Elanco Animal Health Reports First Quarter Results

• Gross margin (reported) improved 190 basis points to 53.0
  percent of revenue
• Earnings per share (EPS) was $0.09 (reported), or $0.25
  (adjusted)
• Revenue declined 1 percent to $731.1 million; Total and Core
  Revenue both grew 2 percent at constant currency rates
• Revenue from Innovation portfolio grew 59 percent, represents 13
  percent of total revenue
• Announced agreement to acquire Aratana Therapeutics and
  collaboration with VetDC
• Expected 2019 revenue updated to be between $3.08 billion and
  $3.14 billion due to changes in foreign exchange rate assumptions;
  constant currency growth at 4 to 6 percent remains unchanged
• Reported EPS for 2019 in the range of $0.36 to $0.48, or $1.02
  to $1.12 on an adjusted basis remains unchanged

GREENFIELD, Ind.–(BUSINESS WIRE)–Elanco Animal Health Incorporated (NYSE: ELAN), today reported its
financial results for the first quarter of 2019. The results reflect
underlying volume growth and execution of the company’s targeted,
three-pillar strategy focused on Innovation, Portfolio and Productivity.

“We are pleased to see our productivity agenda unlocking value as
efficiencies and cost savings are reflected in our results with a
significant increase in gross margin as a percent of sales. We
remain encouraged by the growth of our innovation portfolio and are
making strategic investments that advance all three pillars of our
strategy,” said Jeff Simmons, president and chief executive officer of
Elanco. “Our first quarter results demonstrate the value of our
portfolio approach, delivering 2 percent constant currency sales growth,
and in line with our expectations.”

Key Events since the last Earnings Call:

Innovation

• The portfolio of innovation launched since 2015 accounted for $97.8
  million in revenue, up $36.2 million or 59 percent over the same
  quarter last year.
• Galliprant for dogs launched in several European Union countries.
• Correlink approved in Brazil and several other smaller markets outside
  the U.S.

Portfolio

• As a group, the targeted growth categories in Elanco’s portfolio –
  Companion Animal Disease Prevention, Companion Animal Therapeutics and
  Food Animal Future Protein & Health represent 59 percent of Elanco’s
  total Revenue and grew 1 percent, or 4 percent on a constant currency
  basis.
• Launched additional dose presentations for Credelio for dogs and cats.
• Resolved Galliprant channel backorders from the fourth quarter of 2018.

Productivity

• Completed insourcing of chewie platform, used in companion animal
  parasiticide products, driving cost reduction and better capacity
  utilization for several manufacturing sites.
• Established new, lower-cost active pharmaceutical ingredient (API)
  source for Credelio.
• Implemented technical agenda in poultry vaccine manufacturing process
  enhancing product reliability, while reducing cost.
• Executed agreements with various partners to provide distribution
  services aligned with the previously announced decision to change
  go-to-market models in certain International markets.

Additionally, Elanco announced the signing of an agreement to acquire
Aratana Therapeutics and a commercial agreement with VetDC. These
strategic investments are expected to advance all three pillars of our
Innovation, Portfolio, and Productivity strategy.

First Quarter Reported Results:

In the first quarter of 2019, global revenue was $731.1 million, a
decrease of 1 percent compared to the first quarter of 2018. Revenue,
excluding strategic exits, decreased 1 percent to $708.6 million. Gross
margin, as a percent of revenue, increased 190 basis points to 53.0
percent. The effective tax rate was 29.7 percent in the first quarter of
2019. Net income for the first quarter decreased $41.2 million to $31.5
million, or $0.09 per diluted share.

Companion Animal Disease Prevention revenue decreased 8 percent
for the quarter, primarily driven by lower volume and price, as well as
unfavorable impact from foreign exchange rates. Declines in older
generation parasitcide products and vaccines were partially offset by
continued growth in Credelio, Interceptor Plus and certain
over-the-counter products. Year on year comparisons are also impacted by
purchasing patterns.

Companion Animal Therapeutics revenue increased 31 percent for
the quarter, driven by increased volume and to a lesser extent price,
partially offset by the impact of foreign exchange rates. The revenue
increase was primarily driven by sales of Galliprant. In the quarter,
backorders in the channel were resolved and the product was launched in
several European markets.

Food Animal Future Protein & Health revenue was flat for the
quarter, driven by both volume and increased price, fully offset by an
unfavorable impact from foreign exchange rates. Without the impact of
foreign exchange rates, the category grew 5 percent. Growth was driven
by the aqua portfolio and poultry vaccines, offset by timing of
international purchasing patterns for other poultry products.

Food Animal Ruminants & Swine revenue decreased 3 percent for
the quarter, driven by flat volume, a negative impact from foreign
exchange rates and decreased price. Growth in cattle products from the
resolution of certain backorders and favorable purchasing patterns, was
offset by softness in swine antibiotics, particularly in Asia, driven by
the impact of African Swine Fever, continued implementation of
antimicrobial policies across the region and production rationalizations
aligned with our productivity agenda.

Strategic Exits are businesses Elanco has exited or has made the
decision to exit. Revenue from Strategic Exits decreased 4 percent for
the quarter, and represented 3 percent of total revenue.

Gross profit increased 3 percent, to $387.3 million, in the first
quarter of 2019 compared with the first quarter of 2018. Gross margin,
as a percent of revenue, was 53.0 percent, an increase of 190 basis
points period over period. The gross margin increase was primarily due
to the realization of productivity agenda items including strategic
sourcing, insourcing, and SKU rationalizations. Productivity
improvements were partially offset by the impact of product mix and
foreign exchange rates in the quarter.

Total operating expense was flat for the quarter. Marketing, selling and
administrative expenses increased $1.1 million to $181.1 million,
reflecting increased expenses as a result of operating as a public
company, partially offset by continued productivity initiatives and cost
control measures across the business. Research and development expenses
decreased $1.1 million to $64.1 million, or 9 percent of revenue. This
decrease was primarily driven by normal project spend fluctuations and
external innovation milestone payments in the first quarter of 2018 that
created a favorable comparison.

Amortization of intangibles decreased $0.2 million to $49.0 million.
Asset impairments, restructuring, and other special charges increased
$22.5 million to $24.9 million primarily due to integration costs
associated with the implementation of new systems, programs, and
processes due to the separation from Lilly.

Net interest expense was $20.8 million in the first quarter of 2019; no
net interest expense was incurred in the first quarter of the previous
year. Other-net expense of $2.6 million in the first quarter of 2019,
compared with expense of $1.9 million in the first quarter of 2018.

First Quarter Consolidated non-GAAP Results:

Adjusted net income for the first quarter decreased 23 percent to $92.9
million, which excludes the net impact of $61.4 million of asset
impairments, restructuring and other special charges and the
amortization of intangible assets, net of the impact from taxes.
Adjusted EPS for the quarter was $0.25 per diluted share. Adjusted
EBITDA increased 12 percent to $173.0 million, primarily driven by
increased gross profit.

For further detail of non-GAAP measures, see the Reconciliation of GAAP
Reported to Selected Non-GAAP Adjusted Information table later in this
press release.

FINANCIAL GUIDANCE

Elanco is updating its full year guidance for Revenue to reflect changes
in foreign currency assumptions. The company is maintaining guidance for
GAAP EPS, excluding potential impacts from purchase accounting that
would result from the acquisition of Aratana Therapeutics and Adjusted
EPS earnings expectations for the full year 2019.

				2019 Guidance (dollars in millions, except share amounts)
				December Guidance									May Guidance
Core Revenue				$3,040			to			$3,100			$3,020			to			$3,080
Strategic Exits				$60									$60
Revenue				$3,100						$3,160			$3,080						$3,140
GAAP EPS				$0.36			to			$0.48			$0.36			to			$0.48
Amortization of intangible assets				$0.53									$0.53
Expenses associated with establishing stand-alone capabilities				$0.28			to			$0.26			$0.28			to			$0.26
Subtotal				$1.17			to			$1.27			$1.17			to			$1.27
Tax Impact of Adjustments				$(0.15)									$(0.15)
Adjusted EPS				$1.02			to			$1.12			$1.02			to			$1.12

“The continued success of our Innovation, Portfolio and Productivity
strategy will help us to navigate the dynamic global animal health
market. We remain confident in our ability to deliver our expectations
for the full year and are maintaining our guidance for revenue growth at
4 to 6 percent, excluding the impact of foreign exchange, and EPS,” said
Simmons.

WEBCAST & CONFERENCE CALL DETAILS

Elanco will host a webcast and conference call at 8:00 a.m. eastern
today, during which company executives will review first quarter
financial and operational results, discuss 2019 financial guidance, and
respond to questions from financial analysts. Investors, analysts,
members of the media and the public may access the live webcast and
accompanying slides by visiting the Elanco website at https://investor.elanco.com
and selecting Events and Presentations. A replay of the webcast will be
archived and made available a few hours after the event on the company’s
website, at https://investor.elanco.com/investor/events-and-presentations.

ABOUT ELANCO

Elanco (NYSE: ELAN) is a global animal health company that develops
products and knowledge services to prevent and treat disease in food
animals and pets in more than 90 countries. With a 64-year heritage, we
rigorously innovate to improve the health of animals and benefit our
customers, while fostering an inclusive, cause-driven culture for more
than 5,800 employees. At Elanco, we’re driven by our vision of food and
companionship enriching life – all to advance the health of animals,
people and the planet. Learn more at www.elanco.com.

Cautionary Statement Regarding Forward-Looking
Statements

This press release includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934 (Exchange Act). This press release
contains forward-looking statements, including, without limitation,
statements concerning our 2019 guidance, our industry and our
operations, performance and financial condition, including in
particular, statements relating to our business, growth strategies,
product development efforts and future expenses.

Forward-looking statements are based on our current expectations and
assumptions regarding our business, the economy and other future
conditions. Because forward-looking statements relate to the future, by
their nature, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. As a result, our
actual results may differ materially from those contemplated by the
forward-looking statements. Important factors that could cause actual
results to differ materially from those in the forward-looking
statements include regional, national, or global political, economic,
business, competitive, market, and regulatory conditions including, but
not limited to the following:

• heightened competition, including from innovation or generics;
• the impact of disruptive innovations and advances in veterinary
  medical practices, animal health technologies and alternatives to
  animal-derived protein;
• changes in regulatory restrictions on the use of antibiotics in food
  animals;
• impact of generic products;
• our ability to implement our business strategies or achieve targeted
  cost efficiencies and gross margin improvements;
• consolidation of our customers and distributors;
• an outbreak of infectious disease carried by food animals;
• the success of our R&D and licensing efforts;
• our ability to complete acquisitions and successfully integrate the
  businesses we acquire;
• misuse or off-label use of our products;
• unanticipated safety, quality or efficacy concerns associated with our
  products;
• the impact of weather conditions and the availability of natural
  resources;
• risks related to our presence in emerging markets;
• changes in U.S. foreign trade policy, imposition of tariffs or trade
  disputes;
• the impact of global macroeconomic conditions; and
• the effect on our business of the transactions involving the
  separation of our business from that of Eli Lilly & Co. (Lilly) and
  the distribution of Lilly’s interest in us to its shareholders through
  an exchange offer consummated on March 11, 2019.

For additional information about the factors that could cause actual
results to differ materially from forward-looking statements, please see
the company’s latest Forms 10-K and 10-Q filed with the Securities and
Exchange Commission. Although we have attempted to identify important
risk factors, there may be other risk factors not presently known to us
or that we presently believe are not material that could cause actual
results and developments to differ materially from those made in or
suggested by the forward-looking statements contained in this quarterly
report. If any of these risks materialize, or if any of the above
assumptions underlying forward-looking statements prove incorrect,
actual results and developments may differ materially from those made in
or suggested by the forward-looking statements contained in this
quarterly report. For the reasons described above, we caution you
against relying on any forward-looking statements, which should also be
read in conjunction with the other cautionary statements that are
included elsewhere in this press release. Any forward-looking statement
made by us in this press release speaks only as of the date thereof.
Factors or events that could cause our actual results to differ may
emerge from time to time, and it is not possible for us to predict all
of them. We undertake no obligation to publicly update or to revise any
forward-looking statement, whether as a result of new information,
future developments or otherwise, except as may be required by law.
Comparisons of results for current and any prior periods are not
intended to express any future trends or indications of future
performance, unless specifically expressed as such, and should be viewed
as historical data.

Use of Non-GAAP Financial Measures:

We use non-GAAP financial measures, such as revenues excluding strategic
exits, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin,
adjusted net (income) loss, adjusted EPS, adjusted gross profit and
adjusted gross margin to assess and analyze our operational results and
trends as explained in more detail in the reconciliation tables later in
this release.

We believe these non-GAAP financial measures are also useful to
investors because they provide greater transparency regarding our
operating performance. Reconciliation of non-GAAP financial measures and
reported GAAP financial measures are included in the tables accompanying
this press release and are posted on our website at www.elanco.com.
The primary material limitations associated with the use of such
non-GAAP measures as compared to U.S. GAAP results include the
following: (i) they may not be comparable to similarly titled measures
used by other companies, including those in our industry, (ii) they
exclude financial information and events, such as the effects of an
acquisition or amortization of intangible assets, that some may consider
important in evaluating our performance, value or prospects for the
future, (iii) they exclude items or types of items that may continue to
occur from period to period in the future and (iv) they may not exclude
all unusual or non-recurring items, which could increase or decrease
these measures, which investors may consider to be unrelated to our
long-term operations, such as Strategic Exits. These non-GAAP measures
are not, and should not be viewed as, substitutes for U.S. GAAP reported
measures. We encourage investors to review our unaudited condensed
consolidated and combined financial statements in their entirety and
caution investors to use U.S. GAAP measures as the primary means of
evaluating our performance, value and prospects for the future, and
non-GAAP measures as supplemental measures.

Availability of Certain Information

We use our website to disclose important company information to
investors, customers, employees and others interested in the Elanco. We
encourage investors to consult our website regularly for important
information about Elanco.

Elanco Animal Health Incorporated Unaudited Condensed Consolidated and Combined Statements of Operations (Dollars and shares in millions, except per share data)
				Three Months Ended March 31,
				2019					2018
Revenue				$	731.1				$	736.2
Costs, expenses, and other:
Cost of sales				343.8					360.0
Research and development				64.1					65.2
Marketing, selling, and administrative				181.1					180.0
Amortization of intangible assets				49.0					49.2
Asset impairments, restructuring, and other special charges				24.9					2.4
Interest expense, net of capitalized interest				20.8					—
Other–net expense				2.6					1.9
Income before income taxes				$	44.8				$	77.5
Income taxes				13.3					4.8
Net income				$	31.5				$	72.7
Earnings per share:
Basic				$	0.09				$	0.25
Diluted				$	0.09				$	0.25
Weighted average shares outstanding:
Basic				365.7					293.3
Diluted				366.0					293.3

Elanco Animal Health Incorporated
Reconciliation of GAAP
Reported to Selected Non-GAAP Adjusted Information
(Unaudited)
(Dollars
in millions, except per share data)

We define Adjusted Net Income as net income (loss) excluding
amortization of intangible assets, purchase accounting adjustments to
inventory, integration costs of acquisitions, severance, asset
impairment, gain on sale of assets, facility exit costs and other
specified significant items, such as unusual or non-recurring items that
are unrelated to our long-term operations adjusted for income tax
expense associated with the excluded financial items.

We define Adjusted EBITDA as net income (loss) adjusted for interest
expense (income), income tax expense (benefit) and depreciation and
amortization, further adjusted to exclude purchase accounting
adjustments to inventory, integration costs of acquisitions, severance,
asset impairment, gain on sale of assets, facility exit costs and other
specified significant items, such as unusual or non-recurring items that
are unrelated to our long-term operations adjusted for income tax
expense associated with the excluded financial items.

We define Adjusted EPS as adjusted net income divided by the number of
weighted average shares outstanding as of March 31, 2019 and 2018.

The following is a reconciliation of GAAP Reported for the three months
ended March 31, 2019 and 2018 to Selected Non-GAAP Adjusted information:

				Three months ended March 31, 2019															Three months ended March 31, 2018
				GAAP Reported					Adjusted Items (b)					Non- GAAP (a)					GAAP Reported					Adjusted Items (b)					Non- GAAP (a)
Cost of sales (1)				$	343.8				$	(0.6	)			$	344.4				$	360.0				$	—				$	360.0
Amortization of intangible assets				$	49.0				49.0					—					$	49.2				49.2					—
Asset impairments, restructuring and other special charges (2) (3)				$	24.9				24.9					—					$	2.4				2.4					—
Income before taxes				$	44.8				$	73.3				$	118.1				$	77.5				$	51.6				$	129.1
Provision for taxes (4)				$	13.3				(11.9		)			25.2					$	4.8				$	(4.1	)			8.9
Net income				$	31.5				$	61.4				$	92.9				$	72.7				$	47.5				$	120.2
Earnings per share:
basic (6)				$	0.09				$	0.17				$	0.25				$	0.20				$	0.13				$	0.33
diluted				$	0.09				$	0.17				$	0.25				$	0.20				$	0.13				$	0.33
Adjusted weighted average shares outstanding:
basic (5)				365.7					365.7					365.7					365.6					365.6					365.6
diluted				366.0					366.0					366.0					365.6					365.6					365.6

Numbers may not add due to rounding.

The table above reflects only line items with non-GAAP adjustments.

(a) The company uses non-GAAP financial measures that differ from
financial statements reported in conformity with U.S. generally accepted
accounting principles (GAAP). The company’s non-GAAP measures adjust
reported results to exclude amortization of intangibles and items that
are typically highly variable, difficult to predict, and/or of a size
that could have a substantial impact on the company’s reported
operations for a period. The company believes that these non-GAAP
measures provide useful information to investors. Among other things,
they may help investors evaluate the company’s ongoing operations. They
can assist in making meaningful period-over-period comparisons and in
identifying operating trends that would otherwise be masked or distorted
by the items subject to the adjustments. Management uses these non-GAAP
measures internally to evaluate the performance of the business,
including to allocate resources. Investors should consider these
non-GAAP measures in addition to, not as a substitute for or superior
to, measures of financial performance prepared in accordance with GAAP.

(b) Adjustments to certain GAAP reported measures for the three months
ended March 31, 2019 and 2018 include the following:

(1) 2019 excludes inventory adjustments related to the suspension of
commercial activities for Imrestor (-$0.6 million).

(2) 2019 excludes charges associated with the impairment of intangible
assets ($4.0 million) as well as charges primarily related to
independent stand-up costs and other related activities ($20.9 million).

(3) 2018 excludes charges associated with restructuring charges ($2.4
million) primarily related to integration and other activities.

(4) 2019 and 2018 represent the income tax expense associated with the
adjusted items.

(5) Adjusted weighted average shares outstanding: Basic and diluted
includes 72.3 million shares sold in the September 2018 initial public
offering for the three months ended March 31, 2018.

(6) Reconciliation of each adjustment to earnings per share by line item
is shown in the table below. As Reported GAAP EPS of $0.25 for Q1 2018
was calculated using a weighted average shares of 293.3; however, in
order to provide a more meaningful representation of comparative
results, the table utilized a weighted average shares of 365.6 to arrive
at GAAP EPS of $0.20.

				Q1 2019					Q1 2018
As Reported EPS				$	0.09				$	0.25
Cost of sales				(0.0		)			—
Amortization of intangible assets				0.13					0.13
Asset impairments, restructuring and other special charges				0.07					0.01
Subtotal				$	0.20				$	0.14
Tax Impact of Adjustments				(0.03		)			(0.01		)
Total Adjustments to EPS				$	0.17				$	0.13
Impact of Adjusted weighted shares outstanding: Basic and diluted (1)									(0.05		)
Adjusted EPS				$	0.25				$	0.33

Numbers may not add due to rounding.

(1) See note (5) above. Impact is based on 72.3 million shares sold in
the September 2018 initial public offering for the three months ended
March 31, 2018.

For the periods presented, we have not made adjustments for all items
that may be considered unrelated to our long-term operations. We believe
adjusted EBITDA, when used in conjunction with our results presented in
accordance with U.S. GAAP and its reconciliation to net income, enhances
investors’ understanding of our performance, valuation and prospects for
the future.

Contacts

Investors: Jim Greffet (317) 383-9935 or [email protected]

Media:
Colleen Parr Dekker (317) 989-7011 or [email protected]

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