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Investor Contact: Tiffany Kanaga (302) 897-0668
Media Contact: Colleen Parr Dekker (317) 989-7011
Elanco Animal Health
Reports Fourth Quarter and Full Year 2020 Results
GREENFIELD, IN (February 24, 2021) - Elanco Animal
Health Incorporated (NYSE: ELAN) today reported its financial results for the fourth quarter and full year of 2020, increased guidance
for full year 2021, and provided initial guidance for the first quarter of 2021. The results reflect the inclusion of the Bayer
Animal Health business that Elanco acquired on August 1, 2020.
"Elanco is entering 2021 with good momentum. Fourth quarter
revenue surpassed our guidance as U.S. Pet Health, U.S. Farm Animal, and China swine outperformed our expectations. Adjusted EPS
came in at the high-end of the range with our productivity agenda intact, partly offsetting what were largely one-time and targeted
investments in our future growth and our people. Innovation is progressing as outlined at our December Investor Day, and our eight
launches planned for 2021 are on track," said Jeff Simmons, president and chief executive officer at Elanco. "Additionally,
we are rapidly executing on the necessary actions to drive synergies from the Bayer Animal Health acquisition, taking important
steps toward being an agile, fit-for-purpose animal health leader. Today, we are increasing our 2021 guidance to reflect the ongoing
advancement of our Innovation, Portfolio, Productivity (IPP) strategy in driving shareholder value, and continued confidence in
our underlying fundamentals and market positioning."
In the fourth quarter, Elanco results compared to the company's
December 15, 2020 guidance as follows:
| Fourth Quarter 2020 Results (dollars in millions, except per share amounts) | December Guidance | Actual | Comparison to Midpoint | |||||||||
| Revenue | $1,040 - $1,070 | $ | 1,140 | $ | 85 | |||||||
| Reported Net Loss | $(185) - $(155) | $ | (323 | ) | $ | (153 | ) | |||||
| Adjusted EBITDA | $140 - $160 | $ | 176 | $ | 26 | |||||||
| Reported EPS | $(0.38) - $(0.32) | $ | (0.66 | ) | $ | (0.31 | ) | |||||
| Adjusted EPS | $0.06 - $0.12 | $ | 0.12 | $ | 0.03 |
In the fourth quarter, Elanco's revenue was $1,139.7 million,
benefiting from increased scale and diversification with the addition of Bayer Animal Health. Products from the legacy Bayer Animal
Health business contributed $396.3 million, including $100 million from the Advantage family of products and $64 million from Seresto.
In the U.S., Elanco outperformed the company's expectations
for the quarter as many key Pet Health products achieved share gains compared to last year, including Credelio, Galliprant, Seresto,
and the Advantage family. The U.S. Farm Animal business also surpassed the company's expectations as the pressure from COVID-19
on cattle and swine customers further lessened sequentially. However, internationally, poultry and aqua remained negatively impacted
by unfavorable macroeconomic conditions and reduced consumption, with trends largely unchanged since the third quarter. China swine
sales continued to see strong recovery in the wake of African Swine Fever.
Additionally, operating expenses exceeded the company's expectations,
as a result of investments that were largely one-time and discretionary in nature, and can be divided into four categories that
are roughly equal in size: 1) brand building in the U.S. and China; 2) R&D acceleration and business partnering; 3) higher
incentive compensation driven by revenue outperformance; and 4) legal, IT, and other stabilization related costs.
The company remains on track to complete the transition to the
Elanco standalone ERP system by the end of the first quarter of 2021. As of today, substantially all the company's business units
have executed the independent ERP stand-up, and Elanco will exit all material transition services agreements with Lilly by the
end of March, as planned.
Innovation Launches and Approvals
Innovation will drive Elanco's long-term growth algorithm, with
an expected two to three percentage point contribution to overall revenue growth annually. The company expects the eight products
to be launched in 2021 to contribute $80 to $100 million in revenue during the year.
Operational Efficiencies
On January 26, 2021, Elanco announced restructuring
actions to drive synergies from the Bayer Animal Health acquisition and other operational efficiencies. As a part of this
effort, the company announced its intent to eliminate approximately 350 positions across the world to reduce duplication and
optimize structures in U.S. operations, marketing, manufacturing and quality central functions, and administrative areas.
Additionally, the company intends to close R&D sites in Manukau, New Zealand and Cuxhaven, Germany, subject to
appropriate local consultation processes, consolidating R&D activities and aligning capabilities to the newly combined
innovation portfolio. Including actions announced in September, these headcount reductions are expected to drive
approximately half of the total expected synergies. Other savings in procurement and the rationalization of smaller and/or
overlapping R&D projects are anticipated to deliver $40 to $50 million of synergies in 2021. In total, we expect $160 to
$175 million of cumulative synergies to be achieved in 2021, progressing to the anticipated $300 million outlined by the end
of 2023. The company expects to record charges of between $58 million to $77 million in connection with the January
restructuring announcement, with $55 million to $70 million in severance and other cash charges and the balance in asset
impairments and other non-cash charges. Elanco expects to recognize between $58 million to $70 million of the total
restructuring costs in the first quarter of 2021 with the remaining amount recognized over the balance of 2021.
Legacy Elanco's manufacturing organization captured $115 million
in cost savings and avoidance in 2020. Since 2018, the team has delivered $250 million in cost savings and avoidance, and most
recently contributing to the fourth quarter gross margin performance.
Working Capital and Balance Sheet
In the fourth quarter, days sales outstanding continued to improve
sequentially, standing at 66 days vs. the peak of 103 in the first quarter of 2020. As of December 31, 2020, cash and cash equivalents
were $495 million, with gross debt of $6.2 billion, and resulting net debt of $5.7 billion. The company continues to anticipate
gross debt paydown of $500 million in 2021, with progress toward the net leverage goal of being below 3x by the end of 2023.
Fourth Quarter Reported Results:
In the fourth quarter of 2020, total revenue was $1,139.7 million,
an increase of 45 percent, and also an increase of 45 percent without the impact of foreign exchange rates, compared with the fourth
quarter of 2019. Legacy Elanco revenue in the fourth quarter was $743.4 million, a decline of 6 percent year over year and without
the impact of foreign exchange rates. Gross margin, as a percent of revenue, was 47.7 percent, a decline of 20 basis points as
compared with the fourth quarter of 2019. Total operating expense was $486.8 million, an increase of $233.6 million compared
with the fourth quarter of 2019 because of the inclusion of the Bayer Animal Health business. Tax expense was $4.7 million
in the fourth quarter of 2020. Net loss for the fourth quarter of 2020 was $322.8 million, or $0.66 per diluted share, compared
with a net loss of $9.5 million for the same period in 2019.
Pet Health Disease Prevention revenue increased 122 percent
for the quarter, driven by the addition of Bayer Animal Health product revenue of $200.3 million. Growth in the legacy Elanco business
of $7.8 million or 4 percent reflects price growth across the portfolio and volume growth in Pet Health vaccines and Credelio,
partially offset by declines in older generation parasiticides and the impact of products that were divested during the third quarter
Pet Health Therapeutics revenue increased 24 percent
for the quarter, driven by the addition of Bayer Animal Health product revenue of $25.4 million. The decline in the legacy Elanco
business of $2.3 million or 3 percent reflects the impact of products that were divested during the third quarter of 2020, partially
offset by volume growth in the pain portfolio, including Galliprant and price growth.
Farm Animal Future Protein & Health revenue increased
2 percent for the quarter, driven by the addition of Bayer Animal Health product revenue of $27.5 million and increased price for
legacy Elanco products. Growth was partially offset by volume declines in the legacy Elanco business 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, and, to a lesser extent, an unfavorable impact from foreign exchange rates. Revenue for the legacy Elanco business
declined by $22.9 million or 11 percent.
Farm Animal Ruminants & Swine revenue increased
33 percent for the quarter, driven by the addition of Bayer Animal Health product revenue of $121.7 million and increased
price for legacy Elanco. Legacy Elanco volume declined due to lower demand driven by generic competition, an unfavorable
comparison to the prior year period which had higher sales from the commercial agreement for Posilac, and, to a lesser
extent, the negative impact of the COVID-19 pandemic on global protein markets. These impacts were partially offset by
increased demand in China's swine market with continued favorable producer economics and positive efforts to repopulate herds
impacted by African Swine Fever in 2019. Revenue for the legacy Elanco business declined by $22.8 million or 8 percent.
Contract Manufacturing (formerly Strategic Exits) represents
contract manufacturing relationships which are not long-term value drivers for the company. Contract Manufacturing revenue increased
158 percent for the quarter, including $21.4 million from the addition of Bayer Animal Health and represented 3 percent of
Gross profit was $543.5 million, or 47.7 percent of revenue,