Full Press Release Details
Investor Contact: Jim Greffet (317) 383-9935
Media Contact: Colleen Parr Dekker (317) 989-7011
Elanco Animal Health
Reports 2020 First Quarter Results
GREENFIELD, Ind. (May 7, 2020) - Elanco Animal Health
Incorporated (NYSE: ELAN) today reported its financial results for the first quarter of 2020. The results reflect the impact of
the COVID-19 pandemic on the business, particularly actions that the pandemic has prompted us to take with our commercial distribution
partners. Despite the unique factors that contributed to the first quarter performance, our innovation, portfolio, and productivity
strategy continues to be our focus and the long-term industry fundamentals and durability remain intact.
"In the first quarter, the COVID-19 pandemic created working
capital pressures across our commercial value chain and dampened assumptions about near-term demand from end users of our products.
These factors coupled with our recent evaluation of distributor performance has prompted us to tighten our approach across many
facets of our distributor relationships. Our relationship with our commercial partners has evolved significantly over the last
13 years and while distribution will continue to play a role in the future, our analysis shows our internal demand generation efforts
are superior to distributors and higher inventory levels are not driving demand as it had in the past," said Jeff Simmons,
president and chief executive officer at Elanco. "In the first quarter, we made initial progress to meaningfully reduce channel
inventory, primarily in our U.S. companion animal business, and we expect to further tighten channel inventory across all business
areas, primarily in the second quarter. The decrease in channel inventory is a structural change that will improve our working
capital and maximize our operational flexibility in the current environment and beyond. While the actions we are taking with our
commercial partners negatively impact our reported sales performance in the near term, these changes will strengthen our position,
optimize our promotional approach and enable us to direct investment to the internal commercial activities that drive demand for
our products over the long term."
Simmons emphasized, "Importantly, these changes are independent
of the underlying fundamentals that give me confidence - strong leading indicators in clinic performance driven by our internal
teams, the accelerating importance of alternative channels, strong demand for our solutions in poultry and aqua, and even encouraging
recovery signs from China's swine industry. We do expect demand-related pressure on our business as a result of the COVID-19 pandemic
in the coming quarters; however, these fundamentals, along with a productivity agenda that continues to deliver price and cost
improvement, a strong pipeline with potential for five new products contributing revenue by the end of 2021, and a continued focus
on the well-being of our employees, customers, animals as well as broader communities, are representative of the company we are
building for long term success."
Underlying fundamentals of our business in the first quarter
remained strong despite the actions taken related to channel inventory:
Animal health manufacturing has been designated as essential
and Elanco manufacturing plants and research labs continue to operate with appropriate personal safety measures. Importantly, Elanco
has not experienced any COVID-19 related disruption in the inputs for or supply of our products and, pending re-opening timelines,
are not expecting any delays related to our manufacturing productivity agenda, innovation timelines, or independent company stand
up. Employees in other company functions in most regions are working remotely, abiding by social distancing guidelines, and maintaining
virtual engagement with co-workers, customers, regulators, and other stakeholders. Elanco has initiated plans to begin return to
site measures aligned with federal and state regulations over the course of the coming months.
In this time of uncertainty, the health and well-being of our
employees, customers, animals and the communities where we operate are our top priority. In March, the Elanco Foundation, formed
in 2019, pledged more than $700,000 to help fight rising food insecurity challenges brought on by the COVID-19 pandemic. Elanco
and the Foundation are collaborating with leaders in the communities where we operate to support community organizations and food
banks. Additionally, Elanco is leading a coalition in Indiana to raise $1.6 million to feed 10,000 families with children in the
local Indianapolis Public School system, where eight in ten kids struggle with food security. The commitment to our vision of Food
and Companionship Enriching Life has never been more relevant than it is in these unprecedented times.
The Bayer Animal Health transaction continues
to advance, including the following progress since our last earnings call:
"I am excited about the future leadership team, whose expertise,
experience and energy will drive the success of the combined company," Simmons said. "We remain encouraged by the regulatory
and integration planning progress despite COVID-19 challenges, as well as Bayer's strong financial performance in the first quarter.
We continue to look toward a mid-2020 close."
First Quarter Reported Results:
In the first quarter of 2020, total revenue
was $657.7 million, a decrease of 10 percent, or a decrease of 9 percent without the impact of foreign exchange rates, compared
with the first quarter of 2019. Revenue, excluding strategic exits, was $638.7 million, a decrease of 9 percent without the impact
of foreign exchange rates. Gross margin, as a percent of revenue, was 49.4 percent, a decline of 360 basis points as compared with
the first quarter of 2019. Total operating expense was $248.8 million, an increase of 1 percent compared with the first quarter
of 2019. Tax benefit was $18.7 million in the first quarter of 2020. Net loss for the first quarter of 2020 was $49.1 million,
or $0.12 per diluted share, compared with net income of $31.5 million, or $0.09 per diluted share, for the same period in 2019.
Companion Animal Disease Prevention
revenue decreased 25 percent for the quarter, driven by decreased volume and to a significantly lesser extent unfavorable impact
from foreign exchange rates, partially offset by an increase in price. Without the impact of foreign exchange rates, the category
decreased 24 percent. While underlying demand grew in the first quarter, the volume decrease was the result of actions taken across
brands to reduce channel inventory levels due to the impact of the COVID-19 pandemic on the companion animal market.
Companion Animal Therapeutics revenue
decreased 19 percent for the quarter, driven by decreased volume and to a significantly lesser extent an unfavorable impact from
foreign exchange rates. Without the impact of foreign exchange rates, the category decreased 18 percent. While clinic-level demand
for Galliprant grew in major markets and geographic expansion continued into Latin America in the first quarter, the volume decrease
was the result of actions taken across brands to reduce channel inventory levels due to the impact of the COVID-19 pandemic on
the companion animal market, offset by the inclusion of sales for Entyce and Nocita as a result of the acquisition of
Aratana in the third quarter of 2019.
Food Animal Future Protein & Health revenue increased
8 percent for the quarter, driven by increased volume and price, partially offset by an unfavorable impact from foreign exchange
rates. Without the impact of foreign exchange rates, the category grew 10 percent. Growth was driven by continued strong demand
in the international poultry and aqua portfolios, in addition to anticipatory buying in the quarter by direct customers in international
export markets to ensure continuity of supply ahead of potential COVID-19 pandemic disruptions.
Food Animal Ruminants & Swine revenue decreased 8
percent for the quarter, driven by deceased volume and price, and unfavorable impact from foreign exchange rates. Without the impact
of foreign exchange rates, the category decreased 7 percent. The decrease was driven by expected impacts from headwinds for Rumensin
and Paylean , the continued replenishment of sterile injectable products from our contract manufacturing partner
and actions to reduce inventory levels. These headwinds were partially offset by increased demand in China's swine market as a
result of favorable producer economics and positive efforts to repopulate herds impacted by African Swine Fever in 2019, in addition
to anticipatory buying in the quarter by direct customers in international export markets to ensure continuity of supply ahead
of potential COVID-19 pandemic disruptions.
Strategic Exits are businesses Elanco has exited or has
made the decision to exit. Revenue from Strategic Exits decreased 15 percent for the quarter, and represented 3 percent of total
Gross profit was $325.0 million, or 49.4
percent of revenue, in the first quarter of 2020 compared with $387.3 million, or 53.0 percent, for the first quarter of 2019.
Gross margin as a percent of revenue declined 360 basis points, primarily due to unfavorable product and geographic mix and unfavorable
effect of foreign exchange rates, partially offset by continued improvements in manufacturing productivity and price.
Total operating expenses increased $3.6
million in the first quarter of 2020. Marketing, selling and administrative expenses increased less than 1 percent to $182.0 million,
reflecting additional costs from acquired businesses in 2019, primarily Aratana, partially offset by strong expense management.
Research and development expenses increased 4 percent to $66.8 million, or 10 percent of revenue, reflecting additional costs from
acquired businesses in 2019, including Aratana and Prevtec.
Amortization of intangibles increased $2.6
million to $51.6 million in the first quarter of 2020 as compared with the first quarter of 2019, as a result of the acquisitions