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What changed in Elanco Animal Health Inc's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Elanco Animal Health Inc's 2022 and 2023 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 2023 report.

+495 added−552 removedSource: 10-K (2024-02-26) vs 10-K (2023-03-01)

Top changes in Elanco Animal Health Inc's 2023 10-K

495 paragraphs added · 552 removed · 328 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

94 edited+38 added−68 removed24 unchanged
Biggest changeWe 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 and continually meet the ever-changing needs of our customers and other stakeholders in a dynamic and growing industry. 20 Table of Contents Beyond professional growth and development, Elanco employees actively engage in initiatives aligned to Elanco's Healthy Purpose , which is our ESG and sustainability framework, 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." Environmental, Health and Safety We are subject to various federal, state, local and foreign environmental, health and safety (EHS) laws and regulations.
Biggest changeWe 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.
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 in our portfolio.
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.
The main regulatory body in the U.S. for veterinary pesticides is the Environmental Protection Agency (EPA).
Environmental Protection Agency (EPA). The main regulatory body in the U.S. for veterinary pesticides is the EPA.
Our regulatory function is Elanco's key interface with the relevant authorities. It is responsible for applying for and obtaining the necessary registrations and post-approvals: extending them if appropriate (e.g., developing claims in additional species), updating (e.g., changes to shelf-life or manufacturing site), and ongoing monitoring of safety and efficacy through our global pharmacovigilance system.
Our regulatory function is Elanco's key interface with the relevant authorities and is responsible for applying for and obtaining the necessary registrations and post-approvals, extending them if appropriate (e.g., developing claims in additional species), updating (e.g., changes to shelf-life or manufacturing site) and ongoing monitoring of safety and efficacy through our global pharmacovigilance system.
This in turn enables the calculation of appropriate withdrawal times for our products prior to an animal entering the food chain. Advertising and Promotion Review. Promotion of ethical animal health products is controlled by regulations in many countries. These rules generally restrict advertising and promotion to those claims and uses that have been reviewed and endorsed by the applicable agency.
This in turn enables the calculation of appropriate withdrawal times for our products prior to an animal entering the food chain. Advertising and Promotion Review. Promotion of animal health products is controlled by regulations in many countries. These rules generally restrict advertising and promotion to those claims and uses that have been reviewed and endorsed by the applicable agency.
In connection with certain of our acquisitions, we have also entered into indemnification agreements pursuant to which we are, or may be, indemnified for various environmental clean-ups; however, such indemnities are limited in both time and scope and may be further limited in the presence of new information or may not be available at all.
We have also entered into indemnification agreements in connection with certain of our past acquisitions, pursuant to which we are, or may be, indemnified for various environmental clean-ups. However, such indemnities are limited in both time and scope and may be further limited in the presence of new information or may not be available at all.
Regulatory The sale of animal health products is governed by the laws and regulations specific to each country in which we sell our products. To maintain compliance with these regulatory requirements, we have established processes, systems, and dedicated resources with end-to-end involvement from product concept to launch and maintenance in the market.
Regulatory Matters The sale of animal health products is governed by the laws and regulations specific to each country in which we sell our products. To maintain compliance with these regulatory requirements, we have established processes, systems and dedicated resources with end-to-end involvement from product concept to launch and maintenance in the market.
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 that 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 help ensure we attract and retain talent, as well as reward and recognize top-performing employees through merit increases and other rewards.
The EPA’s Office of Pesticide Programs is responsible for the regulation of most pesticide products applied to animals in accordance with a memorandum of understanding between the FDA and EPA for products that are subject to regulation under both the FFDCA and the Federal Insecticide, Fungicide and Rodenticide Act.
The EPA’s Office of Pesticide Programs is responsible for the regulation of most pesticide products applied to animals in accordance with a memorandum of understanding between the FDA and the EPA for products that are subject to regulation under both the FFDCA and the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA).
MAPA is one of the most active regulatory agencies in Latin America, having permanent seats at several international animal health forums, such as Codex Alimentarius, World Organization for Animal Health and Committee of Veterinary Medicines for the Americas. Japan.
MAPA is one of the most active regulatory agencies in Latin America, having permanent seats at several international animal health forums, such as Codex Alimentarius, World Organization for Animal Health and Committee of Veterinary Medicines for the Americas.
Poultry Seasonality While many of our products are sold consistently throughout the year, we do experience seasonality in our pet health business due to increased demand for certain parasiticide product offerings in the first half of the year.
Seasonality While many of our products are sold consistently throughout the year, we do experience seasonality in our pet health business due to increased demand for certain parasiticide product offerings in the first half of the year.
We will provide any of the foregoing information without charge upon written request to Elanco’s Corporate Secretary, Elanco, 2500 Innovation Way, Greenfield, Indiana 46140. Information relating to shareholder services is also available on our website. Information contained on our website is not part of, or incorporated by reference, in this Form 10-K. 21 Table of Contents
We will provide any of the foregoing information without charge upon written request to Elanco’s Corporate Secretary, Elanco, 2500 Innovation Way, Greenfield, Indiana 46140. Information relating to shareholder services is also available on our website. Information contained on our website is not part of, or incorporated by reference, in this Form 10-K. 16 Table of Contents
Certain products, both existing and new products that we introduce, may compete with other branded or generic products already on the market or that are later developed by competitors. When competitors introduce new products with ease-of-use, therapeutic or cost advantages, our products may become subject to decreased sales and/or price reductions.
Certain Elanco products, both existing and new, may compete with other branded or generic products already on the market or that are later developed by competitors. When competitors introduce new products with ease-of-use, therapeutic or cost advantages, our products may become subject to decreased sales and/or price reductions.
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 required. Reports of product quality defects, adverse events or unexpected results are maintained and submitted in accordance with the agency requirements. Environmental Protection Agency.
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.
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. The regulatory body in the U.S. for veterinary biologicals is the U.S. Department of Agriculture (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. USDA. The regulatory body in the U.S. for veterinary biologicals is the USDA.
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 to protect our intellectual property rights.
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.
Our approach is a build, buy, or ally strategy to develop compelling innovations that originate from our scientists and innovators, academia, agribusiness, or external partners including human pharmaceutical, agriculture and biotechnology organizations.
Our approach is a build, buy or partner strategy to develop compelling innovations that originate from our scientists and innovators, academia, agribusiness or external partners including human pharmaceutical, agriculture and biotechnology organizations.
JMPR reviews residues and analytical aspects of the pesticides, estimate the maximum residue levels, review toxicological data and estimate acceptable daily intakes for humans of the pesticides under consideration. Elanco works with this committee to establish acceptably safe levels of residual substances in food-producing animals after treatment with veterinary drugs or pesticides.
JMPR reviews residues and analytical aspects of the pesticides, estimates the maximum residue levels, reviews toxicological data and estimates acceptable daily intakes for humans of the pesticides under consideration. Elanco works with this committee to establish acceptably safe levels of residual substances in food-producing animals after treatment with veterinary drugs or pesticides.
Patents for individual products expire at different times based on the date of the patent filing (or sometimes 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.
There are three organizations under the MOA that regulate animal health: The Institute of Veterinary Drug Control 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: 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 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.
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.
Our veterinary consultants are available to provide scientific consulting focused on disease management and herd management, training and education on diverse topics, including responsible product use, and generally have advanced degrees in veterinary medicine, veterinary nutrition or other agriculture-related fields. These direct relationships with customers allow us to better understand their needs.
Our veterinary consultants are available to provide scientific consulting focused on disease management and herd management, training and education on diverse topics, including responsible product use, and generally have advanced degrees in veterinary medicine, veterinary nutrition or other agriculture-related fields. These direct relationships with customers allow us to better understand their needs and provide us access to customer decision makers.
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.
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.
Information relating to corporate governance at Elanco, including our Corporate Governance Guidelines, Code of Conduct, Financial Code of Ethics, Articles of Incorporation, Bylaws, Committee Charters; information concerning our executive officers and members of our board of directors; and ways to communicate are available on our website.
Information relating to corporate governance at Elanco, including our Corporate Governance Guidelines, Code of Conduct, Financial Code of Ethics, Articles of Incorporation, Bylaws, Committee Charters; information concerning our executive officers and members of our Board of Directors; and ways to communicate are also available on our website, www.elanco.com.
Competition may vary depending on the particular region, species, product category, or individual product. We compete principally on the basis of product quality, price, cost-effectiveness, promotional effectiveness, new product development and product differentiation.
Competition We face intense competition globally. Competition may vary depending on the particular region, species, product category or individual product. We compete principally on the basis of product quality, price, cost-effectiveness, promotional effectiveness, new product development and product differentiation.
Our vaccines portfolio provides differentiated prevention coverage for a number of important pet health risks and is available in the U.S. only. In therapeutics, we have a broad pain and osteoarthritis portfolio across species, modes of action, indications and disease stages.
Our vaccines portfolio provides differentiated prevention coverage for a number of important pet health risks and is available in the U.S. only. In therapeutics, we have a broad pain portfolio for dogs and cats across modes of action, indications and disease stages.
Due to our operations, these laws and 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 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.
Sales and Marketing Through our global sales force comprised of approximately 2,010 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 2,000 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.
Additionally, our sales representatives and veterinary consultants focus on collaborating with our customers to educate and support them on topics such as local disease awareness and to help them adopt new and more sophisticated animal health solutions, including through the use of our products.
Additionally, our sales representatives and veterinary consultants focus on collaborating with our customers to educate and support them on topics such as local disease awareness and to help them adopt new and more sophisticated animal health solutions, which may include the use of our products.
Other countries’ regulatory agencies typically either refer to some or all of the requirements of the U.S. or EU, but may have additional specific local requirements.
Many other countries’ regulatory agencies either refer to some or all of the requirements of the U.S. or EU and may have additional specific local requirements.
We have one of the broadest parasiticide portfolios in the pet health sector based on indications, species and formulations, with products that protect pets from worms, fleas and ticks.
We have one of the broadest parasiticide portfolios in the pet health market based on indications, species and formulations, with products that protect pets from fleas, ticks and internal parasites.
The Ministry of Agriculture (MOA) 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, pesticide and feed/feed additives for animal use.
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.
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.
At this time, there are no indications of market entries for generic versions of Comfortis or Trifexis in the U.S., Canada or Australia. • The Seresto formulation patent will expire in the U.S. in September 2027.
At this time, there are no indications of market entries for generic versions of Trifexis in these countries. • The Seresto formulation patent will expire in the U.S. in September 2027.
Certain environmental laws impose joint and several liability, without regard to fault, for clean-up costs on persons who have disposed of or released hazardous substances into the environment, including at third-party sites or offsite disposal locations, or that currently own or operate (or formerly owned or operated) sites where such a release occurred.
Certain environmental laws impose joint and several liability, without regard to fault, for clean-up costs related to the disposal or release of hazardous substances into the environment, including at third-party sites or offsite disposal locations, or at sites that are currently owned or operated (or were formerly owned or operated) where such a disposal or release occurred.
We commit to create a culture built on the foundation of three values and four behavioral pillars: Values that Guide our Decisions: Integrity - Do the right thing in the right way. Respect - Respect people, our customers and the animals in their care. Excellence - Be accountable. Continuously improve. Deliver with discipline.
We are committed to creating a culture built on the foundation of the three following values that guide our decisions and the four following behavioral pillars that guide our actions: Values: Integrity – Do the right thing in the right way. Respect – Respect people, our customers and the animals in their care. Excellence – Be accountable. Continuously improve.
Available Information Our website address is www.elanco.com. On our website, we make available, free of charge, our annual, quarterly and current reports, including amendments to such reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the U.S. Securities and Exchange Commission (the SEC).
On our website, specifically within the "Investor Relations" section, we make available, free of charge, our annual, quarterly and current reports, including amendments to such reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the U.S. Securities and Exchange Commission (the SEC).
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, the animal health division of E.I. du Pont de Nemours and Company, a subsidiary of DowDuPont, Inc. There are also several new start-up companies working in the animal health area.
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.
Our efforts to enhance diversity, equity and inclusion are critical to creating and maintaining our purpose-driven culture and strengthening our promises to our employees and customers. Formed in 2015, our Global Elanco Diversity, Equity and Inclusion Council (EDEIC) serves as a catalyst for a culture where diversity, equity and inclusion are embraced and recognized as a business-result driver.
Our efforts to strengthen IDEA are critical to sustaining a purpose-driven culture and strengthening our promises to our employees and customers. Formed in 2015, our Global Elanco Inclusion, Diversity, Equity and Accessibility Council (EIDEAC) serves as a catalyst for a culture where IDEA is embraced and recognized as business-result drivers.
With presence in more than 90 countries, our diverse, durable portfolio serves animals across our core species consisting of: 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 aqua (collectively, farm animal).
Our policy is to vigorously protect, enforce and defend our rights to our intellectual property, as appropriate. 15 Table of Contents Our product portfolio and certain product candidates enjoy the protection of approximately 6,500 patents and applications, filed in over 90 countries, with concentration in our major markets as well as other markets with strong patent systems, such as Australia, Brazil, Canada, Europe, Japan and the U.S.
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.
In this way, the regulatory function ensures registrations remain valid, and the products can continue to be sold. To effectively do this, the regulatory function actively engages in dialogue with the relevant authorities regarding their policies that relate to animal health 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.
Behavioral Pillars that Guide our Actions: Involve - We seek participation and input to gain commitment and passionate performance and create an engaged community. We act with humility as One Elanco, collaborating for the best outcomes for the entire company.
Deliver with discipline. Behavioral Pillars: Involve – We seek participation and input to gain commitment and passionate performance and create an engaged community. We act with humility as One Elanco, collaborating for the best outcomes for the entire company. Deliver – We focus on the essential, build mastery and diligently deliver on our commitments to our colleagues, customers and shareholders.
At Elanco, we are committed to fostering an inclusive culture where employees can make a difference, encouraging ownership, growth, and well-being. The following gives an overview of our approach to managing human capital resources.
At Elanco, we are committed to fostering an inclusive culture where employees can make a difference, encouraging ownership, growth and well-being.
Dogs (1) Formerly marketed as Duramune ™. 10 Table of Contents Farm Animal Products Primary Product Description Species AviPro™ (vaccines) Includes multiple products that collectively protect against Newcastle disease, infectious bronchitis, fowl cholera, paramyxovirus Type 3, Bursal Disease, other diseases and foodborne pathogens like Salmonella.
Dogs TruCan™ (vaccines) Includes multiple products that collectively protect against distemper, adenovirus, parvovirus, corona, parainfluenza, leptospira canicola and other diseases. Dogs Farm Animal Products Product Description Primary Species AviPro™ (vaccines) Includes multiple products that collectively protect against Newcastle disease, infectious bronchitis, fowl cholera, paramyxovirus Type 3, Bursal Disease, other diseases and foodborne pathogens like Salmonella.
In most of our markets, the relevant authority is separate from those governing human medicinal products. 16 Table of Contents United States U.S. Food and Drug Administration. 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.
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.
All countries that are not part of the EU but belong to the European Economic Area (EEA), i.e., Norway, Iceland and Liechtenstein, have been part of the scientific assessment done by the CVMP.
All countries that are not part of the EU but belong to the European Economic Area (EEA), such as Norway, Iceland and Liechtenstein, have been part of the scientific assessment done by the CVMP. These countries issue a national marketing approval in accordance with the European Commission's decision.
We could be subject to liability for the investigation and remediation of legacy environmental contamination caused by historical industrial activity at sites that we own or on which we operate.
Although our current reserves for environmental remediation obligations are not material, we could be subject to liability for the investigation and remediation of legacy environmental contamination caused by historical industrial activity at sites we own or on which we operate. We are also monitoring and investigating environmental contamination from past industrial activity at certain sites.
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.
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.
Our Seresto ™ and Advantage ™, Advantix ™, and Advocate ™ (collectively referred to as the Advantage Family ) products are over-the-counter treatments for the elimination and prevention, respectively, of fleas and ticks, and complement our prescription parasiticide products, Credelio ™, Interceptor Plus ™, and Trifexis .
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 ™.
We select CMOs based on several factors, including: (i) their ability to reliably supply products or materials that meet our quality standards at an optimized cost; (ii) their access to specialty products and technologies; (iii) capacity; (iv) financial analyses; and (v) local presence.
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.
In 2022 and 2021, we launched nine new products in major geographies and delivered many geographic expansion and life cycle management enhancements of existing products across pet health and farm animal.
In 2021 through 2023, we received 36 regulatory approvals in total for new products in major geographies and have delivered many geographic expansion and life cycle management enhancements of existing products across both pet health and farm animal product categories.
Farm Animal: Our farm animal portfolio consists of products designed to prevent, control and treat health challenges, primarily focused on cattle (beef and dairy), swine, poultry, and aquaculture (cold and warm water) production. 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, 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.
These countries issue a national marketing approval in accordance with the European Commission's decision. 17 Table of Contents If approval is sought for products that either cannot or do not need to follow the centralized procedure, approval can also be achieved by national approval in an EEA country agency.
If approval is sought for products that either cannot or do not need to follow the centralized procedure, approval can also be achieved by national approval in an EEA country agency. This national authorization can be mutually recognized by other EEA countries/EU member states (Mutual Recognition Procedure).
The agreement includes regulatory and customs cooperation mechanisms, as well as provisions supporting open and fair competition. The Northern Ireland protocol, which is part of the trade deal, requires that VMD follow EU rules in Northern Ireland. Laws applying to the rest of the U.K. could now diverge but currently remain largely aligned. Brazil.
The Northern Ireland protocol, which is part of the trade deal, requires that VMD follow EU rules in Northern Ireland. Laws applying to the rest of the U.K. remain largely aligned.
As a result of these relationships, our sales and consulting visits provide us with access to customer decision makers. In addition, our sales and marketing organization provides enhanced value by supporting farm animal producers to help maximize their yields and reduce costs. Our analytics help customers analyze large amounts of health and production data.
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.
We apply large and small molecule approaches for both farm animals and pets. 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.
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.
Barueri, Brazil Kiel, Germany Clinton, Indiana Prince Edward Island, Canada 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 Binh Duong, Vietnam Winslow, Maine Our global manufacturing and supply chain is also supported by a network of CMOs.
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.
International European Union (EU). We are governed by the following EU regulatory bodies in addition to each of the national regulatory bodies in the 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.
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.
In 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 which expire in September 2026. • The Milbemax formulation patents extend through July 2024 in the U.S., Europe, and other key markets. • Certain legacy Advantage Family products acquired from Bayer Animal Health, including Advantage, Advantix, Advocate, and Advantage Multi are off patent.
In 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.
Poultry Baycox™ (totrazuril) Oral treatment for control of coccidiosis caused by Isopora suis infection in swine and clinical coccidiosis caused by Eimeria bovis or Eimeria zuernii in young cattle. Attacks all stages of the parasite. Cattle, Swine Baytril (enrofloxacin) Injectable antibiotic active against various bacterial diseases in cattle (major bovine pathogens) and swine (respiratory disease pathogens).
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.
Deliver - We focus on the essential, build mastery, and diligently deliver on our commitments to our colleagues, customers, and shareholders. Own - We are accountable and empowered. We ask questions and raise concerns. We are fully invested in Elanco's success. Innovate - We bring an innovative mindset that drives continuous improvement of our processes, products, and services.
Own – We are accountable and empowered. We ask questions and raise concerns. We are fully invested in Elanco's success. Innovate – We bring an innovative mindset that drives continuous improvement of our processes, products and services. At Elanco, this culture drives employee performance, and our employees are driven by these values and behavioral pillars.
Below is a summary of our recent and upcoming key patent expirations: • Galliprant’s active ingredient, grapiprant, is encompassed by both compound and physical form patents in the U.S., Europe, Canada and other key markets, with terms expiring between October 2021 and March 2026. Expirations in 2021 related to compound patents in the U.S., Europe and Japan.
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.
We intend to continue our efficiency improvement programs in our manufacturing and supply chain organization. We have strong globally managed and coordinated quality control and quality assurance programs in place at all internal manufacturing sites and external manufacturing hubs, and we regularly inspect and audit our internal sites and CMO locations. Competition We face intense competition globally.
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.
This national authorization can be mutually recognized by other EEA countries/EU member states (Mutual Recognition Procedure). In addition, national and mutual recognition can be done in a combined procedure (Decentralized Procedure). A series of regulations, directives, guidelines, EU Pharmacopeia Monographs and other legislation provide the requirements for approval in the EU.
In addition, national and mutual recognition can be done in a combined procedure (Decentralized Procedure). A series of regulations, directives, guidelines, EU Pharmacopeia Monographs and other legislation provide the requirements for approval in the EU. In general, these requirements are similar to those in the U.S., requiring demonstrated evidence of purity, safety, efficacy and consistency of manufacturing processes.
Cats, Dogs Seresto ( imidacloprid + flumethrin ) Flea and tick collar based on a patented low dose, slow release technology that kills and repels fleas and ticks, kills lice for up to 8 months with one single application, and reduces vector-borne disease transmission risk (e.g., leishmaniosis).
Cats, Dogs Seresto Flea and tick collar with a patented low dose, slow-release technology that kills and repels fleas and ticks which may transmit vector-borne diseases and kills lice for up to 8 months. Cats, Dogs Trifexis Prevents heartworm disease, kills fleas, helps prevent flea infestations and also helps treat and control hookworms, roundworms and whipworms.
For calves (excluding veal calves), prevents and controls coccidiosis due to Eimeria bovis and Eimeria zuernii . Rumensin is an animal-only antibiotic and an ionophore. Cattle Surmax™ / Maxus™ / Inteprity (avilamycin) Prevents mortality caused by necrotic enteritis associated with Clostridium perfringens 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™ / Maxus™ / Inteprity Prevents necrotic enteritis in broiler chickens. Surmax, Maxis and Inteprity are animal-only antibiotics.
Individuals lead our R&D organization with deep technical knowledge and substantial experience in discovery research, clinical sciences, and technological development across our pet health and farm animal product categories. We execute the R&D pipeline using a fully integrated global network of labs, service centers, and development sites supported by a network of third-party alliances.
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.
Based on EFSA’s mandate, it evaluates applications for feed additives, including coccidiostats, enzymes and several nutritionals for animals. The European Chemicals Agency (ECHA) is the agency of the EU for the safe use of chemicals. Based on the ECHA’s mandate, it conducts the evaluation of biocides for the EU.
The European Food Safety Authority (EFSA) is the agency of the EU that provides scientific advice and communicates with respect to existing and emerging risks associated with the food chain. Based on EFSA’s mandate, it evaluates applications for feed additives, including coccidiostats, enzymes and several nutritionals for animals.
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. 14 Table of Contents Manufacturing and Supply Chain Our products are manufactured both at sites operated by us and sites operated by third-party contract manufacturing organizations (CMOs).
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.
International Operations Our operations are conducted globally, and we sell our products in over 90 countries. Emerging market economies are an important component of our growth strategy to advance as a global leader in the animal health industry and will serve as the base upon which we build our commercial and local innovation capabilities.
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 following graph illustrates our reported revenue by our key geographic regions: 8 Table of Contents Products We have a diverse portfolio of products marketed under approximately 200 brands, including products for both pets and farm animals. Our pet health products help veterinarians and pet owners better care for pets.
Our reported revenue by geographic region was as follows: Products We have a diverse portfolio of products marketed under approximately 200 brands, including products for both pets and farm animals. Pet Health: Our pet health products help pets live longer, healthier and more active lives. Our global pet health portfolio is focused on parasiticides, vaccines and therapeutics.
ITEM 1. BUSINESS Overview Elanco Animal Health Incorporated and its subsidiaries (collectively, Elanco, the Company, we, us, or our) is committed to helping our customers improve the health of animals in their care, while also making a meaningful impact on the communities we serve.
ITEM 1. BUSINESS Overview Elanco Animal Health Incorporated and its subsidiaries (collectively, Elanco, the Company, we, us, or our) 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.
We focus our R&D investment on projects that target novel product introductions with new active ingredients, as well as products leveraging known active ingredients in new indications, presentations, combinations, and species expansion. We seek to concentrate our resources on projects that match our strategy and where we can leverage our broad technical and commercial capabilities.
We focus our R&D investments on projects that target novel product introductions with new active ingredients, as well as products leveraging known active ingredients in new indications, presentations, combinations and species expansion. Our R&D efforts are balanced across species, development phases and technology platforms. We apply large and small molecule approaches for both farm animals and pets.
Of the 9,740 global employees, approximately 30% are U.S.-based and approximately 70% are employed in other jurisdictions. Some of these employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements, including approximately 200 union employees located at our Fort Dodge, Iowa and Santa Clara, Mexico facilities. 19 Table of Contents Our Culture.
Approximately 30% of our global workforce is U.S.-based, while slightly more than 10% of our global employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements, primarily in Germany and the U.S. Our Culture.
We have a global manufacturing network of 18 sites comprised of the following: International U.S.
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.
In addition, the World Organization for Animal Health is an associate member of VICH. Human Capital Employees. As of December 31, 2022, we employed approximately 9,000 full time employees. In addition, we employed approximately 740 fixed-duration employees, which are individuals hired for a pre-defined length of time (one to four years). Together, they total approximately 9,740 employees worldwide.
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).
In 2022, our top selling products as a percentage of total revenue were as follows: 2022 Top selling products: Seresto 8 % Rumensin 6 % Top five selling products: Seresto, Rumensin, Advocate, Advantix, and Maxiban 24 % Set forth below is information regarding our principal products, which are defined as product lines and products that represented approximately 1% or more of our revenue in 2022: Pet Health Products Primary Product Description Species Advantix (imidacloprid + permethrin + pyriproxyfen) Monthly topical application that kills and repels fleas, ticks and mosquitoes, kills lice and repels biting flies.
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.
We also have a significant international regulatory operation that manages new product submissions and ensures ongoing compliance for our existing commercial portfolio. Portfolio investment decisions and prioritization are influenced by the probability of technical success, economic value, time to market, and portfolio fit and balance.
Our R&D organization utilizes a fully integrated global network of labs, service centers and development sites supported by a network of third-party partners. We also have a significant international regulatory operation that manages new product submissions and ensures ongoing compliance for our existing commercial portfolio.
Department of Agriculture (USDA) in the first quarter of 2023. For further discussion of our recent business development initiatives, see the Overview section within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8.
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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeFinancial Statements and Supplementary Data — Note 10: Debt" to the consolidated financial statements for further discussion. 39 Table of Contents Our high level of debt could have important consequences, including: • making it more difficult for us to satisfy our obligations with respect to our debt and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing other indebtedness; • requiring us to dedicate a substantial portion of our cash flow from operations to the payment of interest and the repayment of our indebtedness, thereby reducing funds available to us for other purposes; • limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements, including dividends; • 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; • causing us to make non-strategic divestitures; • exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable rates of interest; • limiting our flexibility in planning for and reacting to changes in the animal health industry; • impacting our effective tax rate; and • increasing our cost of borrowing.
Biggest changeIn 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.
If our distributors, licensors or we do not prevail in this type of litigation, we may be required to: • pay monetary damages; • obtain a license in order to continue manufacturing or marketing the affected products, which may not be available on commercially reasonable terms, or at all; or • stop activities, including any commercial activities, relating to the affected products, which could include a recall of the affected products and/or a cessation of sales in the future.
If our distributors, licensors or we do not prevail in this type of litigation, we may be required to: • pay monetary damages; • obtain a license in order to continue manufacturing or marketing the affected products, which may not be available on commercially reasonable terms, or at all; and/or • stop activities, including any commercial activities, relating to the affected products, which could include a recall of the affected products and/or a cessation of sales in the future.
In addition, products stolen or unlawfully diverted from inventory, warehouses, plants or while in transit, which are not properly stored or which have an expired shelf life and which have been repackaged or relabeled and which are sold through unauthorized channels, could adversely impact animal health and safety, our reputation and our business.
In addition, products stolen or unlawfully diverted from inventory, warehouses, plants or while in transit; products which are not properly stored or which have an expired shelf life; and/or products which have been repackaged or relabeled and sold through unauthorized channels, could adversely impact animal health and safety, our reputation and our business.
We could be subject to liability for the investigation and remediation of legacy environmental contamination caused by historical industrial activity at sites that we own or on which we operate. The costs associated with future cleanup activities that we may be required to conduct or finance could be material.
We could be subject to liability for the investigation and remediation of legacy environmental contamination caused by historical industrial activity at sites we own or on which we operate. The costs associated with future cleanup activities that we may be required to conduct or finance could be material.
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 results of operations and financial condition.
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.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions, and to certain financial, business, legislative, regulatory or other factors beyond our control.
Although the impact of generic competition in the animal health industry to date has not typically mirrored that seen in human health, product pricing and the impact of generic competition in the future may more closely mirror human health as a result of changes in industry dynamics, such as channel expansion, consolidation, an increase in the availability and use of pet insurance and the potential for generic competition by established animal health businesses.
Although the impact of generic competition in the animal health industry to date has not typically mirrored that seen in human health, product pricing and the impact of generic competition in the future may more closely mirror human health as a result of changes in industry dynamics, such as channel expansion, customer consolidation, an increase in the availability and use of pet insurance and the potential for generic competition by established animal health businesses.
Certain of our credit facilities contain restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to pay dividends and make other restricted payments. As a result, capital appreciation, if any, of our common stock may be our shareholders' major source of gain for the foreseeable future.
Certain of our credit facilities contain restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to pay dividends or to make other restricted payments. As a result, capital appreciation, if any, of our common stock may be our shareholders' major source of gain for the foreseeable future.
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. 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 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.
ITEM 1A. RISK FACTORS Our business, financial condition and results of operations are subject to various risks, including but not limited to the risks described below. If any of such risks actually materializes, our business, financial condition and results of operations could be materially adversely affected. Risks Related to Elanco's Business and Industry The animal health industry is highly competitive.
ITEM 1A. RISK FACTORS Our business, financial condition and results of operations are subject to various risks, including but not limited to the risks described below. If any of such risks actually materializes, our business, financial condition and results of operations could be materially adversely affected. Risks Related to the Animal Health Industry The animal health industry is highly competitive.
In addition, if we are unable to maintain our existing license agreements or other agreements pursuant to which third parties grant us rights to intellectual property, including because such agreements terminate, our financial condition and results of operations could be materially adversely affected.
In addition, if we are unable to maintain our existing license agreements or other agreements pursuant to which third parties grant us rights to intellectual property, including because such agreements terminate, our business, financial condition and results of operations could be materially adversely affected.
To the extent that any of our competitors are more successful with respect to any key competitive factor, or we are forced to reduce, or are unable to raise, the price of any of our products in order to remain competitive, our business, financial condition and results of operations could be materially adversely affected.
To the extent any of our competitors are more successful with respect to any key competitive factor, or we are forced to reduce, or are unable to raise, the price of any of our products in order to remain competitive, our business, financial condition and results of operations could be materially adversely affected.
If we are unable to successfully integrate our systems to support critical business operations and to produce information for business decision-making activities, we could experience a material adverse impact on our business or an inability to timely and accurately report our financial results.
If we are unable to successfully integrate our systems to support critical business operations and to produce information for business decision-making activities, we could also experience a material adverse impact on our business or an inability to timely and accurately report our financial results.
Counterfeit or illegally compounded products are frequently unsafe or ineffective and can be potentially life-threatening to animals. Our reputation and business could suffer harm as a result of counterfeit or illegally compounded products which are alleged to be equivalent and/or which are sold under our brand name.
Counterfeit or illegally compounded products are frequently unsafe or ineffective and can be potentially life-threatening to animals. Our reputation and business could suffer harm as a result of counterfeit or illegally compounded products which are alleged to be equivalent and/or which are sold under our brand name(s).
Minor deviations in our manufacturing or logistical processes, such as temperature excursions or improper package sealing, could result, and have in the past resulted in, delays, inventory shortages, unanticipated costs, product recalls, product liability and/or regulatory action.
Further, minor deviations in our manufacturing or logistical processes, such as temperature excursions or improper package sealing, could result, and have in the past resulted in, delays, inventory shortages, unanticipated costs, product recalls, product liability and/or regulatory action.
Business — Intellectual Property.” Generic competitors are becoming more aggressive in terms of launching products before patent rights expire, and, because of attractive pricing, sales of generic products are an increasing percentage of overall animal health sales in certain regions.
Business – Intellectual Property." Generic competitors are becoming more aggressive in terms of launching products before patent rights expire, and, because of attractive pricing, sales of generic products are an increasing percentage of overall animal health sales in certain regions.
Credit rating agencies also evaluate our industry as a whole and may change their credit ratings for us based on their overall view of our industry. We cannot be sure that credit rating agencies will maintain their ratings on us and certain of our debt.
Credit rating agencies also evaluate our industry as a whole and may change their credit ratings for us based on their overall view of our industry. We cannot be sure that credit rating agencies will maintain their ratings for us or for certain of our debt.
The animal health industry is highly competitive. Our competitors include standalone animal health businesses, the animal health businesses of large pharmaceutical companies, specialty animal health businesses and companies that mainly produce generic products. Several new start-up companies also compete in the animal health industry.
The animal health industry is highly competitive. Our competitors include standalone animal health businesses, the animal health businesses of large pharmaceutical companies, specialty animal health businesses and companies that mainly produce generic products. Several start-up companies also compete in the animal health industry.
If any of our top products experience issues, such as disruptive innovations or the introduction of more effective competitive products, negative publicity, changes to veterinarian or customer preferences, loss of patent protection, material product liability litigation, new or unexpected side effects, manufacturing disruptions and/or regulatory proceedings, our revenue could be negatively impacted, perhaps significantly.
If any of our top products experience issues, such as disruptive innovations or the introduction of more effective competitive products, negative publicity, changes in veterinarian or customer preferences, loss of patent protection, material product liability litigation, new or unexpected side effects, manufacturing disruptions and/or regulatory proceedings, our revenue could be negatively impacted, perhaps significantly.
However, trade partnerships and treaties can be modified by domestic and foreign governments, which could result in new or increased tariffs. Additionally, countries are becoming increasingly protectionist, both to protect local industries as well as to ensure domestic supply chain continuity for key products, such as medicine.
However, trade partnerships and treaties can be modified by domestic and foreign governments, which could result in new or increased tariffs. Additionally, countries are becoming increasingly protectionist, both to protect local industries as well as to ensure domestic supply chain continuity for key products, such as medicines.
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 environmental, health and safety 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 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.
In addition, pet owners may substitute human health products for animal health products if human health products are deemed to be lower-cost alternatives. Legislation has also been proposed in the U.S., and may be proposed in the U.S. or abroad in the future, which could impact the distribution channels for our pet health products.
In addition, pet owners may substitute human health products for animal health products if human health products are deemed to be lower-cost alternatives. Legislation has also been proposed in the U.S. and may be proposed in the U.S. or abroad in the future, that could impact the distribution channels for our pet health products.
Our amended and restated articles of incorporation and our amended and restated bylaws contain provisions that are intended to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover, which could deter coercive takeover practices and inadequate takeover bids.
Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws contain provisions intended to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover, which could deter coercive takeover practices and inadequate takeover bids.
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.
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.
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. 28 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.
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.
For example, many of our competitors have relationships with key distributors and, because of their size, the ability to offer attractive pricing incentives, which may negatively impact or hinder our relationships with these distributors.
For example, many of our competitors have relationships with key distributors and, because of their size, an ability to offer attractive pricing incentives, which may negatively impact or hinder our relationships with these distributors.
In addition, concerns about the financial resources of pet owners could cause veterinarians to alter their treatment recommendations in favor of lower-cost alternatives to our products, which could result in a decrease in sales of our pet health products, especially in developed countries where there are higher rates of pet ownership.
In addition, concerns about the financial resources of pet owners 26 Table of Contents could cause veterinarians to alter their treatment recommendations in favor of lower-cost alternatives to our products, which could result in a decrease in sales of our pet health products, especially in developed countries where there are higher rates of pet ownership.
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.
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.
These impacts include, but are not limited to: • 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 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.
Further, consolidation in the animal health industry could result in existing competitors realizing additional efficiencies or improving portfolio bundling opportunities, thereby potentially increasing their market share and pricing power, which could lead to a decrease in our revenue and profitability and an increase in competition.
Further, consolidation in the animal health industry could result in existing competitors realizing additional efficiencies or improving portfolio bundling opportunities, thereby potentially increasing their market share and pricing power, which could lead to a decrease in our revenue and profitability.
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.
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.
For example, on average, approximately 75% and 60% of total annual revenue contribution from our higher-margin parasiticide products Seresto and Advantage Family , respectively, occurs in the first half of the year. This dynamic is reflective of the flea and tick season in the Northern Hemisphere.
For example, on average, approximately 75% and 60% of total annual revenue contribution from our higher margin parasiticide products Seresto and Advantage Family , respectively, occurs in the first half of the year, reflective of the flea and tick season in the Northern Hemisphere.
In most markets, pet owners typically purchase 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 or other over-the-counter distribution channels.
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.
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.
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 reports alleging that the collar has caused injury and death to pets. Further, a U.S.
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.
Competitive pressure could arise from, among other things, more favorable safety and efficacy product profiles, limited demand growth or a significant number of additional competitive products being introduced into a particular market, price reductions by competitors, the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure animal health products at lower costs than we can and the ability of competitors to access more or newer technology than we can.
Competitive pressures could arise from, among other things, differences in safety and efficacy product profiles, limited demand growth or a significant number of additional competitive products being introduced into a particular market, price reductions by competitors, the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure animal health products at lower costs than we can and the ability of competitors to access more or newer technology than we can.
For example, shareholder class action lawsuits that were 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 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.
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 generally accepted accounting principles, 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.
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.
Our credit facilities contain, and any other existing or future indebtedness of ours would likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our and our subsidiaries’ ability to, among other things: • incur additional debt, guarantee indebtedness or issue certain preferred shares; • pay dividends on or make distributions in respect of, or repurchase or redeem, our capital stock or make other restricted payments; • prepay, redeem or repurchase certain debt; • make loans or certain investments; • sell certain assets; • create liens on certain assets; • consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; • enter into certain transactions with our affiliates; • substantially alter the businesses we conduct; • enter into agreements restricting our subsidiaries’ ability to pay dividends; and • designate our subsidiaries as unrestricted subsidiaries.
Our credit facilities contain, and any other existing or future indebtedness of ours would likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things: • incur additional debt, guarantee indebtedness or issue certain preferred shares; • prepay, redeem or repurchase certain debt; • pay dividends on or make distributions in respect of, or repurchase or redeem, our capital stock or make other restricted payments; • make loans or certain investments; • sell certain assets; • create liens on certain assets; • consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; • enter into certain transactions with our affiliates; and • substantially alter the businesses we conduct.
Some of our top products such as the Advantage Family , Rumensin , Maxiban , Denagard and Tylan Premix do not have patent protection. Other products are protected by patents that expire over the next several years.
Some of our top products such as the Advantage Family , Rumensin , Maxiban , Denagard and Trifexis do not have patent protection. Other products are protected by patents that expire over the next several years.
Risks Related to Elanco Common Stock We do not anticipate paying dividends on our common stock in the foreseeable future. We do not anticipate paying any dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt.
We do not anticipate paying any dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt.
Potential difficulties that we may encounter in the integration process, including as a result of distraction of our management, include the following: • the inability to realize the anticipated value from various assets of the target 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 target company as a result of the diversion of management’s attention from ongoing business activities as a result of completing the transaction and integrating the companies’ operations.
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.
As such, our ability to effectively manage our business depends on the security, reliability and adequacy of our technology systems and data and the ability of our employees to follow our cyber security policies and protocols. 37 Table of Contents Any actual or perceived access, disclosure or other loss of information or any significant breakdown, intrusion, interruption, cyber-attack or corruption of customer, employee or company data or our failure to comply with federal, state, local and foreign privacy laws or contractual obligations with customers, vendors, payment processors and other third parties, could result in legal claims or proceedings, liability under laws or contracts that protect the privacy of personal information, regulatory penalties, disruption of our operations, and damage to our reputation, all of which could materially adversely affect our business, revenue and competitive position.
As such, our ability to effectively manage our business depends on the security, reliability and adequacy of our technology systems and data and the ability of our employees to follow our cybersecurity policies and protocols. 33 Table of Contents Any actual or perceived access, disclosure or other loss of information or any significant breakdown, intrusion, interruption, cyber-attack or corruption of customer, employee or company data, or our failure to comply with federal, state, local and foreign privacy laws or contractual obligations with customers, vendors, payment processors and other third parties, could result in legal claims or proceedings, liability under laws or contracts that protect the privacy of personal information, regulatory penalties, disruption of our operations and damage to our reputation, all of which could materially adversely affect our business, financial condition and results of operations.
Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.
Similarly, changes in the expected or actual return on plan assets can result in significant changes in the net periodic pension cost in the following years.
We intend to vigorously defend 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 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.
If any such claims with respect to Seresto or our other products are resolved adversely to us, or if a regulatory agency determines that a recall of any of our products, including Seresto , is necessary, such action could cause harm to our reputation, reduce our product sales, result in monetary penalties and other costly remedies against us, and could therefore have a material adverse effect on our business, financial condition and results of operations.
However, if any similar claims with respect to our products are resolved adversely to us, or if a regulatory agency determines that a recall or cancellation of registrations of any of our products is necessary, such action could cause harm to our reputation, reduce our product sales, result in monetary penalties and other costly remedies against us, and could therefore have a material adverse effect on our business, financial condition and results of operations.
It is possible that our costs of complying with current and future environmental, health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous materials could materially adversely affect our business, financial condition and results of operations.
It is possible that our costs of complying with current and future EHS laws, and our liabilities arising from past or future releases of, or exposure to, hazardous materials could materially adversely affect our business, financial condition and results of operations.
Any further downgrades could result in requirements to pay additional interest under the senior unsecured notes. Moreover, any decision to downgrade our ratings could restrict our access to, and negatively impact the terms of, current or future financings and trade credit extended by our suppliers of raw materials or other vendors.
Any further downgrades could result in requirements to pay additional interest under the 4.900% Senior Notes due 2028. Moreover, any decision to downgrade our ratings could restrict our access to, and negatively impact the terms of, current or future financings and trade credit extended by our suppliers of raw materials or other vendors.
Any one of these consequences could materially adversely affect our business, financial condition and results of operations. In addition, we will not be able to market new products unless and until we have obtained all required regulatory approvals in each jurisdiction where we propose to market those products.
Any one of these consequences could materially adversely affect our business, financial condition and results of operations. In addition, we will not be able to market new products unless and until we have obtained all required regulatory approvals or equivalent notices in each jurisdiction where we plan to market those products.
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.
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.
This trend has been demonstrated by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products 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.
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; • natural disasters; 33 Table of Contents • 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: • 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.
Rising costs or reduced income for our customers could have a material adverse effect on our business, financial condition and results of operations. We rely on third parties to source many of our raw materials and to manufacture products that we distribute. For more information, see "Item 1.
Rising costs or reduced income for our customers could have a material adverse effect on our business, financial condition and results of operations. We also rely on third parties to source many of our raw materials and to manufacture products that we distribute.
Our international operations could be limited or disrupted by any of the following: • volatility in the international financial markets; • changes in the value of foreign currencies relative to the U.S. dollar or high inflation; • 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 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.
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; • continued uncertainty, potential instability and volatility due to the withdrawal of the U.K. from the EU; and 36 Table of Contents • 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 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, if one or more of our pet health distributors discontinues or modifies their relationship with us, our business, financial condition and results of operations may be materially adversely affected.
Any of these events could materially adversely affect our business, financial condition and results of operations. In addition, if one or more of our pet health distributors discontinues or modifies their relationship with us, our business, financial condition and results of operations may be materially adversely affected.
Clinical trials and procedures are inherently uncertain and there can be no assurance that these trials or procedures will be enrolled or completed in a timely or cost-effective manner or result in a commercially viable product or indication. Failure to do so could have a material adverse effect on our prospects.
Clinical trials and procedures are inherently uncertain and there can be no assurance that these trials or procedures will be enrolled or completed in a timely or cost-effective manner or result in a commercially viable product or indication. Failure to achieve positive clinical trial and/or testing results could have a material adverse effect on our prospects.
Business — Manufacturing and Supply Chain." We have and may continue to experience cost increases in certain raw materials or other components required to manufacture our products due to increased shipping costs and other inflationary pressures. This may have a material adverse impact on our financial results if we cannot pass on such increases to our customers.
Additionally, we have and may continue to experience cost increases for certain raw materials or other components required to manufacture our products due to increased shipping costs and other inflationary pressures. This may have a material adverse impact on our financial results if we cannot pass on such increases to our customers.
Our business has been and may continue to be negatively impacted by human disease outbreaks, epidemics, pandemics or other widespread public health concerns, such as the COVID-19 pandemic, including its variants, and the related travel restrictions and governmental mandates.
Our business has been, and may continue to be, negatively impacted by human disease outbreaks, epidemics, pandemics or other widespread public health concerns, such as the COVID-19 pandemic and its variants.
There are two classes of antibiotics used in animal health: shared-class, or medically important, antibiotics, which are used to treat infectious disease caused by pathogens that occur in both humans and animals; and animal-only antibiotics, which are used to treat infectious disease caused by pathogens that occur in animals only. For more information, see “Item 1.
There are two classes of antibiotics used in animal health: shared-class, or medically important, antibiotics, which are used to treat infectious disease caused by pathogens that occur in both humans and animals; and animal-only antibiotics, which are used to treat infectious disease caused by pathogens that occur in animals only.
The instruments that will govern our indebtedness 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 capital to be used to repay other indebtedness when it becomes due.
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.
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; • 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). 41 Table of Contents Such actions by the lenders could cause cross defaults under our other indebtedness, including our senior unsecured notes.
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).
Our insurance policies may be insufficient to protect against all potential hazards or litigation claims. 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.
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.
Even after a product reaches market, we may be subject to re-review and may lose our approvals. For example, pending claims have been asserted in a lawsuit against the FDA's approval of Experior™ , which was one of our eight new product launches in 2021 .
Even after a product reaches market, we may be subject to re-review and may lose our approvals. For example, pending claims have been asserted in a lawsuit against the FDA's approval of Experior, a product launched in 2021 .
In recent years, there has been a trend toward the concentration of veterinarians in large clinics and hospitals. In addition, farm animal producers, particularly swine and poultry producers, and our distributors have seen recent consolidation in their industries.
In recent years, there has been a trend toward the concentration of veterinarians in large clinics and hospitals. We have also seen recent consolidation among farm animal producers, particularly swine and poultry producers, and among our distributors.
A third party may sue us, or our distributors or licensors, or otherwise make a claim alleging infringement or other violation of such third-party’s patents, trademarks, trade dress, copyrights, trade secrets, domain names or other intellectual property rights.
The actual or purported intellectual property rights of third parties may negatively affect our business. A third party may sue us, or our distributors or licensors, or otherwise make a claim alleging infringement or other violation of such third-party’s patents, trademarks, trade dress, copyrights, trade secrets, domain names or other intellectual property rights.
Because we market our pet health prescription products primarily through the veterinarian distribution channel, any significant decrease in visits to veterinarians by pet owners could reduce our market share for such products and materially adversely affect 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.
If we are deemed by a governmental or regulatory agency to have engaged in the promotion of any of our products for off-label use, such agency could request that we modify our training or promotional materials and practices, and we could be subject to significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry.
If we are deemed by a governmental or regulatory agency to have engaged in the promotion of any of our products for off-label use, such agency could request that we modify our training or promotional materials and practices, and we could be subject to significant fines and penalties.
Given the volatility of exchange rates and despite the mitigating impact of foreign currency forward or option derivative contracts we enter into in order to reduce the effect of fluctuating currency exchange rates in future periods, there is no guarantee that we will be able to effectively manage currency transaction and/or translation risks, which could adversely affect our results of operations.
Given the volatility of exchange rates and despite the mitigating impact of foreign currency forward or option derivative contracts we enter into to reduce the effect of fluctuating currency exchange rates, there is no guarantee we will be able to effectively manage currency transaction and/or translation risks, which could adversely affect our results of operations. See Part II, Item 7A.
We have certain defined benefit pension plans, predominantly in Germany and Switzerland, in which our employees participate that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees were legally required to transfer to us at the time of our separation from Lilly.
We have certain defined benefit pension plans, predominantly in Germany and Switzerland, that are either dedicated to our current or past employees or where the plan assets and liabilities related to our current or past employees were legally required to transfer to us at the time of our separation from Lilly (see Note 17.
Litigation matters and regulatory investigations, regardless of their merits or their ultimate outcomes, are costly, divert management’s attention and may materially adversely affect our reputation and demand for our products. We cannot predict with certainty the eventual outcome of pending or future legal matters.
Litigation matters and regulatory investigations, regardless of their merits or ultimate outcomes, are costly, divert management’s attention and may materially adversely affect our reputation and demand for our products. We cannot predict with certainty the eventual outcome of pending or future legal matters. An adverse outcome of litigation or legal matters could result in us being responsible for significant damages.
Our subsidiaries may not be able to, or may not be permitted to, make adequate distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from our subsidiaries.
Our subsidiaries may not be able to, or may not be permitted to, make adequate distributions to enable us to make required debt repayments. Each subsidiary is a distinct legal entity and, under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from them.
Our business could be materially adversely affected by labor disputes, strikes or work stoppages. Some of our employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements in certain jurisdictions, including the U.S. 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 in certain jurisdictions. As a result, we are subject to the risk of labor disputes, strikes, work stoppages and other labor-relations matters.
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, including those arising from the recent crisis in Ukraine.
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.
Public loss of confidence in the integrity of vaccines and/or pharmaceutical products as a result of counterfeiting, illegal compounding or theft could have a material adverse effect on our business, financial condition and results of operations.
Public loss of confidence in the integrity of vaccines and/or pharmaceutical products as a result of counterfeiting, illegal compounding or theft could have a material adverse effect on our business, financial condition and results of operations. The misuse or off-label use of our products may harm our reputation or result in financial or other damages.
In the wake of the COVID-19 pandemic, we are increasingly dependent on our information technology systems as our office workers, who are primarily working 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 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.
As of December 31, 2022, for pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation was $301 million with plan assets of $150 million.
As of December 31, 2023, for pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation was $343 million with plan assets of $168 million.
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, including weather conditions or an outbreak of infectious disease such as COVID-19 or diseases carried by farm animals such as African Swine Fever.
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.
Changes in our credit rating could increase our interest expense and restrict our access to, and negatively impact the terms of, current or future financings or trade credit. Credit rating agencies continually revise their ratings for the companies that they follow, including us.
We have pledged a significant portion of our assets as collateral under our credit facilities. Changes in our credit ratings could increase our interest expense and restrict our access to, and negatively impact the terms of, current or future financings or trade credit. Credit rating agencies continually revise their ratings for the companies they follow, including us.
Increased or decreased inventory levels in our distribution channels can lead to fluctuations in our revenues and variations in payment terms extended to our distributors can impact our cash flows. In addition to selling our products directly to veterinarians, we sell to distributors and retailers who, in turn, sell our products to third parties.
Increased or decreased inventory levels in our distribution channels can lead to fluctuations in our revenues and levels of inventory on-hand. In addition to selling our products directly to veterinarians, we sell to distributors and retailers who, in turn, sell our products to third parties.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeIn addition, our global manufacturing network is supplemented by approximately 150 CMOs. For more information, see "Item 1. Business — Manufacturing and Supply Chain." 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.
Biggest changeOur 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.
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. The largest manufacturing site in our network 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 18 manufacturing sites. Our largest manufacturing site is located in Clinton, Indiana.
Business — Research and Development." We own or lease various additional properties for other business purposes, including office space, warehouses and logistics centers. We believe that our existing properties, as supplemented by CMOs, are adequate for our current requirements and our operations in the near future.
We believe our existing properties, as supplemented by CMOs, are adequate for our current requirements and our operations in the near future.
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In addition, we maintain R&D operations at non-manufacturing locations in the U.S., Germany, Australia, Brazil, China, India, and Switzerland. Our R&D headquarters is currently our U.S. R&D site located in Greenfield, Indiana and will relocate to Indianapolis, Indiana when we relocate our global headquarters, expected in 2025. For more information, see "Item 1.
Added
Our 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.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe graph assumes that $100 was invested on September 20, 2018 (our initial public offering date) in Elanco common stock, the S&P 500 Index, and the S&P 500 Pharmaceuticals Index. The graph measures total shareholder return, which takes into account both stock price and dividends.
Biggest changeThe graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company’s stock.
Holders There were 234 holders of record of our common stock as of February 24, 2023. This does not include the number of shareholders who hold shares of our common stock through banks, brokers or other financial institutions.
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.
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. Performance Graph This 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 for the period ended on December 31, 2022.
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.
September 20, 2018 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Elanco Animal Health Inc. $ 100.00 $ 87.58 $ 81.81 $ 85.19 $ 78.83 $ 38.76 S&P 500 Index 100.00 86.97 114.36 135.40 174.26 142.70 S&P 500 Pharmaceuticals Index 100.00 98.62 113.50 122.04 153.47 166.44
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
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It assumes that dividends paid by a company are reinvested in that company’s stock. 45 Table of Contents *$100 invested on September 20, 2018 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.
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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.

Item 7. Management's Discussion & Analysis

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

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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, including weather conditions and the COVID-19 global pandemic.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 operations and financial position.
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.
In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, 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, amount and availability of taxable temporary differences and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
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 $181 million and $162 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 $289 million and $181 million, respectively, against these deferred tax assets.
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, following U.S. tax reforms, the income taxes associated with transferring cash to the U.S.
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.
Purchase obligations consist of open purchase orders as of December 31, 2022 and contractual payment obligations with significant vendors which are noncancelable and are not contingent. These obligations are primarily short-term in nature. See Note 14: 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, 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.
Contractual Obligations Our contractual obligations and commitments as of December 31, 2022 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, 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.
See Note 16: Income Taxes to our consolidated financial statements for further discussion. 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 of the U.S.
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.
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 which include principal and interest payments as well as interest rate swaps, operating lease payments, purchase obligations, and costs associated with the integration of Bayer Animal Health.
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.
For more information related to our impairment charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements. 59 Table of Contents 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.
For more information related to our indefinite-lived asset impairment charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements. 47 Table of Contents 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.
As of December 31, 2022 and 2021, we had valuation allowances of $228 million and $182 million, respectively. In recent years we have incurred pre-tax losses in the U.S. primarily as a result of transaction, restructuring, integration and other costs.
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.
We anticipate that we will continue to record a valuation allowance against the losses until such time as we are able to determine it is “more likely than not” that the deferred tax asset will be realized. Recently Issued Accounting Pronouncements For discussion of our new accounting standards, see "Item 8.
We anticipate we will continue to record a valuation allowance against the losses until such time as we are able to determine it is “more likely than not” that the deferred tax asset will be realized. Recently Issued Accounting Pronouncements For discussion of our new accounting standards, see "Item 8. Financial Statements and Supplementary Data — Note 2.
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.
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.
For results of operations discussions related to years ended December 31, 2021 and 2020, refer to Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 28, 2022.
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.
Our future growth and success depend on both our pipeline of new products, including new products that we develop internally and may develop through joint ventures and products that we are able to obtain through licenses or acquisitions, and the expansion of the use 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 are able to obtain through licenses or acquisitions, and the life cycle management of our existing products.
During the year ended December 31, 2022, revenue to Russian and Ukrainian customers represented approximately 2% of our consolidated revenue. Assets held in Russia as of December 31, 2022 represented less than 1% of our consolidated assets.
During 2023, revenue from Russian and Ukrainian customers represented approximately 1% of our consolidated revenue. Assets held in Russia as of December 31, 2023, represented less than 1% of our consolidated assets.
We intend to indefinitely reinvest foreign earnings for continued use in our foreign operations. See Note 16: Income Taxes to the consolidated financial statements for further discussion. 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.
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.
Cash used for financing activities during 2022 primarily reflected the tender offer completed during the year as well as net repayments on our revolving credit facility and the repayment of indebtedness outstanding under our term loan B credit facility, partially offset by proceeds from our newly issued incremental term facilities.
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.
As markets 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.
However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See "Item 1A.
Critical Accounting Policies and Estimates The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
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.
The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods. (2) Impact of 2021 revenue from Bayer Animal Health is reflected in volume.
The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior year were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods. (2) Represents revenue from arrangements in which we manufacture products on behalf of a third-party.
At this time, we are limiting our business in Russia to only the essential products that support these needs, while complying with all imposed sanctions.
At the center of that work is ensuring access and availability of food and avoiding the spread of disease. At this time, we are limiting our business in Russia to only the essential products that support these needs, while complying with all imposed sanctions.
Significant management judgment is required in estimating fair values in our impairment reviews and in the creation of forecasts of future operating results that are used in the discounted cash flow method of valuation.
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.
These 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 interest rates and inflation.
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.
We expect 2023 capital expenditures and software purchases to be approximately $165 million to $190 million. 57 Table of Contents Description of Indebtedness For a complete description of our debt and available credit facilities as of December 31, 2022, see Note 10: Debt to the consolidated financial statements.
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.
Overview Elanco is a global animal health company that develops products for pets and farm animals in more than 90 countries. With a heritage dating back to 1954, we rigorously innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees.
With a heritage dating back to 1954, we consistently innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees.
Comparability of Historical Results Our historical results of operations for the periods presented 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 Conditions Affecting Our Results of Operations." 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 elsewhere in this report.
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.
Based on our qualitative assessment, we concluded that it was more likely than not that the fair value of our single reporting unit was less than its carrying value, and therefore, we were required to perform a quantitative goodwill impairment test, which involved comparing the estimated fair value of our single reporting unit with its carrying value, including goodwill.
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.
Farm Animal revenue decreased by $113 million or 5%, driven by an unfavorable impact from foreign exchange rates and a decrease in volume, partially offset by an increase in price. On a constant currency basis, revenue was flat year over year.
Farm animal revenue increased $52 million, or 2%, driven by an increase in price, which was partially offset by an unfavorable impact from foreign exchange rates. On a constant currency basis, the increase of 4% was primarily attributable to pricing increases, as volumes were flat year over year.
In addition, we have the ability to access capital markets to obtain debt refinancing for longer-term funding, if required, to service our long-term debt obligations. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants. Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility.
Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants. Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As market conditions change, we will continue to monitor our liquidity position.
Our products are generally sold worldwide to third-party distributors and independent retailers, and directly to farm animal producers and veterinarians. With the acquisition of Bayer Animal Health, we have expanded our presence in retail and e-commerce channels, allowing our customers to shop where and how they want.
Our products are generally sold worldwide to third-party distributors and independent retailers, and directly to farm animal producers and veterinarians. In recent years, we have expanded our omnichannel presence in both the veterinary clinic and in retail markets, including e-commerce.
Revenue Recognition Our gross product revenue is subject to deductions that are generally estimated and recorded in the same period that the revenue is recognized and that primarily represent revenue incentives (rebates and discounts) and sales returns.
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).
A change in these assumptions may result in an increase or decrease in the realizability of our existing deferred tax assets, and therefore a change in the valuation allowance, in future periods. Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years.
A change in these assumptions may result in an increase or decrease in the realizability of our existing deferred tax assets, and therefore a change in the valuation allowance, in future periods. In making such judgments, significant weight is given to evidence that can be objectively verified.
Certain of our accounting policies are considered critical because these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often requiring the use of estimates about the effects of matters that are inherently uncertain.
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.
Year Ended December 31, % Change (Dollars in millions) 2022 2021 2020 22/21 21/20 Revenue $ 4,411 $ 4,764 $ 3,271 (7)% 46% Costs, expenses and other: Cost of sales 1,913 2,132 1,667 (10)% 28% % of revenue 43% 45% 51% Research and development 321 369 329 (13)% 12% % of revenue 7% 8% 10% Marketing, selling and administrative 1,265 1,403 997 (10)% 41% % of revenue 29% 29% 30% Amortization of intangible assets 528 556 360 (5)% 54% % of revenue 12% 12% 11% Asset impairment, restructuring and other special charges 183 634 623 (71)% 2% Interest expense, net of capitalized interest 241 236 150 2% 57% Other (income) expense, net 32 5 (178) NM NM Loss before income taxes (72) (571) (677) 87% 16% % of revenue (2)% (12)% (21)% NM NM Income tax expense (benefit) 6 (88) (103) 107% 15% Net loss $ (78) $ (483) $ (574) 84% 16% Certain amounts and percentages may reflect rounding adjustments.
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.
The decrease was primarily driven by cash paid for the acquisition of KindredBio during the year ended December 31, 2021, as well as a year over year decrease in cash paid for purchases of intangible assets. These decreases were partially offset by a year over year increase in cash used for purchases of property and equipment.
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.
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 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.
Our products are sold in more than 90 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. For the years ended December 31, 2022 and 2021, approximately 51% of our revenue was denominated in foreign currencies.
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.
Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert 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.
The change was primarily due to an increase in taxes on international operations driven by increased taxable income as well as an increase in state taxes in separate filing states offset by other decreases, including a $16 million Brazil income tax refund claim resulting from a Supreme Court decision rendered in 2022 that determined certain Brazil state valued-added tax (VAT) incentives were not subject to federal tax, a $17 million tax benefit due to the termination of interest rate swaps and a $12 million net reduction in taxes associated with the divestiture of the Speke manufacturing site.
Income tax expense for the year ended December 31, 2022, included a $17 million income tax benefit reclassified from accumulated other comprehensive loss due to the termination of interest rate swaps and a $16 million Brazil income tax refund claim resulting from a Brazil Supreme Court decision rendered in 2022 that determined certain Brazil state value-added tax (VAT) incentives were not subject to federal tax.
Financing Activities Our cash used in financing activities was $549 million for the year ended December 31, 2022 compared to cash provided by financing activities of $210 million for the year ended December 31, 2021.
Financing Activities Cash used for financing activities was $83 million for the year ended December 31, 2023, compared to $549 million for the year ended December 31, 2022. In 2023, cash used to repay long-term borrowings totaled $402 million and included the repayment in full of our 4.272% Senior Notes due 2023.
For more information, see Note 3: Basis of Presentation to the consolidated financial statements.
For additional information, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
We do not currently manufacture products or source any materials from companies in Russia for use in our products, but that could change because of new laws requiring products sold in Russia to be produced there as well. We do not conduct business with the Russian government.
We have entered into an agreement pursuant to which we will supply raw material inventories to an entity in Russia that will manufacture its own products, which we will then distribute, because of new laws requiring products sold in Russia to be produced there as well. We do not conduct business with the Russian government.
Risk Factors - We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful." 56 Table of Contents 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, $ Change Net cash provided by (used for): 2022 2021 2020 22/21 21/20 Operating activities $ 452 $ 483 $ (41) $ (31) $ 524 Investing activities (179) (530) (4,779) 351 4,249 Financing activities (549) 210 4,954 (759) (4,744) Effect of exchange rate changes on cash and cash equivalents (17) (31) 27 14 (58) Net increase (decrease) in cash, cash equivalents and restricted cash $ (293) $ 132 $ 161 $ (425) $ (29) Operating Activities Our cash flow from operating activities decreased $31 million to $452 million for the year ended December 31, 2022 from $483 million for the year ended December 31, 2021.
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.
Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, “Risk Factors,” may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements.
“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.
On a global basis, the effect of price, foreign exchange rates and volumes on changes in revenue as compared to the prior year was as follows: Full year 2022 (Dollars in millions) Revenue Price FX Rate Volume Total CER (1) Pet Health $ 2,138 2% (4)% (7)% (9)% (5)% Farm Animal 2,219 2% (5)% (2)% (5)% —% Subtotal 4,357 2% (4)% (5)% (7)% (2)% Contract Manufacturing 54 —% (4)% (29)% (34)% (29)% Total $ 4,411 2% (4)% (5)% (7)% (3)% Full year 2021 (Dollars in millions) Revenue Price FX Rate Volume (2) Total CER (1) Pet Health $ 2,350 4% 1% 68% 73% 72% Farm Animal 2,332 —% 1% 26% 27% 26% Subtotal 4,682 2% 1% 44% 47% 46% Contract Manufacturing 82 —% —% 3% 3% 3% Total $ 4,764 2% 1% 43% 46% 45% Note: Numbers may not add due to rounding (1) Constant exchange rate (CER), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange.
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.
For example: • for 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; and • for sales returns, we consider items such as: local returns policies and practices; returns as a percentage of revenue; an understanding of the reasons for past returns; estimated shelf life by product; and estimates of the amount of time between shipment and return to estimate the impact of sales returns.
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.
If so, such extensions of customer payment terms could result in additional uses of our cash flow. Investing Activities Our cash flow used for investing activities decreased $351 million to $179 million for the year ended December 31, 2022 compared to $530 million for the year ended December 31, 2021.
Investing Activities Cash used for investing activities decreased $10 million to $169 million for the year ended December 31, 2023, compared to $179 million for the year ended December 31, 2022.
These include, but are not limited to, estimates and assumptions regarding (1) our future cash flows, revenue, and other profitability measures such as gross margin and EBITDA margin, (2) the long-term growth rate of our business, and (3) the determination of our weighted-average cost of capital, which is a factor in determining the discount rate.
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.
Components of Revenue and Costs and Expenses Revenue Our revenue is primarily derived from a diversified portfolio of products across species consisting of dogs and cats (collectively, pet health) and cattle, poultry, swine 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 aqua (collectively, farm animal).
This decrease was partially offset by a decrease in net loss after adjusting for non-cash items, as well as proceeds of $207 million from interest rate swap settlements in the current year.
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.
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. Although the amounts recorded for these revenue deductions are dependent on estimates and assumptions, historically our adjustments to actual results have not been material.
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.
Interest Expense, Net of Capitalized Interest Year Ended December 31, % Change (Dollars in millions) 2022 2021 2020 22/21 21/20 Interest expense, net of capitalized interest $ 241 $ 236 $ 150 2 % 57 % Interest expense increased $5 million to $241 million in 2022, primarily due to $20 million in debt extinguishment losses recorded upon the retirement of a portion of the aggregate principal on our 4.272% Senior Notes due August 28, 2023 and our Term Loan B during the year and higher interest on variable-rate debt due to rate increases, partially offset by a lower average debt balance and the favorable impact of refinancing at lower interest rates.
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.
See Note 4: Summary of Significant Accounting Policies and Note 5: Revenue to the consolidated financial statements for further discussion regarding our revenue recognition policy and quantitative information regarding our rebate programs, respectively. 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.
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.
Accordingly, in any period, our reported revenue, expenses and resulting earnings (loss) are impacted by changes in the exchange rates of those currencies relative to the U.S. dollar. Increases or decreases in inventory levels in our distribution channels can positively or negatively impact our quarterly and annual revenue results, leading to variations in revenues.
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.
Global economic conditions continue to create uncertainty, most notably due to the Russia-Ukraine conflict, the COVID-19 pandemic, supply chain disruptions, and rising inflation. Continued evolution of these conditions has led to economic slowdowns in certain countries and/or regions.
Continued evolution of these conditions has led 40 Table of Contents to economic slowdowns in certain countries and/or regions and volatility in consumer behavior. We anticipate global macroeconomic pressures to continue in 2024. Russia-Ukraine Conflict: As a global animal health leader, we have an obligation to support the health of animals and people.
We continue to pursue the development of new chemical and biological molecules through our approach to innovation.
Product Development and Regulatory Update 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.
On a constant currency basis, the decrease of 5% was primarily attributable to lower demand as a result of increased competition impacting certain parasiticide products as well as the overall deterioration in global macroeconomic conditions, which particularly impacted sales of over-the-counter U.S. parasiticide products. The impact was partially offset by growth in our global pain portfolio.
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.
A change in these assumptions or the use of alternative estimates and assumptions could have a significant impact on the estimated fair value and may expose us to impairment losses. During the years ended December 31, 2022, 2021 and 2020, we recorded asset impairments of $60 million, $66 million and $17 million, respectively.
F uture changes in our discount rate assumption, whether driven by increases in long-term treasury rates or other factors, or future changes in any of these other significant assumptions or the use of alternative estimates and assumptions, could have a significant impact on our reporting unit's estimated fair value and may expose us to further goodwill impairment losses.
Amortization of Intangible Assets Year Ended December 31, % Change (Dollars in millions) 2022 2021 2020 22/21 21/20 Amortization of intangible assets $ 528 $ 556 $ 360 (5) % 54 % Amortization of intangible assets decreased $28 million to $528 million in 2022 as compared to 2021, primarily due to the impact of foreign exchange rates. 54 Table of Contents Asset Impairment, Restructuring and Other Special Charges Year Ended December 31, % Change (Dollars in millions) 2022 2021 2020 22/21 21/20 Asset impairment, restructuring and other special charges $ 183 $ 634 $ 623 (71) % 2 % For additional information regarding our asset impairment, restructuring and other special charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements.
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.
Subsequent to the acquisition date, our consolidated financial statements include the assets, liabilities, operating results and cash flows of Bayer Animal Health. We offer a diverse portfolio of approximately 200 brands that make us a trusted partner to pet owners, veterinarians and farm animal producers.
We operate our business in a single segment, directed at advancing the well-being of animals, people and the planet, enabling us to realize our vision of Food and Companionship Enriching Life. Our diverse product portfolio of approximately 200 brands helps make us a trusted partner to pet owners, veterinarians and farm animal producers.
These fluctuations may also affect the ability to buy and sell our products between markets impacted by significant exchange rate variances. Currency movements decreased revenue by approximately 4% during the year ended December 31, 2022. Currency movements increased revenue by approximately 1% and decreased revenue by approximately 1% during the years ended December 31, 2021 and 2020, respectively.
For the years ended December 31, 2023 and 2022, approximately 51% of our revenue was denominated in foreign currencies. Foreign currency movements decreased revenue by 1% and 4% for the years ended December 31, 2023 and 2022, respectively, compared to the prior years.
We believe we are an industry leader in animal health R&D, with a track record of product innovation, business development and commercialization. Competition We face intense competition. Principal methods of competition vary depending on the particular region, species, product category, or individual product. Some of these methods include product quality, price, cost-effectiveness, promotional effectiveness, new product development and product differentiation.
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.
Removed
We operate our business in a single segment directed at fulfilling our vision of enriching the lives of people through food, making protein more accessible and affordable, and through pet companionship, helping pets live longer, healthier lives. We advance our vision by offering products in two primary categories: pet health and farm animal.
Added
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.
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On August 27, 2021, we acquired KindredBio, a biopharmaceutical company that developed innovative biologics focused on saving and improving the lives of pets. We had previously signed an agreement with KindredBio in the second quarter of 2021 to acquire exclusive global rights to KIND-030, a monoclonal antibody in development for the treatment and prevention of canine parvovirus.
Added
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.
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The acquisition of KindredBio further accelerates our opportunity for expansion in pet health, notably by expanding our research efforts in dermatology. See Note 6: Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for additional information on the acquisition.
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Based on comprehensive data from the study, the EPA concluded that Seresto continues to meet all the EPA’s standards for registration under FIFRA, which ensures that products do not pose an unreasonable risk of harm.
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Subsequent to the acquisition date, our consolidated financial statements include the assets, liabilities, operating results and cash flows of KindredBio On August 1, 2020, we completed the acquisition of Bayer Animal Health. The acquisition expanded our pet health product category, advancing our planned portfolio mix transformation and creating a better balance between our farm animal and pet health product categories.
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We believe the EPA's conclusions align with those of authorities worldwide, with Seresto being approved for use in more than 80 countries and supported by veterinary professionals around the globe. The robust scientific evidence continues to support Seresto 's safe use.
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Our product portfolio and pipeline have been enhanced by the addition of Bayer Animal Health, which complements our commercial operations and international infrastructure. See Note 6: Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for additional information on the acquisition.
Added
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).
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A summary of our 2022, 2021 and 2020 revenue and net loss is as follows: Year Ended December 31, 2022 2021 2020 Revenue $ 4,411 $ 4,764 $ 3,271 Net loss (78) (483) (574) 47 Table of Contents As a global company, significant portions of our revenue and expenses are recorded in currencies other than the U.S. dollar.
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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.
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Key Trends and Conditions Affecting Our Results of Operations Industry Trends The animal health industry, which includes both pets and farm animals, is a growing industry that benefits billions of people worldwide.
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We anticipate some additional costs through early 2024 as we finalize these integration activities. Macroeconomic Factors: Our operations are exposed to and are impacted by various global macroeconomic factors.
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We believe that factors influencing growth in demand for pet medicines and vaccines include: • increased pet ownership globally; • pets living longer; and • owners sharing a unique and loving bond with their pets. As demand for animal protein grows, farm animal health is becoming increasingly important.
Added
We face continuing market and operating challenges across the globe due to, among other factors, the Russia-Ukraine conflict, conditions related to the COVID-19 pandemic, supply chain disruption, higher interest rates, foreign currency exchange rate volatility and inflationary pressures.
Removed
We believe that factors influencing growth in demand for farm animal medicines and vaccines include: • two in three people needing improved nutrition; • increased global demand for protein, particularly poultry and aquaculture; • natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, driving the need for more efficient food production; • loss of productivity due to farm animal disease and death; • increased focus on food safety and food security; and • human population growth, increased standards of living, particularly in many emerging markets, and increased urbanization.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

8 edited+9 added−3 removed1 unchanged
Biggest changeWe also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates in future periods.
Biggest changeWe 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 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 face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies.
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.
As of December 31, 2022, we held certain interest rate swap agreements with a notional value of $3,050 million and maturities ranging from 2023 to 2025 that have the economic effect of modifying our variable interest such that a portion of the variable-rate interest payable becomes fixed.
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.
As of December 31, 2022, $4,151 million and $1,749 million of our total long-term debt, including the current portion, is fixed-rate debt (including variable-rate converted to fixed-rate through the use of interest rate swaps) and unhedged variable-rate debt, respectively.
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.
Assets held in Argentina as of December 31, 2022 represented less than 1% of our consolidated assets. During the first quarter of 2022, Turkey’s three-year cumulative inflation rate exceeded 100%, and we concluded that Turkey became a hyperinflationary economy for accounting purposes.
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.
As of April 1, 2022, we applied hyperinflationary accounting for our subsidiary in Turkey and changed its functional currency from the Turkish lira to the U.S. dollar. During the year ended December 31, 2022, revenue in Turkey represented less than 1% of our consolidated revenue.
We have applied hyperinflationary accounting for our Argentina and Turkey subsidiaries since 2018 and 2022, respectively, and as a result, have changed their functional currencies to the U.S. dollar.
Assets held in Turkey as of December 31, 2022 represented less than 1% of our consolidated assets. While the hyperinflationary conditions did not have a material impact on our business during the year ended December 31, 2022, in the future, we may incur larger currency devaluations, which could have a material adverse impact on our results of operations.
While 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.
We estimate that a hypothetical 10% adverse movement in all foreign currency exchange rates related to the translation of the results of our foreign operations would increase our net loss by less than $1 million for the year ended December 31, 2022. 60 Table of Contents We generally identify hyperinflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%.
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%.
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We have concluded that our Argentina subsidiary is operating in a hyperinflationary market. As a result, beginning in the second quarter of 2018, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. dollar. During the year ended December 31, 2022, revenue generated in Argentina represented less than 1% of our consolidated revenue.
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We are exposed to foreign currency exchange risk as the functional currency financial statements of non-U.S. subsidiaries are translated to U.S. dollars. We are also subject to foreign currency transaction gains and losses to the extent revenue and expense transactions are not denominated in the functional currency of a subsidiary.
Removed
Interest Risk Our variable-rate debt is exposed to interest rate fluctuations based on LIBOR and Term SOFR.
Added
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.
Removed
During the year ended December 31, 2022, we recorded a gain of $157 million, net of taxes on these interest rate swaps in other comprehensive loss. See "Item 8. Financial Statements and Supplementary Data — Note 11: Financial Instruments and Fair Value" for further information. 61 Table of Contents
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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.
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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.
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We also have a series of cross-currency fixed interest rate swaps to help mitigate the impact of currency fluctuations on our operations in Switzerland. Gains or losses related to these instruments due to spot rate fluctuations are recorded as cumulative translation adjustments (CTA) as a component of other comprehensive income (loss).
Added
Gains and losses will remain in accumulated other comprehensive income (loss) until either the sale or substantial liquidation of the hedged subsidiary.
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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.
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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.
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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

Other ELAN 10-K year-over-year comparisons