Core Insights - Investors in the Medical - Outpatient and Home Healthcare sector may find value in Elanco Animal Health Incorporated (ELAN) and U.S. Physical Therapy (USPH) as potential undervalued stocks [1] Valuation Metrics - Elanco Animal Health Incorporated has a Zacks Rank of 1 (Strong Buy), indicating a positive earnings outlook, while U.S. Physical Therapy has a Zacks Rank of 3 (Hold) [3] - ELAN's forward P/E ratio is 23.42, compared to USPH's forward P/E of 34.08, suggesting that ELAN is more attractively priced [5] - The PEG ratio for ELAN is 3.83, while USPH's PEG ratio is 4.46, indicating that ELAN may offer better value relative to its expected earnings growth [5] - ELAN's P/B ratio stands at 1.51, whereas USPH's P/B ratio is 2.69, further supporting the argument that ELAN is undervalued [6] - Based on these valuation metrics, ELAN receives a Value grade of B, while USPH is rated C, highlighting ELAN as the superior value option [6]

Core Viewpoint - Elanco Animal Health Incorporated (ELAN) has received an upgrade to a Zacks Rank 2 (Buy), indicating a positive outlook based on rising earnings estimates, which significantly influence stock prices [1][4][6]. Earnings Estimates and Ratings - The Zacks rating system is centered around changes in earnings estimates, tracking the Zacks Consensus Estimate for EPS from sell-side analysts for the current and following years [2]. - The Zacks rating upgrade reflects an improvement in Elanco's underlying business, suggesting that investors may respond positively, potentially driving the stock price higher [6][11]. Impact of Earnings Estimate Revisions - Empirical research shows a strong correlation between earnings estimate revisions and near-term stock movements, making it beneficial for investors to track these revisions [7]. - The Zacks Rank system classifies stocks into five groups based on earnings estimates, with a strong historical performance, particularly for Zacks Rank 1 stocks, which have averaged a +25% annual return since 1988 [8]. Current Earnings Estimates for Elanco - Elanco is projected to earn $0.88 per share for the fiscal year ending December 2025, with no year-over-year change, but the Zacks Consensus Estimate has increased by 5% over the past three months [9]. Conclusion on Zacks Rating System - The Zacks rating system maintains a balanced distribution of "buy" and "sell" ratings across its universe of over 4,000 stocks, with only the top 20% receiving a "Strong Buy" or "Buy" rating, indicating superior earnings estimate revisions [10][11].

Core Insights - Elanco Animal Health Incorporated is recognized as one of the best pharma stocks to buy according to billionaires, highlighting its strong market position and growth potential [1] - The company focuses on improving animal health and food safety through innovation and sustainability, leveraging nearly 70 years of expertise in veterinary pharmaceuticals and biologics [2] Financial Performance - Elanco joined the S&P MidCap 400 Index in September 2025, indicating rising investor confidence and an enhanced market profile [3] - The company reported double-digit organic growth in Q2 2025, successfully ramping up new products and revising full-year guidance upwards [3] - Aggressive deleveraging of the balance sheet has improved financial flexibility for future product launches and strategic investments [3] Product Development - Recent regulatory approvals have expanded Elanco's product portfolio, including Zenrelia™, a JAK inhibitor for canine dermatology, which is the fastest-growing brand [4] - The USDA-approved TruCan™ Ultra vaccine provides broad respiratory protection for dogs, and the company has increased access to the Canine Parvovirus Monoclonal Antibody (CPMA) [4] - Elanco's innovation pipeline includes six potential blockbuster products expected in the US by year-end, covering monoclonal antibodies, advanced vaccines, and oral therapies [5]

Core Insights - Elanco Animal Health has updated the U.S. Zenrelia label following FDA review, removing the risk of fatal vaccine-induced disease from the labeling, which enhances the product's safety profile [2][3][5] - Zenrelia, a once-daily oral JAK inhibitor for dogs, has been positively received by veterinarians and pet owners, with over half a million dogs treated globally [1][4][5] - The updated label aligns the U.S. version closer to those in other markets like the EU and Japan, reflecting a commitment to ongoing data generation to strengthen the product's label [3][5] Product Performance - Zenrelia has shown remarkable performance in its first year, now available in multiple countries including the U.S., Canada, and Brazil, with positive real-world outcomes reported by veterinarians [4][5] - More than 90% of U.S. veterinarians are aware of Zenrelia, and 80% of clinics reordered the product after experiencing its results [7] Safety and Efficacy - The totality of evidence supports Zenrelia's safety and efficacy when used according to label directions, with ongoing studies published in veterinary journals confirming its effectiveness [3][6] - The updated label includes a Boxed Warning advising on the timing of Zenrelia administration relative to vaccinations to mitigate risks of inadequate immune response [2][11] Veterinary Community Feedback - Veterinarians are increasingly using Zenrelia as a first-line treatment for allergic dermatitis, particularly during allergy seasons, indicating its growing acceptance in clinical practice [8][9] - The updated label facilitates discussions between veterinarians and pet owners regarding treatment options, enhancing the product's usability in practice [8]

Core Insights - President Trump has demanded major pharmaceutical companies to lower drug prices to "most favored nation" levels by September 29, prompting a response from the industry [1][2] - The administration has not specified the actions it may take if companies do not comply, but has indicated a willingness to use all available measures to protect American families from high drug prices [2] - A total of 17 large pharmaceutical companies received letters from the government, instructing them to sell drugs directly to consumers, bypassing pharmacy benefit managers [3] Company Highlights - **Jazz Pharmaceuticals plc (NASDAQ:JAZZ)**: - Ranked 10th among the best pharmaceutical stocks, with 10 billionaire holdings [8] - Recently received FDA accelerated approval for Modeyso, the first therapy for a rare CNS cancer, showing a 22% overall response rate in trials [9] - Focused on rare oncology indications and has ongoing trials for other promising drugs [10][11] - **Elanco Animal Health Incorporated (NYSE:ELAN)**: - Also ranked 9th with 10 billionaire holdings, recognized for its leadership in veterinary pharmaceuticals [12] - Joined the S&P MidCap 400 Index in September 2025, reflecting increased investor confidence [13] - Reported double-digit organic growth in Q2 2025 and has a strong innovation pipeline with six potential blockbuster products expected by year-end [14][15]

Group 1 - Elanco Animal Health has emphasized growth, innovation, and cash as its priorities over the last 3 to 4 years, resulting in 8 consecutive quarters of growth [4] - The company has demonstrated quality growth across its core business and innovation, with positive performance in all four quadrants of its business [5] - The engagement with investors at the Morgan Stanley Global Healthcare Conference has been productive, highlighting the company's commitment to ongoing dialogue and transparency [2][3]

Elanco Animal Health Conference Call Summary Company Overview - **Company**: Elanco Animal Health (NYSE: ELAN) - **Event**: FY Conference on September 09, 2025 - **Speakers**: CEO Jeff Simmons, CFO Bob van Himburgen Key Points Industry and Market Position - Elanco has achieved eight consecutive quarters of growth, emphasizing growth innovation as a priority for the last three to four years [2][3] - The company has two products, Experior and Credelio Quattro, that have reached blockbuster status, with expectations for a third product, IL-31 monoclonal antibody, to gain approval by the end of the year [3][19] Financial Performance and Strategy - The company has reduced debt significantly, aiming to lower leverage below 3x by 2027 [3][10] - CFO Bob van Himburgen's focus includes margin enhancement and cash flow management, with a goal to improve gross and EBITDA margins over the next decade [6][10][57] - Elanco Ascend initiative aims to enhance operational efficiency and support margin improvements [10][57] Innovation and Product Pipeline - Elanco has raised its innovation guidance multiple times, with a current target of $600 to $700 million for its innovation basket [13] - Key products driving innovation include Experior in cattle and Credelio Quattro in the pet segment, with significant market potential [14][35] - The company is investing in R&D and direct-to-consumer (DTC) marketing to support product launches and top-line growth [16][17] Market Dynamics - The oral broad-spectrum endectocide market is the fastest-growing segment in animal health, with Credelio Quattro capturing 14% of dollar share [33][34] - The farm animal segment, while having lower gross margins, is seen as a durable and stable business with strong cash flow potential [29][32] Competitive Landscape - Elanco is focused on differentiating its products in the dermatology market, with a strong emphasis on the IL-31 monoclonal antibody as a key future product [52][56] - The company is actively working to improve the label for Zenralia in the U.S. to match international standards, which is expected to enhance market adoption [48][49] Operational Improvements - The company is refining operational efficiencies across its P&L, with expectations for EBITDA margins to grow at a faster pace than gross margins [64] - Elanco is committed to maintaining a consistent growth trajectory while managing costs effectively [59][65] Future Outlook - Elanco anticipates continued solid growth driven by innovation and operational improvements, with a focus on cash flow and margin enhancement [58][59] - The company plans to share its long-term strategic vision, including the Elanco 2030 plans, with investors in the future [65] Additional Insights - The company is leveraging its strong relationships with distributors to enhance market presence and share [40] - Elanco's strategy includes a focus on high-impact innovation in major markets, aiming for a consistent flow of new products [22][60] This summary encapsulates the key insights and strategic directions discussed during the Elanco Animal Health conference call, highlighting the company's focus on innovation, financial health, and market positioning within the animal health industry.

Core Insights - Elanco Animal Health has made significant advancements with its latest pet health innovations, Credelio Quattro and Zenrelia, showcasing its commitment to enhancing treatment standards for pets and veterinarians globally [1] Group 1: Credelio Quattro - Credelio Quattro has become Elanco's fastest pet health blockbuster, achieving $100 million in net sales in under eight months, marking it as one of the industry's fastest products to reach this milestone [2][5] - The product provides comprehensive parasite protection against six types of parasites, including fleas, ticks, heartworm disease, and three intestinal parasites [2] - In June, Credelio Quattro captured approximately 14% of the dollar share in broad-spectrum sales from U.S. veterinary clinics, indicating strong demand for all-in-one products [2] - Elanco plans to expand Credelio Quattro globally, with submissions for approval in multiple countries, including Australia, Canada, the EU, the UK, and Japan, expected to begin in 2026 [3] Group 2: Zenrelia - Zenrelia is a once-daily oral JAK inhibitor that has gained approval in the UK and is now available in the EU and Great Britain, aimed at improving the quality of life for pets and their owners [4][6] - The product is designed to control itching and inflammation associated with skin allergies in dogs over 12 months of age [10] - Elanco has conducted a head-to-head non-inferiority study comparing Zenrelia to the incumbent product Apoquel, demonstrating its effectiveness in treating atopic dermatitis [7]

Core Insights - The article does not provide specific company or industry insights, focusing instead on disclosures and disclaimers related to investment positions and advice [1][2] Group 1 - There are no stock, option, or similar derivative positions held by the analyst in any mentioned companies, nor plans to initiate such positions within the next 72 hours [1] - The article expresses personal opinions of the author and does not reflect the views of Seeking Alpha as a whole [2] - No recommendations or advice are provided regarding the suitability of investments for particular investors [2]

[Forward-Looking Statements and Risk Factor Summary](index=4&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factor%20Summary) This section outlines inherent uncertainties in forward-looking statements and summarizes key risk factors - Forward-looking statements are based on current expectations and assumptions, inherently subject to uncertainties, risks, and changes in circumstances that may cause actual results to differ materially[9](index=9&type=chunk)[10](index=10&type=chunk) - Key risk factors include operating in a highly competitive industry, success of R&D and regulatory efforts, impact of disruptive innovations, competition from generic products, changes in regulatory restrictions, disease outbreaks, customer consolidation, dependence on top products, ability to complete acquisitions/divestitures, manufacturing problems, inventory fluctuations, risks related to AI, IT systems, weather conditions, loss of key personnel, labor disputes, substantial indebtedness, interest rate changes, goodwill write-downs, raw material costs, foreign/domestic economic/political/legal/business environments, foreign currency exchange rate fluctuations, underfunded pension plan liabilities, no dividend payment plan, activist shareholders, tax expense/exposures, regulatory actions, farm animal sustainability initiatives, tariffs, litigation, intellectual property rights, product misuse/counterfeiting, safety/quality/efficacy concerns, insufficient insurance, privacy laws, environmental/health/safety regulations, and inability to achieve ESG goals[11](index=11&type=chunk)[13](index=13&type=chunk) [PART I. Financial Information](index=6&type=section&id=PART%20I.%20Financial%20Information) This part presents Elanco's unaudited consolidated financial statements and management's discussion and analysis [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20FINANCIAL%20STATEMENTS) Elanco's unaudited consolidated financial statements for Q2 and H1 2025, including operations, balance sheets, and key notes [Condensed Consolidated Statements of Operations (Unaudited)](index=6&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS%20(UNAUDITED)) This statement provides a summary of the company's revenues, gross profit, net income (loss), and earnings per share for the periods presented Table: Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Revenue | $1,241 million | $1,184 million | $2,434 million | $2,389 million | | Gross profit | $713 million | $689 million | $1,397 million | $1,379 million | | Net income (loss) | $11 million | $(50) million | $78 million | $(18) million | | Basic EPS | $0.02 | $(0.10) | $0.16 | $(0.04) | | Diluted EPS | $0.02 | $(0.10) | $0.16 | $(0.04) | [Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)](index=7&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20INCOME%20(LOSS)%20(UNAUDITED)) This statement details the company's net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments Table: Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) | $11 million | $(50) million | $78 million | $(18) million | | Other comprehensive income (loss), net of taxes | $391 million | $(77) million | $579 million | $(276) million | | Comprehensive income (loss) | $402 million | $(127) million | $657 million | $(294) million | - Foreign currency translation, net of taxes, significantly contributed to other comprehensive income, with **$403 million for Q2 2025** and **$621 million for H1 2025**, compared to losses in the prior year periods[18](index=18&type=chunk) [Condensed Consolidated Balance Sheets](index=8&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) This statement presents the company's financial position, including assets, liabilities, and equity, as of the reporting dates Table: Condensed Consolidated Balance Sheets | Asset/Liability | June 30, 2025 (Millions USD) | December 31, 2024 (Millions USD) | Change (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :-------------------- | | Cash and cash equivalents | $539 | $468 | +$71 | | Accounts receivable, net | $989 | $805 | +$184 | | Inventories | $1,670 | $1,574 | +$96 | | Property and equipment, net | $1,357 | $993 | +$364 | | Goodwill | $4,758 | $4,414 | +$344 | | Total assets | $13,742 | $12,614 | +$1,128 | | Total current liabilities | $1,392 | $1,315 | +$77 | | Long-term debt and finance lease liability | $4,148 | $4,277 | -$129 | | Liability for sale of future revenue | $293 | — | +$293 | | Total liabilities | $6,967 | $6,518 | +$449 | | Total equity | $6,775 | $6,096 | +$679 | [Condensed Consolidated Statements of Equity (Unaudited)](index=9&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20EQUITY%20(UNAUDITED)) This statement outlines changes in the company's total equity, accumulated deficit, and accumulated other comprehensive loss Table: Condensed Consolidated Statements of Equity | Metric | December 31, 2024 (Millions USD) | June 30, 2025 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | | Total equity | $6,096 | $6,775 | | Accumulated deficit | $(1,950) | $(1,872) | | Accumulated other comprehensive loss | $(771) | $(192) | - Net income contributed **$67 million (Q1 2025)** and **$11 million (Q2 2025)** to equity, while other comprehensive income (loss), net of tax, contributed **$188 million (Q1 2025)** and **$391 million (Q2 2025)**, largely due to foreign currency translation[24](index=24&type=chunk) [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=10&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS%20(UNAUDITED)) This statement summarizes the company's cash flows from operating, investing, and financing activities for the periods presented Table: Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | Change (YoY, Millions USD) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------- | | Net Cash Provided by Operating Activities | $233 | $202 | +$31 | | Net Cash (Used for) Provided by Investing Activities | $(114) | $4 | -$118 | | Net Cash Used for Financing Activities | $(104) | $(120) | +$16 | | Net increase in cash and cash equivalents | $71 | $64 | +$7 | - Investing activities included **$122 million** in net purchases of property and equipment and software in **H1 2025**, up from **$58 million** in **H1 2024**, primarily due to manufacturing facility expansions[27](index=27&type=chunk)[135](index=135&type=chunk) - Financing activities in **H1 2025** included **$290 million** proceeds from the sale of future revenue, used to repay **$374 million** in long-term borrowings[27](index=27&type=chunk)[136](index=136&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=11&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) This section provides detailed explanations and disclosures regarding the company's significant accounting policies, financial instruments, debt, revenue, and other key financial information [Note 1. Basis of Presentation and Summary of Significant Accounting Policies](index=11&type=section&id=Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note describes the basis of preparation for the unaudited condensed consolidated financial statements, adhering to SEC interim reporting requirements and GAAP - The unaudited condensed consolidated financial statements are prepared in accordance with SEC interim reporting requirements and GAAP, with certain disclosures condensed or omitted[30](index=30&type=chunk) - Interim results should not be considered indicative of results for any other interim period or for the full year ending **December 31, 2025**, or any other future period[31](index=31&type=chunk) [Note 2. New Financial Accounting Pronouncements](index=11&type=section&id=Note%202.%20New%20Financial%20Accounting%20Pronouncements) This note details new accounting standards and their expected impact on future financial reporting - ASU 2023-09 (Income Taxes) is effective for fiscal years beginning after **December 15, 2024**, and is expected to result in additional income tax disclosures[32](index=32&type=chunk) - ASU 2024-03 (Expense Disaggregation Disclosures) is effective for fiscal years beginning after **December 15, 2026**, and will provide more detailed information about significant expense categories[33](index=33&type=chunk) [Note 3. Revenue](index=11&type=section&id=Note%203.%20Revenue) This note disaggregates revenue by product category for the three and six months ended June 30, 2025 and 2024 Table: Revenue by Product Category (Three Months) | Product Category | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | % Change | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | :------- | | Pet Health | $643 | $579 | 11% | | Farm Animal | $583 | $594 | (2)% | | Contract Mfg & Other | $15 | $11 | 36% | | **Total Revenue** | **$1,241** | **$1,184** | **5%** | Table: Revenue by Product Category (Six Months) | Product Category | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | % Change | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | :------- | | Pet Health | $1,278 | $1,218 | 5% | | Farm Animal | $1,129 | $1,150 | (2)% | | Contract Mfg & Other | $27 | $21 | 29% | | **Total Revenue** | **$2,434** | **$2,389** | **2%** | - A single customer accounted for approximately **12%** and **10%** of revenue for the six months ended **June 30, 2025** and **2024**, respectively[38](index=38&type=chunk) [Note 4. Acquisitions, Divestitures and Other Arrangements](index=12&type=section&id=Note%204.%20Acquisitions%2C%20Divestitures%20and%20Other%20Arrangements) This note details significant transactions including facility acquisitions, sales, and the divestiture of the Aqua business - Acquired the Speke, U.K. manufacturing facility in **November 2024** for **$36 million** to minimize supply disruption for farm animal product lines[40](index=40&type=chunk) - Sold the New Zealand manufacturing facility in **February 2025** for **$9 million cash**[41](index=41&type=chunk) - Closed the sale of the Aqua business on **July 9, 2024**, for **$1,294 million cash**, primarily used to repay term loan debt, resulting in a pre-tax gain of **$640 million**[42](index=42&type=chunk) [Note 5. Asset Impairment, Restructuring and Other Special Charges](index=13&type=section&id=Note%205.%20Asset%20Impairment%2C%20Restructuring%20and%20Other%20Special%20Charges) This note outlines various special charges, including restructuring, acquisition/divestiture costs, and asset impairments Table: Asset Impairment, Restructuring and Other Special Charges | Charge Type | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Restructuring charges | $0 | $4 | $1 | $43 | | Acquisition & divestiture-related charges | $1 | $10 | $1 | $17 | | Asset impairments | $0 | $61 | $0 | $61 | | Other | $0 | $5 | $8 | $5 | | **Total expense** | **$1** | **$80** | **$10** | **$126** | - Asset impairments in **2024** principally reflected the write-off of the IL-4R IPR&D asset (**$53 million**)[44](index=44&type=chunk) - Restructuring charges in **2024** primarily related to cash-based severance costs from a program shifting international resources from farm animal to pet health[43](index=43&type=chunk) [Note 6. Inventories](index=14&type=section&id=Note%206.%20Inventories) This note provides a breakdown of inventory categories, including finished products, work in process, and raw materials Table: Inventories by Category | Inventory Category | June 30, 2025 (Millions USD) | December 31, 2024 (Millions USD) | | :----------------- | :------------------------------- | :------------------------------- | | Finished products | $819 | $754 | | Work in process | $826 | $783 | | Raw materials and supplies | $98 | $98 | | **Total Inventories** | **$1,670** | **$1,574** | [Note 7. Debt](index=14&type=section&id=Note%207.%20Debt) This note details the company's debt structure, including term loans, senior notes, and finance lease liabilities Table: Debt Structure | Debt Type | June 30, 2025 (Millions USD) | December 31, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | | Term Loan B due 2027 | $2,288 | $2,593 | | Securitization Facility | $100 | $100 | | 4.900% Senior Notes due 2028 | $750 | $750 | | **Total debt** | **$3,954** | **$4,321** | | Finance lease liability | $255 | — | | **Total long-term debt and finance lease liability** | **$4,148** | **$4,277** | - The Revolving Credit Facility provides up to **$750 million** in borrowing capacity, bearing interest at Term SOFR plus **1.60%** at **June 30, 2025**[48](index=48&type=chunk) - Entered into a five-year finance lease for the new corporate headquarters in **June 2025**, resulting in a **$255 million** finance lease liability and a **$234 million** right-of-use asset[52](index=52&type=chunk) [Note 8. Financial Instruments](index=15&type=section&id=Note%208.%20Financial%20Instruments) This note describes the company's use of derivative financial instruments to manage market risks - Outstanding foreign currency exchange contracts had aggregate notional amounts of **$1,011 million** at **June 30, 2025**[56](index=56&type=chunk) - Restructured net investment hedges in **January 2025**, settling previous instruments and entering new cross-currency fixed interest rate swaps with **1,000 million CHF** notional amounts[57](index=57&type=chunk) - Outstanding interest rate swaps totaled **$2,800 million** as of **June 30, 2025**, with scheduled maturities in **2026**, and forward-starting interest rate swap agreements of **$850 million** will become effective in **2026**[59](index=59&type=chunk) [Note 9. Fair Value](index=16&type=section&id=Note%209.%20Fair%20Value) This note provides fair value measurements for derivative instruments, contingent consideration liabilities, and long-term debt - Fair value measurements for derivative instruments are primarily **Level 2**, while contingent consideration liabilities are **Level 3**, estimated using a Monte Carlo simulation model[64](index=64&type=chunk)[66](index=66&type=chunk) - Long-term debt (excluding finance lease liability) had a carrying amount of **$(3,975) million** and a fair value of **$(4,007) million** at **June 30, 2025**[64](index=64&type=chunk) [Note 10. Liability for Sale of Future Revenue](index=17&type=section&id=Note%2010.%20Liability%20for%20Sale%20of%20Future%20Revenue) This note details the liability recognized from the sale of future royalties and sales milestone payments from XDEMVY - Received **$295 million cash** from Blackstone in **May 2025** for rights to future royalties and sales milestone payments from XDEMVY in the U.S. until **August 2033**[67](index=67&type=chunk) - The proceeds, net of **$5 million** transaction costs, were recorded as a **$293 million** liability for sale of future revenue as of **June 30, 2025**[67](index=67&type=chunk)[71](index=71&type=chunk) - Imputed interest expense of **$7 million** was recognized for the three months ended **June 30, 2025**, with an effective interest rate of **16.1%**[71](index=71&type=chunk) [Note 11. Income Taxes](index=18&type=section&id=Note%2011.%20Income%20Taxes) This note presents income tax expense (benefit) and effective tax rates, discussing factors influencing the rates Table: Income Tax Expense (Benefit) and Effective Tax Rate | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Income tax expense (benefit) | $14 million | $18 million | $7 million | $(2) million | | Effective tax rate | 55.4% | (61.3)% | 7.6% | 7.4% | - The effective tax rate for **Q2 2025 (55.4%)** was primarily due to the jurisdictional mix of projected income/losses and discrete tax expenses from a foreign tax rate change[72](index=72&type=chunk) - The 'One Big Beautiful Bill Act,' enacted **July 4, 2025**, is being evaluated for its expected impact on consolidated results and U.S. valuation allowance position[74](index=74&type=chunk) [Note 12. Commitments and Contingencies](index=18&type=section&id=Note%2012.%20Commitments%20and%20Contingencies) This note outlines significant legal proceedings, including securities class actions, derivative lawsuits, and an antitrust lawsuit - A putative securities class action (Barpar) and related derivative lawsuits allege materially false/misleading statements regarding Zenrelia product safety and labeling; motions to dismiss are pending or cases are stayed[78](index=78&type=chunk) - Ongoing shareholder class actions (Hunter, Safron Capital) relate to alleged false/misleading statements about supply chain, inventory, revenue, and distributor relationships; appeals are ongoing for both[79](index=79&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - An antitrust lawsuit (Tevra Brands, LLC) against Bayer Animal Health (acquired by Elanco) regarding alleged unlawful exclusive dealing resulted in a jury verdict for Bayer Animal Health, now under appeal, with additional related matters filed[82](index=82&type=chunk) [Note 13. Earnings Per Share](index=20&type=section&id=Note%2013.%20Earnings%20Per%20Share) This note provides basic and diluted weighted-average common shares outstanding for the periods presented Table: Earnings Per Share Data | Metric | Three Months Ended June 30, 2025 (Millions) | Three Months Ended June 30, 2024 (Millions) | Six Months Ended June 30, 2025 (Millions) | Six Months Ended June 30, 2024 (Millions) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Basic weighted-average common shares outstanding | 496.6 million | 494.2 million | 495.9 million | 493.7 million | | Diluted weighted-average shares outstanding | 500.1 million | 494.2 million | 499.6 million | 493.7 million | - Approximately **3.5 million to 3.7 million** potential common shares were excluded from the calculation of diluted weighted-average shares outstanding because their effect was anti-dilutive[84](index=84&type=chunk) [Note 14. Business Segment Information](index=20&type=section&id=Note%2014.%20Business%20Segment%20Information) This note clarifies Elanco operates as a single business segment and provides a breakdown of significant segment expenses - Elanco operates as a single business segment focused on the development, manufacturing, marketing, and sales of animal health products for both pets and farm animals[85](index=85&type=chunk) - The CEO, as the chief operating decision maker, manages resource allocation and business process decisions globally, with consolidated net income (loss) as the principal measure of segment profit and loss[85](index=85&type=chunk) Table: Other Significant Segment Expenses | Expense Category | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | | Research and development | $186 | $176 | | Marketing and selling | $497 | $442 | | General and administrative | $244 | $249 | | Interest expense, net | $88 | $131 | | Income tax expense (benefit) | $7 | $(2) | | **Total other significant segment expenses** | **$1,045** | **$1,007** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on Elanco's financial condition and results of operations [Business Overview and Key Trends](index=22&type=section&id=Business%20Overview%20and%20Key%20Trends) This section provides an overview of Elanco's global leadership in animal health, its diverse portfolio, and key trends - Elanco is a global leader in animal health, offering a diverse portfolio of approximately **200 brands** for pets and farm animals in over **90 countries**[90](index=90&type=chunk)[91](index=91&type=chunk) - Key trends impacting results include new/higher tariffs in **2025** (leading to accelerated customer purchases in **Q2 2025**), a freeze in U.S. government sustainability incentives, the sale of future XDEMVY royalties, the new corporate headquarters lease, and the divestiture of the Aqua business in **July 2024**[95](index=95&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk)[99](index=99&type=chunk) - The pet health business experiences seasonality, with increased demand for parasiticide products (Seresto, Advantage Family) in the first half of the year[102](index=102&type=chunk) [Product Development and Regulatory Update](index=22&type=section&id=Product%20Development%20and%20Regulatory%20Update) This section highlights recent product approvals and launches, demonstrating the company's innovation in animal health - Bovaer (methane-reducing feed ingredient) received FDA approval in **May 2024** and launched in Q3 2024[92](index=92&type=chunk) - Zenrelia (JAK inhibitor for canine atopic dermatitis) received final FDA approval in **September 2024** and launched in the U.S., with subsequent approvals in Brazil, Canada, Japan, and the EU[92](index=92&type=chunk) - Credelio Quattro (monthly chewable for dogs protecting against multiple parasites) received final FDA approval in **October 2024** and launched in **January 2025**[92](index=92&type=chunk) [Results of Operations Analysis](index=24&type=section&id=Results%20of%20Operations%20Analysis) This section provides a detailed analysis of the company's revenue, gross profit, operating expenses, and net income (loss) Table: Key Results of Operations | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | % Change | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | % Change | | :---------------------------------- | :------------------------------- | :------------------------------- | :------- | :------------------------------ | :------------------------------ | :------- | | Revenue | $1,241 million | $1,184 million | 5% | $2,434 million | $2,389 million | 2% | | Gross profit | $713 million | $689 million | 3% | $1,397 million | $1,379 million | 1% | | Gross margin % | 57% | 58% | -1 ppt | 57% | 58% | -1 ppt | | R&D | $92 million | $89 million | 3% | $186 million | $176 million | 6% | | Marketing, selling & admin | $400 million | $354 million | 13% | $741 million | $691 million | 7% | | Asset impairment, restructuring & other special charges | $1 million | $80 million | (99)% | $10 million | $126 million | (92)% | | Interest expense, net | $48 million | $65 million | (26)% | $88 million | $131 million | (33)% | | Net income (loss) | $11 million | $(50) million | NM | $78 million | $(18) million | NM | - Pet Health revenue increased **11%** for **Q2 2025**, driven by higher volumes (new products like Credelio Quattro, AdTab, Zenrelia), a **4% price increase**, and foreign currency exchange rate movements[110](index=110&type=chunk)[112](index=112&type=chunk) - Farm Animal revenue decreased **2%** for **Q2 2025**, primarily due to the Aqua business divestiture (which generated **$49 million** in **Q2 2024**), largely offset by a **4% volume increase** (led by Experior in U.S. cattle) and a **2% price increase**[110](index=110&type=chunk)[114](index=114&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's primary liquidity sources, operating cash flows, available credit facilities, and cash flow activities - Primary liquidity sources are cash on hand (**$539 million** at **June 30, 2025**), cash flows from operations, and funds available under credit facilities (Revolving Credit Facility: **~$750 million** unused; Securitization Facility: **~$165 million** undrawn)[129](index=129&type=chunk)[131](index=131&type=chunk) Table: Cash Flow Activities | Activity | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | Change (YoY, Millions USD) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------- | | Operating activities | $233 | $202 | +$31 | | Investing activities | $(114) | $4 | -$118 | | Financing activities | $(104) | $(120) | +$16 | | Net increase in cash | $71 | $64 | +$7 | - Cash used for investing activities increased significantly due to **$122 million** in capital expenditures for manufacturing facility expansions in **H1 2025**[135](index=135&type=chunk) [Critical Accounting Estimates](index=28&type=section&id=Critical%20Accounting%20Estimates) This section highlights critical accounting estimates, particularly the ongoing assessment for goodwill impairment - The ongoing assessment for goodwill impairment is a critical accounting estimate, requiring significant management judgment in estimating fair value using an income approach[139](index=139&type=chunk) - Estimates involve future cash flows, revenue growth rates, profitability measures (gross margin, EBITDA margin), and appropriate discount rates[139](index=139&type=chunk) - Future goodwill impairment charges could result from decreased assumptions on cash flows, revenue growth, or profitability, or material increases in long-term interest rates[140](index=140&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Elanco is exposed to market risks from foreign currency exchange rate fluctuations and variable interest rates, which it manages [Foreign Exchange Risk](index=29&type=section&id=Foreign%20Exchange%20Risk) This section describes Elanco's exposure to foreign currency exchange risk from non-U.S. subsidiaries' financial statements and transactions - Elanco is exposed to foreign currency exchange risk from the translation of non-U.S. subsidiaries' financial statements and transactions not denominated in the functional currency[142](index=142&type=chunk) - Primary exposures are to the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, and Chinese yuan[142](index=142&type=chunk) - Hyperinflationary accounting has been applied for the Turkey subsidiary since **2022**, changing its functional currency to the U.S. dollar[143](index=143&type=chunk) [Interest Rate Risk](index=29&type=section&id=Interest%20Rate%20Risk) This section details how Elanco manages interest rate risk through interest rate swaps, converting variable-rate debt to fixed-rate - Outstanding interest rate swap agreements with a combined notional amount of **$2,800 million** effectively modified variable-rate debt to fixed-rate as of **June 30, 2025**[144](index=144&type=chunk) - Forward-starting interest rate swap agreements with a combined notional amount of **$850 million** will become effective in **2026**[144](index=144&type=chunk) - Approximately **89%** of long-term indebtedness (excluding finance lease liability) bore interest at a fixed rate as of **June 30, 2025**[144](index=144&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20CONTROLS%20AND%20PROCEDURES) Management evaluated disclosure controls and procedures as effective, with no material changes in internal control - Disclosure controls and procedures were evaluated by management, including the CEO and CFO, and concluded to be effective as of **June 30, 2025**[147](index=147&type=chunk) - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the second quarter of 2025[148](index=148&type=chunk) [PART II. Other Information](index=31&type=section&id=PART%20II.%20Other%20Information) This part provides additional information on legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and exhibits [Item 1. Legal Proceedings](index=31&type=section&id=Item%201.%20LEGAL%20PROCEEDINGS) This section refers to Note 12 for a summary of the company's legal proceedings, including various class action and derivative lawsuits - A summary of legal proceedings is provided in Note 12. Commitments and Contingencies to the condensed consolidated financial statements[151](index=151&type=chunk) [Item 1A. Risk Factors](index=31&type=section&id=Item%201A.%20RISK%20FACTORS) There have been no material changes to the risk factors previously disclosed in the company's 2024 Form 10-K - No material changes from the risk factors previously disclosed in the **2024 Form 10-K**[152](index=152&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds to report [Item 3. Defaults Upon Senior Securities](index=31&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities to report [Item 4. Mine Safety Disclosures](index=31&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) No mine safety disclosures to report [Item 5. Other Information](index=31&type=section&id=Item%205.%20Other%20Information) No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2025 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended **June 30, 2025**[153](index=153&type=chunk) [Item 6. Exhibits](index=32&type=section&id=Item%206.%20EXHIBITS) This section lists the exhibits filed or furnished with the Form 10-Q, including employment agreements, credit facility amendments, and certifications - Exhibits include employment agreements, a transition agreement, an amendment to the receivables loan agreement, Section 302 and 906 certifications of the CEO and CFO, and Interactive Data Files (Inline XBRL)[156](index=156&type=chunk) [Signatures](index=33&type=section&id=SIGNATURES) This section confirms the official signing of the report by the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer - The report was signed on **August 7, 2025**, by Jeffrey N. Simmons, President and Chief Executive Officer, and Robert M. VanHimbergen, Executive Vice President and Chief Financial Officer[159](index=159&type=chunk)