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Investor Contact: Tiffany Kanaga (302) 897-0668
Media Contact: Colleen Parr Dekker (317) 989-7011
Elanco Animal Health
Reports Third Quarter 2020 Results
GREENFIELD, Ind. (November 6, 2020) - Elanco Animal
Health Incorporated (NYSE: ELAN) today reported its financial results for the third quarter of 2020 and provided guidance for the
fourth quarter of 2020. The results reflect the inclusion of the Bayer Animal Health business that Elanco acquired on August 1,
"In the third quarter, Elanco executed with discipline
and urgency to deliver on our stated expectations for the quarter, achieving results at the high end of our guidance while bolstering
our competitive position amid lingering pandemic headwinds in our Farm Animal business," said Jeff Simmons, president and
chief executive officer at Elanco. "We closed the industry's largest acquisition and moved with speed and decisiveness to
integrate the Bayer Animal Health business and announce at least $100 million in actions toward our synergy target. Our IPP strategy
is working through a combined portfolio and greater access to the world's animals, a pipeline that is progressing, and a productivity
agenda that continues to support gross margin expansion. We closed the quarter as a stronger enterprise, driving sustainable, long
term value creation for shareholders and society."
The Bayer Animal Health transaction closed on August 1, 2020,
at which time various divestitures were also completed. Bayer Animal Health products contributed revenue of $195.6 million in the
approximately seven weeks of invoicing during the third quarter. As anticipated, the Bayer Animal Health portfolio experienced
the reversal of the retailer stock-in, created by the pandemic trends and anticipation of IT system blackout periods around closing.
Globally, Seresto added $20 million and the Advantage family added $55 million in revenue in the quarter.
While the pet health industry recovery continues, the COVID-19
pandemic pressured global economies and agriculture. As expected, Elanco's business was negatively impacted in the third quarter
by an estimated $35 million, primarily in the Farm Animal business. Although improvements were made in reducing the backlog of
animal processing in the U.S. livestock industry, unfavorable macroeconomic conditions and reduced consumption trends pressured
prices and producer profitability in both poultry and aqua, impacting Elanco's international business. Despite these near term
headwinds, poultry and aqua remain important growth drivers for Elanco over the long term.
Innovation Approvals
Elanco received European Commission approval for Increxxa, a
product for bovine and swine respiratory disease, which will be a valuable addition to the company's Farm Animal portfolio. Additionally,
the U.S. Food and Drug Administration has approved Elura, a weight loss management treatment for cats with chronic kidney disease,
expanding Elanco's feline offerings while addressing an unmet need in an increasingly common condition as cats age. The company
has received approval for four out of the at least five launch equivalents that are expected to enter the marketplace before the
On September 30, 2020, Elanco announced initial restructuring
actions to drive synergies from the Bayer Animal Health acquisition. As part of this effort, the company announced its intent to
eliminate more than 900 positions across nearly 40 countries, primarily in Sales and Marketing, but also R&D, Manufacturing
and Quality, and back office support. These actions have begun to reduce duplication, drive efficiency, and optimize the company's
footprint across geographies. The cost savings from this announcement of at least $100 million are expected to annualize by the
second half of 2021. Elanco remains on track to deliver $275 million to $300 million in cost synergies, with the first two-thirds
coming in the first 30 months post-acquisition.
Working Capital and Balance Sheet
Elanco continues to drive improvements in net working capital
and balance sheet leverage. In the third quarter, days sales outstanding improved sequentially, standing at 67 days vs. the peak
of 103 days in the first quarter of 2020. As announced at the end of the quarter, the company has started repayment against the
Term Loan that funded the Bayer Animal Health acquisition, with $100 million repaid on September 25, 2020. As
of September 30, 2020, cash and cash equivalents were $659.9 million.
2020 remains a uniquely cash heavy year as a result of the stand
up of the independent Elanco ERP system and IT infrastructure, the execution of the acquisition, and the build of the requisite
ERP infrastructure for the Bayer Animal Health business. The company now estimates that total cash cost for the independent company
stand up will be in the range of $280 to $320 million, net of certain real estate dispositions and employee benefit changes. The
increase compared to the prior expected range of $240 to $290 million primarily reflects higher costs to execute local country
IT infrastructure deployment and transitions as a result of pandemic related travel restrictions and protocols, as well as increased
site cutover expenses and additional scope costs. The company still anticipates the completion of the ERP system and necessary
IT infrastructure transitions by the previously communicated timeline of the first quarter of 2021. Additionally, as shared in
the pro forma financials in the 8-K filing on October 15, 2020, the company capitalized approximately $72 million for the ERP infrastructure
supporting the Bayer Animal Health business.
Healthy Purpose 2030 Sustainability Commitments
On October 27, 2020, Elanco announced its first sustainability
commitments, just two years after becoming an independent company. The decade-long commitments support the United Nations Sustainable
Development Goals (SDGs), address societal challenges, and underscore Elanco's role in improving the health of animals, which
also improves the health of people and the planet. The Protein, Planet, and Pet Pledges aim to provide improved access to nutritious
protein, reduce the company's and customers' footprint on the planet, and help support more healthy pets that in turn
support people's wellbeing.
"Business can be a unique force for good, and at Elanco,
we believe we have the opportunity and responsibility to help tackle key societal challenges," said Jeff Simmons, president
and CEO at Elanco. "Elanco's Healthy Purpose sustainability commitments, the first of its kind in the animal health industry,
advances the world's wellbeing while supporting and strengthening our own business. It all starts with a healthy, strong
enterprise driven by the growth, innovation, and margin expansion agenda against which we are executing. Through these efforts,
Elanco is focused on creating value for our customers, employees, shareholders, and society as a whole."
Elanco's Healthy Purpose Sustainability Commitments are detailed
on the company's website at www.elanco.com.
Third Quarter Reported Results:
In the third quarter of 2020, total revenue was $889.6 million,
an increase of 15 percent, or an increase of 16 percent without the impact of foreign exchange rates, compared with the third
quarter of 2019. Revenue excluding Contract Manufacturing was $873.5 million, an increase of 17 percent without the impact of
foreign exchange rates. Gross margin, as a percent of revenue, was 50.3 percent, a decline of 300 basis points as compared with
the third quarter of 2019. Total operating expense was $365.8 million, an increase of 40 percent compared with the third quarter
of 2019, driven by costs from the Bayer Animal Health acquisition. Tax benefit was $74.0 million in the third quarter of 2020.
Net loss for the third quarter of 2020 was $135.0 million, or $(0.29) per diluted share, compared with net income of $10.0 million,
or $0.03 per diluted share, for the same period in 2019.
Pet Health Disease Prevention revenue increased 43 percent
for the quarter, driven by the addition of Bayer Animal Health product revenue of $99.7 million. The decline in the legacy Elanco
business was driven by an unfavorable comparison to the prior period which included an initial stocking for a new customer agreement
and a full quarter of revenue for products that were divested during the third quarter of 2020, partially offset by price growth
across the portfolio and higher volume from newer generation parasiticide products, primarily Credelio.
Pet Health Therapeutics revenue increased 18 percent
for the quarter, driven by the addition of Bayer Animal Health product revenue of $13.5 million and to a lesser extent price. Growth
in the legacy Elanco business was driven by pricing benefits across the portfolio, partially offset by an unfavorable comparison
to the prior period which included an initial stocking for a new customer agreement and a full quarter of revenue for products
that were divested during the third quarter of 2020.
Farm Animal Future Protein & Health revenue decreased
5 percent for the quarter, driven by lower volume and, to a lesser extent, unfavorable impact from foreign exchange rates, partially
offset by an increase in price for legacy Elanco despite the addition of Bayer Animal Health product revenue of $15.9 million.
Legacy Elanco revenue declined as a result of lower levels of demand in certain markets due to the negative impact of the COVID-19
pandemic on poultry and aqua consumption, production, and profitability as well as an unfavorable comparison to the prior period
as a result of the sellout of the remaining inventory of a product that was phased out in China.
Farm Animal Ruminants & Swine revenue increased 10
percent for the quarter, driven by the addition of Bayer Animal Health product revenue of $61.0 million, partially offset by an
unfavorable impact from foreign exchange rates and decreased price. Legacy Elanco revenue declined due to lower demand driven by