10q10k10q10k.net

What changed in Elanco Animal Health Inc's 10-K — 2023 vs 2024

vs

Paragraph-level year-over-year comparison of Elanco Animal Health Inc's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+414 added−414 removedSource: 10-K (2025-02-25) vs 10-K (2024-02-26)

Top changes in Elanco Animal Health Inc's 2024 10-K

414 paragraphs added · 414 removed · 327 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

72 edited+10 added−13 removed71 unchanged
Biggest changeIn Europe, the formulation patents will expire in June 2025, but in some countries, including Spain and the U.K., supplementary protection certificates (SPCs) have been granted that expire in September 2026. • Patent coverage for Milbemax/Interceptor chewable products extends through July 2024 in Europe and other key markets, and patent coverage for Interceptor Plus extends through October 2028. • Certain Advantage Family products, including Advantage, K-9 Advantix and Advocate are off patent. • The U.S. patent for Experior 's active ingredient, lubabegron, is currently scheduled to expire in July 2024, with a pending patent term extension application that could extend protection until April 2025.
Biggest changeIn Europe, the formulation patents will expire in June 2025, but in some countries, including Spain, Italy and the U.K., supplementary protection certificates (SPCs) have been granted that expire in August 2026. • Patent coverage for Milbemax/Interceptor chewable products expired in July 2024 in Europe and other key markets.
Healthier People: We help improve people's lives and livelihoods by promoting animal companionship and enabling healthier and more plentiful and environmentally friendly production of meat, milk, fish and eggs. Healthier Planet: We are committed to minimizing our own environmental footprint, while leveraging product and service innovations to help our customers advance their own sustainability efforts.
Healthier People: We help improve people's lives and livelihoods by promoting animal companionship and enabling healthier and more plentiful and environmentally friendly production of meat, milk, fish and eggs. Healthier Planet: We are committed to minimizing our environmental footprint while leveraging product and service innovations to help our customers advance their own sustainability efforts.
We invest in our workforce by offering competitive salaries, incentives and benefits. Our pay for performance philosophy is designed to create ownership and help ensure we attract and retain talent, as well as reward and recognize top-performing employees through merit increases and other rewards.
We invest in our workforce by offering competitive salaries, incentives and benefits. Our pay-for-performance philosophy is designed to create ownership and to help ensure we attract and retain talent, as well as reward and recognize top-performing employees through merit increases and other rewards.
Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies. European Union (EU) The EMA is a centralized agency of the EU responsible for the scientific evaluation of many of the Veterinary Medicinal Products (VMP) developed by pharmaceutical companies for use in the EU.
Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies. European Union (EU) The European Medicines Agency (EMA) is a centralized agency of the EU responsible for the scientific evaluation of many of the Veterinary Medicinal Products (VMP) developed by pharmaceutical companies for use in the EU.
Most authorities also consider the standards set by international animal health entities, including the World Organization for Animal Health, Codex Alimentarius and the International Cooperation on Harmonization of Technical Requirements for Registration of Veterinary Medicinal Products (VICH). Joint FAO/WHO Expert Committee on Food Additives.
Most authorities also consider the standards set by international animal health entities, including the World Organization for Animal Health (WOAH), Codex Alimentarius and the International Cooperation on Harmonization of Technical Requirements for Registration of Veterinary Medicinal Products (VICH). Joint FAO/WHO Expert Committee on Food Additives.
Our Advantage Family of brands ( Advantage ™, K-9 Advantix ™, Advocate ™, among others) and Seresto ™ products are over-the-counter treatments for the prevention and elimination of fleas and ticks and complement our prescription parasiticide products, which include our Credelio Family of brands ( Credelio ™, Credelio Cat ™, Credelio Plus ™), Interceptor Plus ™, Drontal Family of brands (Doncit ™, Drontal ™, Drontal Plus ™) and Trifexis ™.
Our Advantage Family of brands ( Advantage ™, K-9 Advantix ™, Advocate ™, AdTab ™, among others) and Seresto ™ products are over-the-counter treatments for the prevention and elimination of fleas and ticks and complement our prescription parasiticide products, which include our Credelio Family of brands ( Credelio ™, Credelio Cat ™, Credelio Plus ™), Interceptor Plus ™, Drontal Family of brands (Doncit ™, Drontal ™, Drontal Plus ™) and Trifexis ™.
With a heritage dating back to 1954, we were formerly a business unit of Eli Lilly and Company (Lilly), becoming an independently incorporated company on September 18, 2018, and finalizing our separation from Lilly in March 2019. In August 2020 we acquired Bayer Animal Health, marking the largest acquisition in industry history.
With a heritage dating back to 1954, we were formerly a business unit of Eli Lilly and Company (Lilly), becoming an independently incorporated company on September 18, 2018. We finalized our separation from Lilly in March 2019. In August 2020 we acquired Bayer Animal Health, marking the largest acquisition in industry history.
Our external manufacturing network seeks to ensure that all CMOs we use adhere to our standards of manufacturing quality. Pharmaceutical production processes are complex, highly regulated and can vary widely from product to product. Shifting or adding manufacturing capacity can be a lengthy process requiring significant capital expenditures, process modifications and regulatory approvals.
Our external manufacturing team seeks to ensure that all CMOs we use adhere to our standards of manufacturing quality. Pharmaceutical production processes are complex, highly regulated and can vary widely from product to product. Shifting or adding manufacturing capacity can be a lengthy process requiring significant capital expenditures, process modifications and regulatory approvals.
Information regarding our principal products and product families, those that represented approximately 1% or more of our revenue in 2023, is as follows: Pet Health Products Product Description Primary Species Advantage Family Family of topical applications that provide broad-spectrum protection against and treatment of fleas, ticks, mosquitoes, lice and biting flies.
Information regarding our principal products and product families, those that represented approximately 1% or more of our revenue in 2024, is as follows: Pet Health Products Product Description Primary Species Advantage Family Family of topical applications that provide broad-spectrum protection against and treatment of fleas, ticks, mosquitoes, lice and biting flies.
This acquisition also helped us expand our portfolio, creating a better balance between our pet health and farm animal products and between the U.S. and international markets, while also expanding our omnichannel presence in both the veterinary clinic and in retail markets, including e-commerce.
This acquisition also helped us expand our portfolio, creating a better balance between our pet health and farm animal products and between the United States (U.S.) and international markets, while also expanding our omnichannel presence in both the veterinary clinic and in retail markets, including e-commerce.
Additionally, as part of the drug experience report, we are required to submit all new information pertaining to the safety or effectiveness of a product, regardless of the source. USDA. The regulatory body in the U.S. for veterinary biologicals is the USDA.
Additionally, as part of the drug experience report, we are required to submit all new information pertaining to the safety or effectiveness of a product, regardless of the source. U.S. Department of Agriculture (USDA). The regulatory body in the U.S. for veterinary biologicals is the USDA.
Dogs Interceptor Plus Prevents heartworm disease and helps treat and control roundworm, hookworm, whipworm and tapeworm infections. Dogs Milbemax™ Treats and controls parasitic infections due to common intestinal worms. Cats, Dogs Onsior™ Controls postoperative pain and inflammation associated with certain surgeries.
Cats, Dogs Galliprant Controls pain and inflammation associated with osteoarthritis. Dogs Interceptor Plus Prevents heartworm disease and helps treat and control roundworm, hookworm, whipworm and tapeworm infections. Dogs Milbemax™ Treats and controls parasitic infections due to common intestinal worms. Cats, Dogs Onsior™ Controls postoperative pain and inflammation associated with certain surgeries.
In this way, the regulatory function ensures registrations remain valid and our products can continue to be sold. To effectively do this, our regulatory function actively engages in dialogue with the relevant authorities regarding policies that relate to animal health products. In most of our markets, the relevant authority is separate from those governing human medicinal products.
In this way, the regulatory function ensures registrations remain valid and our products can continue to be sold. To effectively do this, our regulatory function actively engages in dialogue with the relevant authorities regarding policies that relate to animal health products. In most of our markets, the relevant authority is separate from those governing human medicinal products. United States FDA.
Beyond professional growth and development, Elanco employees actively engage in initiatives aligned to Elanco's Healthy Purpose to advance the well-being of animals, people, the planet and our enterprise, enabling us to realize our vision of Food and Companionship Enriching Life. Available Information Our website address is www.elanco.com.
Beyond professional growth and development, Elanco employees actively engage in initiatives aligned to Elanco's Healthy Purpose to advance the well-being of animals, people, the planet and our enterprise, enabling us to realize our vision of Food and Companionship Enriching Life. 15 Table of Contents Available Information Our website address is www.elanco.com.
While many of the patents and patent applications in our portfolio are the result of our own work, others have been developed in collaboration with partners, acquired through business transactions or licensed to us by third parties. A subset of our current products or product candidates are covered by patents and patent applications.
While many of the patents and patent applications in our portfolio are the result of our own work, others have been developed in collaboration with partners, acquired through business transactions 11 Table of Contents or licensed to us by third parties. A subset of our current products or product candidates are covered by patents and patent applications.
Brazil The Ministry of Agriculture, Livestock Production and Supply (MAPA) is the regulatory body in Brazil that is responsible for the regulation and control of pharmaceuticals, biologicals and medicinal feed additives for animal use. MAPA’s regulatory activities are conducted through the Secretary of Agricultural Defense and its Livestock 13 Table of Contents Products Inspection Department.
Brazil The Ministry of Agriculture, Livestock Production and Supply (MAPA) is the regulatory body in Brazil that is responsible for the regulation and control of pharmaceuticals, biologicals and medicinal feed additives for animal use. MAPA’s regulatory activities are conducted through the Secretary of Agricultural Defense and its Livestock Products Inspection Department.
China The Ministry of Agriculture and Rural Affairs (MARA) is the regulatory body that is responsible for the regulation and control of pharmaceuticals, biologicals, disinfectants, medicinal feed additives, pesticide and feed/feed additives for animal use.
China The Ministry of Agriculture and Rural Affairs (MARA) is the regulatory body that is responsible for the regulation and control of pharmaceuticals, biologicals, disinfectants, medicinal feed additives, pesticides and feed/feed additives for animal use.
Post-approval 12 Table of Contents monitoring of products is required by law, with reports being provided to the CVM’s Office of Surveillance and Compliance. Reports of product quality defects, adverse events or unexpected results are maintained and submitted in accordance with the law.
Post-approval monitoring of products is required by law, with reports being provided to the CVM’s Office of Surveillance and Compliance. Reports of product quality defects, adverse events or unexpected results are maintained and submitted in accordance with the law.
We seek to file and maintain trademarks around the world based on commercial activities in most regions where we have, or desire to have, a business presence for a particular product. We currently maintain more than 14,500 trademark applications and registrations in major regions, primarily identifying products dedicated to the care of livestock and pets.
We seek to file and maintain trademarks around the world based on commercial activities in most regions where we have, or desire to have, a business presence for a particular product. We currently maintain more than 12,800 trademark applications and registrations in major regions, primarily identifying products dedicated to the care of livestock and pets.
Our farm animal portfolio of products for cattle (beef and dairy), swine, poultry and aquaculture (cold and warm water) is primarily focused on: 1) efficiency and performance; 2) disease prevention and treatment; 3) food safety; and 4) sustainability. Our products include medicated feed additives, injectable antibiotics, vaccines, insecticides and enzymes, among others.
Our farm animal portfolio of products for cattle (beef and dairy), swine and poultry is primarily focused on: 1) efficiency and performance; 2) disease prevention and treatment; 3) food safety; and 4) sustainability. Our products include medicated feed additives, injectable antibiotics, vaccines, insecticides and enzymes, among others.
We believe this approach will allow us to consistently progress our multi-year innovation projects toward regulatory approvals, while ensuring clear visibility to the innovation portfolio composition, value and progress. As of December 31, 2023, we employed over 1,000 employees in our global R&D and Regulatory Affairs organizations.
We believe this approach allows us to consistently progress our multi-year innovation projects toward regulatory approvals, while ensuring clear visibility to the innovation portfolio composition, value and progress. As of December 31, 2024, we employed over 1,000 employees in our global R&D and Regulatory Affairs organizations.
Due to our operations, these laws and 14 Table of Contents regulations also require us to obtain and comply with permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.
Due to our operations, these laws and regulations also require us to obtain and comply with permits, registrations and other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.
In connection with past divestitures, we have undertaken certain indemnification obligations that may require us, in the future, to conduct or finance environmental clean-ups at sites that we no longer own or operate.
In connection with past divestitures, we have undertaken certain indemnification obligations that may require us, in the future, to conduct or 14 Table of Contents finance environmental clean-ups at sites that we no longer own or operate.
Cattle, Swine Rumensin Improves feed and milk production efficiency and increases rate of weight gain in cows. Also prevents and controls coccidiosis for cows, calves (excluding veal calves) and goats. Rumensin is an animal-only antibiotic and an ionophore. Cattle Surmax™ / Maxus™ / Inteprity Prevents necrotic enteritis in broiler chickens. Surmax, Maxis and Inteprity are animal-only antibiotics.
Cattle, Swine Rumensin Improves feed and milk production efficiency and increases rate of weight gain in cows. Also prevents and controls coccidiosis for cows, calves (excluding veal calves) and goats. Rumensin is an animal-only antibiotic and an ionophore. Cattle Surmax™ Prevents necrotic enteritis in broiler chickens. Surmax is an animal-only antibiotic.
We have made, and intend to continue to make, necessary expenditures for compliance with applicable EHS laws and regulations. Human Capital Employees. As of December 31, 2023, we employed approximately 9,300 full time employees and approximately 500 fixed-duration employees, which are individuals hired for a pre-defined length of time (typically one to four years).
We have made, and intend to continue to make, necessary expenditures for compliance with applicable EHS laws and regulations. Human Capital Employees. As of December 31, 2024, we employed approximately 9,000 full time employees and approximately 450 fixed-duration employees, which are individuals hired for a pre-defined length of time (typically one to four years).
There are three organizations under the MARA that regulate animal health: The Institute of Veterinary Drug Control (IVDC) is responsible for the evaluation of new applications, renewals, variations, manufacturers, quality methods and tissue residue methods for pharmaceuticals, biologicals, disinfectants and medicinal feed additives. The feed/feed additive office is responsible for the registration and renewal of feed and feed additives.
There are three organizations under the MARA that regulate animal health: 13 Table of Contents • The Institute of Veterinary Drug Control (IVDC) is responsible for the evaluation of new applications, renewals, variations, manufacturers, quality methods and tissue residue methods for pharmaceuticals, biologicals, disinfectants and medicinal feed additives. • The feed/feed additive office is responsible for the registration and renewal of feed and feed additives. • The pesticide bureau is responsible for the registration and renewal of pesticide products.
We benchmark our total rewards annually to ensure our compensation and benefit programs remain competitive with our peers. Our benefits are one way we support our employees’ well-being and live up to our employee promise. Development.
We benchmark our total rewards annually to ensure our compensation and benefit programs remain competitive with our peers. Our benefits are one way we support our employees’ well-being and deliver on our employee promise. Development.
The pesticide bureau is responsible for the registration and renewal of pesticide products. Rest of World Country-specific regulatory laws typically have provisions that include requirements for certain labeling, safety, efficacy and manufacturers’ quality control procedures (to assure the consistency of the products), manufacturing site standards, as well as company records and reports.
Rest of World Country-specific regulatory laws typically have provisions that include requirements for certain labeling, safety, efficacy and manufacturers’ quality control procedures (to assure the consistency of the products), manufacturing site standards, as well as company records and reports.
A key element of our targeted value creation strategy is to drive future revenue growth through consistent, high-impact innovation. We continue to pursue the development of new chemical and biological molecules, as well as additional registrations and indications for current products.
Poultry A key element of our targeted value creation strategy is to drive revenue growth through portfolio development and product innovation. We continue to pursue the development of new chemical and biological molecules, as well as additional registrations and indications for current products.
Our external manufacturing network centrally governs and provides oversight to our global CMO relationships. We select CMOs based on several factors, including: (1) their ability to reliably supply products or materials that meet our quality standards at an optimized cost; (2) their access to specialty products and technologies; (3) capacity; (4) financial analyses; and (5) local presence.
We select CMOs based on several factors, including: (1) their ability to reliably supply products or materials that meet our quality standards at an optimized cost; (2) their access to specialty products and technologies; (3) capacity; (4) financial analyses; and (5) local presence.
However, various developments have led, and in the future may lead, to interruption or shortages in supply (for example, with U.S. cattle and pet vaccines in 2023) until we establish new sources, implement alternative processes, bring new manufacturing facilities online or pause or discontinue product sales in one or more markets.
However, various developments have led, and in the future may lead, to interruption or shortages in supply until we establish new sources, implement alternative processes, bring new manufacturing facilities online or pause or discontinue product sales in one or more markets.
Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and aqua (collectively, farm animal).
Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and, prior to the divestiture of our aqua business in July 2024, aqua (collectively, farm animal).
Our future growth depends on both our pipeline of new products, including new products we develop internally, develop with partners or that we are able to obtain through licenses or acquisitions, and the life cycle management of our existing products. In 2023, we received conditional approval from the U.S.
Our future growth depends on both our pipeline of new products, including new products we develop internally, develop with partners or that we are able to obtain through licenses or acquisitions, and the life cycle management of our existing products.
United States Food and Drug Administration (FDA). The regulatory body that is responsible for the regulation of animal health pharmaceuticals in the U.S. is the Center for Veterinary Medicine (CVM), a division of the FDA.
The regulatory body that is responsible for the regulation of animal health pharmaceuticals in the U.S. is the Center for Veterinary Medicine (CVM), a division of the FDA.
Below is a summary of our recent and upcoming key patent expirations: • Galliprant is protected by patents in the U.S., Europe, Canada, Japan and other key markets.
Other products are protected by patents that expire over the next several years. Below is a summary of our recent and upcoming key patent expirations: • Galliprant is protected by patents in the U.S., Europe, Canada, Japan and other key markets.
For example, based upon historical results, approximately 75% and 60% of total annual revenue contributed by our higher-margin parasiticide products Seresto and Advantage Family , respectively, has occurred during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere.
For example, in 2024 approximately 70% and 55% of total annual revenue generated by our higher-margin parasiticide products Seresto and Advantage Family , respectively, occurred during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere.
Our R&D organization is comprised of internal research, development, regulatory and external innovation collaborations and is led by highly experienced individuals with deep technical knowledge and substantial experience in discovery research, clinical sciences, technological development and regulatory expertise across our pet health and farm animal product categories.
Our R&D team is a project driven organization, with our R&D projects executed and led by highly experienced individuals with deep technical knowledge and substantial experience in discovery research, clinical sciences, technological development and regulatory expertise across our pet health and farm animal product categories.
We primarily sell our farm animal products to third-party distributors and directly to a diverse set of farm animal producers, including beef and dairy farmers as well as pork, poultry and aquaculture operations. With the acquisition of Bayer Animal Health, we expanded our omnichannel presence in both the veterinary clinic and in retail markets, including e-commerce.
We primarily sell our farm animal products to third-party distributors and directly to a diverse set of farm animal producers, including beef, dairy, pork and poultry operations. Our omnichannel presence allows us to sell into both the veterinary clinic and retail markets, including e-commerce.
Our policy is to vigorously protect, enforce and defend our rights to our intellectual property. Our product portfolio and certain product candidates enjoy the protection of approximately 6,500 patents and applications, filed in over 90 countries, with a concentration in our major markets as well as other markets with strong patent laws and protections.
Our product portfolio and certain product candidates enjoy the protection of approximately 6,700 patents and applications, filed in over 90 countries, with a concentration in our major markets as well as other markets with strong patent laws and protections.
Certain top selling pet health products, including the Advantage Family and Seresto , are offered through these channels. Our largest customer, an affiliate of AmerisourceBergen Corp., is a third-party veterinary distributor and represented approximately 10% of our revenue in 2023. Our second largest customer, which is also a third-party distributor, represented approximately 6% of our revenue in 2023.
Certain top selling pet health products, including the Advantage Family and Seresto , are offered through these channels. Our largest customer, an affiliate of Cencora, Inc., is a third-party veterinary distributor and represented approximately 11% of our total revenue in 2024.
We offer our employees opportunities to advance their careers at Elanco and are passionate about equipping employees with skills and development opportunities to help them thrive while continually meeting the ever-changing needs of our customers and other stakeholders in a dynamic and growing industry.
We offer employees opportunities to advance their careers at Elanco and are committed to equipping employees with relevant skills and development opportunities to help them thrive and meet the ever-changing needs of customers and stakeholders across our dynamic and growing industry.
We generally seek to develop an appropriate inventory strategy to fill market demand until an alternative source of supply can be implemented, in the event a supplier becomes unable to provide the required materials or product.
To maintain supply of our products, we use a variety of techniques, including comprehensive quality and planning and inventory management systems. We generally seek to develop an appropriate inventory strategy to fill market demand until an alternative source of supply can be implemented, in the event a supplier becomes unable to provide the required materials or product.
We will also continue to drive geographic and channel expansion, to reach more of the world's animals. Further, we continue to focus on our strategic Productivity initiatives to improve earnings and cash flows.
We also continue to optimize our diverse Portfolio to grow, leveraging our deep, established customer relationships and expanding product offerings. We will also continue to drive geographic and channel expansion, to reach more of the world's animals. Further, we continue to focus on our strategic Productivity initiatives to improve earnings and cash flows.
Cattle Hemicell Enzyme supplement for poultry and swine feeds. Poultry, Swine Maxiban Prevents coccidiosis in broiler chickens . Maxiban is an animal-only antibiotic and an ionophore. Poultry Monteban Prevents coccidiosis in broiler chickens . Monteban is an animal-only antibiotic and an ionophore. Poultry Pulmotil™ Controls swine respiratory disease and bovine respiratory disease (BRD). Pulmotil is a shared-class antibiotic.
Cattle 8 Table of Contents Product Description Primary Species Hemicell Enzyme supplement for poultry and swine feeds. Poultry, Swine Maxiban / Monteban Prevents coccidiosis in broiler chickens . Maxiban and Monteban are animal-only antibiotics and ionophores. Poultry Pulmotil™ Controls swine respiratory disease and bovine respiratory disease (BRD). Pulmotil is a shared-class antibiotic.
Patents for individual products expire at different times based on the date of the patent filing (or occasionally, the date of patent grant) and the legal term of patents in the countries where such patents are obtained.
Patents for individual products expire at different times based on the date of the patent filing (or occasionally, the date of patent grant) and the legal term of patents in the countries where such patents are obtained. Some of our principal products, including certain products within our Advantage Family , Rumensin and Maxiban / Monteban do not have patent protection.
All manufacturers of animal health biologicals must show their products to be pure, safe, effective and produced by a consistent method of manufacture as defined under the Virus Serum Toxin Act. Post-approval monitoring of products is also required. Reports of product quality defects, adverse events or unexpected results are maintained and submitted in accordance with the agency requirements.
All manufacturers of animal health biologicals must show their products to be pure, safe, effective and produced by a consistent method of manufacture as defined under the 12 Table of Contents Virus Serum Toxin Act. Post-approval monitoring of products is also required.
Additionally, we employ various delivery strategies for products, including in-feed, injectable, oral and topical formulations developed in conjunction with our manufacturing team to assure production that leverages the capabilities within our internal and external manufacturing network. Portfolio investment decisions and prioritization are influenced by the probability of technical success, economic value, time to market, portfolio fit and balance.
Additionally, we employ various delivery strategies for products, including in-feed, injectable, oral and topical formulations developed in conjunction with our manufacturing team to assure reliable and consistent production that leverages the capabilities within our internal and external manufacturing network.
No other customer represented greater than 5% of revenue during 2023. Research and Development Our R&D efforts focus on delivering consistent, high-impact innovation.
Our second largest customer, which is also a third-party distributor, represented approximately 6% of revenue in 2024, while no other customer represented greater than 5% of revenue during 2024. Research and Development Our R&D efforts focus on delivering consistent, high-impact innovation.
Sales and Marketing Through our global sales force of over 2,000 sales representatives, our veterinary consultants and our key distributors, we seek to build strong customer relationships and fulfill demand for our pet health products primarily with veterinarians and, in some markets, pet owners, and for our farm animal products primarily with farm animal producers, veterinarians and nutritionists.
Sales and Marketing Through our global sales force of over 2,200 sales representatives, our veterinary consultants and our key distributors, we seek to build strong customer relationships and fulfill demand for our products. Our sales representatives visit our customers, including consultants, veterinarians, farm animal producers and resellers, to inform, promote and sell our products and to support customers.
Our strong quality control and quality assurance programs are managed and coordinated globally and are in place at all internal manufacturing sites and external manufacturing hubs. We also regularly inspect and audit our internal sites and CMO locations. To maintain supply of our products, we use a variety of techniques, including comprehensive quality and planning and inventory management systems.
We also intend to continue our efficiency improvement programs in our manufacturing and supply chain organization. Our strong quality control and quality assurance programs are managed and coordinated globally and are in place at all internal manufacturing sites and external manufacturing hubs. We also regularly inspect and audit our internal sites and CMO locations.
Our focused strategy prioritizes certain assets, including late-stage potential blockbusters, while maximizing life cycle management and refilling the early-stage pipeline to achieve a consistent flow of innovation. We also continue to optimize our diverse Portfolio to grow, leveraging our deep, established customer relationships and expanding product offerings.
We consistently innovate to improve the health of animals and to benefit our customers. Our focused strategy prioritizes certain assets, including late-stage potential blockbusters, while maximizing life cycle management and refilling the early-stage pipeline to achieve a consistent flow of innovation.
We seek to concentrate our resources on projects that match our strategy and where we can leverage our broad technical and commercial capabilities.
We seek to concentrate our resources on projects that match our strategy and where we can leverage our broad technical and commercial capabilities. In addition to supporting our existing product portfolio, new product innovation is a core part of our business strategy.
Patent coverage relating to methods of use and formulation will expire in 2035 in most jurisdictions. • Various formulation and method of use patents encompass our spinosad pesticide product, Trifexis . The Trifexis formulation and method of use patents expired in September 2021 in the U.S., Canada and Australia.
Patent coverage relating to methods of use and formulation will expire in 2035 in most jurisdictions. • The Seresto formulation patent will expire in the U.S. in September 2027.
Our reported revenue by product category was as follows: Contract manufacturing represents revenue from arrangements in which we manufacture products on behalf of a third party. International Operations Our operations are conducted globally. The United States (U.S.) is our largest market, accounting for 45% of our total revenue in 2023.
We advance this vision by offering a comprehensive portfolio of products in the pet health and farm animal product categories. Our reported revenue by product category was as follows: Contract manufacturing and other represents revenue from arrangements in which we manufacture products on behalf of a third party and royalty revenue. International Operations Our operations are conducted globally.
Certain products within the Advantage Family also provide protection against heartworm, lungworm and other gastrointestinal worm infections, including roundworms, whipworms and hookworms. Cats, Dogs Atopica™ Controls atopic dermatitis. Dogs Claro™ / Neptra™ One-dose treatment for otitis externa associated with susceptible strains of bacteria and yeast.
Certain products within the Advantage Family also provide protection against heartworm, lungworm and other gastrointestinal worm infections, including roundworms, whipworms and hookworms. Cats, Dogs Atopica™ Controls atopic dermatitis. Dogs Credelio Family Family of oral products that kills adult fleas, treats flea infestations and treats and controls tick infestations.
Customers We primarily sell our pet health products to third-party distributors and retailers, as well as directly to veterinarians who typically then sell our products to pet owners.
Furthermore, our expertise and data analytics help our customers analyze large amounts of health and production data in order to improve production efficiency and business performance. 9 Table of Contents Customers We primarily sell our pet health products to third-party distributors and retailers, as well as directly to veterinarians who typically then sell our products to pet owners.
Barueri, Brazil Kiel, Germany Clinton, Indiana Prince Edward Island, Canada (1) Santa Clara, Mexico Terre Haute, Indiana Chengdu, China Manukau, New Zealand Fort Dodge, Iowa Wusi, China Banwol, South Korea Elwood, Kansas Huningue, France Chungli, Taiwan Kansas City, Kansas Cuxhaven, Germany Dong Nai, Vietnam (1) Winslow, Maine (1) In February 2024 we announced the pending sale of our aqua business, which includes these manufacturing sites to a subsidiary of Merck Animal Health.
Barueri, Brazil Santa Clara, Mexico Clinton, Indiana Chengdu, China Manukau, New Zealand (1) Terre Haute, Indiana Wusi, China Banwol, South Korea Fort Dodge, Iowa Huningue, France Chungli, Taiwan Elwood, Kansas Cuxhaven, Germany Speke, United Kingdom (2) Kansas City, Kansas Kiel, Germany Winslow, Maine 10 Table of Contents (1) In October 2024, we entered into an agreement to sell our manufacturing facility in Manukau, New Zealand.
In 2023, our top five selling products and/or product families were our Advantage Family (cats and dogs), Seresto (cats and dogs), Rumensin (cattle), our Credelio Family (cats and dogs) and Maxiban (poultry). These products and product families combined to represent approximately 31% of our total revenue in 2023, although none represented more than 10% individually.
In 2024, our top five selling products and/or product families were our Advantage Family (cats and dogs), Seresto (cats and dogs), Rumensin (cattle), Maxiban / Monteban (poultry) and our Credelio Family (cats and dogs).
Healthier Enterprise: We are committed to growing our business with integrity and excellence with respect to all stakeholders, fostering an inclusive culture where employees can make a difference – encouraging ownership, growth and well-being. Our business and operations are exposed to and are impacted by various global macroeconomic factors.
Healthier Enterprise: We are committed to growing our business with integrity and excellence with respect to all stakeholders, fostering an inclusive, cause-driven culture where employees can make a difference – encouraging ownership, growth and well-being. 6 Table of Contents Commercial Operations We operate our business as a single segment within the animal health industry, dedicated to fulfilling our vision of Food and Companionship Enriching Life.
In addition, our sales and marketing organization provides enhanced value by supporting farm animal producers to maximize their yields and reduce their costs. Furthermore, 9 Table of Contents our expertise and data analytics help our customers analyze large amounts of health and production data in order to improve production efficiency and business performance.
In addition, our sales and marketing organization provides enhanced value by supporting farm animal producers to maximize their yields and reduce their costs.
R&D expenses totaled $327 million in 2023, $321 million in 2022 and $369 million in 2021. Manufacturing and Supply Chain We have a global manufacturing network of 18 sites comprised of the following: 10 Table of Contents International U.S.
Portfolio investment decisions and prioritization are influenced by the probability of technical success, economic value, time to market, portfolio fit and balance. R&D expenses totaled $344 million in 2024, $327 million in 2023 and $321 million in 2022. Manufacturing and Supply Chain We have a global manufacturing network of 17 sites comprised of the following: International U.S.
Poultry Baycox™ Oral treatment for control of coccidiosis in swine and clinical coccidiosis in young cattle. Attacks all stages of the parasite. Cattle, Swine Baytril Injectable antibiotic active against bacterial respiratory disease pathogens. Baytril is a shared-class antibiotic. Cattle, Swine Catosal™ / Comforta™ Injectable for prevention or treatment of deficiencies of vitamin B12, Cyanocobalamin and phosphorous.
Poultry Baytril Injectable antibiotic active against bacterial respiratory disease pathogens. Baytril is a shared-class antibiotic. Cattle, Swine Catosal™ Injectable for prevention or treatment of deficiencies of vitamin B12 and phosphorus. Cattle Denagard™ Treats swine dysentery. Denagard is a shared-class antibiotic. Swine Experior Reduces ammonia gas emissions from an animal or its waste.
Environmental Protection Agency (EPA). The main regulatory body in the U.S. for veterinary pesticides is the EPA.
Reports of product quality defects, adverse events or unexpected results are maintained and submitted in accordance with the agency requirements. Environmental Protection Agency (EPA). The main regulatory body in the U.S. for veterinary pesticides is the EPA.
In addition, we compete with numerous other producers of animal health products throughout the world. Intellectual Property Our technology, brands and other intellectual property are important elements of our business. We rely on patent, trademark, copyright and trade secret laws, as well as regulatory exclusivity periods and non-disclosure agreements 11 Table of Contents to protect our intellectual property rights.
We rely on patent, trademark, copyright and trade secret laws, as well as regulatory exclusivity periods and non-disclosure agreements to protect our intellectual property rights. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property.
We also face competition globally from manufacturers of generic drugs, as well as from producers of nutritional health products, such as DSM Nutritional Products AG and Danisco Animal Nutrition & Health, a subsidiary of International Flavors & Fragrances, Inc. There are also several start-up companies working in the animal health area.
We also compete with numerous other producers of animal health products throughout the world, including start-up companies working in the animal health area. In addition, we also face competition globally from manufacturers of generic drugs and producers of nutritional health products. Intellectual Property Our technology, brands and other intellectual property are important elements of our business.
Dogs Credelio Family Family of oral products that kills adult fleas, treats flea infestations and treats and controls tick infestations. Cats, Dogs Drontal Family Family of injectable and oral tablet dewormers indicated for the removal of tapeworms, hookworms, roundworms and whipworms. Cats, Dogs Galliprant Controls pain and inflammation associated with osteoarthritis.
The introduction of Credelio Quattro ™ in January 2025 adds a monthly chewable tablet for dogs that protects against fleas, ticks, heartworms, roundworms, hookworms and three different species of tapeworms. Cats, Dogs Drontal Family Family of injectable and oral tablet dewormers indicated for the removal of tapeworms, hookworms, roundworms and whipworms.
While the patent term extension application is pending, we plan to request available interim patent extensions to maintain coverage. Coverage for Experior methods of use will expire in 2037 in the U.S. and 2035 in other key markets. Additionally, many of our vaccine products, including the TruCan family of vaccines, are based on proprietary or patented master seeds and formulations.
Additionally, many of our vaccine products, including the TruCan family of vaccines, are based on proprietary or patented master seeds and formulations.
By total revenue, China, Brazil and the United Kingdom (U.K.) are our largest markets outside the U.S. Emerging market economies are an important component of our growth strategy and will serve as a base upon which we expect to build our commercial and local innovation capabilities.
The U.S. is our largest market, accounting for 46% of our total revenue in 2024. By total revenue, China, Brazil and the United Kingdom (U.K.) are our largest markets outside the U.S.
This sale is anticipated to close around mid-year 2024 pending regulatory approvals and subject to other closing conditions. See Note 19. Subsequent Events to the consolidated financial statements for further information. Our products are manufactured both at the sites listed above that are operated by us and across a network of approximately 140 contract manufacturing organizations (CMOs).
Our products are manufactured both at the sites listed above that are operated by us and across a network of approximately 130 contract manufacturing organizations (CMOs). Our external manufacturing team centrally governs and provides oversight to our global CMO relationships.
Leadership and employees are encouraged to evaluate performance with these values and behavioral pillars in mind. Inclusion, Diversity, Equity and Accessibility (IDEA). We are focused on delivering consistent high impact innovation and maximizing the value of our current portfolio. This effort is enhanced by an inclusive workforce with diverse backgrounds, strengths and perspectives.
Leadership and employees are encouraged to evaluate performance with these values and behavioral pillars in mind. Inclusion, Diversity, Equity and Accessibility (IDEA). Our comprehensive IDEA strategy includes talent acquisition efforts focused on attracting high-quality candidates from a variety of sources and learning, mentoring and development opportunities for all employees.
We have in the past invested in, and will continue to invest in, improvements to our existing manufacturing facilities and we intend to continue our efficiency improvement programs in our manufacturing and supply chain organization.
We have in the past invested in, and will continue to invest in, improvements to our existing manufacturing facilities. For example, in 2024 we announced a planned $130 million expansion of our biologics manufacturing facility in Elwood, Kansas to enable further growth of our monoclonal antibody portfolio.
Poultry (1) In February 2024 we announced the pending sale of our aqua business, which includes the Clynav product, to a subsidiary of Merck Animal Health. This sale is anticipated to close around mid-year 2024 pending regulatory approvals and subject to other closing conditions. See Note 19. Subsequent Events to the consolidated financial statements for further information.
This transaction is expected to close in the first half of 2025 pending regulatory approvals and subject to other closing conditions. (2) In November 2024, we acquired the manufacturing facility and related assets in Speke, U.K. from a previous contract manufacturing partner. See Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for further information.
Removed
For example, in recent years we have been impacted by operating challenges across the globe due to the Russia-Ukraine conflict, conditions related to the COVID-19 pandemic, supply chain disruptions, a rising interest rate environment, foreign currency exchange rate volatility and inflationary pressures, among others.
Added
These products and product families combined to represent approximately 36% of our total revenue in 2024, with our largest product family, Advantage Family , representing approximately 10% of total revenue.
Removed
Continued evolution of these conditions has led to economic slowdowns in certain countries and/or regions and volatility in consumer behavior. We continue to monitor these factors and have worked with our customers, employees, suppliers and other stakeholders to mitigate their impacts.
Added
We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. New product development and regulatory highlights during 2024 included the following: Bovaer : In May 2024, the U.S.
Removed
For additional information on these macroeconomic challenges and the impact on our business, operations, financial condition and results, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1A.
Added
Food and Drug Administration (FDA) completed its comprehensive, multi-year review of Bovaer ® (3-NOP), a first-in-class methane-reducing feed ingredient for use in lactating dairy cattle. Producers began feeding the product to cattle in the U.S. during the third quarter of 2024.
Removed
Risk Factors". 6 Table of Contents Commercial Operations We operate our business as a single segment within the animal health industry, dedicated to fulfilling our vision of Food and Companionship Enriching Life. We advance this vision by offering a comprehensive portfolio of products in the pet health and farm animal product categories.
Added
Zenrelia : We received final FDA approval for Zenrelia ® , a JAK inhibitor targeting control of pruritus and atopic dermatitis in dogs, in September 2024. We launched Zenrelia shortly after final approval, with the first sales occurring in late September. We have also received approval for Zenrelia in Brazil, Canada and Japan.

… 15 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

154 edited+32 added−34 removed128 unchanged
Biggest changeIf our use of AI becomes controversial, we may experience reputational harm to our brand, competitive harm or legal liability. At the same time, our competitors may incorporate AI into their operations more quickly than we do or with more successful outcomes, which would also harm our business.
Biggest changeAt the same time, our competitors may incorporate AI into their operations more quickly than we do or with more successful outcomes, which would also harm our business. We also expect there will be new laws or regulations concerning the use of AI technology, which might be burdensome to comply with and may limit our ability to use this technology.
Furthermore, the timing and cost of our R&D may increase, and our R&D may become less predictable as, among other things, regulations applicable to our industry may make it more time-consuming and/or costly to research, develop and register products.
Furthermore, the timing and cost of our R&D may increase, and our R&D may become less predictable as, among other things, regulations applicable to our industry make it more time-consuming and/or costly to research, develop and register products.
Some of our employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements in certain jurisdictions. As a result, we are subject to the risk of labor disputes, strikes, work stoppages and other labor-relations matters.
Some of our employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements. As a result, we are subject to the risk of labor disputes, strikes, work stoppages and other labor-relations matters in certain jurisdictions.
We may be unable to negotiate new collective bargaining agreements on similar or more favorable terms, and may experience work stoppages, higher ongoing labor costs or other labor problems in the future at our sites. We may also experience difficulty or delays in implementing changes to our workforce in certain markets.
We may be unable to negotiate new collective bargaining agreements on similar or more favorable terms, and we may experience work stoppages, higher ongoing labor costs or other labor problems in the future at our sites. We may also experience difficulty or delays in implementing changes to our workforce in certain markets.
Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings between U.S. and non-U.S. jurisdictions or among jurisdictions with differing statutory tax rates, changes in our overall profitability, changes in tax laws or treaties or in their application or interpretation, changes in tax rates, changes in GAAP, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures.
Future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings between U.S. and non-U.S. jurisdictions or among jurisdictions with differing statutory tax rates, changes in our overall profitability, changes in tax laws or treaties or in their application or interpretation, changes in tax rates, changes in GAAP, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures.
We cannot be certain that a competitor or other third party does not have, or will not obtain rights to, intellectual property that may prevent us from manufacturing, developing or marketing certain of our products, regardless of whether we believe such intellectual property rights are valid and enforceable or we believe we would otherwise be able to develop a more commercially successful product, which may materially adversely affect our business, financial condition and results of operations.
We cannot be certain that a competitor or other third party does not have, or will not obtain rights to, intellectual property that may prevent us from manufacturing, developing or marketing certain products, regardless of whether we believe such intellectual property rights are valid and enforceable or we believe we would otherwise be able to develop a more commercially successful product, which may materially adversely affect our business, financial condition and results of operations.
Despite these efforts and precautions, we may be unable to prevent a third party from copying or otherwise obtaining and using our trade secrets or our other intellectual property without authorization, and legal remedies may not adequately compensate us for the damages caused by such unauthorized use.
Despite these efforts and precautions, we may be unable to prevent a third party from copying or otherwise obtaining and using our trade secrets or other intellectual property without authorization, and legal remedies may not adequately compensate us for the damages caused by such unauthorized use.
In addition, we may determine that we should increase our coverage, and this insurance may be prohibitively expensive to us or our collaborators or licensees and may not fully cover our potential liabilities.
In addition, we may determine that we should increase our coverage, and this insurance may be prohibitively expensive to us, our collaborators or our licensees and may not fully cover our potential liabilities.
Department of the Treasury and the EU, in relation to our products or the products of farmers and other customers; • government limitations on foreign ownership; • government takeover or nationalization of business; • changes in tax laws and tariffs; • imposition of anti-dumping and countervailing duties or other trade-related sanctions; • costs and difficulties and compliance risks in staffing, managing and monitoring international operations, including in the use of overseas third-party goods and service providers; • corruption risk inherent in business arrangements and regulatory contacts with foreign government entities; • longer payment cycles and increased exposure to counterparty risk; and • additional limitations on transferring personal information between countries or other restrictions on the processing of personal information.
Department of the Treasury and the EU, in relation to our products or the products of farmers and other customers; • government limitations on foreign ownership; • government takeover or nationalization of business; • changes in tax laws and tariffs; • imposition of anti-dumping and countervailing duties or other trade-related sanctions; • costs and difficulties and compliance risks in staffing, managing and monitoring international operations, including in the use of overseas third-party goods and service providers; • corruption risk inherent in business arrangements and regulatory contacts with foreign government entities; • longer payment cycles in certain foreign countries and increased exposure to counterparty risk; and • additional limitations on transferring personal information between countries or other restrictions on the processing of personal information.
In addition, our high level of indebtedness could have other important consequences, including: • limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements; • increasing our vulnerability to general adverse economic and industry conditions; • making us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; • restricting us from making strategic acquisitions, engaging in development activities or exploiting business opportunities; and • limiting our flexibility in planning for and reacting to changes in the animal health industry.
Our high level of indebtedness could have other important consequences, including: • limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements; • increasing our vulnerability to general adverse economic and industry conditions; • making us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; • restricting us from making strategic acquisitions, engaging in development activities or exploiting business opportunities; and • limiting our flexibility in planning for and reacting to changes in the animal health industry.
This trend has been demonstrated by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products and has been accelerated by the increased consumer preferences toward e-commerce in recent years. Pet owners also could decrease their reliance on, and visits to, veterinarians as they rely more on internet-based animal health information.
This trend has been demonstrated by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products and has been accelerated by the increased consumer preferences toward e-commerce in recent years. Pet owners also could decrease their reliance on, and visits to, veterinarians as they rely more on internet-based animal health information and telemedicine.
Any potential cyber breach could result in the unauthorized access, public disclosure, loss or theft of confidential data, or unauthorized access to, disruption of or interference with our operations that rely on information systems. Such breach can also have negative consequences, such as increased costs for security measures or remediation costs, and diversion of management attention (see Item 1C.
Any potential cyber breach could result in the unauthorized access, public disclosure, loss or theft of confidential data, or unauthorized access to, disruption of or interference with our operations that rely on information systems. Such breach could also have negative consequences, such as increased costs for security measures or remediation costs, and diversion of management attention (see Item 1C.
Feed, fuel, transportation and other key costs for farm animal producers may continue to increase, or animal protein prices or sales may decrease. Either of these trends could cause deterioration in the financial condition of our farm animal product customers, potentially inhibiting their ability to purchase our products or pay us for products delivered.
Feed, fuel, transportation and other key costs for farm animal producers may continue to increase, or animal-derived protein prices or sales may decrease. Either of these trends could cause deterioration in the financial condition of our farm animal product customers, potentially inhibiting their ability to purchase our products or pay us for products delivered.
Any disruption or failure in our AI systems or those of third parties on whom we rely could result in delays and operational challenges, and the various operational, compliance and reputational issues could materially adversely affect our business, financial condition and results of operations. We depend on sophisticated information technology and infrastructure.
Any disruption or failure in our AI systems or those of third parties on whom we rely could result in delays and operational challenges, and the various operational, compliance and reputational issues could materially adversely affect our business, financial condition and results of operations. We depend on sophisticated information technology (IT) and infrastructure.
Sales of our farm animal products could be materially adversely affected by a general outbreak of infectious disease, or an outbreak of disease carried by farm animals, which could lead to the widespread death or precautionary destruction of farm animals as well as the reduced consumption and demand for animal protein.
Sales of our farm animal products could be materially adversely affected by a general outbreak of infectious disease, or an outbreak of disease carried by farm animals, which could lead to the widespread death or precautionary destruction of farm animals as well as the reduced consumption and demand for animal-derived protein.
For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their animal health products directly from veterinarians.
For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their animal health products, or fill their prescriptions, directly from veterinarians.
We are vigorously defending against the claims made in these lawsuits; however, the ultimate resolution cannot be predicted, and the claims raised in these lawsuits may result in further legal matters or actions against us, including, but not limited to, government enforcement actions or additional private litigation.
We are vigorously defending against the claims made in these and other lawsuits; however, the ultimate resolution cannot be predicted, and the claims raised in these lawsuits may result in further legal matters or actions against us, including, but not limited to, government enforcement actions or additional private litigation.
In connection with the Base Erosion and Profit Shifting (BEPS) Integrated Framework provided by the Organization for Economic Cooperation and Development (OECD), the OECD has introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two or the minimum tax directive.
In connection with the Base Erosion and Profit Shifting (BEPS) Integrated Framework provided by the Organization for Economic Cooperation and Development (OECD), the OECD introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two or the minimum tax directive.
Ionophores are a special class of animal-only antimicrobials, and because of their animal-only designation, mode of action and spectrum of activity, their use has not to date been impacted by regulations or changing market demand in many international markets.
Ionophores are a special class of animal-only antimicrobials, and because of their animal-only designation, mode of action and spectrum of activity, to date their use has not been materially impacted by regulations or changing market demand in many international markets.
Further, our debt instruments may restrict our ability to dispose of assets and may restrict the use of proceeds from those dispositions and may also restrict our ability to raise debt or equity financing to be used to repay other indebtedness when it becomes due.
Further, our debt instruments may restrict our ability to dispose of assets, the use of proceeds from those dispositions and/or our ability to raise debt or equity financing to be used to repay other indebtedness when it becomes due.
The costs of defending an intellectual property claim could be substantial and could materially adversely affect our business, financial condition and results of operations, even if we successfully defend such claim.
The costs of defending an intellectual property claim could be substantial and could materially adversely affect our business, financial condition and results of operations, even if we successfully defend against such claim.
We are also exposed to the risk of rising interest rates to the extent we fund our operations with short-term or variable-rate borrowings. See Part II, Item 7A. Quantitative and Qualitative Disclosure About Market Risk for further discussion around our exposure to changes in interest rates. We may be required to write down goodwill or identifiable intangible assets.
We are also exposed to the risk of rising interest rates to the extent we fund our operations with short-term or variable-rate borrowings. See Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk for further discussion around our exposure to changes in interest rates. We may be required to write down goodwill or identifiable intangible assets.
We are increasingly dependent on our information technology systems as many of our office workers who work partially or primarily remotely, rely on third-party applications to perform their job duties and are processing information through our network via their home networks, which may be less secure.
We are increasingly dependent on our IT systems as many of our office workers who work partially or primarily remotely, rely on third-party applications to perform their job duties and are processing information through our network via their home networks, which may be less secure.
As an animal health company dedicated to innovating and delivering products and services to prevent and treat disease in animals, we are required to evaluate the effect of our existing and new products in animals in order to register such products. Animal testing in certain industries has been the subject of controversy and adverse publicity.
As an animal health company dedicated to innovating and delivering products and services to prevent and treat diseases in animals, we are required to evaluate the effect of our existing and new products in animals in order to register such products. Animal testing in certain industries has been the subject of controversy and adverse publicity.
In addition, a number of factors could cause production interruptions, including: • the failure of us or any of our vendors or suppliers, including logistical service providers, to comply with applicable regulations and quality assurance guidelines; • mislabeling; • construction delays; • equipment malfunctions; • shortages of materials; • labor problems; • delays in receiving required governmental authorizations or regulatory approvals; • natural disasters and/or adverse weather conditions; • power outages; • criminal and terrorist activities; • changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, shipping distributions or physical limitations; and • the outbreak of any highly contagious diseases.
In addition, a number of factors could cause production interruptions, including: 21 Table of Contents • the failure of us or any of our CMOs, vendors or suppliers, including logistical service providers, to comply with applicable regulations and quality assurance guidelines; • mislabeling; • construction delays; • equipment malfunctions; • shortages of materials; • labor problems; • delays in receiving required governmental authorizations or regulatory approvals; • natural disasters and/or adverse weather conditions; • power outages; • criminal and terrorist activities; • changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, shipping distributions or physical limitations; and • the outbreak of any highly contagious diseases.
Our manufacturing network may be unable to meet the demand for our products, or we may have excess capacity if demand for our products changes. Throughout 2023 we experienced increasing levels of inventory on-hand, in part due to volatility in demand across different markets and distribution channels.
Our manufacturing network may be unable to meet the demand for our products, or we may have excess capacity if demand for our products changes. For example, in 2023 we experienced increasing levels of inventory on-hand, in part due to volatility in demand across different markets and distribution channels.
In addition to the negative impact on our cash flows, if we are not able to more effectively manage the purchase and production of our inventories to match the timing of customer demand, we may face increased costs for warehousing and the potential for our inventories to become unusable or obsolete.
In addition to the negative impact on our cash flows, if we are not able to effectively manage the purchase and production of our inventories to match the timing of customer demand, we may face increased costs and the potential for our inventories to become unusable or obsolete.
Inventory levels at our distributors and retailers increase or decrease as a result of various 22 Table of Contents factors, including end customer demand, new customer contracts, heightened competition, required minimum inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics and procedures and environmental factors beyond our control.
Inventory levels at our distributors and retailers increase or decrease as a result of various factors, including end customer demand, new customer contracts, heightened competition, required minimum inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics and procedures and environmental factors beyond our control.
Breaches of our information technology systems or improper disclosure of confidential company or personal data, or a failure to comply with privacy laws, regulations and our contractual obligations concerning data privacy or the security of certain information, could have a material adverse effect on our reputation and operations.
Breaches of our IT systems or improper disclosure of confidential company or personal data, or a failure to comply with privacy laws, regulations and our contractual obligations concerning data privacy or the security of certain information, could have a material adverse effect on our reputation and operations.
In certain markets, including the U.S., sales of certain of our farm animal products have been negatively affected by an increase in consumer sentiment for proteins and dairy products produced without the use of antibiotics or other products intended to increase animal production.
In certain markets, including the U.S., sales of certain of our farm animal products have been negatively affected by changes in consumer sentiment for proteins and dairy products produced without the use of antibiotics or other products intended to increase animal production.
In addition, we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products in general, by food producers, veterinarians and pet owners. Any concern as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation.
We also depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products in general, by food producers, veterinarians and pet owners. Any concern as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation.
Further, others may independently and lawfully develop substantially similar or identical products that circumvent our intellectual property by means of alternative designs or processes or otherwise. The illegal distribution and sale by third parties of counterfeit or illegally compounded versions of our products or of stolen, diverted or relabeled products could have a negative impact on our reputation and business.
Further, others may independently and lawfully develop substantially similar or identical products that circumvent our intellectual property by means of alternative designs or processes or otherwise. 31 Table of Contents The illegal distribution and sale by third parties of counterfeit or illegally compounded versions of our products or of stolen, diverted or relabeled products could have a negative impact on our reputation and business.
Foreign Corrupt Practices Act (the FCPA) and similar non-U.S. laws and regulations; • compliance with foreign labor laws; • compliance with local, regional and global restrictions on banking and commercial activities in emerging markets; • burdens to comply with multiple and potentially conflicting foreign laws and regulations, including those relating to EHS requirements and those in emerging markets; • changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our customers, including the imposition of limits on our profitability; • political and social instability, including crime, civil disturbance, terrorist activities and armed conflicts such as the Russia-Ukraine conflict and the related government and other entity responses; • trade restrictions and restrictions on direct investments by foreign entities, including restrictions administered by the Office of Foreign Assets Control of the U.S.
Foreign Corrupt Practices Act (the FCPA) and similar non-U.S. laws and regulations; • compliance with labor laws; • compliance with local, regional and global restrictions on banking and commercial activities in emerging markets; • burdens to comply with multiple and potentially conflicting foreign laws and regulations, including those relating to EHS requirements and those in emerging markets; • changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our customers, including the imposition of limits on our profitability; • political and social instability, including crime, civil disturbance, terrorist activities and armed conflicts and the related government and other entity responses; • trade restrictions and restrictions on direct investments by foreign entities, including restrictions administered by the Office of Foreign Assets Control of the U.S.
Due to this, unplanned plant shutdowns, manufacturing or quality assurance difficulties, failure or refusal of a supplier or CMO to supply contracted quantities or difficulties in predicting or variability in demand for our products have caused, and may in the future cause, interruption or higher costs in the supply of certain products, product shortages or pauses or discontinuations of product sales in one or more markets.
Accordingly, unplanned plant shutdowns, manufacturing or quality assurance difficulties, failure or refusal of a supplier or CMO to supply contracted quantities or difficulties in predicting or variability in demand for our products have caused, and may in the future cause, interruption or higher costs in the supply of certain products, product shortages or pauses or discontinuations of product sales in one or more markets.
We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations, including customer, employee and company data. The secure processing, maintenance and transmission of this information is critical to our operations.
We rely on IT systems to process, transmit and store electronic information in our day-to-day operations, including customer, employee and company data. The secure processing, maintenance and transmission of this information is critical to our operations.
For 30 Table of Contents example, shareholder class action lawsuits filed against us in 2020 allege, in part, that we and certain of our executives made materially false and/or misleading statements and/or failed to disclose certain facts about our supply chain, inventory, revenue, projections and our relationships with third party distributors and revenue attributable to those distributors.
For example, shareholder class action lawsuits filed against us in 2020 allege, in part, that we and certain of our executives made materially false and/or misleading statements and/or failed to disclose certain facts about our supply chain, inventory, revenue, projections and our relationships with third party distributors and revenue attributable to those distributors.
In addition, construction of sites is expensive, and our ability to recover costs will depend on the market acceptance and success of the products produced at the new sites, which is uncertain. Significant cost overruns or delays in completing these projects could have an adverse effect on our financial condition and results of operations.
In addition, construction of sites is expensive, and our ability to recover costs will depend on the market acceptance and success of the products produced at the new sites, which is uncertain. Significant cost overruns or delays in completing these projects could have a material adverse effect on our financial condition and results of operations.
We are primarily exposed to foreign exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan. To the extent revenue and expense transactions are not denominated in the functional currency, we are also subject to the risk of transaction losses.
We are primarily exposed to foreign exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan. To the extent revenue and expense transactions are not 27 Table of Contents denominated in the functional currency, we are also subject to the risk of transaction losses.
There are also significant risks involved with such changes, including the potential for significant business disruption, diversion of management's time and attention from on-going operations, loss of human capital talent, temporarily reduced productivity and the risk of failing to achieve some or all of the anticipated benefits of the restructuring or organizational changes.
There are also significant risks involved with such changes, including the potential for significant business disruption, diversion of management's time and attention from ongoing operations, loss of human capital talent, temporarily reduced productivity and the risk of failing to achieve some or all of the anticipated benefits of the restructuring or organizational changes.
We rely on a combination of insurance and self-insurance, and changes in predictions, assumptions and interpretations could affect our operations. Insurance policies include limits and may be insufficient to protect against all potential hazards and risks or litigation claims. Our product liability insurance policy may not fully cover our potential liabilities.
We rely on a combination of insurance and self-insurance, and changes in predictions, assumptions and interpretations could affect our operations. Insurance policies include limits and may be insufficient to protect against all potential hazards and risks or litigation claims. Our product liability insurance policy may not fully cover 32 Table of Contents our potential liabilities.
The impact of changes in regulations and market preferences regarding the use of antibiotics in farm animals could have a material adverse effect on our business, financial condition and results of operations.
The impact of changes in regulations and market preferences regarding the use of antibiotics and productivity products in farm animals could have a material adverse effect on our business, financial condition and results of operations.
In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs, as well as restrictions and sanctions that may be imposed on one or more jurisdictions.
In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs, as well as restrictions and sanctions that may be imposed on one or more jurisdiction.
Additionally, the increased interest rate environment, particularly for long-term treasury rates, played a critical role in the goodwill impairment charge we recorded during 2023. Any further increases in Term SOFR or other benchmark rates, including long-term treasury rates, would expose us to additional interest rate risk, additional expense and the potential for additional future impairments.
Additionally, the increased interest rate environment, particularly for long-term treasury rates, played a critical role in the goodwill impairment charge we recorded in 2023. Increases in Term SOFR or other benchmark rates, including long-term treasury rates, would expose us to additional interest rate risk, additional expense and the potential for additional future impairments.
If our information technology systems or our service providers' information technology systems were to fail or be breached, this could materially adversely affect our reputation and our ability to perform critical business functions, and sensitive and confidential data could be compromised. Our business may be negatively affected by weather conditions and the availability of natural resources.
If our IT systems or our service providers' IT systems were to fail or be breached, this could materially adversely affect our reputation and our ability to perform critical business functions, and sensitive and confidential data could be compromised. Our business may be negatively affected by weather conditions and the availability of natural resources.
The funded status and net periodic pension cost for these plans is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets.
The funded status and net periodic pension cost for these plans can be materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets.
In the event of an event of default under our credit facilities, it is expected that the lenders: • will not be required to lend any additional amounts to us; • could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit; 25 Table of Contents • could require us to apply all of our available cash to repay these borrowings; or • could effectively prevent us from making debt service payments on the notes (due to a cash sweep feature).
In an event of default under our credit facilities, it is expected that the lenders: • will not be required to lend any additional amounts to us; • could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit; • could require us to apply all of our available cash to repay these borrowings; or • could effectively prevent us from making debt service payments on our senior unsecured notes (due to a cash sweep feature).
Legal and Regulatory Compliance Risks Our business is subject to substantial regulation. As a global company, we are subject to various state, federal and international laws and regulations, including regulations relating to the development, quality assurance, manufacturing, importation, distribution, marketing and 29 Table of Contents sale of our products.
Legal and Regulatory Compliance Risks Our business is subject to substantial regulation. As a global company, we are subject to various state, federal and international laws and regulations, including regulations relating to the development, quality assurance, manufacturing, importation, distribution, marketing and sale of our products.
There may be increased risk of product liability claims if veterinarians, farm animal producers, pet owners or others attempt to use our products off-label, including the use of our products in species 32 Table of Contents (including humans) for which they have not been approved.
There may be increased risk of product liability claims if veterinarians, farm animal producers, pet owners or others attempt to use our products off-label, including the use of our products in species (including humans) for which they have not been approved.
These matters may include, among other things, allegations of violation of U.S. and foreign competition law, labor laws, securities laws and regulations, consumer protection laws and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort.
These matters may include, among other things, allegations of violation of U.S. and/or foreign competition laws, labor laws, securities laws and regulations, consumer protection laws and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract, tort and tax liabilities.
If there is an increased 18 Table of Contents public perception that consumption of food derived from animals that utilize our products poses a risk to human health, there may be a further decline in the production of those food products and, in turn, demand for our products.
If there is an increased public perception that consumption of food derived from animals that utilize our products poses a risk to human health, there may be a further decline in the production of those food products and, in turn, demand for our products.
The discovery of additional cases of any of these, or new diseases, may result in additional restrictions on animal protein, reduced herd or flock sizes or reduced demand for animal protein, any of which may have a material adverse effect on our business, financial condition and results of operations.
The discovery of additional cases of any of these, or other diseases, may result in additional restrictions on animal-derived protein, reduced herd or flock sizes or reduced demand for animal-derived protein, any of which may have a material adverse effect on our business, financial condition and results of operations.
A failure to comply with any of these laws, regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary 27 Table of Contents penalties, or both, disruptions to our business, limitations on our ability to import and export products and damage to our reputation.
A failure to comply with any of these laws, regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary penalties, or both, disruptions to our business, limitations on our ability to import and export products and damage to our reputation.
Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to intangible assets and increased operating expenses, which could adversely affect our financial condition and results of operations.
Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities, increased amortization expenses related to acquired intangible assets and increased operating expenses, any of which could adversely affect our financial condition and results of operations.
If our information technology systems and processes are not sufficient to support our business and financial reporting functions, or if we fail to properly implement our new business processes, our financial reporting may be delayed or inaccurate and, as a result, our business, financial condition and results of operations may be materially adversely affected.
If our IT systems and processes are not sufficient to support our business and financial reporting functions, or if we fail to properly implement our new business processes, our financial reporting may be delayed or inaccurate and, as a result, our business, financial condition and results of operations may be materially adversely affected.
Further, labor-related issues, including at our suppliers or CMOs, could cause a disruption of our operations, which could have a material adverse effect on our business, financial condition and results of operations, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation or shortages and reduced revenue and net income. Economic, Market and Financial Risks We have substantial indebtedness.
Further, labor-related issues, including at our suppliers or CMOs, could cause a disruption of our operations, potentially resulting in cancelled orders by customers or unanticipated inventory accumulation or shortages, which could have a material adverse effect on our business, financial condition and results of operations. Economic, Market and Financial Risks We have substantial indebtedness.
Due principally to the sharp increase in long-term treasury rates in the third quarter of 2023, which led to an increased discount rate assumption relative to prior assessments, we recorded a $1,042 million pre-tax impairment charge.
Due principally to the sharp increase in long-term treasury rates in 2023, which led to an increased discount rate assumption relative to prior assessments, we recorded a $1,042 million pre-tax impairment charge.
If we are unable to generate new products or expand the use of our existing products, our business, financial condition and results of operations could be materially adversely affected. Further, as part of our development strategy, we often hire clinical research organizations to perform preclinical testing and clinical trials for drug candidates.
If we are unable to generate commercially successful new products or expand the use of our existing products, our business, financial condition and results of operations could be materially adversely affected. Additionally, as part of our development strategy, we often hire clinical research organizations to perform preclinical testing and clinical trials for drug candidates.
Such shareholder activism could give rise to perceived uncertainties as to our future strategy, adversely affect our relationships with business partners and make it more difficult to attract and retain qualified personnel. Responding to unwanted stockholder activism could also result in substantial costs, including significant legal fees and other expenses.
Such shareholder activism could give rise to perceived uncertainties as to our future strategy, adversely affect our relationships with business partners and make it more difficult to attract and retain qualified personnel. Responding to unwanted stockholder activism has resulted in and could in the future result in substantial costs, including significant legal fees and other expenses.
Quantitative and Qualitative Disclosure About Market Risk for further discussion around our exposure to potential changes in foreign currency exchange rates. We have underfunded pension plan liabilities. We will require current and future operating cash flow to fund these shortfalls, reducing the cash available for other uses.
Quantitative and Qualitative Disclosures About Market Risk for further discussion around our exposure to potential changes in foreign currency exchange rates. We have underfunded pension plan liabilities. We will require current and future operating cash flows to fund these shortfalls, reducing the cash available for other uses.
Our R&D, acquisition and licensing efforts may fail to generate new products or expand the use of our existing products. Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop internally or through joint ventures and products we are able to obtain through licenses or acquisitions.
Our R&D, acquisition and licensing efforts may fail to generate commercially successful new products or to expand the use of our existing products. Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we develop internally or through joint ventures and products we obtain through licenses or acquisitions.
These concerns, including those relating to Seresto , and the related harm to our reputation could materially adversely affect our business, financial condition and results of operations, regardless of whether such reports are accurate. Our insurance policies may be insufficient to protect against all potential hazards or litigation claims.
These concerns and the related harm to our reputation could materially adversely affect our business, financial condition and results of operations, regardless of whether such reports are accurate. Our insurance policies may be insufficient to protect against all potential hazards or litigation claims.
If we become the subject of certain forms of shareholder activism, such as proxy contests or hostile bids, the attention of our management and our Board of Directors may be diverted from executing our strategy.
If we become the subject of new or additional forms of shareholder activism, such as proxy contests or hostile bids, the attention of our management and our Board of Directors may be diverted from executing our strategy.
Regulatory restrictions and bans on the use of antibiotics and productivity products in farm animals, as well as changing market demand, may continue to negatively affect demand for certain of our farm animal products. Over the past few years, our operational results have been, and may continue to be, affected by regulations and changing market demand.
Regulatory restrictions and bans on the use of antibiotics and productivity products in farm animals, as well as changing market demand, may continue to negatively affect demand for certain of our farm animal products. Our operational results have been, and may continue to be, affected by regulations and changing market demand.
These impacts included, and in the event of a future widespread public health concern may in the future include: • Reductions in demand or significant volatility in demand for one or more of our products, caused by, among other things: the temporary inability of our customers to purchase our products due to illness, quarantine, travel restrictions and/or financial hardship; decreased veterinary visits; farm animal processing plant shutdowns; shifts in demand by trading down to lower priced products; or stockpiling activity; • Inability to meet customer needs and achieve cost targets due to disruptions in our manufacturing and supply chains caused by labor constraints or inability to obtain key raw materials, increased transportation costs or other manufacturing and distribution disruptions; • Failure of third parties on which we rely, including our suppliers, contract manufacturers, distributors, contractors and other external business partners, to meet their obligations, which may be caused by their own financial or operational challenges; • Limited ability to access the global financial market, which could negatively impact our short-term and long-term liquidity; or • Significant changes in the political environments in the markets in which we manufacture, sell or distribute our products, including lockdowns, import/export restrictions or other governmental mandates that limit or close operating and manufacturing facilities, restrict travel to perform necessary business functions or otherwise prevent us or our third-party partners, suppliers or customers from sufficiently staffing operations, including operations necessary for the production, distribution and sale of our products.
These impacts may include: • Reductions in demand or significant volatility in demand for one or more of our products, caused by, among other things: the temporary inability of our customers to purchase our products due to illness, quarantine, travel restrictions and/or financial hardship; decreased veterinary visits; farm animal processing plant shutdowns; shifts in demand by trading down to lower priced products; or stockpiling activity; • Inability to meet customer needs and achieve cost targets due to disruptions in our manufacturing and supply chains caused by labor constraints or an inability to obtain key raw materials, increased transportation costs or other manufacturing and distribution disruptions; 23 Table of Contents • Failure of third parties on which we rely, including our suppliers, CMOs, distributors, contractors and other external business partners, to meet their obligations, which may be caused by their own financial or operational challenges; • Limited ability to access the global financial market, which could negatively impact our short-term and long-term liquidity; or • Significant changes in the political environments in the markets in which we manufacture, sell or distribute our products, including lockdowns, import/export restrictions or other governmental mandates that limit or close operating and manufacturing facilities, restrict travel to perform necessary business functions or otherwise prevent us or our third-party partners, suppliers or customers from sufficiently staffing operations, including operations necessary for the production, distribution and sale of our products.
In addition to competition from established market participants, new entrants to the animal health medicines and vaccines industry could substantially reduce our market share, render our products obsolete or disrupt our business model.
In addition to competition from established market participants, new entrants to the animal health industry could substantially reduce our market share, render our products obsolete or disrupt our business model.
There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, particularly in the U.S. or other material foreign jurisdictions, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected.
There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, particularly in the U.S. or other material foreign jurisdictions, or if the ultimate determination of taxes owed is greater than amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected.
We believe many of our competitors are conducting R&D activities in areas served by our products and in areas in which we are developing products. We also face competition from manufacturers of drugs globally, as well as producers of nutritional health products. These competitors may have access to greater financial, marketing, technical and other resources.
We believe many of our competitors are conducting R&D activities in areas served by our products and in areas in which we are developing products. We also face competition from producers of nutritional health products. These competitors may have access to greater financial, marketing, technical and other resources.
For example, lawsuits seeking actual damages, injunctive relief and/or restitution for allegedly deceptive marketing have been filed against us arising out of the use of Seresto , a non-prescription flea and tick collar for cats and dogs, based on media reports alleging that the collar has caused injury and death to pets.
Additionally, lawsuits seeking actual damages, injunctive relief and/or restitution for allegedly deceptive marketing were filed against us arising out of the use of Seresto , a non-prescription flea and tick collar for cats and dogs, based on media reports alleging that the collar caused injury and death to pets.
Because we market our pet health prescription products primarily through the veterinarian distribution channel, in the event of a significant decrease in visits to veterinarians by pet owners, our market share for such products could be reduced, materially adversely affecting our business, financial condition and results of operations.
Because we market our pet health prescription products primarily through the veterinarian distribution channel, in the event of a significant decrease in visits to veterinarians by pet owners, our market share for such products could be reduced, materially adversely affecting our business, financial condition and results of operations. Legislation has been proposed in the U.S.
To the extent future ERP or other integration activities are required related to future acquisitions, divestitures or joint ventures, we could be required to deploy significant resources and attention to these efforts.
To the extent future ERP or other integration or carve-out activities are required for future acquisitions, divestitures or joint ventures, we could be required to deploy significant resources and attention to these efforts.
We had approximately $5.8 billion of outstanding indebtedness at December 31, 2023. A significant amount of our cash flows from operations is dedicated to servicing this indebtedness and will not be available for other purposes, including our operating, investing or financing needs.
We had approximately $4.3 billion of outstanding indebtedness at December 31, 2024. A significant amount of our cash flows from operations is dedicated to servicing this indebtedness and will not be available for other purposes, including our operating, investing or financing needs.
Even if we are able to successfully configure and change our systems, all technology systems, even with implementation of security measures, are vulnerable to disability, failures or unauthorized access.
Even if we are able to successfully configure and change our systems, all technology systems, even with implementation of security measures, are vulnerable to disability, failures and cybersecurity risks, including unauthorized access.
We are continuing to enhance a number of our business processes, including our financial reporting and supply chain processes and with respect to where and from whom we obtain information technology systems. We have made, and will continue to make, significant configuration, process and data changes within many of the information technology systems we use.
We are continuing to enhance a number of our business processes, including our financial reporting and supply chain processes and from whom we obtain IT systems. We have made, and will continue to make, significant configuration, process and data changes within many of the IT systems we use.
In most markets, pet owners have historically purchased their animal health products directly from veterinarians. However, pet owners increasingly have the option to purchase animal health products from sources other than veterinarians, such as online retailers, “big-box” retail stores or other over-the-counter distribution channels.
In most markets, pet owners have historically purchased their animal health products directly from veterinarians. However, pet owners increasingly have the option to purchase animal health products from sources other than veterinarians, such as online retailers, “big-box” retail stores, specialty pet shops via telemedicine distributors, or other distribution channels.
Additionally, as a result of our acquisition of Bayer Animal Health, we integrated each business' distinct enterprise resource planning (ERP) systems into one primary platform, a process that was substantially completed in the second quarter of 2023.
For example, as a result of our acquisition of Bayer Animal Health, we integrated each business' distinct enterprise resource planning (ERP) systems into one primary platform, a process that was substantially completed in 2023.
ERP integrations have inherent risks, which can complicate our business operations and potentially lead to breakdowns in data integrity and may preclude our ability to supply products for a period of time, as was the case in the second quarter of 2023.
ERP integrations have inherent risks, which can complicate our business operations and potentially lead to breakdowns in data integrity and may preclude our ability to supply products for a period of time, as was the case with this aforementioned ERP integration in April 2023.
At December 31, 2023, the net carrying value of our goodwill and other indefinite-lived intangible assets on our consolidated balance sheet was $5,094 million and $347 million, respectively. Other indefinite-lived intangible assets primarily consist of in-process R&D (IPR&D) projects acquired as a part of past business combinations.
At December 31, 2024, the net carrying value of goodwill and other indefinite-lived intangible assets on our consolidated balance sheet was $4,414 million and $291 million, respectively. Other indefinite-lived intangible assets primarily consist of in-process R&D (IPR&D) projects acquired as a part of past business combinations.
Our international operations could be limited or disrupted by any of the following: • volatility in the international financial markets; • compliance with governmental controls; • difficulties enforcing contractual and intellectual property rights; • parallel trade in our products (importation of our products from EU countries where our products are sold at lower prices into EU countries where the products are sold at higher prices); • compliance with a wide variety of laws and regulations, such as the U.S.
Our operations could be limited or disrupted by any of the following: • volatility in financial markets; • compliance with governmental controls and sanctions; • difficulties enforcing contractual and intellectual property rights given variability in the laws of individual countries and their respective practices with respect to enforcement of contractual and intellectual property rights; • parallel trade in our products (importation of our products from EU countries where our products are sold at lower prices into EU countries where the products are sold at higher prices); • compliance with a wide variety of laws and regulations, such as the U.S.
Introduction or acceptance of competing animal health products and innovation or disruptive protein alternatives could materially adversely affect our business, financial condition and results of operations. Generic products may be viewed as more cost-effective than our products. We face competition from products produced by other companies, including generic alternatives to our products.
Introduction or acceptance of competing animal health products and innovation or disruptive protein alternatives could materially adversely affect our business, financial condition and results of operations. Generic products may be viewed as more cost-effective than our products. In certain markets, we face competition from generic alternatives to our products.
Potential difficulties we may encounter in the integration process include the following: • the inability to realize the anticipated value from various assets of the acquired company; • the inability to combine the businesses of the acquired company with ours in a manner that permits us to achieve the cost savings or other synergies anticipated as a result of the transaction or to achieve such cost savings or other anticipated synergies in a timely manner, which could result in us not realizing some anticipated benefits of the transaction in the time frame anticipated, or at all; • the loss of key employees; • potential unknown liabilities and unforeseen increased expenses, delays or unfavorable conditions in connection with the closing of the transaction and the subsequent integration; and • performance shortfalls at our or the acquired company as a result of the diversion of management’s attention from ongoing business activities.
Potential difficulties we may encounter in the integration or carve out process include: • the inability to realize the anticipated value from various assets of the acquired company; • the potential for stranded costs, loss of scale and/or inefficiencies in a post-divestiture cost structure; • the inability to combine the business of an acquired company with ours in a manner that permits us to achieve the cost savings or other synergies anticipated as a result of the transaction or to achieve such cost savings or other anticipated synergies in a timely manner, which could result in us not realizing some anticipated benefits of the transaction in the time frame anticipated, or at all; 20 Table of Contents • the loss of key employees; • potential unknown liabilities and unforeseen increased expenses, delays or unfavorable conditions in connection with the closing of the transaction and the subsequent integration or carve out; and • performance shortfalls at our or the acquired company as a result of the diversion of management’s attention from ongoing business activities.

… 140 more changes not shown on this page.

Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

9 edited+2 added−2 removed21 unchanged
Biggest changeRisk Factors – Breaches of our information technology systems or improper disclosure of confidential company or personal data, or a failure to comply with privacy laws, regulations and our contractual obligations concerning data privacy or the security of certain information, could have a material adverse effect on our reputation and operations." Risk Management, Strategy and Governance Given the importance of the integrity and security of the information and data utilized in our day-to-day operations, our processes for assessing, identifying and managing material risks from cybersecurity threats is incorporated into our overall enterprise risk management framework.
Biggest changeRisk Factors – Breaches of our IT systems or improper disclosure of confidential company or personal data, or a failure to comply with privacy laws, regulations and our contractual obligations concerning data privacy or the security of certain information, could have a material adverse effect on our reputation and operations." Management’s Responsibilities Management is responsible for executing the Cybersecurity Risk Management, Strategy and Governance policies outlined above.
ITEM 1C. CYBERSECURITY Our business relies on information technology (IT) systems to process, transmit and store electronic information, including customer, employee and company data. The secure processing, maintenance and transmission of this information, including information housed both within an internal IT system or with a third-party and cloud-based environments, is critical to our operations.
ITEM 1C. CYBERSECURITY Our business relies on IT systems to process, transmit and store electronic information, including customer, employee and company data. The secure processing, maintenance and transmission of this information, including information housed both within an internal IT system or with a third-party and cloud-based environments, is critical to our operations.
Any incident deemed high severity would result in notification by the CISO to the Cyber Lead team to determine the appropriate actions to be taken. This determination would be made by the Cyber Lead team based on both qualitative and quantitative factors regarding the extent and magnitude of the incident.
Any incident deemed high severity would result in notification by the CISO to the Cyber Lead team to determine the appropriate actions to be taken. This determination would be made by the Cyber Lead team based on both qualitative and quantitative 35 Table of Contents factors regarding the extent and magnitude of the incident.
The Cyber Lead team is tasked 35 Table of Contents with determining the severity of a cybersecurity incident and bringing together the proper resources to lead the corporate-wide response to such incidents, including engaging the Company’s Disclosure Committee, in the event an incident may rise to a level deemed material to us.
The Cyber Lead team is tasked with confirming the severity of a cybersecurity incident and bringing together the proper resources to lead the corporate-wide response to such incidents, including engaging the Company’s Disclosure Committee, in the event an incident may rise to a level deemed material to us.
We have established an information security team which is structured into three areas, each with its own teams and leaders who report directly to our Chief Information Security Officer (CISO): 1) Governance, Risk and Compliance; 2) Architecture; and 3) Operations (Detect and Respond).
We have established an information security team which is structured into three areas, that all report directly to our Chief Information Security Officer (CISO): 1) Governance, Risk and Compliance; 2) Architecture; and 3) Operations (Detect and Respond).
Each of the systems utilized in our business operations is subject to continually evolving cybersecurity risks and threats that present a risk to the continuity of our business operations, potential financial losses and damage to our reputation, including a loss of public trust. For more information on potential risks related to cybersecurity threats and incidents, please see "Item 1A.
Each of the systems utilized in our business operations is subject to continually evolving cybersecurity risks and threats that present a risk to the continuity of our business operations, potential financial losses and damage to our reputation, including a loss of public trust.
Governance, Risk and Compliance : Our approach to cybersecurity governance, risk and compliance is based on overarching guidelines, standards and best practices developed by the U.S. National Institute of Standards and Technology (NIST), a department of the U.S. Department of Commerce.
Our information security team includes professionals with relevant industry, educational and cybersecurity experience. Governance, Risk and Compliance : Our approach to cybersecurity governance, risk and compliance is based on overarching guidelines, standards and best practices developed by the U.S. National Institute of Standards and Technology (NIST), a department of the U.S. Department of Commerce.
Our current CISO has over 16 years of experience in various roles involving information technology governance and compliance, including cybersecurity, engineering and enterprise architecture, while our Chief Information Officer (CIO) has over 25 years of IT and cybersecurity experience. Our information security team includes professionals with relevant industry, educational and cybersecurity experience.
Our current CISO, who reports directly to our Chief Information Officer (CIO), has over 17 34 Table of Contents years of experience in various roles involving information technology governance and compliance, including cybersecurity, engineering and enterprise architecture, while our CIO has over 25 years of IT and cybersecurity experience.
In the event an incident is escalated by the Cyber Lead team, the Disclosure Committee, led by our Chief Financial Officer and General Counsel, would evaluate all estimable quantitative and qualitative factors, to determine if a Current Report on Form 8-K would be required under Item 1.05, “Material Cybersecurity Incidents”.
In the event an incident is escalated by the Cyber Lead team, the Disclosure Committee, led by our Chief Financial Officer and General Counsel, would evaluate all estimable quantitative and qualitative factors, to determine if a Current Report on Form 8-K would be required under Item 1.05, “Material Cybersecurity Incidents.” For the year ended December 31, 2024, we have not identified any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations, or financial condition.
Removed
Management’s Responsibilities Management is responsible for executing the Cybersecurity Risk Management, Strategy and Governance policies outlined above.
Added
Risk Management, Strategy and Governance Given the importance of the integrity and security of the information and data utilized in our day-to-day operations, our processes for assessing, identifying and managing material risks from cybersecurity threats is incorporated into our overall enterprise risk management framework.
Removed
Through December 31, 2023, there have been no cybersecurity incidents deemed to have had a material impact on our results of operations or financial condition.
Added
For more information on potential risks related to cybersecurity threats and incidents, please see "Item 1A.

Item 2. Properties

Properties — owned and leased real estate

3 edited+0 added−0 removed1 unchanged
Biggest changeOur R&D headquarters is currently located in Greenfield, Indiana and will relocate to Indianapolis, Indiana when we relocate our global headquarters, expected in 2025. 36 Table of Contents We own or lease various additional properties for other business purposes, including office space, warehouses and logistics centers.
Biggest changeOur R&D headquarters is currently located in Greenfield, Indiana and will relocate to Indianapolis, Indiana when we relocate our global headquarters, expected in 2025. We own or lease various additional properties for other business purposes, including office space, warehouses and logistics centers.
ITEM 2. PROPERTIES The address of our global headquarters is currently 2500 Innovation Way, Greenfield, IN 46140. We plan to relocate our global headquarters to a new office building in Indianapolis, Indiana, with occupancy expected in 2025. Our global manufacturing network is comprised of 18 manufacturing sites. Our largest manufacturing site is located in Clinton, Indiana.
ITEM 2. PROPERTIES The address of our global headquarters is currently 2500 Innovation Way, Greenfield, IN 46140. We plan to relocate our global headquarters to a new office building in Indianapolis, Indiana, with occupancy expected in 2025. Our global manufacturing network is comprised of 17 manufacturing sites. Our largest manufacturing site is located in Clinton, Indiana.
Our global manufacturing network is also supplemented by approximately 140 CMOs. We have R&D operations co-located with certain of our manufacturing sites to facilitate the efficient transfer of production processes from our laboratories to manufacturing. In addition, we maintain R&D operations at non-manufacturing locations in the U.S., U.K., Germany, Australia, Brazil, China, India and Switzerland.
Our global manufacturing network is also supplemented by approximately 130 CMOs. We have R&D operations co-located with certain of our manufacturing sites to facilitate the efficient transfer of production processes from our laboratories to manufacturing. In addition, we maintain R&D operations at non-manufacturing locations in the U.S., Germany, Australia, Brazil, China, India and Switzerland.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

3 edited+1 added−2 removed1 unchanged
Biggest changeMARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information On September 20, 2018, our common stock began trading on the New York Stock Exchange under the symbol “ELAN.” On January 30, 2020, our tangible equity units (TEUs) began trading on the New York Stock Exchange under the symbol “ELAT.” The TEUs were delisted from trading when they converted to shares of our common stock as scheduled on February 1, 2023.
Biggest changeITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information On September 20, 2018, our common stock began trading on the New York Stock Exchange under the symbol “ELAN.” Holders There were 184 holders of record of our common stock as of February 20, 2025.
Performance Graph The following graph compares the return on Elanco's common stock with that of the S&P 500 Stock Index and the S&P 500 Pharmaceuticals Index over the five-year period ended on December 31, 2023. The graph assumes that $100 was invested on December 31, 2018, in Elanco common stock, the S&P 500 Index and the S&P 500 Pharmaceuticals Index.
Performance Graph The following graph compares the return on Elanco's common stock with that of the S&P 500 Stock Index and the S&P 500 Pharmaceuticals Index over the five-year period ended on December 31, 2024. The graph assumes that $100 was invested on December 31, 2019, in Elanco common stock, the S&P 500 Index and the S&P 500 Pharmaceuticals Index.
Dividend Policy We do not anticipate paying dividends on our common stock in the foreseeable future; however, we may change our dividend policy at any time.
This does not include the number of shareholders who hold shares of our common stock through banks, brokers or other financial institutions. Dividend Policy We do not anticipate paying dividends on our common stock in the foreseeable future; however, we may change our dividend policy at any time.
Removed
Holders There were 210 holders of record of our common stock as of February 21, 2024. This does not include the number of shareholders who hold shares of our common stock through banks, brokers or other financial institutions.
Added
December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 December 31, 2024 Elanco Animal Health Inc. $ 100.00 $ 104.14 $ 96.37 $ 41.49 $ 50.59 $ 41.12 S&P 500 Index 100.00 118.39 152.34 124.73 157.48 196.88 S&P 500 Pharmaceuticals Index 100.00 107.53 135.21 146.65 147.13 159.21 37 Table of Contents
Removed
December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 Elanco Animal Health Inc. $ 100.00 $ 93.40 $ 97.27 $ 90.01 $ 38.76 $ 47.26 S&P 500 Index 100.00 131.47 155.65 200.29 163.98 207.04 S&P 500 Pharmaceuticals Index 100.00 115.09 123.75 155.62 168.77 169.33 38 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

76 edited+41 added−32 removed9 unchanged
Biggest changeThis can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control. 42 Table of Contents On a global basis, our revenue by product category for the years ended December 31 is summarized as follows: Revenue % of Total Revenue Increase (Decrease) (Dollars in millions) 2023 2022 2023 2022 $ Change % Change CC (1) Pet Health $ 2,104 $ 2,138 48 % 48 % $ (34) (2)% (1)% Farm Animal 2,271 2,219 51 % 50 % 52 2% 4% Subtotal 4,375 4,357 99 % 99 % 18 —% 2% Contract Manufacturing (2) 42 54 1 % 1 % (12) (22)% (21)% Total $ 4,417 $ 4,411 100 % 100 % $ 6 —% 1% Note: Numbers may not add due to rounding (1) Constant Currency (CC), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange rates.
Biggest changeThis can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control.
In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods of tax attributes, amount and availability of taxable temporary differences and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods of tax attributes, availability of taxable temporary differences and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our financial position and results of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operation and financial position.
As a result, we have concluded that it is “more likely than not” that a portion of the U.S. deferred assets will not be utilized, and have recorded valuation allowances of $289 million and $181 million, respectively, against these deferred tax assets.
As a result, we have concluded that it is “more likely than not” that a portion of the U.S. deferred assets will not be utilized, and have recorded valuation allowances of $218 million and $289 million, respectively, against these deferred tax assets.
Purchase obligations consist of open purchase orders as of December 31, 2023, and contractual payment obligations with significant vendors which are noncancelable and not contingent. These obligations are primarily short-term in nature. See Note 13. Leases to the consolidated financial statements for further discussion regarding the contractual obligations related to our new corporate headquarters in Indianapolis, Indiana.
Purchase obligations consist of open purchase orders as of December 31, 2024, and contractual payment obligations with significant vendors which are noncancelable and not contingent. These obligations are primarily short-term in nature. See Note 13. Leases to the consolidated financial statements for further discussion regarding our contractual obligations related to leases, including for our new corporate headquarters in Indianapolis, Indiana.
“Risk Factors,” may cause our actual results, financial position and cash generated from operations to differ materially from these forward-looking statements. Business Overview Elanco is a global leader in animal health, dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets.
“Risk Factors,” may cause our actual results, financial position and cash flows to differ materially from these forward-looking statements. Business Overview Elanco is a global leader in animal health, dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets.
This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Form 10-K. Certain statements in this Item 7 of Part II of this Form 10-K constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A.
This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Form 10-K. Certain statements in this Item 7 of Part II of this Form 10-K constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements and Risk Factor Summary" and Item 1A.
Our future growth and success depend on both our pipeline of new products, including new products we develop internally, develop with partners or that we are able to obtain through licenses or acquisitions, and the life cycle management of our existing products.
Our future growth and success depend on both our pipeline of new products, including new products we develop internally, develop with partners or that we obtain through licenses or acquisitions, and the life cycle management of our existing products.
For goodwill impairment tests, we estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference.
For quantitative goodwill impairment tests, when required, we estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference.
As of December 31, 2023 and 2022, we had valuation allowances of $363 million and $228 million, respectively. In recent years we have incurred pre-tax losses in the U.S. primarily as a result of impairments and transaction, restructuring, integration and other costs.
As of December 31, 2024 and 2023, we had valuation allowances of $269 million and $363 million, respectively. In recent years we have incurred pre-tax losses in the U.S. primarily as a result of impairments and transaction, restructuring, integration and other costs.
Based on that qualitative assessment, if we conclude it is more likely than not that the fair value is less than its carrying value, we conduct a quantitative impairment test, which involves comparing the estimated fair value of our single reporting unit or indefinite-lived asset(s) to its carrying value.
Based on that qualitative assessment, if we conclude it is more likely than not that the fair value is less than its carrying value, we conduct a quantitative impairment test, which involves comparing the estimated fair value of our single reporting unit to its carrying value.
When required, a comparison of fair value to the carrying amount of our asset(s) is performed to determine the amount of impairment, if any. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit or other indefinite-lived asset(s) is less than its carrying value.
When required, a comparison of fair value to the carrying amount of our reporting unit is performed to determine the amount of impairment, if any. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value.
For results of operations discussions related to years ended December 31, 2022 and 2021, refer to Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2022 , filed with the SEC on March 1, 2023.
For results of operations discussions related to the years ended December 31, 2023 and 2022, refer to Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 , filed with the SEC on February 26, 2024.
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, such as principal and interest payments, as well as interest rate swaps, operating lease payments, purchase obligations and costs associated with business integrations.
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, including both principal and interest payments, as well as interest rate swaps, operating lease payments, purchase obligations and costs associated with mergers, acquisitions, divestitures, business integrations and/or restructuring activities.
Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the future due to many factors, including but not limited to the factors identified in "Key Trends and Factors Affecting Our Results of Operations" above.
Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the future due to many factors, including but not limited to the factors identified in the "Product Development and Regulatory Update" and "Other Key Trends and Factors Affecting Our Results of Operations" discussions above.
Impairment of Goodwill and Other Indefinite-Lived Assets Goodwill and other indefinite-lived intangible assets are not amortized but are reviewed at least annually for impairment during the fourth quarter, or more frequently if there is a significant change in events or circumstances that indicate the fair value of our single reporting unit or other indefinite-lived asset(s) is more likely than not less than its carrying amount (i.e., a "triggering event").
Impairment of Goodwill and Indefinite-Lived Assets Goodwill is not amortized but is reviewed at least annually for impairment during the fourth quarter, or more frequently if there is a significant change in events or circumstances that indicates the fair value of our single reporting unit is more likely than not less than its carrying amount (a "triggering event").
Significant management judgment was required in estimating our reporting unit’s fair value and in the creation of forecasts of future operating results that were used in the discounted cash flow method of the income approach valuation.
Significant management judgment is required in estimating our reporting unit’s fair value and in the creation of forecasts of future operating results to be used in the discounted cash flow method of the income approach valuation.
We apply estimation methodologies consistently from year to year. The following is a summary of accounting policies that we consider critical to the consolidated financial statements. Revenue Recognition Our gross product revenue is subject to deductions that are generally estimated and recorded in the same period the revenue is recognized and primarily represent revenue incentives (rebates and discounts).
The following is a summary of accounting estimates that we consider critical to our consolidated financial statements. Revenue Recognition Our gross product revenue is subject to reductions that are generally estimated and recorded in the same period the revenue is recognized and primarily represent revenue incentives (rebates and discounts).
Summary of Significant Accounting Policies." 48 Table of Contents
Summary of Significant Accounting Policies." 47 Table of Contents
NM - Not meaningful Revenue As a global company, our products are sold in more than 90 countries, and as a result significant portions of our revenue and expenses are recorded in currencies other than the U.S. dollar. As a result, our revenue is influenced by changes in foreign currency exchange rates.
NM - Not meaningful 40 Table of Contents Revenue Our products are sold in more than 90 countries, and as a result, a significant portion of our revenue is recorded in currencies other than the U.S. dollar. Because of this, our revenue is influenced by changes in foreign currency exchange rates.
Debt to the consolidated financial statements for further information related to our debt related borrowing and repayment activity. Capital Expenditures Capital expenditures, which we define as cash paid for property and equipment and software, were $140 million during 2023, a decrease of $31 million compared to 2022.
Debt to the consolidated financial statements for further information related to our debt related borrowing and repayment activity. Capital Expenditures Capital expenditures, which we define as cash paid for property and equipment and software, were $147 million during 2024, an increase of $7 million compared to 2023.
Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and aqua (collectively, farm animal).
Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and, prior to the divestiture of our aqua business in July 2024 (see below), aqua (collectively, farm animal).
Income Tax Expense Year Ended December 31, (Dollars in millions) 2023 2022 % Change Income tax expense 36 6 NM Effective tax rate (3) % (8) % Income tax expense was $36 million in 2023 compared to $6 million in 2022, and the effective tax rate was (3)% in 2023, compared to (8)% in 2022.
Income Tax Expense Year Ended December 31, (Dollars in millions) 2024 2023 % Change Income tax expense 150 36 NM Effective tax rate 31 % (3) % Income tax expense was $150 million in 2024 compared to $36 million in 2023.
Subsequent Events to the consolidated financial statements for further information. Approved restructuring plan: In February 2024 our Board of Directors authorized a restructuring plan (the restructuring plan) to improve operational efficiencies and better align our organizational structure with current business needs, top strategic priorities and key growth opportunities.
Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements for further information on these acquisition and integration activities. Restructuring Activities: In February 2024, our Board of Directors authorized a restructuring plan (the restructuring plan) to improve operational efficiencies and better align our organizational structure with current business needs, top strategic priorities and key growth opportunities.
For additional information regarding this goodwill impairment, see Note 11. Goodwill and Intangibles to the consolidated financial statements. Further, during the years ended December 31, 2023, 2022 and 2021, we recorded asset impairments related to our other indefinite-lived intangibles of $6 million, $59 million and $55 million, respectively.
During the years ended December 31, 2024, 2023 and 2022, we recorded asset impairments related to our indefinite-lived intangibles of $56 million, $6 million and $59 million, respectively. For more information related to our indefinite-lived asset impairment charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges and Note 11. Goodwill and Intangibles to the consolidated financial statements.
Subsequent Events to the consolidated financial statements for further information. 41 Table of Contents Results of Operations The following discussion and analysis of the consolidated statements of operations should be read along with the consolidated financial statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data .
Results of Operations The following discussion and analysis of the consolidated statements of operations should be read along with the consolidated financial statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data .
We intend to indefinitely reinvest substantially all foreign earnings for continued use in our foreign operations. As our business evolves, we may change that strategy, particularly to the extent we identify tax efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.
As our business evolves, we may change that strategy, particularly to the extent we identify tax efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.
Other Key Trends and Factors Affecting Our Results of Operations Acquisition and Integration Activity: In 2023 we acquired certain U.S. marketed products, pipeline products, inventory and an assembled workforce from NutriQuest, LLC (NutriQuest) and certain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil).
In 2023, we acquired certain U.S. marketed products, pipeline products, inventory and an assembled workforce from NutriQuest, LLC (NutriQuest) and certain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil).
However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See "Item 1A.
As market conditions change, we will continue to monitor our liquidity position. However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See "Item 1A.
We anticipate capital expenditures in 2024 to be approximately $180 million to $200 million. Description of Indebtedness For a complete description of our debt and available credit facilities as of December 31, 2023, see Note 8. Debt to the consolidated financial statements.
Description of Indebtedness For a complete description of our debt and available credit facilities as of December 31, 2024, see Note 8. Debt to the consolidated financial statements.
Due principally to the sharp increase in long-term treasury rates, which led to an increased discount rate assumption relative to prior assessments, our quantitative test resulted in a $1,042 million pre-tax impairment charge.
Due principally to an increased discount rate assumption, which was driven by the sharp increase in long-term treasury rates, our quantitative goodwill impairment test resulted in a $1,042 million pre-tax impairment charge. For additional information, see Note 11.
The negative effective tax rate in 2023 differed from the statutory income tax rate primarily due to the recognition of the aforementioned goodwill impairment charge that was non-deductible for income tax purposes in most of the impacted jurisdictions and an increase in our valuation allowance during the year, primarily attributable to the likelihood of not realizing the benefit of U.S. federal and state deferred tax assets due to pre-tax losses.
The negative effective tax rate in 2023 differed from the statutory income tax rate primarily due to the recognition of the goodwill impairment charge recognized in 2023 that was non-deductible for income tax purposes in most of the impacted jurisdictions, as well as an increase in our valuation allowance, primarily attributable to the likelihood of not realizing the benefit of U.S. federal and state deferred tax assets due to pre-tax losses. 43 Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our credit facilities.
Certain of our accounting policies are considered critical because these policies are the most important to the fair presentation of our financial statements, including the disclosures thereto, and may require significant, difficult or complex judgments, probabilities and assumptions that we believe to be reasonable, but that can be inherently uncertain.
Certain of our accounting estimates are considered critical because they are the most important to the fair presentation of our financial statements, including the disclosures thereto, and often require significant, difficult or complex judgments, probabilities and assumptions.
Year Ended December 31, (Dollars in millions) 2023 2022 % Change Revenue $ 4,417 $ 4,411 —% Costs, expenses and other: Cost of sales 1,931 1,913 1% % of revenue 44% 43% Research and development 327 321 2% % of revenue 7 % 7% Marketing, selling and administrative 1,285 1,265 2% % of revenue 29 % 29% Amortization of intangible assets 548 528 4% % of revenue 12 % 12% Asset impairment, restructuring and other special charges 127 183 (31)% Goodwill impairment 1,042 — NM Interest expense, net of capitalized interest 277 241 15% Other expense, net 75 32 134% Loss before income taxes (1,195) (72) NM % of revenue (27) % (2) % Income tax expense 36 6 NM Net loss $ (1,231) $ (78) NM Certain amounts and percentages may reflect rounding adjustments.
Year Ended December 31, (Dollars in millions) 2024 2023 % Change Revenue $ 4,439 $ 4,417 —% Costs, expenses and other: Cost of sales 2,003 1,931 4% % of revenue 45 % 44 % Research and development 344 327 5% % of revenue 8 % 7% Marketing, selling and administrative 1,314 1,285 2% % of revenue 30 % 29% Amortization of intangible assets 527 548 (4)% Asset impairment, restructuring and other special charges 150 127 18% Goodwill impairment — 1,042 NM Gain on divestiture (640) — NM Interest expense, net of capitalized interest 235 277 (15)% Other expense, net 18 75 (76)% Income (loss) before income taxes 488 (1,195) NM Income tax expense 150 36 NM Net income (loss) $ 338 $ (1,231) NM Certain amounts and percentages may reflect rounding adjustments.
If our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted. We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change. Such changes generally would be reflected in our consolidated financial statements in the period they are determined.
We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change, and such changes generally would be reflected in our consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year.
We monitor and adjust the amount of foreign cash based on projected cash flow requirements. Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, the income taxes associated with transferring cash to the U.S.
Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, the income taxes associated with transferring cash to the U.S. We intend to indefinitely reinvest substantially all foreign earnings for continued use in our foreign operations.
Goodwill impairment: Given the sharp increase in long-term treasury rates in the third quarter of 2023, we assessed our long-lived assets for impairment, concluding that qualitative impairment indicators (i.e., a triggering event) existed as of September 30, 2023, for certain indefinite-lived assets, including goodwill. Accordingly, we performed an interim quantitative goodwill impairment test.
Given the sharp increase in long-term treasury rates in the third quarter of 2023, we assessed our long-lived assets for impairment, concluding that a triggering event existed for certain indefinite-lived assets, including goodwill. Accordingly, we performed interim quantitative impairment tests of our goodwill and other indefinite-lived assets, which resulted in a $1,042 million pre-tax goodwill impairment charge.
For estimates related to our revenue incentives, we use our historical experience with similar incentives programs and current sales data and estimates of inventory levels at our channel distributors to evaluate the impact of such programs on revenue and continually monitor the impact of this experience and adjust as necessary. 46 Table of Contents Although the amounts recorded for revenue deductions are dependent on estimates and assumptions, historically our adjustments to actual results have not been material.
For estimates related to revenue incentives, we use our historical experience with similar incentives programs, current sales data and estimates of inventory levels at our channel distributors to estimate the impact of such programs on revenue and continually monitor the impact of this experience and adjust as necessary.
Asset Impairment, Restructuring and Other Special Charges Year Ended December 31, (Dollars in millions) 2023 2022 % Change Asset impairment, restructuring and other special charges $ 127 $ 183 (31) % Asset impairment, restructuring and other special charges decreased $56 million in 2023 compared to 2022, primarily due to lower impairment charges and costs associated with the implementation of new systems, programs and processes resulting from the integration of Bayer Animal Health.
Amounts recorded to asset impairment, restructuring and other special charges during the year ended December 31, 2023, primarily represented $93 million of costs associated with the implementation of new systems, programs and processes due to the integration of Bayer Animal Health and $32 million of asset impairment charges.
Risk Factors - We have substantial indebtedness." Cash Flows The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented: (Dollars in millions) Year Ended December 31, Net cash provided by (used for): 2023 2022 $ Change Operating activities $ 271 $ 452 $ (181) Investing activities (169) (179) 10 Financing activities (83) (549) 466 Effect of exchange rate changes on cash and cash equivalents (12) (17) 5 Net increase (decrease) in cash and cash equivalents $ 7 $ (293) $ 300 45 Table of Contents Operating Activities Cash provided by operating activities decreased $181 million to $271 million for the year ended December 31, 2023, compared to $452 million for the year ended December 31, 2022.
Risk Factors - We have substantial indebtedness." Cash Flows The following table provides a summary of cash flows from operating, investing and financing activities for the years ended December 31, 2024 and 2023: (in millions) Net cash provided by (used for): 2024 2023 $ Change Operating activities $ 541 $ 271 $ 270 Investing activities 1,158 (169) 1,327 Financing activities (1,492) (83) (1,409) Effect of exchange rate changes on cash and cash equivalents (91) (12) (79) Net increase in cash and cash equivalents $ 116 $ 7 $ 109 Operating Activities Cash provided by operating activities increased $270 million to $541 million for the year ended December 31, 2024, compared to $271 million for the year ended December 31, 2023.
Critical Accounting Policies and Estimates The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and underlying assumptions can impact all elements of our consolidated financial statements.
Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period.
These included, but were not limited to, estimates and assumptions regarding our future cash flows, revenue growth and other profitability measures such as gross margin and EBITDA margin, and the determination of an appropriate discount rate. We made these significant judgments based on our historical experience, relevant market size, historical pricing and expected industry trends.
These include, but are not limited to, estimates and assumptions regarding our future cash flows, revenue growth rates and other profitability measures such as gross margin and EBITDA margin; and the determination of an appropriate discount rate.
These fair value estimates require significant judgment with respect to future revenues and EBIT margins, use of working capital, the selection of appropriate discount rates, product mix, income tax rates and other assumptions and estimates. Such estimates and assumptions are determined based upon our business plans and when applicable, market participants' views of us and other similar companies.
These fair value estimates require significant judgment with respect to future revenues and earnings before interest and taxes (EBIT) margins, use of working capital, the selection of appropriate discount rates, product mix, income tax rates and other assumptions and estimates.
For additional information, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
For additional information, see Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements.
Other Expense, Net Year Ended December 31, (Dollars in millions) 2023 2022 % Change Other expense, net $ 75 $ 32 134 % Other expense, net increased $43 million in 2023, as compared to 2022, due primarily to settlement provisions recorded in 2023 of $15 million related to the Seresto class action lawsuits and $12.5 million for a possible resolution or settlement with the SEC related to potential disclosure claims (see Note 16.
Other expense, net for the year ended December 31, 2023, primarily consisted of foreign currency exchange losses of $50 million and settlement provisions of $15 million related to the Seresto class action lawsuit and $12.5 million for a possible resolution or settlement with the SEC related to potential disclosure claims, which was ultimately settled in 2024 for $15 million, with the increase in the provision recorded within other expense, net in 2024 (see Note 16.
Cash used for financing activities during 2022 primarily reflected the tender offer to partially settle the 4.272% Senior Notes due 2023, as well as net repayments on our Revolving Credit Facility and repayment of indebtedness outstanding under our Term Loan B credit facility, partially offset by proceeds from our incremental term facilities issued in 2022. See Note 8.
Cash used for financing activities during 2023 primarily reflected the repayment of our previously outstanding 4.272% Senior Notes due 2023, partially offset by $200 million of net borrowings on our Revolving Credit Facility and $125 million of net borrowings on our Securitization Facility. See Note 8.
On a constant currency basis, the decrease of 1% was primarily attributable to declines in demand for retail parasiticide products in Spain and continued competitive pressure on certain products in the U.S. veterinary channel. These factors were partially offset by increased pricing, higher demand for over-the-counter products in the U.S. and increased revenue from new products.
Volume decreases were primarily due to competitive pressure on certain products in the U.S. veterinary channel and purchasing patterns of certain over-the-counter (OTC) products by U.S. retailers. These decreases were partially offset by revenue from new products and improved demand for retail parasiticide products in certain European markets, including Spain.
Additionally, as previously disclosed, in April 2023 we successfully completed the integration of the Bayer Animal Health business into our ERP system. We incurred costs totaling $93 million in 2023 related to integration activities, including the build out of processes and systems to support our global organization.
Additionally, we successfully completed the integration of the Bayer Animal Health business into our ERP system, including the build out of processes and systems to support our global organization. See Note 4. Acquisitions, Divestitures and Other Arrangements and Note 5.
We also use an income approach when estimating the fair value of our other indefinite-lived intangible assets, which primarily represent IPR&D acquired from prior business combinations.
Similar to goodwill, indefinite-lived intangible assets are also reviewed for impairment at least annually during the fourth quarter, or more frequently if there is a triggering event. We also typically use an income approach when estimating the fair value of our indefinite-lived intangible assets, which primarily represent IPR&D acquired from prior business combinations.
Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our revenue results, leading to periodic variations in revenue.
For the years ended December 31, 2024 and 2023, approximately 53% and 51%, respectively, of our revenue was denominated in foreign currencies. Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our periodic revenue results, leading to variations in revenue.
Contractual Obligations Our contractual obligations and commitments as of December 31, 2023, are primarily comprised of long-term debt obligations, operating leases and purchase obligations. Our long-term debt obligations are comprised of our expected principal and interest obligations.
Contractual Obligations Our contractual obligations and commitments as of December 31, 2024, are primarily comprised of long-term debt obligations, operating leases, including a 25-year lease commitment that will commence in 2025 for our new corporate headquarters in Indianapolis, Indiana, and purchase obligations. Our long-term debt obligations are comprised of our expected principal and interest obligations.
As of December 31, 2023, we had cash and cash equivalents of $352 million and unused borrowing capacity on our Revolving Credit Facility of approximately $550 million, of which an incremental $50 million was drawn in February 2024. In addition, we have the ability to access capital markets to obtain debt financing for longer-term funding, if required.
As of December 31, 2024, we had $125 million in undrawn borrowing capacity on this facility. We also have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
On a global basis, the effect of price, foreign currency exchange rates and volumes on changes in revenue for the year ended December 31, 2023, as compared to the prior year, was as follows: (Dollars in millions) Revenue Price FX Rate Volume Total CC Pet Health $ 2,104 4% (1)% (5)% (2)% (1)% Farm Animal 2,271 4% (2)% —% 2% 4% Subtotal 4,375 4% (1)% (2)% —% 2% Contract Manufacturing 42 —% (1)% (21)% (22)% (21)% Total $ 4,417 4% (1)% (3)% —% 1% Note: Numbers may not add due to rounding Pet health revenue decreased $34 million, or 2%, driven by a decrease in volume and an unfavorable impact from foreign exchange rates, partially offset by an increase in price.
The effects of price, foreign currency exchange rates, volume changes and the impact of the divestiture of our aqua business on changes in revenue for the year ended December 31, 2024, as compared to the prior year, were as follows: (Dollars in millions) Revenue Price FX Rate Volume Divestiture Total Pet Health $ 2,143 3% —% (1)% —% 2% Farm Animal 2,250 2% (1)% 2% (4)% (1)% Contract Manufacturing and Other 46 10% Total $ 4,439 3% (1)% —% (2)% —% Pet health revenue increased $39 million, or 2%, driven by a 3% increase in pricing, partially offset by slightly lower volumes.
Specifically, the restructuring plan is intended to reallocate resources by shifting international resources from farm animal to pet health as we plan for the global launches of certain potential blockbuster products currently under regulatory review.
Specifically, the restructuring plan was intended to reallocate resources by shifting international resources from farm animal to pet health as we plan for the global launches of certain potential blockbuster products. Further, the restructuring plan impacted how we operate in and sell into the Argentina market, among others, reducing our foreign currency exposure in those markets.
The decrease in cash used for investing activities was primarily driven by a decrease of $31 million in cash paid for property and equipment and software, which was partially offset by cash paid for the acquisitions of certain assets of NutriQuest and NutriQuest Brazil, totaling $19 million, during the year ended December 31, 2023.
Cash used for investing activities of $169 million during the year ended December 31, 2023, primarily related to $140 million of cash paid for property and equipment and software and $19 million paid for our acquisitions of NutriQuest and NutriQuest Brazil. 44 Table of Contents Financing Activities Cash used for financing activities was $1,492 million for the year ended December 31, 2024, compared to $83 million for the year ended December 31, 2023.
These long-term debt repayments were partially offset by $200 million of net borrowings on our Revolving Credit Facility ($350 million in borrowings, net of $150 million in repayments) and $125 million of net borrowings on our new Securitization Facility ($250 million in borrowings, net of $125 million in repayments).
In 2024, we repaid $1,600 million of term loan debt, $200 million, net on our Revolving Credit Facility and $25 million, net on our Securitization Facility. These debt repayments were partially offset by proceeds of $350 million from the issuance of our Incremental Term Facility due 2031 in August 2024.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets are determined using information available at the acquisition date based on expectations and assumptions that are deemed reasonable by management.
The fair values of intangible assets are determined using information available at the acquisition date based on expectations and assumptions that are deemed reasonable by management.
The decrease in cash from operating activities primarily related to a decrease of $150 million of proceeds from interest rate swap settlements year-over-year. Additionally, a larger net loss in 2023 (excluding non-cash goodwill and other impairment charges) was partially offset by year-over-year changes in working capital.
The increase in cash provided by operating activities was driven by year-over-year improvements in changes in operating assets and liabilities, partially offset by a decrease of $52 million of cash proceeds from interest rate swap settlements year-over-year.
Expected pre-tax charges associated with the restructuring plan total $50 to $55 million in 2024, including $40 to $45 million of cash-based severance costs, the majority of which will be paid in 2024. The restructuring plan is expected to result in annualized net savings of $30 to $35 million. See Note 19.
We incurred $44 million of charges associated with the restructuring plan in 2024, the majority relating to cash-based severance costs. The restructuring plan is expected to result in annualized net savings of $30 to $35 million. See Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements for further information.
Changes in valuation allowances are typically included in our tax provision in the period of change.
Deferred Tax Asset Valuation Allowances We maintain valuation allowances unless it is more likely than not that all of the deferred tax asset will be realized. Changes in valuation allowances are typically included in our tax provision in the period of change.
These included, but were not limited to, estimates and assumptions regarding our future cash flows, revenue growth and other profitability measures such as gross margin and EBITDA margin; and the determination of an appropriate discount rate. We made these significant judgments based on our historical experience, relevant market size, historical pricing and expected industry trends.
Significant management judgment was required in estimating the fair value of our single reporting unit, including, but not limited to, estimates and assumptions regarding future cash flows of our single reporting unit, revenue growth and other profitability measures, such as gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA) margin and the determination of an appropriate discount rate.
Goodwill Impairment Year Ended December 31, (Dollars in millions) 2023 2022 % Change Goodwill impairment $ 1,042 $ — NM As discussed above, due principally to the sharp increase in long-term treasury rates in the third quarter of 2023, which we considered a triggering event, we performed a quantitative goodwill impairment test, which resulted in a $1,042 million pre-tax impairment charge.
Goodwill Impairment Year Ended December 31, (Dollars in millions) 2024 2023 % Change Goodwill impairment $ — $ 1,042 NM As previously disclosed, there was a sharp increase in long-term treasury rates during the third quarter of 2023, and as a result, we assessed our long-lived assets, including goodwill, for impairment.
Cost of Sales Year Ended December 31, (Dollars in millions) 2023 2022 % Change Cost of sales $ 1,931 $ 1,913 1 % % of revenue 44 % 43 % Cost of sales increased $18 million in 2023 as compared to 2022, and cost of sales as a percentage of revenue increased from 43% to 44% year-over-year, reflecting the impact of inflation and planned reduced throughput at certain manufacturing sites in support of efforts to reduce inventory balances on-hand and improve cash conversion.
Cost of Sales Year Ended December 31, (Dollars in millions) 2024 2023 % Change Cost of sales $ 2,003 $ 1,931 4 % % of revenue 45 % 44 % Cost of sales increased $72 million in 2024 as compared to 2023, and cost of sales as a percentage of revenue increased from 44% to 45% year-over-year.
Acquisitions and Fair Value We account for the assets acquired and liabilities assumed in an acquisition based on their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill.
The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as estimated asset lives, can materially affect our consolidated results of operations.
The sensitivity of our estimates can vary by program, type of customer and geographic location. Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.
Although the amounts recorded for revenue reductions are dependent on estimates and assumptions, historically our adjustments to actual results have not been material. The sensitivity of our estimates can vary by program, type of customer and geographic location.
If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. See Note 2. Summary of Significant Accounting Policies and Note 3. Revenue to the consolidated financial statements for further discussion regarding our revenue recognition policy and quantitative information regarding our rebate programs, respectively.
Amounts recorded for revenue reductions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. See Note 2.
Interest Expense, Net of Capitalized Interest Year Ended December 31, (Dollars in millions) 2023 2022 % Change Interest expense, net of capitalized interest $ 277 $ 241 15 % Interest expense, net of capitalized interest increased $36 million in 2023 compared to 2022, primarily due to higher interest rates on our outstanding variable-rate debt and rate increases on our Senior Notes driven by credit downgrades.
Interest Expense, Net of Capitalized Interest Year Ended December 31, (Dollars in millions) 2024 2023 % Change Interest expense, net of capitalized interest $ 235 $ 277 (15) % Interest expense, net of capitalized interest decreased $42 million in 2024 compared to 2023, primarily due to lower average outstanding debt balances given our debt repayment activity in the current year (see Note 8.
Research and Development Year Ended December 31, (Dollars in millions) 2023 2022 % Change Research and development $ 327 $ 321 2 % % of revenue 7 % 7 % R&D expenses increased $6 million, or 2%, in 2023 compared to 2022, primarily driven by higher employee-related expenses and project costs. 43 Table of Contents Marketing, Selling and Administrative Year Ended December 31, (Dollars in millions) 2023 2022 % Change Marketing, selling and administrative $ 1,285 $ 1,265 2 % % of revenue 29 % 29 % Marketing, selling and administrative expenses increased $20 million, or 2%, in 2023 compared to 2022, primarily driven by increases in marketing and promotional spend relating to our U.S.
These increases were due to a combination of inflation, planned reduced throughput at certain manufacturing sites and product mix associated with the divestiture of our aqua business, partially offset by increased pricing. 41 Table of Contents Research and Development Year Ended December 31, (Dollars in millions) 2024 2023 % Change Research and development $ 344 $ 327 5 % % of revenue 8 % 7 % R&D expenses increased $17 million, or 5%, in 2024 compared to 2023, primarily driven by higher employee-related expenses and timing of project costs.
Amortization of Intangible Assets Year Ended December 31, (Dollars in millions) 2023 2022 % Change Amortization of intangible assets $ 548 $ 528 4 % Amortization of intangible assets increased $20 million in 2023 compared to 2022, due to the addition of amortization of intangible assets recorded from our acquisitions of certain assets of NutriQuest and NutriQuest Brazil in 2023, as well as the impact of foreign currency exchange rates.
Amortization of Intangible Assets Year Ended December 31, (Dollars in millions) 2024 2023 % Change Amortization of intangible assets $ 527 $ 548 (4) % Amortization of intangible assets decreased $21 million in 2024 compared to 2023.
While we believe the estimates and assumptions underlying our goodwill impairment test were reasonable in view of all available information, t hese assumptions are subject to change in future periods because of, among other things, additional information, financial information based on further historical experience, changes in competition, our investment decisions, volatility in foreign currency exchange rates, results of research and development and changes in macroeconomic conditions, including rising long-term treasury rates and inflation.
While we believe the estimates and assumptions underlying our annual goodwill impairment review in the fourth quarter of 2024 were reasonable in view of all available information, these assumptions are subject to change in future periods because of, among other things, reductions in our estimates of future cash flows, revenue growth or other profitability measures, and/or an increase in the discount rate, which is highly correlated with long-term 46 Table of Contents treasury rates.
For significant acquisitions, we normally engage an independent valuation specialist to assist in valuing significant assets and liabilities.
For significant acquisitions, we normally engage an independent valuation specialist to assist in valuing significant assets and liabilities. Divestitures Determining the gain or loss on the divestiture of a business under GAAP requires us to allocate a portion of our single reporting unit's goodwill to the divested business' carrying value (the disposal group).
For additional information regarding this goodwill impairment, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for further information.
We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. For example, in 2023 we received conditional approval from the USDA and launched our canine parvovirus monoclonal antibody treatment in the U.S.
We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. New product development and regulatory highlights during 2024 included the following: Bovaer : In May 2024, the FDA completed its comprehensive, multi-year review of Bovaer (3-NOP), a first-in-class methane-reducing feed ingredient for use in lactating dairy cattle.
Further, the restructuring plan is expected to result in changes in how we operate in and sell into the Argentina market, among others, which we anticipate will reduce our foreign currency exposure. The restructuring plan will result in the elimination of approximately 420 personnel across our global organization.
Commitments and Contingencies to the consolidated financial statements for further information). Foreign currency exchange losses were lower in 2024 in large part due to the restructuring plan actions in the current year, which impacted how we operate in and sell into the Argentina market, among others, reducing our foreign currency exposure in these markets.
Our aqua business includes products across both warm-water and cold-water species and generated $175 million in revenue during each of the years ended December 31, 2023 and 2022.
We utilized a vast majority of these proceeds to repay previously outstanding term loan debt, thereby reducing our leverage and expected future interest expense. Our aqua business included products across both warm-water and cold-water species and generated revenue of $81 million in 2024, through the divestiture date, and $175 million in 2023.
For additional information, see Note 15. Income Taxes to the consolidated financial statements. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our credit facilities. As a significant portion of our business is conducted internationally, we hold a significant portion of cash outside the U.S.
As a significant portion of our business is conducted internationally, we hold a significant portion of cash outside the U.S. We monitor and adjust the amount of foreign cash based on projected cash flow requirements.
Removed
This product is the first and only approved therapeutic solution to treat canine parvovirus, one of the most contagious and deadly viruses to dogs, if not treated.
Added
Producers began feeding the product to cattle in the U.S. during the third quarter of 2024. Zenrelia : We received final FDA approval for Zenrelia , a JAK inhibitor targeting control of pruritus and atopic dermatitis in dogs, in September 2024. We launched Zenrelia shortly after final approval, with the first sales occurring in late September.
Removed
Seresto: On July 13, 2023, the EPA announced its completion of a comprehensive, multi-year review, with support from the FDA, of the Seresto flea and tick collar and confirmed the continued registration of the collar. As part of the EPA’s scientific review process, the agency analyzed incident data including third-party assessments and compared data to other EPA-registered pet products.
Added
We have also received approval for Zenrelia in Brazil, Canada and Japan. Additional reviews are ongoing in other key markets, including Europe, U.K. and Australia.

… 69 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

10 edited+1 added−4 removed4 unchanged
Biggest changeWhile we anticipate our above noted plans to restructure how we operate in and sell into the Argentina market to mitigate the future impact of hyperinflationary accounting for this affiliate, we may in the future incur further currency devaluations, which could have a material adverse impact on our results of operations.
Biggest changeIn spite of this, and while the application of hyperinflationary accounting for our subsidiaries in Argentina and Turkey did not have a material impact on our business duri ng the year ended December 31, 2024 , we may in the future incur significant currency devaluations, which could have a material adverse impact on our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign currency exchange rates.
If the U.S. dollar were to weaken against the Swiss franc by 10%, the amount of unrealized loss recorded in CTA related to these cross-currency fixed interest rate swaps as of December 31, 2023, would increase by approximately $130 million.
If the U.S. dollar were to weaken against the Swiss franc by 10%, the amount of unrealized loss recorded in CTA related to these cross-currency fixed interest rate swaps as of December 31, 2024, would increase by approximately $125 million.
During the year ended December 31, 2023, revenue in Argentina and Turkey each represented less than 1% of our consolidated revenue, and assets held in Argentina and Turkey at December 31, 2023, each represented less than 1% of our consolidated assets.
During the years ended December 31, 2024 and 2023, revenue in Argentina and Turkey each represented less than 1% of our consolidated revenue, and assets held in Argentina and Turkey at December 31, 2024 and 2023, each represented less than 1% of our consolidated assets.
We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates in future periods. Gains and losses on these derivative contracts are recorded within other expense, net, and offset, in part, the impact of currency fluctuations on the underlying foreign currency denominated assets and liabilities.
We frequently enter into foreign exchange forward or option contracts to reduce the effect of fluctuating currency exchange rates. Gains and losses on these instruments are recorded within other expense, net, and offset, in part, the impact of currency fluctuations on the underlying foreign currency denominated assets and liabilities.
We estimate that a hypothetical 1.0% increase in the applicable Term SOFR benchmark rates throughout 2023 would have resulted in an increase in our interest expense, net of capitalized interest, of approximately $25 million. 49 Table of Contents
We estimate that a hypothetical 1.0% increase in the applicable Term SOFR benchmark rates throughout 2024 would have resulted in an increase in our interest expense, net of capitalized interest, of approximately $12 million. 48 Table of Contents
A hypothetical 10 percent adverse change in exchange rates applied to the fair values of our outstanding foreign currency derivative contracts as of December 31, 2023, would result in an additional unrealized loss of approximately $20 million.
A hypothetical 10 percent adverse change in exchange rates applied to the fair values of our outstanding foreign exchange forward and option contracts as of December 31, 2024, would result in an additional unrealized loss of approximately $55 million.
We are primarily exposed to foreign exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan.
We are primarily exposed to foreign currency exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan. Additionally, we generally identify hyperinflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%.
At December 31, 2023, we held interest rate swap agreements with a notional value of $3,800 million that had the economic effect of modifying this amount of our variable-rate debt to fixed-rate.
This hypothetical unrealized loss would be expected to be offset by a corresponding foreign currency translation gain from our investment in our Swiss subsidiary. Interest Risk At December 31, 2024, we held interest rate swap agreements with a notional value of $2,800 million that had the economic effect of modifying this amount of our variable-rate debt to fixed-rate.
When including the variable-rate converted to fixed-rate through the use of interest rate swaps, as of December 31, 2023, approximately 78% of our long-term indebtedness bore interest at a fixed rate.
We also held forward-starting interest rate swap agreements with a combined notional amount of $850 million, which will become effective in 2026. When including the variable-rate converted to fixed-rate through the use of interest rate swaps, as of December 31, 2024, approximately 82% of our long-term indebtedness bore interest at a fixed rate.
Removed
Throughout the year ended December 31, 2023, we incurred foreign currency losses of $50 million, of which $40 million related to transaction losses due to the effect of exchange rate changes on transactions denominated in currencies other than a subsidiary's functional currency, and $10 million related to our application of hyperinflationary accounting for our subsidiaries in Argentina and Turkey.
Added
In February 2024 our Board of Directors authorized a restructuring plan that, among other strategic decisions, resulted in a change in how we operate in and sell into the Argentina market, reducing our foreign currency exposure with respect to the Argentine peso.
Removed
Of the $40 million of foreign currency transaction losses, $25 million related to our subsidiary in Argentina. While we have recently announced plans to restructure how we operate in and sell into the Argentina market, which we expect to significantly reduce our exposure to such foreign currency transaction losses (see Note 19.
Removed
Subsequent Events to the consolidated financial statements for further information), our global operations continue to expose us to the risk of foreign currency transaction gains and losses. We identify hyperinflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%.
Removed
This hypothetical unrealized loss would be expected to be offset by a corresponding foreign currency translation gain from our investment in our Swiss subsidiary. Interest Risk Effective April 1, 2023, we transitioned the reference rates used in our credit facilities so that, as a result, our variable-rate indebtedness is now exclusively indexed to Term SOFR.

Other ELAN 10-K year-over-year comparisons