care, while also making a meaningful impact on the communities we serve. 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, and sheep (collectively, farm animal). Our purpose - making life better for animals makes life better - inspires us to Go Beyond for animals, our customers, our people, and society.
With a heritage dating back to 1954, we operate our business in a single segment within the animal health industry, offering a diverse product portfolio of approximately 200 brands, which 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 depends on both our pipeline of new products, including new products we develop internally, with partners or 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. Recent new product development, regulatory and product launch highlights include the following:
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 commercialized Zenrelia in Australia, Brazil, Canada, the European Union (EU), Japan and the U.K. Additional reviews are ongoing in other 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 in January 2025 and in December 2025 we also received conditional approval for treatment of the New World screwworm. In April 2026, Credelio Quattro was launched in Australia, and we received regulatory approval in Canada. Additional submissions have been made in other key markets, including the EU, Japan and the U.K.
Befrena: In December 2025, we received final approval from the USDA for Befrena, a new anti-IL31 monoclonal antibody injection targeting canine allergic and atopic dermatitis. We anticipate launching Befrena in the second quarter of 2026.
2026 Q1 Form 10-Q | 18
Other Key Trends and Factors Affecting Our Results of Operations
Restructuring Activities: In December 2025, our Board of Directors authorized a restructuring plan (the 2025 Restructuring Plan) to support margin expansion, optimize our global footprint and further invest in innovation. Specifically, the 2025 Restructuring Plan targeted an expected 2026 closure of the animal studies portion of our R&D facilities in Monheim, Germany, while also expanding our R&D organization in Indianapolis, Indiana, among other changes to our R&D organization. The 2025 Restructuring Plan is also expected to result in our exit from certain farm animal implant products and the related closure of our manufacturing facility in Kansas City, Kansas, in 2026. In total, the 2025 Restructuring Plan is expected to result in a global headcount reduction of approximately 300 employees, with an additional approximately 300 employees whose positions will be replaced with positions in growth areas or in lower-cost geographies.
In connection with the 2025 Restructuring Plan, we incurred charges of $155 million in the fourth quarter of 2025. Expected pre-tax charges associated with the 2025 restructuring plan total $25 million to $30 million in 2026, of which $14 million was incurred during the three months ended March 31, 2026, primarily related to the remaining shut-down costs for our Monheim, Germany facility. The 2025 Restructuring Plan is expected to result in savings of approximately $25 million in 2026 and approximately $60 million in 2027.
Trade Environment and Other U.S. Government Initiatives: Changes to U.S. trade policy continued in the first quarter of 2026. On February 20, 2026, the U.S. Supreme Court ruled that the International Emergency Economic Powers Act does not provide authority for the President to impose tariffs. Subsequently, new tariffs were imposed under Section 122 of the Trade Act of 1974. On April 2, 2026, the President issued a proclamation under Section 232 of the Trade Expansion Act of 1962 imposing tariffs on certain imported patented pharmaceuticals and active pharmaceutical ingredients. While this proclamation targets certain patented pharmaceutical products, it includes significant carve-outs, including for certain animal-health pharmaceutical products. These tariffs are not effective until the third quarter of 2026.
While the ultimate financial impact of these and other decisions cannot be reasonably estimated at this time, we will continue to closely monitor the trade policies in countries in which we operate and/or from which we import products and continue to take actions, where possible, to mitigate the impacts on our business.
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 2025 Form 10-K, our business is subject to risks related to, among other factors, tariffs, trade and monetary policies and economic conditions and events. We do not believe the previously enacted tariffs had a material impact on our results of operations for the three months ended March 31, 2026. However, while animal-health pharmaceutical products are largely exempt from the U.S. tariffs imposed to date, it remains uncertain if this will continue to be the case, and pharmaceutical products are not exempt from all tariffs imposed outside of the U.S.
Further, the U.S. presidential administration has sought to implement significant changes to the size and scope of the federal government. Among these changes, certain previously authorized government incentives focused on the adoption of new products for the sole purpose of sustainability have been frozen or rescinded. 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 2025 Form 10-K, we have made significant progress in recent years in gaining acceptance of farm animal sustainability products. However, we believe the adoption rate of Bovaer, one of our farm animal sustainability products, has been tempered given the absence of government incentives focused on such adoption. We continue to monitor the impact these changes are having on our current business and on the adoption ramp of Bovaer, although the potential longer-term 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. These net proceeds were utilized to repay previously outstanding debt. See Note 10. Liability for Sale of Future Revenue to the condensed consolidated financial statements for further information.
Acquisition and Integration: On April 30, 2026, we completed the previously announced acquisition of AHV International B.V. (AHV), along with selected assets of AHV's affiliates necessary for the on-going operations of the business. AHV is an innovative, farm animal health company incorporated in the Netherlands focused on solutions to improve animal welfare and productivity, while reducing the need for antibiotics. The acquisition of AHV is expected to accelerate our strategy to grow our industry leadership in farm animal products, particularly for cattle, by expanding our product portfolio, primarily throughout Europe and the U.S. We expect AHV to contribute modestly to revenue in 2026, with a more meaningful impact beginning in 2027 as we integrate the business and realize commercial synergies. This transaction was funded utilizing cash on hand and by borrowing $50 million on our Securitization Facility. This acquisition is not expected to materially affect our deleveraging timeline or overall liquidity position.
2026 Q1 Form 10-Q | 19
Macroeconomic Factors: Our operations are exposed to, and impacted by, various global macroeconomic factors, including emerging global armed conflicts and related government responses to them. While our business has not been materially impacted by any such conflicts to date, conflict escalation or prolonged international tensions could result in economic slowdown, volatility in consumer behavior, increased shipping costs or materials costs and/or supply chain disruptions, any one of which could have a material negative impact on our results of operations.
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 2025 approximately 70% and 60% 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.
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.
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Revenue $ 1,371 $ 1,193 15 %
Cost of sales 586 509 15 %
Gross profit 785 684 15 %
Research and development 97 94 3 %
Marketing, selling and administrative 381 341 12 %
Amortization of intangible assets 138 128 8 %
Asset impairment, restructuring and other special charges 16 9 78 %
Interest expense, net of capitalized interest 57 40 43 %
Other expense, net 9 12 (25) %
Income before income taxes 87 60 45 %
Income tax expense (benefit) 30 (7) NM
Net income $ 57 $ 67 (15) %
Certain amounts and percentages may reflect rounding adjustments.
NM - Not meaningful
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 three months ended March 31, 2026 and 2025, approximately 54% and 52%, respectively, 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.
2026 Q1 Form 10-Q | 20
Our revenue by product category for the three months ended March 31, 2026 and 2025, was as follows:
Three Months Ended March 31,
Revenue % of Total Revenue
(Dollars in millions) 2026 2025 2026 2025 $ Change % Change
Pet Health $ 710 $ 635 52 % 53 % $ 75 12 %
Farm Animal 642 546 47 % 46 % 96 18 %
Contract Manufacturing and Other (1)
19 12 1 % 1 % 7 58 %
Total $ 1,371 $ 1,193 100 % 100 % $ 178 15 %
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. Royalty revenue sold to a third party in May 2025 totaled $9 million for the three months ended March 31, 2026. While we are no longer entitled to these royalties, we are required under GAAP to continue recognizing them as revenue. See Note 10. Liability for Sale of Future Revenue for additional information.
The effects of price, foreign currency exchange rates and volume on changes in revenue for the three months ended March 31, 2026, compared to three months ended March 31, 2025, were as follows:
(Dollars in millions)
Revenue Price FX Rate Volume Total
Pet Health $ 710 2% 5% 5% 12%
Farm Animal 642 2% 4% 11% 18%
Contract Manufacturing and Other 19 58%
Total $ 1,371 2% 4% 8% 15%
Note: Numbers may not add due to rounding.
Pet health revenue increased $75 million, or 12%, for the three months ended March 31, 2026, compared to the same period in 2025, driven primarily by higher volumes, the impacts from foreign currency exchange rate movements and increased pricing. Higher volumes were primarily driven by new products, led by Zenrelia and AdTab, and higher parasiticide sales, including increased purchases by a couple new corporate retail customers.
Farm animal revenue increased $96 million, or 18%, for the three months ended March 31, 2026, compared to the same period in 2025, driven by increased volumes across all species, the impacts from foreign currency exchange rate movements and an increase in pricing. Higher volumes were led by Rumensin in U.S. cattle and strength in poultry sales globally.
Gross Profit
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Gross profit $ 785 $ 684 15 %
Gross margin % 57.3 % 57.3 %
Gross profit increased $101 million for the three months ended March 31, 2026, driven largely by the increased revenue discussed above. Gross margin percentage (gross profit as a percentage of total revenue) remained flat compared to 57% for the three months ended March 31, 2025, and was impacted by product mix and higher inventory costs.
Research and Development
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Research and development $ 97 $ 94 3 %
% of revenue 7 % 8 %
Research and development expenses increased $3 million for the three months ended March 31, 2026, as compared to the same period in the prior year. The increase was primarily driven by foreign currency exchange rate movements.
2026 Q1 Form 10-Q | 21
Marketing, Selling and Administrative
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Marketing, selling and administrative $ 381 $ 341 12 %
% of revenue 28 % 29 %
Marketing, selling and administrative expenses increased $40 million for the three months ended March 31, 2026, as compared to the same period in the prior year. This increase was driven by higher compensation expense, foreign currency exchange rate movements and strategic investments in the global launches of new products, partially offset by decreases in certain general and administrative expenses.
Amortization of Intangible Assets
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Amortization of intangible assets $ 138 $ 128 8 %
Amortization of intangible assets increased $10 million for the three months ended March 31, 2026, as compared to the same period in the prior year. The increase was primarily driven by changes in foreign currency exchange rates.
Asset Impairment, Restructuring and Other Special Charges
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Asset impairment, restructuring and other special charges $ 16 $ 9 78 %
Asset impairment, restructuring and other special charges increased $7 million for the three months ended March 31, 2026, as compared to the same period in the prior year. Amounts recorded to asset impairment, restructuring and other special charges during the three months ended March 31, 2026, primarily related to $15 million of non-cash shut-down costs for the animal studies portion of our R&D facilities in Monheim, Germany. Amounts recorded in 2025 primarily consisted of upfront payments made in relation to new licensing arrangements.
Interest Expense, Net of Capitalized Interest
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Interest expense, net of capitalized interest $ 57 $ 40 43 %
Interest expense, net of capitalized interest increased $17 million for the three months ended March 31, 2026, as compared to the same period in the prior year. The increase was principally due to imputed interest on our liability for sale of future revenue of $14 million for the three months ended March 31, 2026 (see Note 10. Liability for Sale of Future Revenue to the condensed consolidated financial statements for further information), as well as interest expense related to our corporate headquarters finance lease, partially offset by lower average debt balances.
Other Expense, Net
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Other expense, net $ 9 $ 12 (25) %
Other expense, net for the three months ended March 31, 2026 was negatively impacted by currency translation losses reclassified from accumulated other comprehensive loss to the condensed consolidated statements of operations in conjunction with the substantial liquidation of a dormant legal entity, a litigation settlement and mark-to-market adjustments on equity investments. Other expense, net for the three months ended March 31, 2025 primarily consisted of foreign currency exchange losses.
Income Tax Expense (Benefit)
Three Months Ended March 31,
(Dollars in millions) 2026 2025 % Change
Income tax expense (benefit) $ 30 $ (7) NM
Effective tax rate 34.6 % (12.2) %
We recognized an income tax expense of $30 million for the three months ended March 31, 2026, and income tax benefit of $7 million for the three months ended March 31, 2025. Our effective tax rate of 34.6% for the three months ended March 31, 2026, differed from the statutory income tax rate primarily due to the tax impact from the
2026 Q1 Form 10-Q | 22
jurisdictional mix of projected earnings and the accrual of global minimum taxes under current law. 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.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our credit facilities. As a significant portion of our business is conducted internationally, we hold a significant portion of cash outside the U.S. We monitor and adjust the amount of foreign cash based on projected cash flow requirements. Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, the income taxes associated with transferring cash to the U.S. We intend to indefinitely reinvest substantially all foreign earnings for continued use in our foreign operations. As our business evolves, we may change that strategy, particularly to the extent we identify tax-efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, including both principal and interest payments, as well as interest rate swaps, lease payments, purchase obligations and costs associated with mergers, acquisitions, divestitures, business integrations and/or restructuring activities. As of March 31, 2026, we had cash and cash equivalents of $428 million and unused borrowing capacity on our Revolving Credit Facility of approximately $750 million. In addition, our Securitization Facility provides for additional borrowing capacity based on our U.S. Net Eligible Receivable Balances. After borrowing $50 million on April 22, 2026 in connection with the AHV acquisition (see Note 4. Acquisitions and Divestitures for further information), we had approximately $134 million in undrawn borrowing capacity on this facility. We also have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As market conditions change, we will continue to monitor our liquidity position. However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See "Item 1A. Risk Factors - We have substantial indebtedness" in Part I of our 2025 Form 10-K.
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities for the three months ended March 31, 2026 and 2025:
(in millions)
Net cash provided by (used for): 2026 2025 $ Change
Operating activities $ 13 $ (4) $ 17
Investing activities (60) (58) (2)
Financing activities (65) 52 (117)
Effect of exchange rate changes on cash and cash equivalents (5) 29 (34)
Net (decrease) increase in cash and cash equivalents $ (117) $ 19 $ (136)
Operating activities
Cash provided by operating activities was $13 million for the three months ended March 31, 2026, compared to cash used in operating activities of $4 million for the three months ended March 31, 2025. The increase in cash provided by operating activities was primarily driven by an increase in non-cash expenses relative to net income, partially offset by changes in working capital.
Investing activities
Cash used for investing activities was $60 million for the three months ended March 31, 2026, compared to cash used for investing activities of $58 million for the three months ended March 31, 2025. Cash used for investing activities during the three months ended March 31, 2026, largely consisted of $51 million of net purchases of property and equipment and software, which was $14 million lower than for the three months ended March 31, 2025. This decrease in purchases of property and equipment primarily related to the timing of spending for the ongoing expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas, as well as capital projects at our Fort Dodge, Iowa, and Huningue, France, manufacturing facilities.
2026 Q1 Form 10-Q | 23
Financing activities
Cash used for financing activities was $65 million for the three months ended March 31, 2026, compared to cash provided by financing activities of $52 million for the three months ended March 31, 2025. Cash used for financing activities during the three months ended March 31, 2026, included the purchase of common stock for employee tax withholding obligations and scheduled repayments of long-term borrowings. Cash provided by financing activities for the three months ended March 31, 2025 included $85 million in net borrowings on our Securitization Facility, primarily for working capital purposes, partially offset by scheduled repayments of long-term borrowings and the purchase of common stock for employee tax withholding obligations.
Description of Indebtedness
For a complete description of our existing debt and available credit facilities as of March 31, 2026 and December 31, 2025, see Note 7. Debt and Finance Lease Liability within Item 8, "Financial Statements and Supplementary Data," of Part II of our 2025 Form 10-K. New developments are discussed in Note 7. Debt and Finance Lease Liability of this Form 10-Q.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Certain of our accounting estimates are considered critical because they are the most important to the fair presentation of our financial statements, including the disclosures thereto, and often require significant, difficult or complex judgments, probabilities and assumptions.
While we believe our critical accounting estimates to be reasonable based on all relevant information available, given their inherent uncertainty, if our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted. We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change, and such changes generally would be reflected in our condensed consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year. Our critical accounting estimates are summarized in Item 7, "Management's Discussion & Analysis of Results of Financial Condition and Results of Operations," of our 2025 Form 10-K. There were no significant changes or developments in the application of our critical accounting estimates during the three months ended March 31, 2026.
Elanco Animal Health Inc. published this content on May 06, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 06, 2026 at 13:06 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]