UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT UNDERPURSUANT TO SECTION 13 orOR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192022

Commission file number 001-38661
elan-20221231_g1.jpg
Elanco Animal Health Incorporated
(Exact name of Registrant as specified in its charter)
INDIANA 82-5497352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 INNOVATION WAY, GREENFIELD, INDIANA 46140
(Address and zip code of principal executive offices)
Registrant’s telephone number, including area code (877) 352-6261
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueELANNew York Stock Exchange
5.00% Tangible Equity UnitsELATNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý No o




Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer
ýAccelerated filer
Non-accelerated filerSmaller reporting company
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2019,2022, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $12.4$9.3 billion. The registrant has no non-voting common stock.
The number of shares of common stock outstanding as of February 25, 2020 were 398,532,25624, 2023 was 491,543,501.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy materials for its 20202023 Annual Meeting of shareholdersShareholders are incorporated by reference into Part III hereof.




Elanco Animal Health IncorporatedELANCO ANIMAL HEALTH INCORPORATED
FormFORM 10-K
For the Year Ended DecemberFOR THE YEAR ENDED DECEMBER 31, 20192022
Table of Contents
TABLE OF CONTENTS
Part I
Item 1.Business
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Part
Item 5.Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6.Selected Financial Data
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Item 9A.
Item 9B.
Item 9C.
Part
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 10.Directors, Executive Officers, and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accountant Fees and Services
Part IV

Item 15.
Item 15.Exhibits and Financial Statement Schedules16.
Item 16.Form 10-K Summary

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Forward-Looking StatementsFORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
ThisThis Annual Report on Form 10-K (Form 10-K) includes forward-looking statements within the meaning of the federal securities laws. This annual report containsThese forward-looking statements, including,include, without limitation, statements concerning the impact on Elanco Animal Health Incorporated and its subsidiaries (collectively, Elanco, the Company, we, us, or our) caused by the integration of recent business acquisitions, expected synergies and cost savings, product launches, expectations relating to human capital resources, the coronavirus (COVID-19) global pandemic, the conflict involving Russia and Ukraine and the potential impact on our acquisitionbusiness and global economic conditions, reduction of the animal health businessdebt, expectations relating to liquidity and sources of Bayer Aktiengesellschaft (Bayer)capital, our expected compliance with debt covenants, cost savings, expenses, and our estimated "stand up" costs as a result of our separation from Eli Lilly & Co. (Lilly), our estimated interest expense,reserves relating to restructuring actions, our industry and our operations, performance and financial condition, and including, in particular, statements relating to our business, growth strategies, distribution strategies, product development efforts and future expenses.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important risk factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national, or global political, economic, business, competitive, market, and regulatory conditions, including but not limited to the following:
heightened competition, including from innovation or generics;
the impact of disruptive innovations and advances in veterinary medical practices, animal health technologies and alternatives to animal-derived protein;
changes in regulatory restrictions on the use of antibiotics in foodfarm animals;
our ability to implement our business strategies or achieve targeted cost efficiencies and gross margin improvements;
consolidation of our customers and distributors;
an outbreak of infectious disease carried by foodfarm animals;
demand, supply and operational challenges associated with the effects of a human disease outbreak, epidemic, pandemic or other widespread public health concern;
the potential impact on our business and global economic conditions resulting from the conflict involving Russia and Ukraine;
the success of our research and development (R&D) and licensing efforts;
our ability to complete acquisitions and successfully integrate the businesses we acquire, including the animal health business of Bayer;
misuse, off-label or counterfeiting use of our products;
unanticipated safety, quality or efficacy concerns and the impact of identified concerns associated with our products;
fluctuations in our business results due to seasonality and other factors;
the impact of weather conditions, including those related to climate change, and the availability of natural resources;
disruptionrisks related to the modification of foreign trade policy;
risks related to currency rate fluctuations;
our dependence on the success of our top products;
the impact of customer exposure to rising costs and reduced customer income;
the lack of availability or significant increases in our supply chain due to manufacturing issues experienced by our contract manufacturers;the cost of raw materials;
the impact of increased or decreased sales into our distribution channels resulting in fluctuation in our revenues;
risks related to the write-down of goodwill or identifiable intangible assets;
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risks related to the evaluation of animals;
manufacturing problems and capacity imbalances;
the impact of litigation, regulatory investigations, and other legal matters, including the risk to our channel distributors resulting in higherreputation and the risk that our insurance policies may be insufficient to protect us from the impact of such matters;
actions by regulatory bodies, including as a result of their interpretation of studies on product safety;
risks related to tax expense or lower inventory levels held by them in advance of or trailing actual customer demand, which could leadexposure;
risks related to variations in quarterly revenue results;environmental, health and safety laws and regulations;
risks related to our presence in emergingforeign markets;
changes in United States (U.S.) foreign trade policy, impositionchallenges to our intellectual property rights or our alleged violation of tariffs or trade disputes;rights of others;
our dependence on sophisticated information technology and infrastructure and the impact of breaches of our information technology systems;
the impact of global macroeconomic conditions;increased regulation or decreased financial support related to farm animals;
adverse effects of labor disputes, strikes, work stoppages, and the loss of key personnel or highly skilled employees;
risks related to underfunded pension plan liabilities;
our ability to complete acquisitions and successfully integrate the businesses we acquire, including Kindred Biosciences, Inc. (KindredBio) and the animal health business of Bayer Aktiengesellschaft (Bayer Animal Health) and specifically the impact of the integration of ERP systems scheduled for April 2023 and related sales order processing blackout periods and their impact on revenue allocation across the first and second quarters of 2023;
the effect of our substantial indebtedness on our business, resultingincluding restrictions in our debt agreements that will limit our operating flexibility;
risks related to certain governance provisions in our constituent documents; and
any failure to maintain an effective system of disclosure controls and internal control over financial reporting, including arising from our separation from Lilly, including the various costs associated with transition to a standalone entity, including the ability to stand up our enterprise resource planning (ERP) system and other information technology systems.an identified material weakness.
See "Risk"Item 1A. Risk Factors" in Part I Item 1A of this Annual Report on Form 10-K for a further description of these and other factors. Although we have attempted to identify important risk factors, there may be other risk factors not presently known to us or that we presently believe are not material that could cause actual results and developments to differ materially from those made in or suggested by the forward-looking statements contained in this annual report.Form 10-K. If any of these risks materialize, or if any of the above assumptions underlying forward-looking statements prove incorrect, actual results and developments may differ materially from those made in or suggested by the forward-looking statements contained in this annual report. For the reasons described above, weForm 10-K. We caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this annual report.Form 10-K. Any forward-looking statement made by us in this annual reportForm 10-K speaks only as of the date hereof. Factors or events that could cause our actual results to differ
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may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or to revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should be viewed as historical data.

Part
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Table of Contents
PART I
ItemITEM 1. BusinessBUSINESS

Overview
Founded in 1954 as part of Lilly, Elanco Animal Health Incorporated (Elanco Parent) 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 premiermeaningful impact on the communities we serve. As a global independent animal health company that innovates, develops, manufactures and markets products for companion and food animals. Headquartered in Greenfield, Indiana,leader, we are the fourth largest animal health companydedicated to innovating and delivering products and services to prevent and treat disease in the world, with revenue of $3.1 billionpets and farm animals, creating value for the year ended December 31, 2019. Globally, we are #1 in medicinal feed additives, #2 in poultry,pet owners, veterinarians, farmers, stakeholders, and #3 in other pharmaceuticals, which are mainly companion animal therapeutics, measured by 2018 revenue, according to Vetnosis. We also have one of the broadest portfolios of pet parasiticides in the companion animal sector. We offersociety as a diverse portfolio of more than 125 brands that make us a trusted partner to veterinarians and food animal producerswhole. With presence in more than 90 countries.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). Through our One Elanco culture, our commitment to excellence, and ownership of our decisions, we strive to always create positive outcomes for our customers, empowering them to share our vision of Food and Companionship Enriching Life.
Elanco Parent was formed in 2018,Formerly a business unit of Eli Lilly and Company (Lilly), we became independently incorporated on September 18, 2018. After two years of operating as a wholly-owned subsidiarystandalone company, we acquired Bayer Animal Health in August 2020, marking the largest acquisition in industry history. This addition has allowed us to expand our portfolio to provide a more comprehensive set of Lilly,animal health solutions while expanding our omni-channel presence, allowing our customers to serveshop where and how they want. As a result, we have increased scale and reach as well as a more balanced portfolio between pet health and farm animal. Refer to “Item 8. Financial Statements and Supplementary Data — Note 6: Acquisitions, Divestitures and Other Arrangements” for additional information.
We are committed to fulfilling our customer promise: We willrigorously innovate to benefit our customers and improve the ultimate parent companyhealth of substantially allanimals.

We expect to capitalize on growth opportunities by advancing our pipeline of innovation and optimizing existing products, as well as through strategic business development. 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. Additionally, in 2021, we advanced our opportunities to access the fast-growing pet dermatology market through the acquisition of KindredBio, adding three potential pipeline blockbusters with launches beginning as early as 2024. As part of the animal health businessesacquisition, we also secured full ownership of Lilly.
On September 20, 2018, our common stock began trading on the New York Stock Exchange (NYSE) undercanine parvovirus therapy that is expected to be conditionally approved by the symbol “ELAN.” On September 24, 2018, Elanco Parent completed an initial public offering (IPO), resultingU.S. Department of Agriculture (USDA) in the issuancefirst quarter of 72.3 million shares2023. For further discussion of its common stock (including shares issued pursuantour 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. Financial Statements and Supplementary Data — Note 6: Acquisitions, Divestitures and Other Arrangements.”

We have continuously strengthened and expanded our three-pronged strategy: Innovation, Portfolio and Productivity. It remains our foundation for sustained growth and profitability. We expect revenue growth through mid-decade to be led by a number of new launches in key market segments and in areas that balance and strengthen our portfolio. For our existing products, we intend to maximize value by investing in focus brands, those significant pet health, poultry and aqua brands that are accretive to our growth. Elanco’s core brands, the vast portion of our aggregate portfolio, are expected to remain stable and/or grow slightly. This part of our strategy is then balanced with defend brands (e.g., Rumensin™, Trifexis™ and the Advantage Family), which are highly profitable and material brands where we intend to maximize profitability and preserve sales. We expect that launch excellence, price, geographic focus, digital and expanding omni-channel leadership will be key enablers of growth.
In addition, we continue to enhance our approach to sustainability and environmental, social, and governance (ESG), which is focused on four interconnected pillars, called Elanco's Healthy Purpose™, to create a meaningful impact today and for years to come:
Healthier Enterprise: Growing our business with integrity and excellence with respect to all stakeholders, where all employees feel safe, engaged and accountable as owners.

Healthier Animals: Helping pets and farm animals live healthy, quality lives by continuously expanding our portfolio, while identifying new and innovative animal care products, practices, and services.
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Healthier People: Improving people’s lives and livelihoods by promoting animal companionship and enabling sustainable production of meat, milk, fish and eggs.

Healthier Planet: Minimizing our own environmental footprint, while leveraging product and service innovations to help our stakeholders advance their sustainability efforts.

In 2022 and 2021, our business, operations, financial condition and results have been impacted by worldwide economic conditions. The global economy has been impacted by the COVID-19 pandemic and the conflict between Russia and Ukraine as well as supply chain disruptions and inflationary pressures. We continue to monitor these factors and have worked with our customers, employees, suppliers and other stakeholders to mitigate their impacts. For additional information, see the Factors Affecting Our Results of Operations section within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 1A. Risk Factors – We could experience demand, supply and operational challenges associated with the effects of a human disease outbreak, epidemic, pandemic or other widespread public health concern," and "Item 1A. Risk Factors – Significant portions of our operations are conducted in foreign jurisdictions, including jurisdictions presenting a high risk of bribery and corruption, and are subject to the underwriters' option to purchase additional shares), which represented 19.8%economic, political, legal and business environments of the outstanding shares, at $24.00 per share resultingcountries in total net proceeds after underwriting discounts and commissions, of $1.7 billion. In connection with the completion of the IPO through a series of equity and other transactions, Lilly transferred to Elanco Parent the animal health businesses that form itswhich we do business. In exchange, Elanco Parent has paid to Lilly approximately $4.2 billion, which included the net proceeds from the IPO, the net proceeds from the debt offering completed by Elanco Parent in August 2018 and the term loan entered into by Elanco Parent in September 2018 (see Note 9: Debt to our consolidated and combined financial statements). These transactions are collectively referred to herein as the "Separation."
On February 8, 2019, Lilly announced an exchange offer whereby Lilly shareholders could exchange all or a portion of Lilly common stock for shares of Elanco common stock owned by Lilly. The disposition of Elanco shares was completed on March 11, 2019, and resulted in the full separation of Elanco along with the disposal of Lilly's entire ownership and voting interest in Elanco.
Commercial Operations

We operate our business in a single segment directed at fulfilling our vision of food and companionship enriching life – all to advance the liveshealth of animals, people through food, making protein more accessible and affordable,the planet. For additional information about our business segment, refer to “Item 8. Financial Statements and through pet companionship, helping pets live longer, healthier lives. Supplementary Data — Note 18: Geographic Information.”
We advance our vision by offering products in fourthese two primary categories:
elan-20221231_g2.jpg
Pet Health: Our portfolio is focused on parasiticides, vaccines and therapeutics. 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. 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 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. Pet owners are increasingly treating osteoarthritis in their pets, and our Galliprant™ product is one of the fastest growing osteoarthritis treatments in the U.S. Additionally, we have products that offer treatment for otitis (ear infections) with Claro™, as well as treatments for certain cardiovascular and dermatology indications.
elan-20221231_g3.jpg
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. We have a wide range of farm animal products, including Rumensin and Baytril™, both of which are used extensively in ruminants (e.g., cattle, sheep and goats). In poultry, our Maxiban™ product is a valuable offering for the control and prevention of intestinal disease.
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CompanionTable of Contents
Our reported revenue for each product category is as follows:
elan-20221231_g4.jpg
Contract manufacturing represents revenue from arrangements in which we manufacture products on behalf of a third party, including supply agreements associated with divestitures of products related to the acquisition of Bayer Animal Disease Prevention (CA Disease Prevention): We have oneHealth.
International Operations
Our operations are conducted globally, and we sell our products in over 90 countries. Emerging market economies are an important component of the broadest parasiticide portfolios in the companion animal sector based on indications, species and formulations, with products that protect pets from worms, fleas and ticks. Combining our parasiticide portfolio with our vaccines presence, we aregrowth strategy to advance as a global leader in the U.S. inanimal health industry and will serve as the disease prevention category based on share of revenue.base upon which we build our commercial and local innovation capabilities.
Companion Animal Therapeutics (CA Therapeutics): We have a broad pain and osteoarthritis portfolio across species, modes of action, indications and disease stages. Pet owners are increasingly treating osteoarthritis in their pets, and our Galliprant product is one of the fastest growing osteoarthritis treatments inRevenues from operations outside the U.S. We also have treatmentsof $2,446 million accounted for otitis (ear infections), as well as cardiovascular55% of our total revenues in 2022. By total revenues, China, Brazil, and dermatology indications.the U.K. are our largest markets outside the U.S.
Food Animal Future Protein & Health (FA Future Protein & Health): Our portfolio in this category, which includes vaccines, nutritional enzymes and animal-only antibiotics, serves the growing demand for protein and includes innovative products in poultry and aquaculture production, where demand for animal health productsThe following graph illustrates our reported revenue by our key geographic regions:
elan-20221231_g5.jpg
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is outpacing overall industry growth. We are focused on developing functional nutritional health products that promote food animal health, including enzymes, probiotics and prebiotics. We are a leader in providing vaccines as alternatives to antibiotics to promote animal health based on share of revenue.
Food Animal Ruminants & Swine (FA Ruminants & Swine): We have developed a range of food animal products used extensively in ruminant (e.g., cattle, sheep and goats) and swine production.
We have a top four presence in all four key industry geographic regions: North America (NA); Europe, the Middle East and Africa (EMEA); Latin America (LATAM); and Asia-Pacific (APAC), as measured by 2018 revenue, according to Vetnosis. The following graphs demonstrate our revenue for the year ended December 31, 2019 by product category and geography:
elan-20191231_g1.jpg
(1) Strategic Exits includes revenue from third-party manufacturing, distribution and other contractual arrangements, as well as products not core to our business, which we made the decision to exit.
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elan-20191231_g2.jpg
(1) LATAM includes aquaculture in all regions
Through our global sales force of approximately 1,425 sales representatives, our veterinary consultants and our key distributors, we seek to build strong customer relationships and fulfill demand for our food animal products primarily with food animal producers, veterinarians and nutritionists, and for our companion animal products primarily with veterinarians and, in some markets, pet owners. We are also expanding into retail channels in order to meet pet owners where they want to purchase.
Our inclusive approach to sourcing innovation helps us identify, attract, fund and develop new ideas that enhance our pipeline and reduce risk as compared to an in-house only approach. Through this process we have launched or acquired 14 new products since 2015, including the additions of Entyce™, Nocita™ and Tanovea™ in 2019, that delivered $439.2 million of revenue in 2019.
We believe we have an experienced leadership team that fosters an adaptive, purpose-driven culture among approximately 6,080 employees worldwide as of December 31, 2019 and that our employees share a deep conviction for achieving our vision of food and companionship enriching life.
For the years ended December 31, 2019 and 2018, our revenue was $3.1 billion, and for the year ended December 31, 2017, our revenue was $2.9 billion. For the years ended December 31, 2019, 2018 and 2017, our net income (loss) was $67.9 million, $86.5 million and $(310.7) million, respectively.
Products
We have a diverse portfolio of products marketed under more than 125approximately 200 brands, including products for both food animalspets and companionfarm animals.
Our foodpet health products help veterinarians and pet owners better care for pets. We partner with our customers for the purpose of providing a consistent flow of innovative and effective products and support. Our R&D focuses on products that prevent and treat disease, improve and extend quality of life and improve the type of care received by pets. We also partner closely with veterinarians to provide technical support and case management for our products. Pet health products represented approximately 48% of our revenue for the year ended December 31, 2022.
Our farm animal products are designed to enable producers to keep animals healthy and deliver more food while using fewer resources. Our antibacterials, anticoccidials, vaccines and parasiticides aim to make food safer by preventing and controlling disease. We offer products and support to enhance the integrity of the food supply, while our productivity enhancers help make food more affordable and abundant by increasing the amount of meat or milk an animal can supply. Furthermore, our expertise and data analytics help our customers improve production efficiency and business performance. FoodFarm animal products represented approximately 60%50% of our revenue for the year ended December 31, 2019.
Our companion animal products help veterinarians better care for pets. We partner with pet owners and veterinarians for the purpose of providing a consistent flow of innovative and effective products and support. Our R&D focuses on products that prevent and treat disease, improve and extend quality of life and improve the type of care received by pets. We also partner closely with veterinarians to provide technical support and case
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management for our products. Companion animal products represented approximately 37% of our revenue for the year ended December 31, 2019.2022.
We group our products into fourtwo principal categories:
CA Disease Prevention: includes parasiticidescategories, Pet Health and vaccine products for canines and felines.
CA Therapeutics: includes products for the treatment of pain, osteoarthritis, otitis, cardiovascular and dermatology indications in canines and felines.
FA Future Protein & Health: includes vaccines, antibiotics, parasiticides and other products used in poultry and aquaculture production, as well as functional nutritional health products, including enzymes, probiotics and prebiotics.
FA Ruminants & Swine: includes vaccines, antibiotics, implants, parasiticides and other products used in ruminants and swine production, as well as certain other food animal products.
We pursue the development of new chemical and biological molecules through our innovation strategy. Since 2015, we have launched or acquired the following 14 products:
In CA Disease Prevention, Credelio™ and Interceptor™Plus.
In CA Therapeutics, Galliprant, Osurnia™, Tanovea, Entyce and Nocita.
In FA Future Protein & Health, Inteprity™, Imvixa™, Clynav™ and Correlink™.
In FA Ruminants & Swine, Imrestor™,Kavault™ and Prevacent™.
In the second quarter of 2018, we suspended commercialization of Imrestor and plan to pursue additional indications. In addition, as part of our antitrust strategy in connection with the acquisition of the animal health business of Bayer, we announced in January 2020 our plan to divest Osurnia and the U.S. rights to Capstar™ and in February 2020 our plan to divest Vecoxan™.
In 2016, we announced the creation of our Nutritional Health organization, which focuses on functional nutrition products, including enzymes, probiotics and prebiotics, which impact animal microbiomes and other dietary factors to reduce disease incidence, improve gut health and enhance feed digestibility. We first focused on nutritional health in 2012, with the acquisition of ChemGen and the Hemicell™ brand. In 2016, we entered into an agreement with Agro Biosciences, Inc. to commercialize Correlink- a novel direct-fed microbial (probiotic) product outside the U.S. In early 2018, we announced a new global, exclusive in-licensing agreement with Ab E Discovery to further develop and bringFarm Animal. Refer to the market an in feed antibody product focused on reducing and controlling coccidiosis. "Commercial Operations" section above for additional information.
In late 2018, we entered into an R&D collaboration with Novozymes to develop nutritional health products in beef and dairy cattle. In 2019, we entered into an R&D collaboration agreement with AgBiome, Inc. to develop nutritional health products for swine.
Rumensin™,2022, our top selling product, contributed approximately 10%, 11%, and 10%products as a percentage of ourtotal revenue in 2019, 2018, and 2017, respectively. No other product contributed 10% or more of our revenue. Our top five selling products, Rumensin, Trifexis™, Maxiban™, Interceptor Plus and Denagard™, collectively contributed approximately 31% of our 2019 revenue. Our top 10 products collectively contributed 43% of our 2019 revenue.were as follows:
2022
Top selling products:
Seresto%
Rumensin%
Top five selling products:
Seresto, Rumensin, Advocate, Advantix, and Maxiban24 %
Set forth below is information regarding our principal products.products, which are defined as product lines and products that represented approximately 1% or more of our revenue in 2022:
CA Disease PreventionPet Health Products
Primary
ProductDescriptionSpecies
Advantix
(imidacloprid + permethrin + pyriproxyfen)
Monthly topical application that kills and repels fleas, ticks and mosquitoes, kills lice and repels biting flies. Provides broad-spectrum protection against these ectoparasites that can transmit diseases.Cats, Dogs
Advantage
(imidacloprid + pyriproxyfen)
Monthly topical flea control that kills fleas, flea eggs and larvae on contact while also treating, preventing and controlling lice infestations.Cats, Dogs
Advocate
(imidacloprid + moxidectin)
Monthly topical treatment to prevent flea infestations as well as heartworm (Dirofilaria immitis), lungworm (Angiostrongylus) and other gastrointestinal worm infections, including roundworms (Toxocara canis and Toxascaris leonina), whipworms (Trichuris vulpis), and hookworms (Ancylostoma caninum, Ancylostoma braziliense, and Unicinaria stenocephala).
Cats, Dogs
Atopica™
(cyclosporine A)
Controls atopic dermatitis in dogs weighing at least 4 lbs.Dogs
9Primary
ProductDescriptionSpecies
Bronchi Shield™ III and Bronchi Shield Oral
(vaccines)
Bronchi Shield III - To protect against adenovirus, parainfluenza and Bordetella bronchiseptica (Bb) in dogs.
Bronchi Shield Oral - To protect against Bb in dogs.
Dogs
Comfortis™
(spinosad)
To kill fleas and prevent and treat flea infestations (Ctenocephalides felis) in cats 14 weeks of age or older and weighing at least 4.1 lbs. and dogs 14 weeks of age or older and weighing at least 5.0 lbs.
Cats, Dogs
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Primary
ProductDescriptionSpecies
Claro / Neptra
(florfenicol + terbinafine + mometasone furoate)
One-dose treatment for otitis externa associated with susceptible strains of bacteria (Staphylococcus pseudintermedius) and yeast (Malassezia pachydermatis).
Dogs
Credelio
(lotilaner)
To killKills adult fleas and to treattreats flea infestations (Ctenocephalides felis) and treattreats and controlcontrols tick infestations (Amblyomma americanum (lone star tick), Dermacentor variabilis (American dog tick), Ixodes scapularis (black‑legged tick) and Rhipicephalus sanguineus (brown dog tick)) for one month in dogs and puppies 8 weeks of age or older and weighing at least 4.4 lbs.
Dogs
Duramune™TruCan™ (1)
(vaccines)
Includes multiple products that collectively protect against distemper, adenovirus, parvovirus, corona, parainfluenza, leptospira canicola, and other diseases in dogs.diseases.Dogs
Rabvac™Galliprant
(vaccines)(grapiprant)
To protect against rabies, includes a 1-yearControls pain and 3-year shot.inflammation associated with osteoarthritis.Cats, Dogs
Fel-O-Vax™
(vaccines)
Includes multiple products that collectively protect against leukemia, rhinovirus, calicivirus, panleukopenia, and chlamydia in cats.Cats
Fel-O-Guard™
(vaccines)
Includes multiple products that collectively protect against leukemia, rhinovirus, calicivirus, panleukopenia, and chlamydia in cats.Cats
Interceptor Plus
(milbemycin oxime/oxime + praziquantel)
To preventPrevents heartworm disease caused by Dirofilaria immitis and for the treatmenttreats and control ofcontrols adult roundworm (Toxocara canis and Toxascaris leonina), adult hookworm (Ancylostoma caninum), adult whipworm (Trichuris vulpis), and adult tapeworm (Taenia pisiformis, Echinococcus multilocularis, and Echinococcus granulosus) infections in dogs and puppies weighing at least 2 lbs. and 6 weeks of age or older. Interceptor Plus is a relaunch of a previously approved formula.
Dogs
Milbemax™
(milbemycin
oxime +
praziquantel)
To treatTreats and controlcontrols parasitic infections due to adult hookworm, adult roundworm and adult tapeworm and to preventprevents heartworm disease caused by Dirofilaria immitis.
Cats, Dogs
Onsior™
(robenacoxib)
Controls postoperative pain and inflammation associated with soft tissue surgery in dogs weighing at least 5.5 lbs. and 4 months of age or older and controls postoperative pain and inflammation associated with orthopedic surgery, ovariohysterectomy and castration in cats weighing at least 5.5 lbs. and dogs.6 months of age or older; for a maximum of 3 days.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
Trifexis
(spinosad +
milbemycin
oxime)
To preventPrevents heartworm disease (Dirofilaria immitis) and to killkills fleas. Trifexis is indicated for the prevention and treatment of flea infestations (Ctenocephalides felis), and the treatment and control of adult hookworm (Ancylostoma caninum), adult roundworm (Toxocara canis and Toxascaris leonina) and adult whipworm (Trichuris vulpis) infections in dogs and puppies 8 weeks of age or older and weighing at least 5 lbs.
Dogs
(1)Formerly marketed as Duramune™.
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CA Therapeutics Products
Primary
ProductDescriptionSpecies
Atopica™
(cyclosporine A)
To control atopic dermatitis in dogs weighing at least 4 lbs.Dogs
Fortekor Plus™
(benazepril +
pimobendan)
To treat congestive heart failure due to atrioventricular valve insufficiency or dilated cardiomyopathy in dogs.Dogs
Galliprant
(grapiprant)
To control pain and inflammation associated with osteoarthritis in dogs.Dogs
Onsior
(robenacoxib)
To control postoperative pain and inflammation associated with soft tissue surgery in dogs weighing at least 5.5 lbs. and 4 months of age or older and control postoperative pain and inflammation associated with orthopedic surgery, ovariohysterectomy and castration in cats weighing at least 5.5 lbs. and 6 months of age or older; for up to a maximum of 3 days.Cats, Dogs
Osurnia(1)
(terbinafine +
florfenicol +
betamethasone
acetate)
To treat otitis externa in dogs associated with susceptible strains of bacteria (Staphylococcus pseudintermedius) and yeast (Malassezia pachydermatis).
Dogs
Entyce
(capromorelin)
To stimulate appetite in dogs.Dogs
Nocita
(bupivacaine liposome)
Local anesthetic to provide up to 72 hours of post-operative pain relief following cranial cruciate ligament surgery in dogs and onychectomy in cats.Cats, Dogs
(1) In January 2020, we announced our plan to divest Osurnia in connection with the pending acquisition of the animal health business of Bayer.
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FA Future Protein & HealthFarm Animal Products
Primary
ProductDescriptionSpecies
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 poultry.Salmonella.Poultry
ClynavBaycox™
(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).Cattle, Swine
Catosal™ /
Comforta™
(butaphosphan + cyanocobalamin)
Injectable for prevention or treatment of deficiencies of vitamin B12, Cyanocobalamin, and phosphorous.Cattle, Horses
Clynav™
(plasmid deoxyribonucleic acid vaccine)
To immunizeImmunizes Atlantic salmon to reduce impaired daily weight gain, and reduce mortality, and cardiac, pancreatic and skeletal muscle lesions caused by pancreas disease following infection with salmonid alphavirus subtype 3 (SAV3).Fish (Salmon)
Coban™ / Elancoban™Denagard™
(monensin)(tiamulin)
To aid in the preventionTreats Swine Dysentery associated with Serpulina hyodysenteriae susceptible to tiamulin and swine bacterial enteritis caused by Escherichia coli and Salmonella choleraesuis sensitive to chlortetracycline and treatment of coccidiosis in broiler and replacement chickens (causedbacterial pneumonia caused by Pasteurella multocida sensitive to chlortetracycline. Eimeria necatrix, E. tenella, E. acervulina, E. brunetti, E. mivati, and E. maxima), in turkeys (caused by Eimeria adenoeides, E. meleagrimitisDenagard and E. gallopavonis) and in growing Bobwhite quail (caused by Eimeria dispersa and E. lettyae). Coban/Elancoban is an animal-only antibiotic and an ionophore.a shared-class antibiotic.
PoultrySwine
Hemicell
(endo-1, 4-â-mannanase)
Enzyme supplement for poultry and swine feeds that contain a source of â-mannanase, which hydrolyses the â-mannans present in soybean and corn meal.Poultry, Swine
Imvixa
(lufenuron)
To prevent and control infestation caused by sea lice, Caligus reogercresseyi, in farmed salmon.
Fish (Salmon)
Maxiban
(narasin +
nicarbazin)
To preventPrevents coccidiosis in broiler chickens caused by Eimeria necatrix, E. tenella, E. acervulina, E. brunetti, E. mivati and E. maxima. Maxiban is an animal-only antibiotic and an ionophore.
Poultry
Monteban™
(narasin)
To preventPrevents coccidiosis in broiler chickens caused by Eimeria necatrix, E. tenella, E. acervulina, E. brunetti, E. mivati and E. maxima. Monteban is an animal-only antibiotic and an ionophore.
Poultry
Surmax™ / Maxus™ / Inteprity
(avilamycin)
To prevent mortality caused by necrotic enteritis associated with Clostridium perfringens in broiler chickens. Surmax, Maxis and Inteprity are animal-only antibiotics.
Poultry
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FA Ruminants & Swine
Primary
ProductDescriptionSpecies
Denagard
(tiamulin)
To treat Swine Dysentery associated with Serpulinahyodysenteriae susceptible to tiamulin and for treatment of swine bacterial enteritis caused by Escherichia coli and Salmonella choleraesuis sensitive to chlortetracycline and treatment of bacterial pneumonia caused by Pasteurella multocida sensitive to chlortetracycline. Denagard is a shared-class antibiotic.
Swine
Pulmotil™
(tilmicosin)
For swine: To controlControls swine respiratory disease associated with Actinobacillus pleuropneumoniae and Pasteurella multocida.multocida.
For cattle: To controlControls bovine respiratory disease (BRD) associated with Mannheimia haemolytica, Pasteurella multocida and Histophilus somni in groups of beef and non-lactating dairy cattle, where active BRD has been diagnosed in at least 10% of the animals in the group. Pulmotil is a shared-class antibiotic.
Cattle, Swine
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Primary
ProductDescriptionSpecies
Rumensin
(monensin)
For cattle fed in confinement for slaughter: To improveslaughter, improves feed efficiency and preventprevents and controlcontrols coccidiosis due to Eimeria bovis and Eimeria zuernii.
For dairy cows: To increasecows, increases milk production efficiency (production of marketable solids-corrected milk per unit of feed intake).
Cattle
For growing cattle on pasture or in dry lot (stocker and feeder and dairy and beef replacement heifers): To increase, increases rate of weight gain and to preventprevents and controlcontrols coccidiosis due to Eimeria bovis and Eimeria zuernii.
For mature reproducing beef cows: To improvecows, improves feed efficiency when receiving supplemental feed and to preventprevents and controlcontrols coccidiosis due to Eimeria bovis and Eimeria zuernii.
For goats: To preventgoats, prevents coccidiosis due to Eimeria crandallis, Eimeria christenseni and Eimeria ninakohlyakimovae in goats maintained in confinement.
For calves (excluding veal calves): To prevent, prevents and controlcontrols coccidiosis due to Eimeria bovis andEimeria zuernii.zuernii.
Rumensin is an animal-only antibiotic and an ionophore.
Cattle
Tylan™ PremixSurmax™ / Maxus™ / Inteprity
(tylosin phosphate)(avilamycin)
To control porcine proliferative enteropathiesPrevents mortality caused by necrotic enteritis associated with Lawsonia intracellularisClostridium perfringens in broiler chickens. Surmax, Maxis and to control porcine proliferative enteropathies associated with Lawsonia intracellularisInteprity immediately after medicating with Tylan Soluble (tylosin tartrate) in drinking water. Tylan Premix is a shared-class antibiotic.are animal-only antibiotics.
Swine, Cattle, Poultry
Vira Shield™
(vaccines)
Includes multiple products that protect against infection, bovine rhinotracheitis, bovine viral diarrhea, bovine respiratory syncytial virus, bovine respiratory disease, leptospira canicola and other diseases in cattle.Cattle
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. For example, based upon historical results, approximately 75% and 60% of total annual revenue contributed by our higher-margin parasiticide products Seresto and Advantage Family, respectively, has occurred during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere.
Antibiotics
Antimicrobial resistance in humans, or the risk that bacterial pathogens that cause infectious disease in humans evolve or otherwise emerge that are resistant to antibiotics or other antimicrobials, is a significant health concern, and animal agriculture can play a role in mitigating this risk. As a company dedicated to the health and well-being of animals, we seek to help veterinarians and farmers responsibly use antibiotics when treating animals. In our efforts to address antibiotic resistance while protecting animal health, we introduced a global antibiotic stewardship plan focused on increasing responsible antibiotic use; reducing the need for shared-class antibiotics; and replacing
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antibiotics with alternatives to help livestock producers treat and prevent animal disease. Antibiotics, used responsibly, along with good animal care practices, help enhance food safety and animal well-being.
There are two classes of antibiotics used in animal health:
Animal-only antibiotics and ionophores: Not all pathogens that cause disease in animals are infectious in humans, and accordingly, animal-only antibiotics are not used in human medicine (i.e., not medically important).medicine. Ionophores are a special class of animal-only antimicrobials uniquely developed only for use in animals. In Europe and certain other jurisdictions, ionophores are not currently classified as antibiotics. Because of their animal-only designation, mode of action, and spectrum of activity, their use is not considered to create the same risk of resistance in human pathogens.
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Shared-class antibiotics: These are used in both humans and animals. Some antibiotics are used to treat infectious disease caused by pathogens that occur in both humans and animals. Of the 18 major antibiotic resistance threats that the Centers for Disease Control and Prevention tracks, two are associated with infectious disease in animals. As part of our global antibiotic stewardship plan and in compliance with the U.S. Food & Drug Administration (FDA) guidance, shared-class antibiotics are labeled only for the treatment of an established need in animals and only with veterinarian oversight.
We have intentionally shifted away from shared-class antibiotics, and are focusing on animal-only antibiotics, as well as antibiotic-free solutions. In 2019, 11%2022, 8% of our revenue was from products classified as shared-class antibiotics (4%(3% from sales in the U.S. and 7%5% from sales outside the U.S.)international sales), which is down from 16%9% in 2015.2021. Revenue from animal-only antibiotics and ionophores represented 24%15% of our total revenue in 2019 (21%2022 (13% from ionophores), which is up from 23%14% in 2015.2021. Through our policies and efforts in this area, we seek to protect the benefits of antibiotics in human medicine, while responsibly protecting the health of foodfarm animals and the safety of our food supply.
Sales and Marketing
OurThrough our global sales organization includesforce comprised of approximately 2,010 sales representatives, our veterinary consultants and other value added specialists. 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.
In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products. In certain markets, we sell certain products directly to retailers. Our presence in retail channels has been expanded by our acquisition of Bayer Animal Health.
Our sales representatives visit our customers, including consultants, veterinarians, foodfarm animal producers, and resellers, to inform, promote and sell our products and to support customers. 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. 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. 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 providing support to foodsupporting farm animal producers to help maximize their yields and reduce costs. Our analytics help customers analyze large amounts of health and production data. As of December 31, 2019, we had approximately 1,425 sales representatives.
Customers
We primarily sell our foodpet health products to third-party distributors and retailers, as well as directly to veterinarians who typically then sell our products to pet owners. We primarily sell our farm animal products to third-party distributors and directly to a diverse set of foodfarm animal producers, including beef and dairy farmers as well as pork, poultry and aquaculture operations. We primarily sellWith the acquisition of Bayer Animal Health, we have expanded our companion animal products to third-party distributors, as well as directly to veterinarians that typically then sell our products to pet owners. We are also expanding intopresence in retail and e-commerce channels in order to meet pet owners where they want to purchase. Certain top selling pet health products acquired from Bayer Animal Health, including Seresto and the Advantage Family, are offered through these channels. Our largest customer, an affiliate of AmerisourceBergen Corp., is a third-party veterinary distributor and represented approximately 13%11% of our revenue for the year ended December 31, 2019.2022. Our next two largest customers, which are also third-party distributors, represented approximately 7% and 6%5%, respectively, of our revenue for the year ended December 31, 2019. No other customer represented more than 5% of our revenue for the same period.

2022.
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Research and Development
Our R&D organization is comprised of internal research, global development, global regulatory and external innovation collaborations and venture investing.collaborations. As of December 31, 2019,2022, we employed approximately 7651,080 employees in our global R&D and Regulatory Affairs organizations. Our global R&D headquarters is located in Greenfield, Indiana. We have R&D facilities in Basel, Switzerland; and Yarrandoo, Australia and R&D facilities co-located with manufacturing sites in Fort Dodge, Iowa; and Cuxhaven, Germany. Additional R&D operations are located in Sao Paulo, Brazil; Shanghai, China; and Bangalore, India. comprised of the following:
InternationalU.S.
Kemps Creek, AustraliaShanghai, ChinaGreenfield, Indiana (R&D headquarters)
Monheim, GermanyBangalore, IndiaFort Dodge, Iowa
Sao Paulo, BrazilBasel, Switzerland
We incurred R&D expenses of $270.1$321 million in 2019, $246.62022, $369 million in 20182021 and $251.7$329 million in 2017.2020.
New product innovation is a core part of our business strategy. Our R&D investment is focused on projects that target novel product introductions, as well as new indications, presentations, combinations and species expansion. Our approach is a build, buy, or ally strategy to develop compelling targets and conceptsinnovations that originate from our scientists and innovators, academia, agribusiness, or external partners including human pharmaceutical, agriculture and biotechnology at all stages of R&D. The ability to source our concepts from different areas allows us to create a pipeline that can be competitive in the categories in which we have chosen to compete, while reducing our risk by not owning and funding all aspects oforganizations. We focus our R&D projects.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 in areason projects that match our strategy and where we believe the sciencecan leverage our broad technical and our capabilities best match the opportunities in the animal health market.commercial capabilities. Specifically, our R&D focuses on sixseven areas across companion animalspets and foodfarm animals. For companion animals, weWe have R&D activities in therapeutics, vaccines, monoclonals and parasiticides while in foodfor pets. In farm animals, we are pursuing pharmaceuticals, vaccines, and nutritional health.sustainable animal protein projects.
Our R&D efforts consist of more than 100 active programsare balanced across species, development phases and technology platforms. For both food animals and companion animals, weWe apply both large and small molecule approaches. In vaccines, our efforts encompass a full range of modified live, inactivatedapproaches for both farm animals and nucleic acid strategies. In nutritional health, we focus on products based on enzymes, probiotics, prebiotics and other approaches that modulate biological activity in the animal digestive tract.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 maximizesleverages the capabilities within our internal and external manufacturing network.
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 engage in licensingexecute the R&D pipeline using a fully integrated global network of labs, service centers, and business development to acquire assetssites supported by a network of third-party alliances. We also have a significant international regulatory operation that manages new product submissions and ensures ongoing compliance for our pipeline and new R&D platforms and to establish strategic R&D collaborations. We make and maintain capital investments in venture capital vehicles that focus on agribusiness and animal health, and we engage in risk sharing collaborations to expand our external capital sources to augment internal investments. To support collaborations with innovation sources focused on human health we have developed capabilities to conduct translational comparative medical research trials in animals with naturally occurring conditions in animals that mimic a human disease or disorder. This type of collaboration de-risks unproven or less well-validated human hypotheses while potentially defining a clinically validated new approach in veterinary medicine.existing commercial portfolio.
Our R&D and commercial leadership allocate R&D investment annually with the goal of aligning near and long-term strategic opportunities and objectives. Portfolio investment decisions and prioritization are made based oninfluenced by the probability of technical success, economic value, time to market, and portfolio fit and balance. We have a matrix organizational structure with dedicated and highly experienced project leaders with clinical, technical development and regulatory approval, timing of approval/launchexpertise and earlier milestones, feasibility and cost of development and manufacturing, intellectual property protection and market attractiveness/commercial forecast. R&D projects are supported by pharmaceutical project management approaches and we aim for all of our supporting R&D functional capabilities and capacities to be managed and matched to the evolving demands of the pipeline.support systems. We believe this overall R&D management system has enabledapproach will allow us to consistently gain productprogress our multi-year innovation projects toward regulatory approvals, while maintainingensuring clear visibility to pipeline breadththe innovation portfolio composition, value, and depth to support sustained launches into the future.progress.
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Manufacturing and Supply Chain
Prior to the separation, ourOur products wereare manufactured both at both sites operated by us and sites operated by third-party contract manufacturing organizations (CMOs).
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We own and operate 12 internalhave a global manufacturing network of 18 sites fourcomprised of which focus on vaccines, six of which focus on other animal health products and two of which are regional sites that focus on packaging:the following:
InternationalU.S.
SiteBarueri, BrazilLocationKiel, GermanySiteLocationClinton, Indiana
ClintonIndiana, U.S.Prince Edward Island, CanadaCanadaSanta Clara, MexicoTerre Haute, Indiana
SpekeChengdu, ChinaLiverpool, U.K.WinslowMaine, U.S.
Kansas CityKansas, U.S.Manukau, New ZealandFort Dodge, Iowa
Wusi, ChinaIowa, U.S.Banwol, South KoreaElwood, Kansas
Huningue,FranceCuxhavenChungli, TaiwanGermanyKansas City, Kansas
WusiCuxhaven, GermanyChinaBinh Duong, VietnamChungliTaiwan
Terre HauteIndiana, U.S.BarueriBrazilWinslow, Maine

We will continue to manufacture one product, human growth hormone, for Lilly at one of these sites until the end of 2020.
Our global manufacturing and supply chain is also supported by a network of CMOs. As of December 31, 2019,2022, this network was comprised of approximately 90150 CMOs. Our external manufacturing network centrally governs our global CMO relationships and provides oversight to these CMOs through four hubs.CMOs.
We select CMOs based on several factors: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; and (iv) financial analyses.analyses; and (v) local presence. Our External Manufacturing Networkexternal manufacturing network seeks to ensure that all of the CMOs we use adhere to our standards of manufacturing quality.
We purchase certain raw materials necessary for the commercial production of our products from a variety of third-party suppliers. We utilize logistics service providers as a part of our global supply chain, primarily for shipping and logistics support.
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 in the sectors and regions on which we focus. Principal methods of competitionglobally. Competition may vary depending on the particular region, species, product category, or individual product. SomeWe compete principally on the basis of these methods includeproduct quality, price, cost-effectiveness, promotional effectiveness, new product development quality,and product differentiation. 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 service and promotion.reductions.
Our primary competitors include animal health medicines and vaccines companies such as Zoetis Inc.; Boehringer Ingelheim Vetmedica, Inc., the animal health division of Boehringer Ingelheim GmbH; and Merck Animal Health, the animal health division of Merck & Co., Inc.; and the animal health business of Bayer. In August 2019, we entered into an agreement to acquire the animal health business of Bayer (see Note 6: Acquisitions to our consolidated and combined financial statements). 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. 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. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property, as appropriate.
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Our product portfolio and certain product candidates enjoy the protection of approximately 3,0006,500 patents and applications, filed in over 5090 countries, with concentration in our major market countriesmarkets as well as other countriesmarkets with strong patent systems, such as Australia, Brazil, Canada, Europe, Japan and the U.S. ManyWhile many of the patents and patent applications in our portfolio are the result of our own work, while other patents and patent applicationsothers have been developed in our portfolio were at least partially developed, andcollaboration 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.
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. For example, 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 that expireexpiring between October 2021 and March 2026. Expirations in 2021 related to compound patents in the U.S., Europe and Japan. Each of these markets have physical form patents that continue beyond 2021. At this time, there is no indication of market entry for a generic version of Galliprant in these regions.
Various formulation and method of use patents encompass the spinosad pesticide products, Comfortis and Trifexis. The Comfortis formulation patent extends through August 2025 in Europe but expired in August 2020 in the U.S., Canada and Australia, and, upon grant of applicable supplementing protection certificate (SPC), through August 2025 in Europe.Australia. The Trifexis formulation and method of use patents extend through September 2026 in Europe but expired in September 2021 in the U.S., Canada and Australia,Australia. 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. In Europe, the formulation patents will expire in June 2025, but in some countries, including Spain and upon grant of applicable SPC,the U.K., supplementary protection certificates (SPCs) have been granted which expire in September 2026.
The Milbemax formulation patents extend through September 2026July 2024 in Europe. 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.
We typically maintain all of our patents and assert our patent rights against third parties as appropriate.
Additionally, many of our vaccine products, including the DuramuneTruCan family of vaccines, are based on proprietary or patented master seeds and formulations. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, through a variety of means, including by seeking to require our employees, consultants, advisors and partners to enter into confidentiality agreements and other arrangements upon the commencement of their employment or engagement.
In order to facilitate the Separation and allow Lilly's and our operations to continue with minimal interruption, Lilly licensed to us the right to use certain intellectual property rights in the animal health field. In addition, Lilly granted us a transitional license to use certain of Lilly’s trademarks for a period of time following the IPO.
We seek to file and maintain trademarks around the world based on commercial activities in most regions where we have, or desire to have, a business presence for a particular product. We currently maintain more than 9,00014,500 trademark applications and registrations in major regions, primarily identifying products dedicated to the care of livestock and companion animals.pets.
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. 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. 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 seeks to engageengages in dialogue with various global agenciesthe relevant authorities regarding their policies that relate to animal health products. In the majoritymost of our markets, the relevant health authority is separate from those governing human medicinal products.
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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. All manufacturers of animal health pharmaceuticals must demonstrate their products to be safe, effective and produced by a consistent method of manufacture as defined under the Federal Food, Drug and Cosmetic Act (FFDCA). The FDA’s basis for approving a new animal drug application is documented in a Freedom of Information Summary. 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. 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). The Center for Veterinary Biologics within the Animal and Plant Health Inspection Service in the USDA is responsible for the regulation of animal health biologicals, which includes but is not limited to vaccines, bacterins, allergens, certain antibodies, antitoxins, toxoids, immunostimulants, certain cytokines, antigenic or immunizing components of live microorganisms, and diagnostic components of natural or synthetic origin, or that are derived
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from synthesizing or altering various substances or components of substances such as microorganisms, genes or genetic sequences, carbohydrates, proteins, antigens, allergens or antibodies. 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.The main regulatory body in the U.S. for veterinary pesticides is the Environmental Protection Agency (EPA). 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. All manufacturers of animal health pesticides must show their products will not cause unreasonable adverse effects to manhumans or the environment as stated in the act. Within the U.S., individual state pesticide authorities must before distribution in that state, also approve pesticide products that arehave been approved by the EPA.EPA before distribution in that state. Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies.
Food Safety Inspection Service.The FDA is authorized to determine the safety of substances (including “generally recognized as safe” substances, food additives and color additives), as well as prescribe their safe conditions of use. However, although the FDA has the responsibility for determining the safety of substances, the Food Safety and Inspection Service, the public health agency inwithin the USDA, still retains, under the tenets of the Federal Meat Inspection Act and the Poultry Products Inspection Act and their implementing regulations, the authority to determine thatwhether new substances and new uses of previously approved substances are suitable for use in meat and poultry products.
The Foreign Corrupt Practices Act (FCPA) prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations. In some countries in which we operate, the pharmaceutical and life sciences industries are exposed to a high risk of corruption associated with sales to healthcare professionals and institutions.International
Outside of the United States
European Union (EU). We are governed by the following EU regulatory bodies: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. The agency has a veterinary review section distinct from the medical review section for human products. The Committee for Veterinary Medicinal Products (CVMP) is responsible for scientific review of the submissions for VMP, and Immunological Veterinary Medicinal Products.including immunological products. If the CVMP concludes that all requirements for quality, safety and efficacy are met and the product benefits outweigh the risks, it issues a positive opinion that is forwarded to the European Commission, whowhich takes the final decision following the European comitology procedure. The centralized marketing authorization (commission decision) of the European Commission is valid in all of the EU.EU and in Northern Ireland. 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. These countries issue a national marketing approval in accordance with the CommissionEuropean Commission's decision. A series
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Table 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.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. 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 general, these requirements are similar to those in the U.S., requiring demonstrated evidence of purity, safety, efficacy and consistency of manufacturing processes.
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, the agencyit evaluates applications for feed additives, including coccidiostats, enzymes and several nutritionals for animals.
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The European ChemicalChemicals Agency (ECHA) is the agency of the EU for the safe use of chemicals. Based on the ECHA’s mandate, the agencyit conducts the evaluation of biocides for the EU.
In regard to Brexit,Since the UKU.K. formally left the EU on January 31, 2020. A transition period is2020, the Veterinary Medicines Directorate (VMD) became the main regulatory body in effect from February 1, 2020 until December 31, 2020, during which the UKU.K. responsible for regulating and controlling veterinary pharmaceuticals. The U.K. and the EU will negotiatereached a trade agreement. Post-separation,deal in December 2020, which went into effect in May 2021. 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 UK has indicated it will looktrade deal, requires that VMD follow EU rules in Northern Ireland. Laws applying to continue working closely with the EMA, and that existing agreements betweenrest of the EMA and other countries such as Switzerland, the U.S. and Canada provide a precedent on which the UKU.K. could build.now diverge but currently remain largely aligned.
Brazil.The Ministry of Agriculture, Livestock Production and Supply (MAPA) is the regulatory body in Brazil that is responsible for the regulation and control of pharmaceuticals, biologicals and medicinal feed additives for animal use. MAPA’s regulatory activities are conducted through the Secretary of Agricultural Defense and its Livestock Products Inspection Department. In addition, regulatory activities are conducted at a local level through the Federal Agriculture Superintendence. These activities include the inspection and licensing of both manufacturing and commercial establishments for veterinary products, as well as the submission, review and approval of pharmaceuticals, biologicals and medicinal feed additives. 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. MAPA was also recently invited to be a Latin American representative at International Cooperation on Harmonisation of Technical Requirements for Registration of Veterinary Medicinal Products (VICH) meetings. Several normative instructions issued by MAPA have set regulatory trends in Latin America.
Japan. The Ministry of Agriculture, Forestry and Fishery (MAFF) is the regulatory body in Japan that is responsible for the regulation and control of pharmaceuticals (including biologicals and pesticide/disinfectant) and feed additive/additives/feed for animal use. MAFF’s regulatory activities are conducted through the Livestock & Aquaculture Product Safety Control Division under Consumer Safety Bureau. The animal drug reviews and approvals, reexamination reviews, GxP compliance checks, GxP site inspections and product assay checks (including vaccine national assays) are done by National Veterinary Assay Laboratory (NVAL). MAFF coordinates with other agencies such as Ministry of Health, Labor and Welfare (MHLW) and Food Safety Commission (FSC) to perform various license compliance checks (e.g., marketing authorization holder, manufacturer and oversea site accreditation) and ensure good promotional activities. Routine inspections, antimicrobial feed additive national assays and manufacturing inspections are done by the Food & Agriculture Material Inspection Center. For foodfarm animal products, animal drug review is done by NVAL but the human food safety review is done by FSC (ADI establishment and antimicrobial risk assessment) and MHLW (MRL establishment). These three agencies (NVAL, FSC and MHLW) work together to approve foodfarm animal products. In addition to those central government agencies, various licenses are delegated to the local municipal government, such as animal drug wholesaler and retailer licenses and feed additive distributor licenses.
China. 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. 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.
The pesticide bureau is responsible for the registration and renewal of pesticide products.
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Australia. The Australian Pesticides and Veterinary Medicines Authority (APVMA) is an Australian government statutory authority established in 1993 to centralizewhere the registration of all agricultural and veterinary products into the Australian marketplace. Previously, each state and territory government had its own system of registration.marketplace is centralized. The APVMA assesses applications from companies and individuals seeking registration so they can supply their product to the marketplace. Applications undergo rigorous assessment using the expertise of the APVMA’s scientific staff and drawing on the technical knowledge of other relevant scientific organizations, Commonwealth government departments and state agriculture departments. If the product works as intended and the scientific data confirms that when used as directed on the product label it will have no harmful or unintended effects on people, animals, the environment or international trade, the APVMA will register the product. As well as registering new agricultural and veterinary products, the APVMA reviews older products that have been on the market for a substantial period of
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time to ensure they still do the job users expect and are safe to use. The APVMA is also responsible for post-authorization oversight, which can include reviews of registered products when particular concerns are raised about their safety and effectiveness. The review of a product may result in confirmation of its registration or it may see registration continue with some changes to the way the product can be used. In some cases, the review may result in the registration of a product being cancelled and the product taken off the market.products.
Rest of world.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. Other countries’ regulatory agencies typically either refer to some or all of the FDA, USDA,requirements of the U.S. or EU, and otherbut may have additional specific local requirements. Most authorities also consider the standards set by international animal health entities, including the World Organization for Animal Health, Codex Alimentarius or VICH (see below), in establishing standards and regulationsthe International Cooperation on Harmonization of Technical Requirements for veterinary pharmaceuticals and vaccines, or review the quality, safety and effectivenessRegistration of the products themselves according to their own national requirements.Veterinary Medicinal Products (VICH).
Global policy and guidance
Joint FAO/WHO Expert Committee on Food Additives. The Joint FAO/WHO Expert Committee on Food Additives is an international expert scientific committee that is administered jointly by the Food and Agriculture Organization of the United Nations (FAO) and the World Health Organization (WHO). They provideIt provides a risk assessment/safety evaluation of residues of veterinary drugs in animal products, exposure and residue definition and maximum residue limit proposals for veterinary drugs. Similarly, the Joint FAO/WHO Meeting on Pesticide Residues (JMPR) is an international expert scientific group administered jointly by the FAO and WHO. 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 these committeesthis committee to establish acceptableacceptably safe levels of residual productsubstances in food-producing animals after treatment with veterinary drugs or pesticides. 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 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. We conduct a review of promotion material for compliance with the local and regional requirements in the markets where we sell animal health products.
Import and Export of Products. The importation and exportation of animal health products is controlled by regulations in many countries. In some jurisdictions this may include obtaining separate permits or licenses by product or by company or filing notices with applicable regulatory agencies prior to import or export of product. We ensure compliance with local, regional and global regulations in the markets where we import/export our animal health products.
International Cooperation on Harmonization of Technical Requirements for Registration of Veterinary Medicinal Products. VICH is a trilateral (EU-Japan-USA)(EU-Japan-U.S.) program launched in 1996 aimed at harmonizing technical requirements for veterinary product registration. Several other countries have obtained observer status, for example, Canada, New Zealand, Australia, and South Africa, and the U.K., or are linked to VICH on the basis of the VICH Outreach Forum, a VICH initiative with the main objective of providing a basis for wider international harmonization of technical requirements. In addition, the World Organization for Animal Health is an associate member of VICH.
The objectives of the VICH are as follows:Human Capital
Establish and implement harmonized technical requirements for the registration of veterinary medicinal products in the VICH regions, which meet high quality, safety and efficacy standards and minimize the use of test animals and costs of product development.
Provide a basis for wider international harmonization of registration requirements through the VICH Outreach Forum.
Monitor and maintain existing VICH guidelines, taking particular note of the ICH work program and, where necessary, update these VICH guidelines.
Ensure efficient processes for maintaining and monitoring consistent interpretation of data requirements following the implementation of VICH guidelines.
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Employees.
By means of a constructive dialogue between regulatory authorities and industry, provide technical guidance enabling response to significant emerging global issues and science that impact regulatory requirements within the VICH regions.
Employees
As of December 31, 2019,2022, we employed approximately 5,7609,000 full time employees. In addition, we employed approximately 320740 fixed-duration employees, which are individuals hired for a pre-defined length of time (one to four years). Together, they total approximately 6,0809,740 employees worldwide. Of the 6,0809,740 global employees, globally, approximately 2,56030% are U.S.-based and approximately 3,52070% 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 150200 union employees in the U.S. located at our Fort Dodge, Iowa manufacturing/R&D facility. Approximately 40%and Santa Clara, Mexico facilities.
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Our Culture. 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 global populationapproach to managing human capital resources.
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.
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 - 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.
Our employees are driven by these values and behavioral pillars. At Elanco, this culture drives employee performance. Leadership and employees are encouraged to evaluate performance with these values and behavioral pillars in mind.
Diversity, Equity and Inclusion. We are focused on discovering new ways in which healthier animals can solve the world’s greatest health and environmental challenges, and this innovation is only possible through an inclusive culture of employees with diverse backgrounds, strengths, and perspectives. 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 customer-facing roles, including but not limited2015, 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. Within this framework, employee development is better supported, opinions and diverse backgrounds are embraced, and we are a stronger company. Current EDEIC focus areas include our Be You! Seminar series to traditional sales roles, technical consultants, account managersraise awareness and commercialprovide a forum for an open discussion on the importance of a diverse and general managers.inclusive workplace at Elanco, strong Employee Resource Groups, an annual Multi-Cultural Summit, and actionable goals for representation of women (globally) and people of color (U.S.) in leadership.
Total 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 that we attract and retain talent as well as reward and recognize top-performing employees through merit increases and other rewards. We benchmark our total rewards annually to ensure our compensation and benefit programs remain competitive with our peers. Our benefits are one way we support our employees’ well-being and live up to our employee promise.
Development. We 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.
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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. These laws and regulations govern matters such asas: the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. 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.
Certain environmental laws impose joint and several liability, without regard to fault, for cleanupclean-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. 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. In addition to clean-up actions brought by federal, state, local and foreign governmental entities, private parties could raise personal injury or other claims against us due to the presence of, or exposure to, hazardous materials on, from or otherwise relating to such a property.
We have made, and intend to continue to make, necessary expenditures for compliance with applicable EHS laws and regulations. We are also monitoring and investigating environmental contamination from past industrial activity at certain sites. As a result, we incurred capital and operational expenditures in 2019 for environmental compliance purposes and for the clean-up of certain past industrial activities. Environmental-relatedWe made no capital expenditures and otherfor environmental-related expenditures were $0.0 million and $0.2 millionitems in 2019, respectively.2022.
In connection with past divestitures, we have undertaken certain indemnification obligations that may require us, in the future, to conduct or finance environmental cleanupsclean-ups at sites that we no longer own or operate. 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 cleanups;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.
Legal Proceedings
We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of U.S. and foreign competition law, labor laws, consumer protection laws and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. We operate in multiple jurisdictions and, as a result, a claim in one jurisdiction may lead to claims or regulatory penalties in other jurisdictions. We intend to vigorously defend against any pending or future claims and litigation, as appropriate.
At this time, in the opinion of our management, the likelihood is remote that the impact of any such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation
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against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.
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 SEC.U.S. Securities and Exchange Commission (the SEC). In addition, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, including Elanco, that file electronically with the SEC at www.sec.gov.
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. 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 Annual Report on Form 10-K.
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ItemITEM 1A. Risk FactorsRISK 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 ElancoElanco's Business and Industry
The animal health industry is highly competitive.
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. We believe many of our competitors are conducting R&D activities in areas served by our products and in areas in which we are developing products. Several new start-up companies also compete in the animal health industry. We also face competition from manufacturers of drugs globally, as well as producers of nutritional health products. These competitors may have access to greater financial, marketing, technical and other resources. As a result, they may be able to devote more resources to developing, manufacturing, marketing and selling their products, initiating or withstanding substantial price competition or more readily taking advantage of acquisitions or other opportunities. 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. 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. In addition to competition from established market participants, new entrants to the animal health medicines and vaccines industry could substantially reduce our market share, render our products obsolete or disrupt our business model.
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. 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 uswe can and the ability of competitors to access more or newer technology than us.we can. 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.
Disruptive innovation and advances in veterinary medical practices, animal health technologies and alternatives to animal-derived protein could negatively affect the market for our products.
The markets for our products are regularly impacted by the introduction and/or broad market acceptance of newly-developednewly developed or alternative products that address the diseases and conditions for which we sell products, including “green” or “holistic” health products, specially bred disease-resistant animals or replacements for meat, milk, eggs or fish from alternative natural or synthetic sources. For example, the market for our companion animalpet health therapeutics has been particularly affected by innovation in new molecules and delivery formulations in recent years. Technological breakthroughs by others may render obsolete our products obsolete and reduce or eliminate the market for our products. Introduction or acceptance of competing animal health products and innovation or disruptive protein alternatives could materially adversely affect our business, financial condition and results of operations.
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Our business is subject to substantial regulation.
As a global company, we are subject to various state, federal and international laws and regulations, including regulations relating to the development, quality assurance, manufacturing, importation, distribution, marketing, and sale of our products. In addition, our manufacturing facilities, including the manufacturing facilities operated by our CMOs, are subject to periodic inspections by regulatory agencies. An inspection may report conditions or practices that indicate possible violations of regulatory requirements. Our failure, or the failure of third parties we rely on, including CMOs, to comply with applicable regulatory requirements, allegations of such non-compliance or the discovery of previously unknown problems with a product or manufacturer could result in, among other things, inspection observation notices, warning letters or similar regulatory correspondence, fines, a partial or total shutdown of production in one or more of our facilities while an alleged violation is remediated, withdrawals or suspensions of current products from the market, and civil or criminal prosecution, as well as decreased sales as a result of negative publicity and product liability claims. 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. 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. Our failure to obtain approvals, delays in the approval process, or our failure to maintain approvals in any jurisdiction, may prevent us from selling products in that jurisdiction until approval or re-approval is obtained, if ever.
In the EU, the Veterinary Medicinal Products Regulation updated the rules related to the authorization and use of veterinary medicines effective January 28, 2022. The updated rules limit the use of antibiotics, tighten importation rules, and impose stricter pharmacovigilance standards. This regulation must still be implemented at the member state level and as such, additional requirements may be adopted by individual member states which would have the effect of increasing the compliance requirements for our business in the EU with resulting costs.
Regulatory restrictions and bans on the use of antibiotics and productivity products in foodfarm animals, as well as changing market demand, may continue to negatively affect demand for certain of our foodfarm animal products.
Over the past few years, our operational results have been, and willmay continue to be, affected by regulations and changing market demand. In certain markets, including the U.S., sales of certain of our foodfarm animal products have been negatively affected by an increase in consumer sentiment for proteins and dairy products produced without the use of antibiotics or other products intended to increase animal production.
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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. See “Business of Elanco -For more information, see “Item 1. Business — Products - Antibiotics.” Concerns that the use of antibiotics in foodfarm animal production may lead to increased antibiotic resistance of human pathogens have resulted in increased regulation and changing market demand. In December 2013, the FDA announced final guidance establishing procedures for the voluntary phase-out in the U.S. over a three-year period of the use of shared-class antibiotics in animal feed or water for growth promotion in foodfarm animal production. The guidance allows for continued use of shared-class antibiotics in food-producing animals under the supervision of a veterinarian for treatment, control and, under certain circumstances, for prevention of disease. The FDA indicated that it took this action to help preserve the efficacy of shared-class antibiotics to treat infections in humans. As part of those efforts, stricter guidelines governing the administration of shared-class antibiotics have recently come into effect. As of January 1, 2017, under the FDA’s guidance and the related rule known as the Veterinary Feed Directive, the use of shared-class antibiotics in the water or feed of food-producing animals requires written authorization by a licensed veterinarian. In June 2021, the FDA announced final guidance establishing procedures for drug sponsors to make similar changes to the approved marketing status of all other dosage forms of shared-class antibiotics to permit their use only under the supervision of a veterinarian, and only when necessary for treatment, control or prevention of specific diseases. The only products we currently market that are impacted by this guidance are Tylan200 and Tylan50, which will be transitioned from over-the-counter to prescription status. In addition, other countries in which we sell or plan to sell our products, such as France and Vietnam, have passed restrictions or bans on antibiotic use. Other countries have placed restrictions or bans on the use of specific antibiotics in certain food-producing animals, regardless of the route of administration (in feed or injectable).
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From 2015 to 2019,2022, our revenue from shared-class antibiotics has declined at a CAGRcompound annual growth rate (CAGR) of 10%1%, excluding the impact of foreign exchange rates. This was driven primarily by changing regulations in many markets, including the Veterinary Feed Directive, as well as changing market demand and our tiered approach to antibiotic stewardship, which included removing growth promotion from labels and requiring veterinary oversight in the U.S. and other markets. Globally, during 2019,2022, our revenue from shared-class antibiotics declined 13%,decreased approximately 11% in comparison to 2021, excluding the impact of foreign exchange rates, and represented 11% (4%8% (3% from sales in the U.S. and 7%5% from sales outside the U.S.)international sales) of total revenue, down from 16% in 2015. The comparison to 2015 is impacted by our 2020 acquisition of Bayer Animal Health, which added certain shared-class antibiotics to our portfolio while significantly increasing our overall annual revenue.
From 2015 to 2019, our2022, we experienced a flat CAGR in revenue from animal-only antibiotics, grew at a CAGR of 4%, excluding the impact of foreign exchange rates, driven by sales outside the U.S., which offset a slight decline in the U.S. Globally, during 2019,rates. During 2022, our revenue from animal-only antibiotics declined 1%,increased approximately 2% in comparison to 2021, excluding the impact of foreign exchange rates, and represented 24%15% (6% from sales in the U.S. and 9% from international sales) and of total revenue, updown from 23% in 2015. In 2019, 87%2022, 13% of our revenue from animal-only antibiotics resulted from the sale of ionophores. Ionophores are a special class of animal-only antimicrobials, and because of their animal-only designation, mode of action and spectrum of activity, their use has not to date been impacted by regulations or changing market demand in many markets outside of the U.S.international markets.
The impact of changes in regulations and market preferences regarding the use of antibiotics in foodfarm animals could have a material adverse effect on our business, financial condition and results of operations. 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. In addition, antibiotic resistance concerns will likely result in additional restrictions or bans, expanded regulations or public pressure to further reduce the use of antibiotics in foodfarm animals, increased demand for antibiotic-free protein, or changes in the market acceptance or regulatory treatment of ionophores, any of which could materially adversely affect our business, financial condition and results of operations.
In addition, our revenue has been impacted by regulatory changes inchanging trade dynamics with China and other markets restrictingthat restrict the use of productivity products, such as those containing ractopamine, in foodfarm animals. This has resulted in many U.S. food producers who access such markets eliminating their use of ractopamine.ractopamine to gain access to those markets. Our FA Ruminants & Swinefarm animal products Optaflexx™ and Paylean™ contain ractopamine. If more producers decide to access such markets or additional markets restrict the use of ractopamine or other productivity products, our business, financial condition and results of operations could be materially adversely affected.

Increased regulation or decreased governmental financial support relating to the raising, processing or consumption of farm animals could reduce demand for our farm animal products.
Companies in the farm animal sector are subject to extensive and increasingly stringent regulations. See "Item 1. Business — Regulatory" for further discussion. If farm animal producers are adversely affected by new regulations or changes to existing regulations, they may reduce herd or flock sizes or become less profitable and, as a result, they may reduce their use of our products, which may materially adversely affect our business, financial condition and results of operations. Also, many farm animal producers benefit from governmental subsidies, and if such subsidies were to be reduced or eliminated, these companies may become less profitable and, as a result, may reduce their use of our farm animal products. More stringent regulation of the farm animal sector, including regarding the use of farm animal products, could have a material adverse effect on our business, financial condition and results of operations.
Our results of operations are dependent upon the success of our top products.
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. Our top five products, Seresto, Rumensin, Advocate, Advantix, and Maxiban contributed approximately 24% of our revenue in 2022. Any issues with these top products, particularly Seresto and Rumensin, which contributed approximately 8% and 6%, respectively, of our revenue in 2022, could have a material adverse effect on our business, financial condition and results of operations.
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Generic products may be viewed as more cost-effective than our products.
We face competition from products produced by other companies, including generic alternatives to our products. We depend on patents and regulatory data exclusivity periods to provide us with exclusive marketing rights for some of our products. 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 jurisdictions where such patents are obtained. The extent of protection afforded by our patents varies from jurisdiction to jurisdiction and is limited by the scope of the claimed subject matter of our patents, the term of the patent and the availability and enforcement of legal remedies in the applicable jurisdiction. In 2019, approximately 67% of our revenue was from products that did not have patent protection, including revenue from someSome 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. As the
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patents for a brand name product expire, competitors may begin to introduce generic or other alternatives, and as a result, we may face competition from lower-priced alternatives to many of our products. For example, we have experienced significant competitive headwinds from generic ractopamine in the U.S. In the third quarter of 2013, a large established animal health company received U.S. approval for generic ractopamine. U.S. revenue from Optaflexx, our ractopamine beef product, has declined at a compound annual growth rate of 21% from 2015 to 2019 as a result of generic competition and international regulatory restrictions. In the third quarter of 2019, an established animal health company received U.S. approval for generic monensin in cattle and goats for certain indications. U.S. revenue from Rumensin, our monensin product, declined at a CAGR of 3% from 2015 to 2022 partly due to competition and may continue to decline as a result of the generic competition. We may face similar competition in the future for existing products that do not benefit from exclusivity or for existing products with material patents expiring in the future. See “Business of Elanco -For further information, see "Item 1. 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. 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. If animal health customers increase their use of new or existing generic products, our business, financial condition and results of operations could be materially adversely affected.
We may not successfully implement our business strategies or achieve targeted cost efficiencies and gross margin improvements.
We are pursuing strategic initiatives that management considers critical to our long-term success, including, but not limited to: improving manufacturing processes, reducing our manufacturing footprint, achieving lean initiatives, consolidating our CMO network, strategically insourcing projects, pursuing cost savings opportunities with respect to raw materials through a new procurement process and improving the productivity of our sales force. We may pursue additional strategic initiatives in the future to improve gross margins and achieve our targeted cost efficiencies. We also have acquired or partnered with a number of smaller animal health businesses, and we intend to continue to do so in the future. There are significant risks involved with the execution of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our control. Accordingly, we may not succeed in implementing these strategic initiatives. Realizing the anticipated benefits from these initiatives, if any benefits are achieved at all, may take several years. We may be unable to achieve our targeted cost efficiencies and gross margin improvements. Additionally, we may have insufficient access to capital to fund investments in strategic initiatives, or our business strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our business.
Consolidation of our customers and distributors could negatively affect the pricing of our products.
Third-party distributors, veterinarians and foodfarm animal producers are our primary customers. In recent years, there has been a trend towardstoward the concentration of veterinarians in large clinics and hospitals. In addition, foodfarm animal producers, particularly swine and poultry producers, and our distributors have seen recent consolidation in their industries. Furthermore, we have seen the expansion of larger cross-border corporate customers and an increase in the consolidation of buying groups (cooperatives of veterinary practices that leverage volume to pursue discounts from manufacturers). The pace of consolidation and structure of markets varies greatly across geographies. If these trends towardstoward consolidation continue, our customers could attempt to improve their profitability by leveraging their buying power to obtain favorable pricing. The resulting decrease in our prices could have a material adverse effect on our business, financial condition and results of operations.
A general outbreak of infectious disease or viruses or anAn outbreak of infectious disease carried by foodfarm animals could negatively affect the demand for, and sale and production of, our foodfarm animal products.
Our global operations expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and have an adverse effect on our results of operations. For example, in December 2019, an outbreak of a new strain of coronavirus in Wuhan, China, has resulted in travel disruption globally and has affected certain companies' operations in China and other countries, including companies with which we do business. At this point, the extent to which the coronavirus may impact our results is uncertain.
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Sales of our foodfarm animal products could be materially adversely affected by a general outbreak of infectious disease, or an outbreak of disease carried by foodfarm animals, which could lead to the widespread death or precautionary destruction of foodfarm animals as well as the reduced consumption and demand for animal protein. In addition, outbreaks of disease carried by foodfarm animals may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our foodfarm animal products due to reduced herd or flock sizes.
In recent years, outbreaks of various diseases, including African Swine Fever, avian influenza, foot-and-mouth disease, bovine spongiform encephalopathy (otherwise known as BSE or “mad cow” disease) and porcine epidemic diarrhea virus (otherwise known as PEDV) have negatively impacted sales of our animal health products. The discovery of additional cases of any of these, or new, diseases may result in additional restrictions on animal protein, reduced herd or flock sizes, or reduced demand for animal protein, any of which may have a material adverse effect on our business, financial condition and results of operations. In addition, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere.
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We could experience demand, supply and operational challenges associated with the effects of a human disease outbreak, epidemic, pandemic or other widespread public health concern.

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. 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.
Despite our efforts to manage and limit these impacts, they are ultimately dependent on factors beyond our control, including the duration and severity of any such outbreak as well as third-party actions taken to contain its spread and mitigate its effects. For COVID-19, the emergence of variants may continue to occur across the geographies in which we operate, leading to varied government and consumer responses, resulting in further volatility in our results and operations.

Our R&D, acquisition and licensing efforts may fail to generate new products or expand the use of our existing products.
Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through licenselicenses or acquisition,acquisitions, including the acquisitionacquisitions of the Bayer animal health business (see Note 6: Acquisitions to our consolidatedAnimal Health and combined financial statements).KindredBio. We commit substantial effort, funds and other resources to R&D, bothprimarily through our own dedicated resources andbut also through collaborations with third parties.
We may be unable to determine with accuracy when or whether any of our products now under development will be approved or launched, or we may be unable to develop, license or otherwise acquire product candidates or products. In addition, we cannot predict whether any products, once launched, will be commercially successful or will achieve sales and revenue that areis consistent with our expectations. The animal health industry is subject to regional and local trends and regulations and, as a result, products that are successful in some markets may not achieve similar success when introduced into other markets. Furthermore, the timing and cost of our R&D may increase, and our R&D may become less predictable as, among other things, regulations applicable to our industry may make it more time-consuming and/or costly to research, develop and register products. If we are unable to generate new products or expand the use of our existing products, our business, financial condition and results of operations willcould be materially adversely affected. For example, between 2015 and 2017, prior to our February 2018 launch of Credelio in the U.S., we experienced an innovation lag in the companion animal parasiticide space. In the absence of a competitive combined oral flea and tick product, our U.S. companion animal parasiticide portfolio revenue declined 15% in 2017, excluding the impact on revenue resulting from a reduction in inventory levels within our distribution channel.
In addition, someAs part of our growth occurred through Lilly’s acquisitions, including Novartis Animal Health, Lohmann Animal Health, Janssen Animal Healthdevelopment strategy, we often hire clinical research organizations to perform preclinical testing and the BI Vetmedica U.S. vaccines portfolio. However, following the Separation, weclinical trials for drug candidates. Clinical trials and procedures are inherently uncertain and there can be no longer benefitassurance 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. Furthermore, unfavorable or inconsistent clinical data from Lilly’s scale, capital base and financial strength.current or future clinical trials or procedures
We had losses in recent periods.
We have incurred net losses in recent periods. We
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conducted by us, our competitors or third parties, or perceptions regarding this clinical data, could continue to incur asset impairment, restructuring and other special charges and could report losses in the future. We also expect to continue to incur substantial expenditures to develop, manufacture and market our products and implement our business strategies, transaction costs and integration expenses associated with acquisitions, additional amortization of intangible assets, and interest expense. We may encounter unforeseen expenses, difficulties, complications, delays, adverse events and other unknown factors that may materially adversely affect our business.ability to obtain necessary approvals and the market’s view of our future prospects.

The misuse or off-label use of our products may harm our reputation or result in financial or other damages.
Our products have been approved for use under specific circumstances for the treatment of certain diseases and conditions in specific species. There may be increased risk of product liability claims if veterinarians, foodfarm animal producers, pet owners or others attempt to use our products off-label, including the use of our products in species
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(including (including humans) for which they have not been approved. Furthermore, the use of our products for indications other than those for which our products have been approved may not be effective, which could harm our reputation and lead to an increased risk of litigation. 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. Any of these events could materially adversely affect our business, financial condition and results of operations.
Animal health products are subject to unanticipated safety, quality or efficacy concerns, which may harm our reputation.
Unanticipated safety, quality or efficacy concerns arise from time to time with respect to animal health products, whether or not scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as well as product liability and other claims.
Regulatory actions based on these types of safety, quality or efficacy concerns could impact all, or a significant portion, of a product’s sales and could, depending on the circumstances, materially adversely affect our results of operations.
In addition, since we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products generally, by food producers, veterinarians and pet owners, any concern as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation. These concerns and the related harm to our reputation could materially adversely affect our business, financial condition and results of operations, regardless of whether such reports are accurate.
Our business may be negatively affected by weather conditions and the availability of natural resources.
The animal health industry and demand for many of our products in a particular region are affected by weather conditions, varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
Food animal producers depend on the availability of natural resources, including large supplies of fresh water. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, veterinarians or food animal producers may purchase less of our products.
Further, heat waves may cause stress in animals and lead to increased vulnerability to disease, reduced fertility rates and reduced milk production. Droughts may threaten pasture and feed supplies by reducing the quality and amount of forage available to grazing livestock, while climate change may increase the prevalence of parasites and diseases that affect food animals. Adverse weather conditions may also have a material impact on the aquaculture business. Changes in water temperatures could affect the timing of reproduction and growth of various fish species, as well as trigger the outbreak of certain water borne diseases.
In addition, veterinary hospitals and practitioners depend on visits from, and access to, the animals under their care. Veterinarians’ patient volume and ability to operate could be adversely affected if they experience prolonged snow, ice or other severe weather conditions, particularly in regions not accustomed to sustained inclement weather.
We may not be able to realize the expected benefits of our investments in emerging markets and are subject to certain risks due to our presence in emerging markets, including political or economic instability and failure to adequately comply with legal and regulatory requirements.
We have taken steps to increase our presence in select emerging markets, including by expanding our sales organization and product offerings in these markets. The acquisition of the Bayer animal health business is expected to further increase our presence in emerging markets (see Note 6: Acquisitions to our consolidated and combined financial statements). Failure to continue to maintain and expand our business in emerging markets could materially adversely affect our business, financial condition and results of operations.

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In addition, certain emerging markets have legal systems that are less developed. Other jurisdictions in which we conduct business may have legal and regulatory regimes that differ materially from U.S. laws and regulations, are continuously evolving or do not include sufficient judicial or administrative guidance to interpret such laws and regulations. Compliance with diverse legal requirements is costly and time-consuming and requires significant resources. Violations or possible violations of applicable laws or regulations by our employees may result in investigation costs, potential penalties and other related costs, which in turn could negatively affect our reputation and our results of operations.
Some countries within emerging markets may be especially vulnerable to periods of local, regional or global economic, political or social instability or crisis. For example, our sales in certain emerging markets have suffered from extended periods of disruption due to natural disasters. Furthermore, we have also experienced lower than expected sales in certain emerging markets due to local, regional and global restrictions on banking and commercial activities in those countries. In addition, certain emerging markets have currencies that fluctuate substantially, which may impact our financial performance. For these reasons, among others, doing business within emerging markets carries significant risks.
Modification of foreign trade policy may harm our food animal product customers.
Changes in laws, agreements and policies governing foreign trade in the territories and countries where our customers do business could negatively impact such customers’ businesses and adversely affect our results of operations. A number of our customers, particularly U.S.-based food animal producers, benefit from free trade agreements, such as the North American Free Trade Agreement (NAFTA). In November 2018, the U.S. negotiated a new trade deal with Canada and Mexico known as the United States-Mexico-Canada-Agreement (USMCA), aimed at re-negotiating and updating the terms of NAFTA. The USMCA was revised by the parties on December 10, 2019. The USMCA still requires ratification by Canada before it can take effect. If the USMCA is not ratified and the U.S. were to withdraw from or materially modify NAFTA or other international trade agreements to which it is a party or if the U.S. were to engage in trade disputes or the imposition of tariffs, our customers could be harmed, and as a result, our business, financial condition and results of operations could be materially adversely affected.
Our business is subject to risk based on global economic conditions.
Macroeconomic business and financial disruptions could have a material adverse effect on our business, financial condition and results of operations. Certain of our customers and suppliers could be affected directly by an economic downturn and could face constraints on the availability of credit or decreased cash flow that could give rise to payment delays, increased credit risk, bankruptcies and other financial hardships that could decrease the demand for our products or hinder our ability to collect amounts due from our customers. If one or more of our large customers, including distributors, discontinues or modifies their relationship with us as a result of economic conditions or otherwise, our business, financial condition and results of operations may be materially adversely affected. In addition, economic concerns may cause some pet owners to forgo or defer visits to veterinary practices or could reduce their willingness to treat pet health conditions or to continue to own a pet. Furthermore, our exposure to credit and collectability risk is higher in certain international markets and our ability to mitigate such risks may be limited. Our procedures intended to monitor and limit our exposure to credit and collectability risk may not effectively limit such risk and avoid losses.
Our results of operations are dependent upon the success of our top products.
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. Our top five products, Rumensin, Trifexis, Maxiban, Denagard and Interceptor Plus, contributed approximately 31% of our revenue in 2019. Any issues with these top products, particularly Rumensin, which contributed approximately 10% of our revenue in 2019 and is now subject to generic competition in the U.S., could have a material adverse effect on our business, financial condition and results of operations.

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Our business is subject to risk based on customer exposure to rising costs and reduced customer income.
Feed, fuel, transportation and other key costs for food animal producers may increase or animal protein prices or sales may decrease. Either of these trends could cause deterioration in the financial condition of our food animal product customers, potentially inhibiting their ability to purchase our products or pay us for products delivered. Our food animal product customers may offset rising costs by reducing spending on our food animal products, including by switching to lower-cost alternatives to our products. 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 companion animal products, especially in developed countries where there is a higher rate of pet ownership. Rising costs or reduced income for our customers could have a material adverse effect on our business, financial condition and results of operations.
For our companion animal products, increased use of alternative distribution channels, or changes within existing distribution channels, could negatively impact our market share, margins and distribution of our products.
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. 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. Because we market our companion animal prescription products primarily through the veterinarian distribution channel, any 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. 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 companion animal products. For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their animal health products directly from veterinarians. Such requirements may lead to increased use of generic alternatives to our products or the increased substitution of our companion animal products with other animal health products or human health products if such other products are deemed to be lower-cost alternatives. Many states already have regulations requiring veterinarians to provide prescriptions to pet owners upon request and the American Veterinary Medical Association has long-standing policies in place to encourage this practice.
Over time, these and other competitive conditions may increase our use of online retailers, “big-box” retail stores or other over-the-counter distribution channels to sell our companion animal products. We may not be adequately prepared or able to distribute our companion animal products if an increased portion of our sales occur through these channels. Also, we may realize lower margins on sales through these distribution channels than we do on sales through veterinarians. Any of these events could materially adversely affect our business, financial condition and results of operations.
In addition, if one or more of our companion animal distributors discontinues or modifies their relationship with us, our business, financial condition and results of operations may be materially adversely affected. For example, in 2017, a change in our U.S. inventory management practices resulted in a revenue lag as existing inventory was sold down, which management estimates decreased our revenue by approximately $35 million.
Supply chain continuity could be disrupted by a major catastrophic event or third party quality issue causing a loss of inventory and/or facility that could negatively impact the amount of product sold.

In our business, we have multiple warehouses in the supply chain that have a material amount of inventory. This could create excessive risk if a catastrophic event were to occur at one of these locations. As such, business continuity plans are critical to our manufacturing sites. Additionally, our contracts require that all CMOs and suppliers have business continuity plans. If business continuity plans are not in place, it could result in disruptions in our supply chain. While we work with our CMOs and suppliers to ensure continuity, no assurance can be given that these efforts will be successful. In addition, due to regulatory requirements relating to the qualification of CMOs and suppliers, we may not be able to establish additional or replacement CMOs or suppliers on a timely basis or without
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excessive cost. The termination, reduction or interruption in our supply chain could adversely impact our ability to produce and sell certain of our products.

Increased or decreased inventory levels at our channel distributors 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 who, in turn, sell our products to third parties.Inventory levels at our distributors may increase or decrease as a result of various factors, including end customer demand, new customer contracts, heightened and generic 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, and procedures and environmental factors beyond our control, including weather conditions or an outbreak of infectious disease carried by food animals such as African Swine Fever. These increases and decreases can lead to variations in our quarterly and annual revenues. In addition, like all companies that manufacture and sell products, we have policies that govern the payment terms that we extend to our customers. Due to consolidation amongst our distributors, as well as changes in the buying habits of end customers or the need for certain inventory levels at our distributors to avoid supply disruptions, from time to time, our distributors have requested exceptions to the payment term policies that we extend to them. Extensions of customer payment terms can impact our cash flows, liquidity and results of operations.

Loss of our executive officers or other key personnel could disrupt our operations.
We depend on the efforts of our executive officers and other key personnel. Our executive officers and other key personnel are not currently, and are not expected to be, subject to non-compete provisions. In addition, we have not entered into employment agreements with our executive officers or other key personnel. Any unplanned turnover or our failure to develop an adequate succession plan for one or more of our executive officers or other key personnel positions could deplete our institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more of our executive officers or other key personnel, or our inability to recruit and retain qualified executive officers or other key personnel in the future, could, at least temporarily, have a material adverse effect on our business, financial condition and results of operations.
We may be required to write down goodwill or identifiable intangible assets.
Under U.S. GAAP, if we determine goodwill or identifiable intangible assets are impaired, we will be required to write down these assets and record a non-cash impairment charge. As of December 31, 2019, we had recorded on our balance sheet goodwill of $3.0 billion and identifiable intangible assets of $2.5 billion. Identifiable intangible assets consist primarily of marketed products acquired or licensed from third parties, licensed platform technologies that have alternative future uses in R&D, manufacturing technologies, and customer relationships from business combinations. We also have indefinite-lived intangible assets, which consist of acquired in-process R&D projects from business combinations that are subject to impairment and non-cash impairment charges.
Determining whether an impairment exists and the amount of the potential impairment involves quantitative data and qualitative criteria that are based on estimates and assumptions requiring significant management judgment. Future events or new information may change management’s valuation of an intangible asset in a short amount of time. The timing and amount of impairment charges recorded in our consolidated and combined statements of operations and write-downs recorded in our consolidated balance sheets could vary if our management’s conclusions change. Any impairment of goodwill or identifiable intangible assets could have a material adverse effect on our business, financial condition and results of operations.
As a standalone public company, we may expend additional time and resources to comply with rules and regulations that did not previously apply to us, and failure to comply with such rules may lead investors to lose confidence in our financial data.
As a standalone public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations of the NYSE. Previously, we had established all of the procedures and practices required as a subsidiary of Lilly, but we must continue to implement others as a separate, standalone public company. Continuing to establish and expand such procedures and practices could increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and could be burdensome on our personnel, systems and resources. We have devoted and are continuing to devote resources to address these public company
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requirements. As a result, we have and will continue to incur legal, accounting and other expenses that we did not previously incur while a subsidiary of Lilly to comply with these rules and regulations. Furthermore, continuing the need to establish the corporate infrastructure necessary for a standalone public company may divert some of our management’s attention from operating our business and implementing our strategy. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements.
Our R&D relies on evaluations of animals, which may become subject to bans, additional restrictive regulations or increased attention from activism movements.
As an animal health medicines and vaccines business, we are required to evaluate the effect of our existing and new products in animals in order to register such products. Animal testing in certain industries has been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to ban animal testing or encourage the adoption of new regulations applicable to animal testing. To the extent that the activities of such organizations and individuals are successful, our R&D, and by extension our business, financial condition and results of operations, could be materially adversely affected. In addition, negative publicity about us or our industry could harm our reputation. For example, food animal producers may experience decreased demand for their products or reputational harm as a result of evolving consumer views of animal rights, nutrition, health-related or other concerns. Any reputational harm to the food animal industry may also extend to companies in related industries, including our company. Adverse consumer views related to the use of one or more of our products in food animals also may result in a decrease in the use of such products and could have a material adverse effect on our operating results and financial condition.

Manufacturing problems and capacity imbalances may cause product launch delays, inventory shortages, recalls or unanticipated costs.
In order to sell our products, we must be able to produce and ship sufficient quantities to our customers. We own and operate 12 internal manufacturing sites located in nine countries. We also employ a network of approximately 90 third-party CMOs. Many of our products involve complex manufacturing processes and are sole-sourced from certain manufacturing sites.
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. 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;
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 near our production sites.
These interruptions could result in launch delays, inventory shortages, recalls, unanticipated costs or issues with our agreements under which we supply third parties, which may materially adversely affect our business, financial condition and results of operations.
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Our manufacturing network may be unable to meet the demand for our products or we may have excess capacity if demand for our products changes. The unpredictability of a product’s regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites and shifting customer demand (including as a result of market conditions or entry of branded or generic competition) increase the potential for capacity imbalances. In addition, construction of sites is expensive, and our ability to recover costs will depend on the market acceptance and success of the products produced at the new sites, which is uncertain.
We rely on third parties to provide us with materials and services and are subject to increased labor and material costs and potential disruptions in supply.
The materials used to manufacture our products may be subject to availability constraints and price volatility caused by changes in demand, weather conditions, supply conditions, government regulations, economic climate and other factors. In addition, labor costs may be subject to volatility caused by the supply of labor, governmental regulations, economic climate and other factors. Increases in the demand for, availability or the price of, materials used to manufacture our products and increases in labor costs could increase the costs to manufacture our products, result in product delivery delays or shortages, and impact our ability to launch new products on a timely basis or at all. We may not be able to pass all or a material portion of any higher material or labor costs on to our customers, which could materially adversely affect our business, financial condition and results of operations.
We may be unable to meet demand for certain of our products if any of our third-party suppliers cease or interrupt operations, fail to renew contracts with us or otherwise fail to meet their obligations to us.
We may incur substantial costs and receive adverse outcomes in litigation and other legal matters.
Our business, financial condition and results of operations could be materially adversely affected by unfavorable results in pending or future litigation matters. If the acquisition of the Bayer animal health business is consummated, our business, financial condition and results of operations could also be materially adversely affected by pending or future litigation matters affecting the Bayer animal health business. These matters may include, among other things, allegations of violation of U.S. and foreign competition law, labor laws, consumer protection laws and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. In addition, changes in the interpretations of laws and regulations to which we are subject, or in legal standards in one or more of the jurisdictions in which we operate, could increase our exposure to liability. For example, in the U.S., attempts have been made to allow damages for emotional distress and pain and suffering in connection with the loss of, or injury to, a companion animal. If such attempts were successful, our exposure with respect to product liability claims could increase materially.
Litigation matters, 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 litigation matters. An adverse outcome of litigation or legal matters could result in us being responsible for significant damages. Any of these negative effects resulting from litigation matters could materially adversely affect our business, financial condition and results of operations.
Our business is subject to substantial regulation.
As a global company, we are subject to various state, federal and international laws and regulations, including regulations relating to the development, quality assurance, manufacturing, importation, distribution, marketing and sale of our products. Changes in applicable federal, state, local and foreign laws and regulations could have a material adverse effect on our business, financial condition and results of operations. In addition, our manufacturing facilities, including the manufacturing facilities operated by our CMOs, are subject to periodic inspections by regulatory agencies. An inspection may report conditions or practices that indicate possible violations of regulatory requirements. Our failure, or the failure of third parties we rely on, including CMOs, to comply with these regulatory requirements, allegations of such non-compliance or the discovery of previously unknown problems with a product or manufacturer could result in, among other things, inspection observation notices, warning letters or similar regulatory correspondence, fines, a partial or total shutdown of production in one or more of our facilities while an alleged violation is remediated, withdrawals or suspensions of current products from the market, and civil or criminal prosecution, as well as decreased sales as a result of negative publicity and product liability claims. Any one of these consequences could materially adversely affect our business, financial condition and results of operations.
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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. Even after a product reaches market, we may be subject to re-review and may lose our approvals. Our failure to obtain approvals, delays in the approval process, or our failure to maintain approvals in any jurisdiction, may prevent us from selling products in that jurisdiction until approval or re-approval is obtained, if ever.
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.
Third parties may illegally distribute and sell counterfeit or illegally compounded versions of our products that do not meet the exacting standards of our development, manufacturing and distribution processes. Counterfeit or illegally compounded medicines pose a significant risk to animal health and safety because of the conditions under which they are manufactured and the lack of regulation of their contents. 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. 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. 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.
We are subject to complex environmental, health and safety laws and regulations.
We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. 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.
Given the nature of our business, we have incurred, are currently incurring and may in the future incur liabilities for the investigation and remediation of contaminated land under the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or under other federal, state, local and foreign environmental cleanup laws, with respect to our current or former sites, adjacent or nearby third-party sites, or offsite disposal locations. We could be subject to liability for the investigation and remediation of legacy environmental contamination caused by historical industrial activity as 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. Additionally, we may become liable to third parties for damages, including personal injury, property damage and natural resource damages, resulting from the disposal or release of hazardous materials into the environment. Such liability could materially adversely affect our business, financial condition and results of operations.
Furthermore, regulatory agencies are showing increasing concern over the impact of animal health products and food animal operations on the environment. This increased regulatory scrutiny has in the past and may in the future necessitate that additional time and resources be spent to address these concerns in both new and existing products.
Our failure to comply with the environmental, health and safety laws and regulations to which we are subject, including any permits issued thereunder, may result in environmental remediation costs, loss of permits, fines, penalties or other adverse governmental or private actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial measures. We could also be held liable for any and all consequences arising out of human exposure to hazardous materials, environmental damage or significant environmental, health and safety issues that might arise at a manufacturing or R&D facility. Environmental laws and regulations are complex, change frequently, have tended to become more stringent and stringently enforced over time and may be subject to new interpretation. It is possible that our costs of complying with current and future environmental, health and safety laws, and our liabilities arising
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from past or future releases of, or exposure to, hazardous materials could materially adversely affect our business, financial condition and results of operations.
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, including Lilly, 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. 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.
The costs of defending an intellectual property claim could be substantial and could materially adversely affect our business, financial condition and results of operations, even if we successfully defend such claim. Moreover, even if we believe that we do not infringe a validly existing third-party patent, we may choose to license such patent, which would result in associated costs and obligations. We may also incur costs in connection with an obligation to indemnify a distributor, licensor or other third party.
The intellectual property positions of animal health medicines and vaccines businesses frequently involve complex legal and factual questions, and an issued patent does not guarantee us the right to practice the patented technology or develop, manufacture or commercialize the patented product. For example, while we generally enter into proprietary information agreements with our employees and third parties, which assign intellectual property rights to us, these agreements may not be honored or may not effectively assign intellectual property rights to us under the local laws of some countries or jurisdictions. We cannot be certain that a competitor or other third party does not have or will not obtain rights to intellectual property that may prevent us from manufacturing, developing or marketing certain of our products, regardless of whether we believe such intellectual property rights are valid and enforceable or we believe we would otherwise be able to develop a more commercially successful product, which may materially adversely affect our business, financial condition and results of operations.
If our intellectual property rights are challenged or circumvented, competitors may be able to take advantage of our R&D efforts or harm the value of our brands.
Our long-term success depends on our ability to market innovative and competitive products. We rely and expect to continue to rely on a combination of intellectual property, including patent, trademark, trade dress, copyright, trade secret and domain name protection, as well as confidentiality and license agreements with our employees and others, to protect our intellectual property and proprietary rights. If we fail to obtain and maintain adequate intellectual property protection, we may not be able to prevent third parties from using our proprietary technologies or from marketing products that are very similar or identical to ours.
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Our currently pending or future patent applications may not result in issued patents, or be approved on a timely basis, if at all. Similarly, any term extensions that we seek may not be approved on a timely basis, if at all. In addition, our issued patents, or any patents that may issue in the future, may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage, including exclusivity in a particular product area.
The validity and scope of our patent claims also may vary between countries, as individual countries have their own patent laws. For example, some countries only permit the issuance of patents covering a novel chemical compound itself, and its first use, and thus further methods of use for the same compound may not be patentable. The validity, enforceability, scope and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings that vary based on the local law of the relevant jurisdiction. Our ability to enforce our patents also depends on the laws of individual countries and each country’s practice with respect to enforcement of intellectual property rights. Patent protection must be obtained on a jurisdiction-by-jurisdiction basis, and we only pursue patent protection in countries where we think it makes commercial sense for the given product. In addition, if we are unable to maintain our existing license agreements or other agreements pursuant to which
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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.
Patent law reform in the U.S. and other countries may also weaken our ability to enforce our patent rights or make such enforcement financially unattractive. For instance, in September 2011, the U.S. enacted theThe America Invents Act which permits enhanced third-party actions for challenging patents and implements a first-to-invent system. These reforms could result in increased costs to protect our intellectual property or limit our ability to obtain and maintain patent protection for our products in these jurisdictions. Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies, which could diminish or eliminate sales and profits from those regions and materially adversely affect our financial condition and results of operations.
Our trademarks and brands may provide us with a competitive advantage in the market as they may be known or trusted by consumers. In order to maintain the value of such brands, we must be able to enforce and defend our trademarks. We have pursued and will continue to pursue the registration of trademarks and service marks in the U.S. and internationally; however, enforcing rights against those who knowingly or unknowingly dilute or infringe our brands can be difficult. Effective trademark, service mark, trade dress or related protections may not be available in every country in which our products and services are available. Enforcement is especially difficult in first-to-file countries where “trademark squatters” can prevent us from obtaining adequate protections for our brands. There can be no assurance that the steps we have taken and will take to protect our proprietary rights in our brands and trademarks will be adequate or that third parties will not infringe, dilute or misappropriate our brands, trademarks, trade dress or other similar proprietary rights.
Many of our products are based on or incorporate proprietary information. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, by generally requiring our employees, consultants, other advisors and other third parties to execute proprietary information and confidentiality agreements upon the commencement of their employment, engagement or other relationship. Despite these efforts and precautions, we may be unable to prevent a third party from copying or otherwise obtaining and using our trade secrets or our other intellectual property without authorization and legal remedies may not adequately compensate us for the damages caused by such unauthorized use. 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.
We
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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.
Third parties may illegally distribute and sell counterfeit or illegally compounded versions of our products that do not meet the exacting standards of our development, manufacturing and distribution processes. Counterfeit or illegally compounded medicines pose a significant risk to animal health and safety because of the conditions under which they are manufactured and the lack of regulation of their contents. 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. 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. With the acquisition of the Bayer Animal Health business, we have now expanded our business more into direct to retailer and e-commerce channels in order to meet the pet owners where they want to purchase, which may increase the risk of counterfeiting of our products. 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.
Unanticipated safety, quality or efficacy concerns or identified concerns associated with our products may harm our reputation and have an adverse impact on our performance.
Unanticipated safety, quality or efficacy concerns arise from time to time with respect to animal health products, whether or not scientifically or clinically supported, potentially leading to product recalls, withdrawals or suspended or declining sales, as well as product liability and other claims. Regulatory actions based on these types of safety, quality or efficacy concerns could impact all, or a significant portion, of a product’s sales.
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. House of Representatives' subcommittee chair requested that we produce certain documents and information related to the Seresto collar, made a request to temporarily remove Seresto collars from the market and, during a hearing at which our President and Chief Executive Officer (CEO) testified, again called for removal of the collars from the market. Similar actions relating to Seresto could be taken by regulatory agencies. 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.
In addition, we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products in general, by food producers, veterinarians and pet owners. Any concern as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation. These concerns, including those relating to Seresto, and the related harm to our reputation could materially adversely affect our business, financial condition and results of operations, regardless of whether such reports are accurate.
We may not successfully implement our business strategies or achieve targeted cost efficiencies and gross margin improvements.

We are pursuing strategic initiatives that management considers critical to our long-term success, including, but not limited to: improving manufacturing processes, reducing our manufacturing footprint, achieving lean initiatives, consolidating our CMO network, strategically insourcing projects, pursuing cost savings opportunities through alternate sources of supply and improving the productivity of our sales force. Following the acquisition of Bayer Animal Health and again in 2021, we conducted restructuring programs which included the elimination of positions across several countries, primarily in sales and marketing, R&D, manufacturing and quality, and back-office support. There are significant risks involved with the execution of these restructuring programs, including costly expenses related to severance, asset impairment and other charges as well as business disruption, loss of accumulated knowledge and procedural efficiency, failure to achieve some or all of the benefits of the restructuring programs,
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lawsuits arising from the restructuring programs, and the need for a significant amount of management and other employees’ time and focus, which may divert attention from operating the business. We may pursue additional strategic initiatives in the future to improve gross margins and achieve our targeted cost efficiencies. We also have acquired or partnered with a number of smaller animal health businesses, and we intend to continue to do so in the future. There are significant risks involved with the execution of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our control. Accordingly, we may not succeed in implementing these strategic initiatives. Realizing the anticipated benefits from these initiatives, if any benefits are achieved at all, may take several years. We may be unable to achieve our targeted cost efficiencies and gross margin improvements. Additionally, we may have insufficient access to capital to fund investments in strategic initiatives, or our business strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our business.

Our business results fluctuate due to seasonality and other factors and the extent of such fluctuations may be unpredictable.
Historically, our operating results have fluctuated during the year, and we expect these fluctuations to continue. 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.
Other factors that may cause our operating results to fluctuate are:
weather conditions, including those related to climate change, and the availability of natural resources;
increased or decreased inventory levels in our distribution channels;
timing of customer orders and deliveries;
competitive changes, such as price changes or new product introductions that we or our competitors may make;
timing of marketing programs and events; and
availability of veterinarians to use our products, as there are seasonal impacts, due to veterinarian vacations or training events that limit their ability to serve their customers that result in the use of our products.
For more detailed information on some of the above-listed factors that can cause fluctuations in our operating results, see risks described below under the headings "Our business may be negatively affected by weather conditions and the availability of natural resources" and "Increased or decreased inventory levels in our distribution channels can lead to fluctuations in our revenues and variations in our payment terms extended to our distributors can impact our cash flows."
Accordingly, the fluctuations in our revenues due to seasonality and other factors, many of which are beyond our control, mean period-to-period comparisons of our historical results are not necessarily meaningful. Investors should not rely on such fluctuations as an indication of our future performance. To the extent that we experience the factors described above, our future operating results may not meet the expectations of securities analysts or investors, which may cause the market price of our common stock to decline.
Our business may be negatively affected by weather conditions and the availability of natural resources.
The animal health industry and demand for many of our products in a particular region are affected by weather conditions, including those related to climate change, varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
Farm animal producers depend on the availability of natural resources, including large supplies of fresh water. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, veterinarians or farm animal producers may purchase less of our products.
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Further, heat waves may cause stress in animals and lead to increased vulnerability to disease, reduced fertility rates and reduced milk production. Droughts may threaten pasture and feed supplies by reducing the quality and amount of forage available to grazing livestock, while climate change may increase the prevalence of parasites and diseases that affect farm animals. Adverse weather conditions may also have a material impact on the aquaculture business. Changes in water temperatures could affect the timing of reproduction and growth of various fish species, as well as trigger the outbreak of certain water borne diseases.
In addition, veterinary hospitals and practitioners depend on visits from, and access to, the animals under their care. Veterinarians’ patient volume and ability to operate could be adversely affected if they experience prolonged snow, ice or other severe weather conditions, particularly in regions not accustomed to sustained inclement weather.
Modification of foreign trade policy may harm our farm animal product customers.
Changes in laws, agreements and policies governing foreign trade in the territories and countries where our customers do business could negatively impact such customers’ businesses and adversely affect our results of operations. A number of our customers rely on duty reduction benefits provided by free trade agreements, such as the U.S.-Mexico-Canada-Agreement. 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. Finally, as global security decreases, more countries will use sanctions and export controls as a method to deal with such insecurity, which could result in decreased markets for our products.

Our results of operations may be adversely affected by foreign currency exchange rate fluctuations.
Our results are reported in U.S. dollars. As a result, 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 for reporting purposes. To the extent that revenue and expense transactions are not denominated in the functional currency, we are also subject to the risk of transaction losses. 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.
Customer exposure to rising costs and reduced customer income, as well as a lack of availability or significant increases in the cost of raw materials used in manufacturing our products, could have a material adverse effect on our profit margins and operating results.
Feed, fuel, transportation and other key costs for farm animal producers may continue to increase or animal protein prices or sales may decrease. Either of these trends could cause deterioration in the financial condition of our farm animal product customers, potentially inhibiting their ability to purchase our products or pay us for products delivered. Our farm animal product customers may offset rising costs by reducing spending on our products, including by switching to lower-cost alternatives. 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. 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. 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. Further, the unavailability or delivery delays of raw materials has affected and could continue to affect our ability to ship the related products timely, more severely impacting high-volume or high-margin products.
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For our pet health products, increased use of alternative distribution channels, or changes within existing distribution channels, could negatively impact our market share, margins and distribution of our products.
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. 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. 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. 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. For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their animal health products directly from veterinarians. Such requirements may lead to increased use of generic alternatives to our products or the increased substitution of our pet health products with other animal health products or human health products if such other products are deemed to be lower-cost alternatives. Many states already have regulations requiring veterinarians to provide prescriptions to pet owners upon request and the American Veterinary Medical Association has long-standing policies in place to encourage this practice.
Over time, these and other competitive conditions may further increase our use of online retailers, “big-box” retail stores or other over-the-counter distribution channels to sell our pet health products. We may not be adequately prepared or able to distribute our pet health products if an increased portion of our sales occur through these channels. Also, we may realize lower margins on sales through these distribution channels than we do on sales through veterinarians. 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. For example, in 2020, we completed the previously communicated channel inventory reduction, moving to inventory levels across the world and across species that represent the minimum necessary to allow our distributors to maintain strong service levels with their end customers.
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.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. These increases and decreases can and have led to variations in our quarterly and annual revenues. In addition, like all companies that manufacture and sell products, we have policies that govern the payment terms that we extend to our customers. Due to consolidation amongst our distributors, as well as changes in the buying habits of end customers or the need for certain inventory levels at our tax rates,distributors to avoid supply disruptions, from time to time, our distributors have requested exceptions to the payment term policies that we extend to them. Extensions of customer payment terms can impact our cash flows, liquidity and results of operations.
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We may be required to write down goodwill or identifiable intangible assets.
Under accounting principles generally accepted in the United States (U.S. GAAP), if we determine goodwill or identifiable intangible assets are impaired, we will be required to write down these assets and record a non-cash impairment charge. As of December 31, 2022, we had recorded on our balance sheet goodwill of $6.0 billion and identifiable intangible assets of $4.8 billion. Identifiable intangible assets consist primarily of marketed products acquired or licensed from third parties, licensed platform technologies that have alternative future uses in R&D, manufacturing technologies, customer relationships from business combinations and software. We also have indefinite-lived intangible assets, which primarily consist of acquired in-process R&D projects from business combinations that are subject to impairment and non-cash impairment charges.
Determining whether an impairment exists and the amount of the potential impairment involves quantitative data and qualitative criteria that are based on estimates and assumptions requiring significant management judgment. Future events or new information may change management’s valuation of an intangible asset in a short amount of time. The timing and amount of impairment charges recorded in the consolidated statements of operations and write-downs recorded on our consolidated balance sheets could vary if our management’s conclusions change. Any impairment of goodwill or identifiable intangible assets could have a material adverse effect on our business, financial condition and results of operations.
Our R&D relies on evaluations of animals, which may become subject to bans, additional restrictive regulations or increased attention from activism movements.
As an animal health medicines and vaccines business, we are required to evaluate the effect of our existing and new products in animals in order to register such products. Animal testing in certain industries has been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to ban animal testing or encourage the adoption of new regulations applicable to animal testing. To the extent that the activities of such organizations and individuals are successful, our R&D, and by extension our business, financial condition and results of operations, could be materially adversely affected. In addition, negative publicity about us or our industry could harm our reputation. For example, farm animal producers may experience decreased demand for their products or reputational harm as a result of evolving consumer views of animal rights, nutrition, health-related or other concerns. Any reputational harm to the farm animal industry may also extend to companies in related industries, including our company. Adverse consumer views related to the use of one or more of our products in farm animals also may result in a decrease in the use of such products and could have a material adverse effect on our operating results and financial condition.

Manufacturing problems and capacity imbalances may cause product launch delays, inventory shortages, recalls or unanticipated costs.
In order to sell our products, we must be able to produce and ship sufficient quantities to our customers. We own and operate 18 internal manufacturing sites located in 11 countries. We also employ a network of approximately 150 third-party CMOs. Many of our products involve complex manufacturing processes and are sole sourced from certain manufacturing sites.
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. 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;
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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.
These interruptions could result in launch delays, inventory shortages, recalls, unanticipated costs or issues with our agreements under which we supply third parties, which may materially adversely affect our business, financial condition and results of operations.
Our manufacturing network may be unable to meet the demand for our products or we may have excess capacity if demand for our products changes. The unpredictability of a product’s regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites and shifting customer demand (including as a result of market conditions or entry of branded or generic competition) increase the potential for capacity imbalances. In addition, construction of sites is expensive, and our ability to recover costs will depend on the market acceptance and success of the products produced at the new sites, which is uncertain.
We have invested and will continue to invest in improvements to our existing manufacturing facilities and in new manufacturing plants. These types of projects are subject to risks of delay or cost overruns inherent in any large construction project and require licensing by or approvals from various regulatory authorities. Significant cost overruns or delays in completing these projects could have an adverse effect on our financial condition or results of operations.

We may incur substantial costs and receive adverse outcomes in litigation, regulatory investigations, and other legal matters.
Our business, financial condition and results of operations could be materially adversely affected by unfavorable results in pending or future litigation, regulatory investigations, and other legal matters. These matters may include, among other things, allegations of violation of U.S. and foreign competition law, labor laws, securities laws and regulations, consumer protection laws and environmental laws and regulations, as well as claims or foreignlitigation relating to product liability, intellectual property, securities, breach of contract and tort. 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. 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.
Also, on July 1, 2021, we received a subpoena from the SEC relating to our channel inventory and sales practices prior to mid-2020. We have been responding to requests for documents and information from the SEC and will continue to do so. We believe that our actions were appropriate. However, we cannot predict the outcome of any particular proceeding, or whether the SEC investigation will be resolved favorably or ultimately result in charges or material damages, fines or other penalties, enforcement actions, or civil or criminal proceedings against us or members of our senior management.
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. An adverse outcome of litigation or legal matters could result in us being responsible for significant damages. Any of these negative effects resulting from litigation, regulatory investigations and other legal matters could materially adversely affect our business, financial condition and results of operations.
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In addition, changes in the interpretations of laws and regulations to which we are subject, or in legal standards in one or more of the jurisdictions in which we operate, could increase our exposure to liability. For example, in the U.S., attempts have been made to allow damages for emotional distress and pain and suffering in connection with the loss of, or injury to, a pet. If such attempts were successful, our exposure with respect to product liability claims could increase materially.
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. Our product liability insurance policy may not fully cover our potential liabilities. In addition, we may determine that we should increase our coverage, and this insurance may be prohibitively expensive to us or our collaborators or licensees and may not fully cover our potential liabilities.
We may incur additional tax legislationexpense or exposurebecome subject to additional tax liabilities.exposure.

We are subject to income taxes in the U.S. and numerous foreignother jurisdictions. Changes in the relevant tax laws, regulations, administrative practices, principles and interpretations could adversely affect ourOur future effective tax rates. The U.S. recently enacted tax reform legislation significantly revising U.S. tax law, and a number of othercountries are actively considering or enacting tax changes. Other organizations, such as the Organization for Economic Cooperation and Development and the European Commission, are also actively considering tax related matters, which could influence international tax policy in countries in which we operate. While outcomes of these initiatives continue to develop and remain uncertain, modifications to key elements of the U.S. or international tax framework could have a material adverse effect on our consolidated results of operations and cash flows.
In December 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the ‘‘2017 Tax Act’’). The 2017 Tax Act included significantcould be adversely affected by changes to the U.S. corporate income tax system, such as the reduction in the corporate incomeeffective tax rate transition to a modified territorial tax system, changes to business related exclusions, deductions and credits, and modifications to international tax provisions. The U.S. Treasury Department and the IRS began to issue major proposed regulations related to the 2017 Tax Act during 2018 and are expected to continue issuing proposed and final regulations. Proposed regulations are generally subject to comment before being finalized; however, once finalized, these regulations may require Elanco to make adjustments, in particular, as a result of certain complex international provisions containeda change in the 2017 Tax Act. Such adjustments might materially impact Elanco’s provision for income taxesmix of earnings between U.S. and effectivenon-U.S. jurisdictions or among jurisdictions with differing statutory tax raterates, 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 period in whichvaluation of deferred tax assets and liabilities, the adjustments are maderesults of audits and could also impact Elanco’s net income, earnings per share, consolidated cash flowsexaminations of previously filed tax returns and liquidity.
In addition, our effective tax rate is subject to potential risks that various taxing authorities may challenge the pricingcontinuing assessments of our cross border arrangements and subject us to additional tax adversely impacting our effective tax rate and tax liability.exposures. We are also subject to the examination of our tax returns and other tax matters by the Internal
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Revenue Service (IRS) and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, particularly in the U.S. or other material foreign jurisdictions, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected.
We are subject to complex environmental, health and safety laws and regulations.
We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. 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.
Given the nature of our business, we have incurred, are currently incurring and may in the future incur liabilities for the investigation and remediation of contaminated land under the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or under other federal, state, local and foreign environmental cleanup laws, with respect to our current or former sites, adjacent or nearby third-party sites, or offsite disposal locations. 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. Additionally, we may become liable to third parties for damages, including for personal injury, property damage and natural resource damages, resulting from the disposal or release of hazardous materials into the environment. Such liability could materially adversely affect our business, financial condition and results of operations.
Furthermore, regulatory agencies are showing increasing concern over the impact of animal health products and farm animal operations on the environment. This increased regulatory scrutiny has in the past and may in the future necessitate that additional time and resources be spent to address these concerns in both new and existing products.
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Our failure to comply with the environmental, health and safety laws and regulations to which we are subject, including any permits issued thereunder, may result in environmental remediation costs, loss of permits, fines, penalties or other adverse governmental or private actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial measures. We could also be held liable for any and all consequences arising out of human exposure to hazardous materials, environmental damage or significant environmental, health and safety issues that might arise at a manufacturing or R&D facility. Environmental laws and regulations are complex, change frequently, have tended to become more stringent and stringently enforced over time and may be subject to new interpretation. 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 affected.affect our business, financial condition and results of operations.
Significant portions of our operations are conducted in foreign jurisdictions, including jurisdictions presenting a high risk of bribery and corruption, and are subject to the economic, political, legal and business environments of the countries in which we do business.
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. 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;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;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. 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
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additional limitations on transferring personal information between countries or other restrictions on the processing of personal information.
In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs.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. Compliance with these requirements may prohibit the import or export of certain products and technologies or may require us to obtain a license before importing or exporting certain products or technologies. 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. In addition, variations in the pricing of our products between jurisdictions may result in the unauthorized importation or unauthorized re-importation of our products between jurisdictions and may also result in the imposition of anti-dumping and countervailing duties or other trade-related sanctions. While the impact of these factors is difficult to predict, any of them could materially adversely affect our business, financial condition and results of operations.
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Further, changes in any of these laws, regulations or requirements, or the political environment in a particular country, may affect our ability to engage in business transactions in certain markets, including investment, procurement and repatriation of earnings.
Significant portions of our operations are conducted in Europe and could be impacted by the withdrawal of the United Kingdom (UK) from the EU, commonly referred to as “Brexit.”
In June 2016, voters in the UK approved an advisory referendum to withdraw from the EU, commonly referred to as Brexit. On March 29, 2017, the UK Prime Minister formally notified the European Council of the UK's intention to withdraw from the EU under Article 50 of the Treaty of Lisbon. Brexit formally occurred on January 31, 2020. A transition period is in effect from February 1, 2020 until December 31, 2020, during which the UK and the EU will negotiate a trade agreement. During this period, EU rules and regulations will remain in effect for the UK. The referendum and notice created political, regulatory and economic uncertainty, particularly in the UK and the EU, and this uncertainty may persist for years if the UK and the EU are unable to reach an agreement by the end of the transition period.
Our business is subject to substantial regulation. If a trade agreement is not reached by the end of the transition period, we may not be able to market certain products that entered the EU market following marketing authorization by UK authorities in all the nations that are parties to free trade agreements with the EU unless and until we have obtained all required regulatory approvals in each jurisdiction where we proposed to market those products.
In addition, the uncertainty related to Brexit has caused foreign exchange rate fluctuations in the past, including the strengthening of the U.S. dollar relative to the Euro and British pound immediately following the announcement of Brexit. Further developments with respect to Brexit could further impact foreign exchange rates, which could materially adversely affect our business, financial condition and results of operations.
The end of the transition period with no agreement in place could significantly disrupt the free movement of goods, services, and people between the UK and the EU, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe and declining gross domestic product in many European markets. The UK's exit from the EU could also result in similar referendums or votes in other European countries in which we do business.
The uncertainty surrounding the terms of the UK's withdrawal and its consequences could adversely impact consumer and investor confidence, and could affect sales or regulation of our products. Any of these effects, among others, could materially adversely affect our business, financial condition and results of operations.
Foreign exchange rate fluctuations and potential currency controls affect our results of operations, as reported in our financial statements.
We conduct operations in many areas of the world, involving transactions denominated in a variety of currencies. In 2019, we generated approximately 44% of our revenue in currencies other than the U.S. dollar, principally the Euro, British pound, Canadian dollar, Australian dollar, Brazilian real, Japanese yen, and Chinese yuan. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenue. In addition, because our financial statements are reported in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations.
We also face risks arising from currency devaluations and the imposition of cash repatriation restrictions and exchange controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Cash repatriation restrictions and exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing restrictions or controls. While we currently have no need and do not intend to repatriate or convert cash held in countries that have significant restrictions or controls in place, should we need to do so to fund our operations, we may be unable to repatriate or convert such cash, or may be unable to do so without incurring substantial costs.
We also bear foreign exchange risk associated with the future cash settlement of an existing net investment hedge. In October 2018, we entered into a fixed interest rate, 5-year, 750 million Swiss franc net investment hedge (NIH) against Swiss franc assets. The NIH is expected to generate approximately $25 million in cash and contra
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interest expense per year; however, there is potential for significant 2023 settlement exposure on the 750 million Swiss franc notional if the U.S. dollar devalues versus the Swiss franc.
We depend on sophisticated information technology and infrastructure.
We rely on various information systems to manage our operations, and we increasingly depend on third parties to operate and support our information technology systems, including by way of virtual and cloud-based operations. These third parties include large established vendors as well as small, privately owned companies. Failure by any provider to adequately service our operations, or a change in control or insolvency of one or more providers, may materially adversely affect our business, financial condition and results of operations. Prior to the Separation, we relied on Lilly to negotiate and manage many of our relationships and contracts with these third parties.
In connection with the Separation, we are continuing to enhance a number of our business processes, including our financial reporting and supply chain processes and with respect to where and from whom we obtain information technology systems. In order to support the new business processes under the terms of our transitional services agreement with Lilly, weWe have made and will continue to make significant configuration, process and data changes within many of the information technology systems we use. If our information technology systems and processes are not sufficient to support our business and financial reporting functions, or if we fail to properly implement our new business processes, our financial reporting may be delayed or inaccurate and, as a result, our business, financial condition and results of operations may be materially adversely affected. Even if we are able to successfully configure and change our systems, all technology systems, even with implementation of security measures, are vulnerable to disability, failures or unauthorized access. If our information technology systems or our service providers' information technology systems were to fail or be breached, this could materially adversely affect our reputation and our ability to perform critical business functions, and sensitive and confidential data could be compromised.
Breaches of our information technology systems or improper disclosure of confidential company or personal data, or a failure to comply with privacy laws, regulations and our contractual obligations concerning data privacy or the security of certain information could have a material adverse effect on our reputation and operations, or we may fail to comply with privacy laws, regulations and our contractual obligations.operations.
We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations, including customer, employee and company data. The secure processing, maintenance and transmission of this information is critical to our operations andoperations. In addition, the legal environment surrounding information security, storage, use, processing, transmission, maintenance, disclosure and privacy is demanding with the frequent imposition of new and changing regulatory requirements.
We also store, process, and transmit certain information with third parties.parties, including the use of cloud technologies. Our information systems and those of our third-party vendors are subjected to computer viruses or other malicious codes, unauthorized access attempts, phishing and cyber or phishing-attacksother cyber-attacks and are also are vulnerable to an increasing threat of continually evolving cybersecurity risks and external hazards, as well as improper or inadvertent staff behavior, all of which could expose confidential company and personal data systems and information to security breaches.behavior. Any suchpotential cyber breach could compromise our networks, and the information stored therein could be accessed, publicly disclosed, lost or stolen. Such attacks could result in our intellectual property and otherthe unauthorized access, public disclosure, loss or theft of confidential information being lostdata, or stolen,unauthorized access to, disruption of, or interference with our operations and otherthat 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.
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. 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.
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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. While we will continue to implement additional protective measures to reduce the risk of and detect cyber-incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. Our protective measures may not protect us against attacks and such attacks could have a significant impact on our business and reputation. In addition, prior to the Separation, we relied on Lilly for certain privacy and compliance functions and personnel and may experience difficulties maintaining and implementing all policies and practices following completion of the Separation.
Increased regulation or decreased governmental financial support relating to the raising, processing or consumption of food animals could reduce demand for our food animal products.
Companies in the food animal sector are subject to extensive and increasingly stringent regulations. See “Business of Elanco - Regulatory.” If food animal producers are adversely affected by new regulations or changes to
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existing regulations, they may reduce herd or flock sizes or become less profitable and, as a result, they may reduce their use of our products, which may materially adversely affect our business, financial condition and results of operations. Also, many food animal producers benefit from governmental subsidies, and if such subsidies were to be reduced or eliminated, these companies may become less profitable and, as a result, may reduce their use of our food animal products. More stringent regulation of the food animal sector, including regarding the use of food animal products, could have a material adverse effect on our business, financial condition and results of operations.
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. We may be unable to negotiate new collective bargaining agreements on similar or more favorable terms and may experience work stoppages, higher ongoing labor costs or other labor problems in the future at our sites. We may also experience difficulty or delays in implementing changes to our workforce in certain markets. These risks may be increased by the Separation because we no longer benefit from Lilly’s prior relationships and negotiations relating to such agreements.
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.
The anticipated benefitsA loss of key personnel or highly skilled employees could disrupt our operations.
Our future success depends partly on the Separationcontinued service of our highly qualified and well-trained key research, engineering, sales, marketing, manufacturing, executive and administrative personnel. We face intense competition for these qualified personnel from Lilly may not be achieved.
We may not be ableour competitors and others, particularly for certain highly technical specialties in geographic areas where we continue to achieve the full strategic and financial benefits expectedrecruit. Due to result from the Separation from Lilly. Further, such benefits, if ultimately achieved,this intense competition, we may be delayed. These benefits includeunable to continue to attract and retain qualified personnel necessary for the following:
improvingdevelopment of our business or to recruit or identify suitable replacement personnel. If we are unsuccessful in our recruitment and retention efforts, our business may be harmed. In addition, if we fail to effectively manage organizational and/or strategic and operational flexibility and streamlining decision-making by providing the flexibility to implement our strategic plan and to respond more effectively to different customer needs and the changing economic and industry environment;
allowing us to adopt the investment policy and dividend policy best suited tochanges, our financial profilecondition, results of operations and business needs, and allowing us to raise capital as an independent business;
creating an independent equity structure that makes possible future acquisitions utilizing our common stockreputation, as well as compensation arrangements;our ability to successfully attract, motivate and
facilitating incentive compensation arrangements for retain key employees, more directly tied to the performance of our business, and enhancing employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of our business.
We may not achieve the anticipated benefits of the Separation from Lilly for a variety of reasons, which could materially adversely affect our business, financial condition and results of operations.be harmed.
We have underfunded pension plan liabilities. We will require current and future operating cash flow to fund these shortfalls, reducing the cash available for other uses.
We have certain defined benefit pension plans, predominantly outside of the U.S., thatin Germany and Switzerland, in which our employees participate in 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 the Separation.our separation from Lilly. The funded status and net periodic pension cost for these plans is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets or in a change in the expected rate of return on plan assets. As of December 31, 2019,2022, for pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation was $218.2$301 million with plan assets of $140.3$150 million. Any changes in the discount rate could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years. The need to make additional cash contributions will
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divert resources from our operations and may have a material adverse effect on our business, financial condition and results of operations.
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Risks Related to Acquisitions and Divestitures
We may not be able to successfully complete favorable transactions or successfully integrate acquired businesses when we pursue acquisitions, divestitures, joint ventures or other significant transactions.
From time to time, we evaluate potential acquisitions, divestitures or joint ventures that would further our strategic objectives. The completion of such transactions suchis often subject to conditions that may be outside our control, including obtaining the requisite approval of the shareholders of the target company and/or government approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Accordingly, we may not be able to complete announced and signed transactions, and therefore, may not realize the acquisition of Aratana Therapeutics, Inc. and Prevtec Microbia Inc.anticipated benefits therefrom.
We finalized the acquisition of Aratana Therapeutics, Inc. on July 18, 2019 and the acquisition of Prevtec Microbia Inc. on July 31, 2019. FollowingAfter the closing of the transactions,an acquisition we are now required to devote significant management attention and resources to integrating the portfolio and operations of the target companies.company. 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 companiescompany 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 transactionstransaction in the time frame anticipated, or at all;
the inability to realize the anticipated value from various assets of the target companies;
loss of key employees;
potential unknown liabilities and unforeseen increased expenses, delays or unfavorable conditions in connection with the closing of the transactionstransaction and the subsequent integration; and
performance shortfalls at our company or the target companiescompany 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.
Additionally, as a result of our acquisition of Bayer Animal Health, we are operating under two separate enterprise resource planning (ERP) systems to support business operations such as invoicing, manufacturing, shipping, inventory control, procurement, supply chain management and financial reporting. We have started the process of integrating these two ERP systems into one primary platform and expect to complete the implementation process during 2023. ERP integrations have inherent risks, which can complicate our business operations and potentially lead to breakdowns in data integrity. The integration activities have also required, and will continue to require, significant resources to deploy. 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.
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. Furthermore, if we issue equity or debt securities to raise additional funds, beyond the equity and debt issuances that have occurred in January and February 2020, our existing shareholders may experience significant dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing shareholders. Furthermore, if we sell a substantial number of shares of common stock in the public markets, the availability of those shares for sale could adversely affect the market price of our common stock. Such sales, or the perception in the market that holders of a large number of shares intend to sell shares, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
Our historical combined financial data prior to the Separation is not necessarily representative of the results we would have achieved as a standalone company and may not be a reliable indicator of our future results.

For periods prior to the Separation, our historical combined financial data included in this report does not reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. This is primarily the result of the following factors:

our historical combined financial data does not reflect the Separation;
our historical combined financial data for periods prior to the Separation reflects expense allocations for certain support functions that were provided on a centralized basis within Lilly, such as expenses for executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations that may be higher or lower than the comparable expenses we would have actually incurred, or will incur in the future, as a standalone company;
our cost of debt and our capital structure has been different from that reflected in our historical combined financial statements for periods prior to the Separation;
significant increases have occurred in our cost structure as a result of the IPO, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act; and
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the IPO had a material effect on our customers and other business relationships, including supplier relationships, and resulted in the loss of preferred pricing available by virtue of our reduced relationship with Lilly.
Our financial condition and future results of operations, after giving effect to the Separation, have been materially different from the amounts for periods prior to the Separation reflected in our historical combined financial statements included in this report. As a result of the Separation, it may be difficult for investors to compare our 2019 and future results to historical results prior to the Separation or to evaluate our relative performance or trends in our business.
Risks Related to the Pending Acquisition of the Bayer Animal Health Business (the Acquisition)
The proposed acquisition of the Bayer animal health business may not be completed on the anticipated terms and there are uncertainties and risks related to consummating the Acquisition.
In August 2019, we entered into a share purchase agreement (Purchase Agreement) to purchase the animal health business of Bayer for approximately $5.3 billion in cash and approximately $2.3 billion of our common stock, subject to certain customary adjustments. Our obligation to consummate the Acquisition is subject to satisfaction or waiver, to the extent permitted under applicable law, of a number of conditions. Among other conditions, the Acquisition is subject to antitrust approvals in certain jurisdictions. We cannot provide any assurance that all required antitrust clearances will be obtained and what conditions will be imposed. There can be no assurance as to the cost, scope or impact of the actions that may be required, including divestiture actions, to obtain antitrust approval. If we are required to or otherwise decide to take such actions in order to close the Acquisition, it could be detrimental to the combined organization following the consummation of the Acquisition, including with respect to the synergies which we expect from the Acquisition. For example, in January 2020, we signed agreements to divest Osurnia, a treatment for otitis externa in dogs, and the U.S. rights to Capstar, an oral tablet that kills fleas in dogs and cats, for an aggregate of $230 million in all cash deals, with the intent to advance our efforts to secure the necessary regulatory clearances for the Acquisition. Furthermore, these actions, or the failure to effect any divestitures at an acceptable price or at all, could have the effect of delaying or preventing completion of the Acquisition or imposing additional costs on or limiting the revenues or cash of the combined organization following the consummation of the Acquisition.
Even if the parties receive antitrust approvals, the applicable domestic or international regulatory authorities could take action under the antitrust laws to prevent or rescind the Acquisition, require the divestiture of assets or seek other remedies. Additionally, state attorneys general could seek to block or challenge the Acquisition as they deem necessary or desirable in the public interest at any time, including after completion of the Acquisition. In addition, in some circumstances, a third party could initiate a private action under antitrust laws challenging or seeking to enjoin the Acquisition, before or after it is completed. We may not prevail and may incur significant costs in defending or settling any action under the antitrust laws.
We may be unable to integrate the Bayer animal health business successfully and realize the anticipated benefits of the Acquisition.
If the Acquisition is completed, the successful integration of the Bayer animal health business and operations into those of our own and our ability to realize the expected synergies and benefits of the Transactions are subject to a number of risks and uncertainties, many of which are outside of our control. We will also be required to devote significant management attention and resources to integrating business practices, cultures and operations of each business. The risks and uncertainties relating to integrating the two businesses and realizing the anticipated cost synergies include, among other things:
the challenge of integrating complex organizations, systems, operating procedures, compliance programs, technology, networks and other assets of the Bayer animal health business;
the difficulties harmonizing differences in the business cultures of our company and the Bayer animal health business;
the inability to combine successfully our respective businesses in a manner that permits us to achieve the cost savings, synergies and other anticipated benefits from the Acquisition;
the inability to minimize the diversion of management attention from ongoing business concerns during the process of integrating the Bayer animal health business into our businesses;
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the inability to resolve potential conflicts that may arise relating to customer, supplier and other important relationships of our business and the Bayer animal health business;
difficulties in retaining key management and other key employees;
the challenge of managing the expanded operations of a significantly larger and more complex company and coordinating geographically separate organizations; and
difficulties in fully exploring intellectual property licensed from Bayer in connection with the acquisition, given Bayer's rights as licensor of such intellectual property.
We will incur substantial expenses to consummate the proposed Acquisition but may not realize the anticipated cost synergies and other benefits to the extent expected, on the timeline expected, or at all. In addition, even if we are able to integrate the Bayer animal health business successfully, the anticipated benefits of the Acquisition may not be realized fully, or at all, or may take longer to realize than expected. Moreover, competition in the animal health industry, including competition that has negatively impacted results in the companion animal parasiticide market, may also cause us not to fully realize the anticipated benefits of the Acquisition. Given the size and significance of the Acquisition, we may encounter difficulties in the integration of the operations of the Bayer animal health business and may fail to realize the full benefits and synergies of the Acquisition, which could adversely impact our business, results of operation and financial condition.
The Bayer animal health business may have liabilities that are not known to us.
The Bayer animal health business may have liabilities that we failed, or were unable, to discover in the course of performing our due diligence investigations of the Bayer animal health business. We cannot assure that the indemnification available to us under the Purchase Agreement in respect of the Acquisition in connection with such agreement will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the Bayer animal health business or property that we will assume upon consummation of the Acquisition. We may learn additional information about the Bayer animal health business that materially adversely affects us, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.
Acquisition accounting adjustments could adversely affect our financial results.
We will account for the completion of the Acquisition using the acquisition method of accounting. We will allocate the total estimated purchase price to net tangible assets, amortizable intangible assets and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the Acquisition record the excess, if any, of the purchase price over those fair values as goodwill. Differences between preliminary estimates and the final acquisition accounting may occur, and these differences could have a material impact on the consolidated and combined financial statements and the combined company’s future results of operations and financial position.
Failure to complete the Acquisition could impact our stock price and our future business and financial results.
If the Acquisition is not completed, our ongoing business and financial results may be adversely affected and we will be subject to a number of risks, including the following:
depending on the reasons for the failure to complete the Acquisition, we could be liable to Bayer for monetary or other damages in connection with the termination or breach of the Purchase Agreement;
we have dedicated significant time and resources, financial and otherwise, in planning for the Acquisition and the associated integration, of which we would lose the benefit if the Acquisition is not completed;
we are responsible for certain transaction costs relating to the Acquisition, whether or not the Acquisition is completed;
while the Purchase Agreement is in force, we are subject to certain restrictions on the conduct of our business, including taking any action that is reasonably likely to prevent, materially delay or materially impair the consummation of the Acquisition, which restrictions may adversely affect our ability to execute certain of our business strategies; and
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matters relating to the Acquisition (including integration planning) may require substantial commitments of time and resources by our management, whether or not the Acquisition is completed, which could otherwise have been devoted to other opportunities that may have been beneficial to us.
In addition, if the Acquisition is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also may be subject to litigation related to any failure to complete the Acquisition or to enforcement proceedings commenced against us to perform our obligations under the Purchase Agreement. If the Acquisition is not completed, these risks may materialize and may adversely affect our business, financial results and financial condition, as well as the price of our common stock.
While the Acquisition is pending, we and the Bayer animal health business will be subject to business uncertainties that could adversely affect our respective businesses.
Our success following the announcement of the Acquisition will depend in part upon the ability of us and the Bayer animal health business to maintain our respective business relationships. Uncertainty about the effect of the Acquisition on customers, suppliers, employees and other constituencies may have a material adverse effect on us and the Bayer animal health business. Customers, suppliers and others who deal with us or the Bayer animal health business may delay or defer business decisions, decide to terminate, modify or renegotiate their relationships or take other actions as a result of the Acquisition that could negatively affect the revenues, earnings and cash flows of our company or the Bayer animal health business. If we are unable to maintain these business and operational relationships, our financial position, results of operations or cash flows could be materially affected.
Our debt following the completion of the Acquisition will be significant and could adversely affect our business and our ability to meet our obligations.
In connection with the Acquisition, we priced a $4.3 billion term facility and a $750.0 million revolving credit facility (the New Credit Facilities) in February 2020, which will become effective at the closing of the Acquisition.
This significant amount of debt and other cash needs could have important consequences to us, including:
requiring a substantial portion of our cash flow from operations to make payments on this debt, thereby limiting the cash we have available to fund future growth opportunities, such as R&D, capital expenditures and acquisitions;
restrictive covenants in our debt arrangements, which could limit our operations and borrowing;
the risk of a future credit ratings downgrade of our debt, increasing future debt costs and limiting the future availability of debt financing;
increasing our vulnerability to general adverse economic and industry conditions and limiting our flexibility in planning for, or reacting to, changes in our business and industry, due to the need to use our cash to service our outstanding debt;
placing us at a competitive disadvantage relative to our competitors that are not as highly leveraged with debt and that may therefore be more able to invest in their business or use their available cash to pursue other opportunities, including acquisitions; and
limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise.
In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of our outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.
The issuance of our common stock to Bayer under the Purchase Agreement will be dilutive to our shareholders and could depress the market price of our common stock.
Following the closing of the Acquisition, Bayer will own shares of our common stock valued at approximately $2.3 billion based on trading prices before the closing of the Acquisition, subject to a minimum and maximum number of shares as provided in the Purchase Agreement. The shares are subject to limited lock-up obligations and following the expiration of such lock-up obligations (the latest of which expire 12 months after the closing of the Acquisition), Bayer is free to sell the shares of our common stock received at the closing of the Acquisition. In addition, under the Purchase Agreement, we agreed to provide Bayer with customary shelf registration rights.
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The market price of shares of our common stock may drop significantly as a result of the resale of the consideration shares, or when the lock-up restrictions on resale by Bayer lapse. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant shareholders.
Risks Related to our Indebtedness
We have substantial indebtedness and expect to incur substantial additional indebtedness.
We have a significant amount of indebtedness, which could materially adversely affect our business, financial condition and results of operations. As of December 31, 2019, in additionSee "Item 8. Financial Statements and Supplementary Data — Note 10: Debt" to $2.4 billion of senior unsecured notes, we had $371.4 million of borrowings under a term loan, which was retired in January 2020 using the proceeds from our most recent equity offering. We have an additional $750.0 million of borrowing capacity ($1.0 billion if certain conditions are met) under our existing revolving facility. See Note 9: Debt to our consolidated and combined financial statements for further discussion.
We expect to incur substantial additional indebtedness in connection with the Acquisition under the New Credit Facilities. If we do so, the risks related to our high level
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Table of debt could intensify. Specifically, ourContents
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.
In addition, the credit agreement expected to govern the New Credit Facilities is expected to contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.
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Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could intensify the risks associated with our indebtedness.
We and our subsidiaries may be able to incur substantial indebtedness in the future, even following the incurrence of indebtedness in connection with the Acquisition.future. Although we expect that the terms of the credit agreement governing the New Credit Facilities willour credit facilities contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are expected to be subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. These restrictions are alsodo not expected to prevent us from incurring other obligations that do not constitute indebtedness. In addition to our borrowings under the New Credit Facilities,our credit facilities, the covenants under the credit agreement governing the New Credit Facilitiesour credit facilities are expected to, and the covenants under any other of our existing or future debt instruments could, allow us to incur a significant amount of additional indebtedness and, subject to certain limitations, such additional indebtedness could be secured. The more leveraged we become, the more we, and in turn our security holders, will be exposed to certain risks described above under “—Wethe heading “We have substantial indebtedness and expect to incur substantial additional indebtedness.”
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.
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. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to dispose of material assets or operations, alter our dividend policy, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. 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. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.
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In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness will depend on the generation of cash flow by our subsidiaries, including certain international subsidiaries, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. 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. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, may materially adversely affect our business, financial condition and results of operations and our ability to satisfy our obligations under our indebtedness or pay dividends on our common stock.
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Our debt agreements following the completion of the Acquisition are expected to contain restrictions that will limit our flexibility in operating our business.
Our existing term facility and revolving credit facility contain, and the New Credit Facilities are expected tofacilities 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.
In addition, the New Credit Facilities are expected tocertain of our credit facilities require us to comply with a net total leverage ratio and a minimum fixed charge coverage ratio under certain circumstances.
As a result of these covenants, we will beare limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
A failure to comply with the covenants under the existing term facility, the existing revolving credit facility, the indenture that governs the senior unsecured notes the New Credit Facilities,and credit facilities, or any of our other existing or future indebtedness could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. In the event of an event of default under the New Credit Facilities,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).
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Such actions by the lenders could cause cross defaults under our other indebtedness, including our senior unsecured notes. If we were unable to repay those amounts, the lenders under the New Credit Facilitiesour credit facilities and any of our other existing or future secured indebtedness could proceed against the collateral granted to them to secure the New Credit Facilitiesour credit facilities or such other indebtedness. We are expecting to pledgehave pledged a significant portion of our assets as collateral under the New Credit Facilities.
The terms and conditions of the New Credit Facilities have not been finalized.
Theour credit agreement relating to the New Credit Facilities has not been finalized. Our entry into the New Credit Facilities is subject to market conditions, and we cannot assure you that the New Credit Facilities will be completed, in the manner, on the terms or on the timetable described herein, or at all. Future changes in market conditions may result in less favorable terms for the New Credit Facilities and any changes to the terms of the New Credit Facilities
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may increase our interest expense and adversely affect our business. The terms of the New Credit Facilities could also change in a way that increases our indebtedness or makes it easier to incur debt in the future.facilities.
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. 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. As a result of the Acquisition,acquisition of Bayer Animal Health, our credit ratings may be downgraded.were downgraded, resulting in increased borrowing costs. Because the ratings of certain of our senior unsecured notes have been downgraded, we will beare required to pay additional interest under the senior unsecured notes. Any further downgrades could result in requiring usrequirements 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.
Changes in interest rates may adversely affect our earnings and/or cash flows.
Our revolvingCertain of our credit facility bearsfacilities bear interest at variable interest rates that use the London Inter-Bank Offered Rate (LIBOR) as a benchmark rate. On July 27, 2017, the United Kingdom’sU.K.'s Financial Conduct Authority (FCA), which regulates LIBOR, announced that it intendsits intention to stop persuading or compelling banks to submit LIBOR quotations after 2021.
In March 2021, (theICE Benchmark Administration, the administrator of LIBOR, with the support of the U.S. Federal Reserve and the FCA, Announcement).formally announced that LIBOR will cease to be published on June 30, 2023. The FCA announcement indicatesAlternative Reference Rates Committee in the U.S. has proposed that the continuation ofSecured Overnight Financing Rate (SOFR) is the preferred alternative to U.S. LIBOR on the current basis cannot and will not be assured after 2021, and LIBOR may cease to exist or otherwise be unsuitable for use as a benchmark. Recent proposals for LIBOR reforms may result in derivatives and other financial contracts that are currently indexed to LIBOR; however, there are presently many variations of SOFR, and it is unknown whether these or any other alternative reference rate will attain market acceptance.
SOFR measures the establishmentcost of new methods of calculating LIBORborrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Even though our credit facilities have either already transitioned to SOFR or the establishment of one or more alternative benchmark rates. Although our revolving credit facility providesprovide for successor base rates, the successor base rates may be related todiscontinuance of LIBOR and the consequencesintroduction of any potential cessation, modification or other reform of LIBOR cannot be predicted at this time. If LIBOR ceases to exist, we may need to amend our existing or enter into a new revolving credit facility, and we cannot predict what alternative reference rates, such as SOFR, could cause the interest rate(s) will be negotiated with our counterparties. As a result, our interest expense may increase, our ability to refinance some or all of our existing indebtedness may be affected and our available cash flow may be adversely affected.
Risks Related to our Relationship with Lilly
As a result of the Separation, we no longer have access to Lilly’s brand, reputation, capital base and other resources.
We believe our association with Lilly has contributed to our building relationships with our customers due to Lilly’s globally recognized brand and perceived high-quality products. The Separation could adversely affect our ability to attract and retain customers, which could result in reduced sales of our products.
The loss of Lilly’s scale, capital base and financial strength may also prompt suppliers to reprice, modify or terminate their relationships with us. In addition, Lilly’s reduction of its ownership of our company could potentially cause some of our existing agreements and licenses to be terminated. We cannot predict with certainty the effect that the Separation will haverates calculated on our business, our clients, vendors or other persons, or whether our brand will be accepted in the marketplace.
Further, because we have only operated as a standalone company for a limited period of time, we may have difficulty doing so. We may need to acquire assetsfloating-rate debt and resources in addition to those provided by Lilly, and in connection with the Separation, may also face difficulty in separating our assets from Lilly’s assets and integrating newly acquired assets into our business. Our business, financial condition and results of operations could be materially adversely affected if we have difficulty operating as a standalone company, fail to acquire assets that prove to be important to our operations or incur unexpected costs in separating our assets from Lilly’s assets or integrating newly-acquired assets.
Lilly may compete with us.
Lilly is not restricted from competing with us in the animal health business. Although Lilly informed us it had no intention to compete with us in the animal health business, if Lilly in the future decides to engage in the type of
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business we conduct, it may have a competitive advantage over us, which may cause our business, financial condition and results of operationsinterest rate swaps to be materially adversely affected.
To preserve the tax-free treatment to Lilly and its shareholders of the Separation and certain related transactions, we may not be able to engage in certain transactions.
To preserve the tax-free treatment to Lilly and its shareholders of the Separation and certain related transactions, under a tax matters agreement with Lilly, we are restricted from taking any action that prevents such transactions from being tax-free for U.S. federal income tax purposes. These restrictions limit our ability to pursue certain strategic transactions or engage in other transactions, including using our common stock to make acquisitions and in connection with equity capital market transactions that might increase the value of our business. Because of these restrictions, following the issuance of our common stock and tangible equity units in public offerings completed in January 2020, and the issuance of the consideration shares to Bayer in connection with the Acquisition, we will have limited or no ability to issue shares of our common stock in the near term.
Lilly’s rights as licensor under the intellectual property and technology license agreement could limit our ability to develop and commercialize certain products.
Prior to the Separation, we had the ability to leverage certain of Lilly’s intellectual property. As part of the Separation, we entered into an intellectual property and technology license agreement. Pursuant to the intellectual property and technology license agreement, Lilly licenses to us certain of its intellectual property (excluding trademarks) related to the animal health business and also grants a license for us to use Lilly’s proprietary compound library for a period of two years plus up to three additional one-year periods, each such period to be granted under Lilly’s sole discretion. If we fail to comply with our obligations under this agreement and Lilly exercises its right to terminate it, our ability to continue to research, develop and commercialize products incorporating that intellectual property will be limited. In addition, this agreement includes limitations that affect our ability to develop and commercialize certain products, including in circumstances where Lilly has an interest in the licensed intellectual property in connection with its human health development programs. These limitations and termination rights may make it more difficult, time consuming or expensive for us to develop and commercialize certain new products, or may result in our products being later to marketdifferent than those of our competitors. For a summary description of the terms of the intellectual property and technology license agreement, see Note 20: Related Party Agreements and Transactions to our consolidated and combined financial statements.
We have incurred and will continue to incur significant charges in connection with the Separation and incremental costs as a standalone public company.
We are currently replicating or replacing certain functions, systems and infrastructure to which we no longer have the same access after the Separation. We have also made and will continue to make investments or hire additional employees to operate without the same access to Lilly’s existing operational and administrative infrastructure. These initiatives may be costly to implement. Due to the scope and complexity of the underlying projects relative to these efforts, the amount of total costs could be materially higher than our estimates, and the timing of the incurrence of these costs is subject to change.
Prior to the Separation, Lilly performed or supported many important corporate functions for us. Our consolidated and combined financial statements prior to the Separation reflect charges for these services on an allocated basis. Following the Separation, many of these services are governed by our transitional services agreement with Lilly. Under the transitional services agreement we are able to use these Lilly services for a fixed term established on a service-by-service basis. Partial reduction in the provision of any service or termination of a service prior to the expiration of the applicable fixed term requires Lilly’s consent. In addition, either party is able to terminate the agreement due to a material breach of the other party, upon prior written notice, subject to limited cure periods or if the other party undergoes a change of control.
We pay Lilly mutually agreed-upon fees for these services, which are based on Lilly’s costs (including third-party costs) of providing the services through March 31, 2021 and subject to a mark-up of 7% thereafter, with additional inflation-based escalation beginning January 1, 2022. However, since our transitional services agreement was negotiated in the context of a parent-subsidiary relationship, the terms of the agreement, including the fees charged for the services, may be higher or lower than those that would be agreed to by parties bargaining at arm’s length for similar services and may be higher or lower than the costs reflected in the allocations in our historical consolidated and combined financial statements. In addition, while these services are being provided to us by Lilly, our
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operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited.
We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we receive from Lilly under the transitional services agreement. Additionally, after the transitional services agreement terminates, we may be unable to sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from Lilly. When we begin to operate these functions separately, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. In addition, we have historically received informal support from Lilly, which may not be addressed in the transitional services agreement. The level of this informal support may diminish or be eliminated in the future.expected.
Risks Related to Elanco Common Stock
Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.
Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities.
As of December 31, 2019, there were 373 million shares of our common stock outstanding, approximately 3.5 million shares of our common stock issuable upon exercise or vesting of outstanding equity awards and an additional 8 million shares of common stock available for issuance under the 2018 Elanco Stock Plan and Elanco Animal Health Incorporated Directors’ Deferral Plan; issuances of these shares are registered on our Registration Statement on Form S-8. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise or vesting by the holders of such awards, subject to vesting restrictions and Rule 144 limitations applicable to our affiliates.
On January 27, 2020, we issued approximately 25 million shares of our common stock in a registered public offering. Additionally, we issued on such date 11 million tangible equity units in a registered public offering. Unless settled earlier, each purchase contract that is a component of a tangible equity unit will settle automatically on the mandatory settlement date into up to 1.5625 shares of our common stock, subject to certain anti-dilution adjustments. All of the shares of common stock and tangible equity units sold in the public offering, as well as the shares of common stock issuable upon settlement of the units, are and will be freely tradable without restriction or further registration under the Securities Act by persons other than our “affiliates” and sales of the shares of common stock, the units or the underlying common stock may depress the price of shares of our common stock.
Pursuant to the Purchase Agreement, we have agreed to issue the consideration shares to Bayer and to use our reasonable best efforts to file a shelf registration statement to register such shares within 60 days after the closing date of the Acquisition. The Purchase Agreement provides that, subject to certain lock-up restrictions with respect to the transfer of the consideration shares, Bayer may request that we complete underwritten offerings with respect the consideration shares, subject to limitations on minimum offering size. The completion of the Acquisition is subject to the satisfaction of certain customary closing conditions, including the receipt of antitrust approvals and the absence of any law or order enjoining or otherwise prohibiting the Acquisition in specified jurisdictions. Bayer will receive the consideration shares at the completion of the Acquisition.
Any shares of common stock sold by Bayer under the shelf registration statement in compliance with or following the expiration of the lock-up provisions under the Purchase Agreement will be freely tradable. In the event Bayer exercises its registration rights and sells a large number of shares of our common stock, such sales could reduce the trading price of our common stock. These sales or the prospects of these sales or any other sales also could impede our ability to raise future capital.
In addition, subject to compliance with our tax matters agreement with Lilly, we may also issue additional shares of common stock or convertible debt securities to finance future acquisitions or for other corporate purposes. We cannot predict the size of future issuances of our common stock or other securities or the effect, if any, that future issuances and sales of our common stock or other securities will have on the market price of our common stock . Sales of substantial amounts of common stock (including shares of common stock issued in connection with the
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Acquisition or any future acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
The price of our common stock may fluctuate substantially.
Investors should consider an investment in our common stock to be risky, and should invest in our common stock only if the investor can withstand a significant loss and wide fluctuations in the market value of the investment. Some factors that may cause the market price of our common stock to fluctuate, in addition to the other risks mentioned in this section of the annual report on Form 10-K, are:
our announcements or our competitors’ announcements regarding new products, enhancements, significant contracts, acquisitions or strategic investments;
changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;
failures to meet external expectations or management guidance;
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in our capital structure or dividend policy future issuances of securities, sales of large blocks of common stock by our shareholders or our incurrence of additional debt;
reputational issues;
changes in general economic and market conditions in or any of the regions in which we conduct our business;
changes in industry conditions or perceptions; and
changes in applicable laws, rules or regulations and other dynamics.
In addition, if the market for stocks in our industry or related industries, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition and results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
The market price of our common stock is also likely to be influenced by the tangible equity units issued by us. For example, the market price of our common stock could become more volatile and could be depressed by:
investors' anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon settlement of the purchase contracts that are a component of the units;
possible sales of our common stock by investors who view the units as a more attractive means of equity participation in us than owning shares of our common stock; and
hedging or arbitrage trading activity that may develop involving the units and our 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. The New Credit Facilities are expected toCertain 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 yourour shareholders' major source of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure you that we will make such a change.
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The distributions we pay on our common stock may not qualify as dividends for U.S. federal income tax purposes, which could adversely affect the U.S. federal income tax consequences to you of owning our common stock.
Generally, any distributions that we make to a stockholdershareholder with respect to its shares of our common stock will constitute a dividend for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. While we expect that we will have accumulated earnings and profits, as determined for U.S. federal income tax purposes, allocated to us as a result of our separation from Lilly, this allocation has not yet been finalized. Furthermore, our ability to generate earnings and profits, as determined for U.S. federal income tax purposes, in any future year is subject to a number of variables that are uncertain and difficult to predict.
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Generally, any distribution not constituting a dividend under the rules described above will be treated as first reducing the investor's adjusted basis in shares of our common stock and, to the extent that the distribution exceeds the adjusted basis in shares of our common stock, as gain from the sale or exchange of such shares, and if the investor is a domestic corporation, it will not be entitled to claim, with respect to such non-dividend distribution, a “dividends-received” deduction, which generally applies to dividends received from other domestic corporations.
Applicable laws and regulations, provisions of our amended and restated articles of incorporation and our amended and restated bylaws may discourage takeover attempts and business combinations that shareholders might consider in their best interests.
Applicable laws, provisions of our amended and restated articles of incorporation and our amended and restated bylaws and certain contractual rights that have been granted to Lilly under the master separation agreement may delay, deter, prevent or render more difficult a takeover attempt that our shareholders might consider in their best interests. For example, they may prevent our shareholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
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. These provisions provide for:
a board of directors divided into three classes with staggered terms;
advance notice requirements regarding how our shareholders may present proposals or nominate directors for election at shareholder meetings;
the right of our board of directors to issue one or more series of preferred stock with such powers, rights and preferences as the board of directors shall determine;
only the board of directors to fill newly-creatednewly created directorships or vacancies on our board of directors;
limitations on the ability of shareholders to call special meetings of shareholders and require that all shareholder action be taken at a meeting rather than by written consent;
a two-thirds shareholder vote requirement to amend our amended and restated articles of incorporation;
the exclusive right of our board of directors to amend our amended and restated bylaws; and
the requirement that a 66 2/3% vote is necessary to remove directors.bylaws.
These limitations may adversely affect the prevailing market price and market for our common stock if they are viewed as limiting the liquidity of our stock or discouraging takeover attempts in the future.
We recently adopted a “proxy access” bylaw, which permits an eligible shareholder or group of shareholders to nominate, and have included in our proxy materials, director nominees constituting up to two individuals or 20% of our board of directors (whichever is greater), subject to the requirements and procedures in our bylaws.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be adversely impacted.
A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis. If we experience a material weakness or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business, financial condition, and results of operations.
In connection with preparing the financial statements as of and for the year ended December 31, 2022, a cumulative error was identified relating to the valuation allowance for taxes for a Southeast Asia affiliate. While immaterial to prior years, correcting this cumulative error in 2022 would have caused the 2022 results to be materially misstated. Therefore, immaterial revisions were made to the consolidated financial statements as of and for the years ended December 31, 2021 and 2020. We determined that this error was the result of a control deficiency that constituted a material weakness in our internal control over financial reporting related to income taxes. The material weakness had not been remediated as of December 31, 2022.
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Although we intend to take remedial actions in response to this control deficiency, there is no assurance that we will be able to prevent a material error or future control deficiencies (including material weaknesses) from occurring. Our inability to assert that our internal control over financial reporting is effective could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may be subject to investigation, litigation, increases in insurance premiums or regulatory fines and sanctions.

ItemITEM 1B. Unresolved Staff CommentsUNRESOLVED STAFF COMMENTS

None.

50ITEM 2. PROPERTIES


Item 2. Properties
Properties
The address of our principal executive officesglobal headquarters is currently c/o Elanco, 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. In 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 in the U.S. to facilitate the efficient transfer of production processes from our laboratories to manufacturing sites.manufacturing. In addition, we maintain R&D operations at non-manufacturing locations in the U.S., Switzerland,Germany, Australia, Brazil, China, India, and China. As part of the Separation, Lilly transferred to us its interest in each of theseSwitzerland. Our R&D facilities. Our largest R&D facilityheadquarters is currently our U.S. R&D site located in Fort Dodge, Iowa, which has approximately 0.3 million square feet.
Our global manufacturing network is comprised of 12 manufacturing sites. The largest manufacturing site inGreenfield, Indiana and will relocate to Indianapolis, Indiana when we relocate our global manufacturing network is our manufacturing site locatedheadquarters, expected in Clinton, Indiana, which has approximately 0.7 million square feet. In addition, our global manufacturing network will continue to be supplemented by approximately 90 CMOs. See2025. For more information, see "Item 1. Business — ManufacturingResearch and Supply Chain.Development."
We own or lease various additional properties for other business purposes, including office space, warehouses and logistics centers. In addition, under the TSA, Lilly provides us with continued access to certain of its premises currently occupied by our employees for up to two years from the date of the Separation.
We believe that our existing properties, as supplemented by CMOs, and access to Lilly facilities that will be provided under the TSA, are adequate for our current requirements and for our operations in the near future.

ItemITEM 3. Legal ProceedingsLEGAL PROCEEDINGS
We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of U.S. and foreign competition law, labor laws, consumer protection laws and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. We operate in multiple jurisdictions and, as a result, a claim in one jurisdiction may lead to claims or regulatory penalties in other jurisdictions. We intend to vigorously defend against any pending or future claims and litigation, as appropriate.

At this time,Information pertaining to certain legal proceedings is provided in the opinion of our management, the likelihood"Item 8. Financial Statements and Supplementary Data — Note 17: Commitments and Contingencies " and is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated and combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.incorporated by reference herein.

ItemITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES

Not applicable.

Part
PART II
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ItemITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATIONInformation
On September 20, 2018, our common stock began trading on the New York Stock Exchange under the symbol “ELAN.”
51On January 30, 2020, our tangible equity units (TEUs) began trading on the New York Stock Exchange under the symbol “ELAT.” The TEUs were delisted from trading when they converted to shares of our common stock as scheduled on February 1, 2023.


HOLDERSHolders
There were 313234 holders of record of our common stock as of February 25, 2020.24, 2023. This does not include the number of stockholdersshareholders who hold shares of our common stock through banks, brokers or other financial institutions.
DIVIDEND POLICYDividend 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 GRAPHPerformance 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 from September 20, 2018 (the first day our common stock was traded in conjunction with our IPO) throughfor the period ended on December 31, 2019.2022. The graph assumes that $100 was invested on September 20, 2018 a person invested $100 each(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. It assumes that dividends paid by a company are reinvested in that company’s stock.
elan-20191231_g3.jpgelan-20221231_g6.jpg
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*$100 invested on 9/20/September 20, 2018 in stock or index, including reinvestment of dividends. Fiscal year endingyears ended December 31.
9/20/189/30/1812/31/183/31/196/30/199/30/1912/31/19September 20, 2018December 31, 2018December 31, 2019December 31, 2020December 31, 2021December 31, 2022
Elanco Animal Health Inc.Elanco Animal Health Inc.100.00  96.92  87.58  89.08  93.89  73.86  81.81  Elanco Animal Health Inc.$100.00 $87.58 $81.81 $85.19 $78.83 $38.76 
S&P 500 IndexS&P 500 Index100.00  100.57  86.97  98.84  103.10  104.85  114.36  S&P 500 Index100.00 86.97 114.36 135.40 174.26 142.70 
S&P 500 Pharmaceuticals IndexS&P 500 Pharmaceuticals Index100.00  102.91  98.62  104.60  104.66  100.45  113.50  S&P 500 Pharmaceuticals Index100.00 98.62 113.50 122.04 153.47 166.44 

ItemITEM 6. Selected Financial Data(RESERVED)
The following tables set forth our selected historical consolidated and combined financial data for the periods indicated below.

Not applicable.
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Our consolidated and combined financial statements include the attribution of certain assets and liabilities that have historically been held at the Lilly corporate level but which are specifically identifiable or attributable to us. Through the completion of the IPO, our consolidated and combined financial statements also include expense allocations related to certain Lilly corporate functions, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. These expenses were allocated to us based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis of revenue, headcount or other measures. We believe that this expense methodology, and the results thereof, is reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred if we would have operated as an independent, publicly traded company for the periods presented. It is impractical to estimate what our standalone costs would have been for the historical periods presented. After the IPO, a TSA between Lilly and Elanco went into effect. Under the terms of the TSA, we will be able to use certain services and resources related to corporate functions historically provided to us by Lilly, such as executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations (Lilly Services) for a fixed term, established on a service-by-service basis. For those TSAs that remain in effect as of December 31, 2019, we are paying Lilly mutually agreed upon fees for the Lilly Services provided under the TSA. Our consolidated and combined financial statements reflect the charges for Lilly Services after the IPO.ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The financial statements presented may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we operated as an independent, publicly traded company for the periods presented prior to IPO.
ELANCO ANIMAL HEALTH INCORPORATED (Dollars in millions, except per-share data)
20192018201720162015
Operations
Revenue$3,071.0  $3,066.8  $2,889.0  $2,913.5  $2,909.1  
Cost of sales1,470.3  1,573.8  1,493.9  1,409.0  1,533.7  
Research and development270.1  246.6  251.7  265.8  291.0  
Marketing, selling and administrative760.2  735.2  779.8  784.8  916.0  
Amortization of intangible assets200.4  197.4  221.2  170.7  163.0  
Asset impairment, restructuring and other special charges185.5  128.8  375.1  308.4  263.3  
Interest expense, net of capitalized interest78.9  29.6  —  —  —  
Other–net, expense (income)
27.4  41.3  (0.1) (2.8) 1.6  
Income (loss) before income tax expense78.2  114.1  (232.6) (22.4) (259.5) 
Income tax expense (benefit)10.3  27.6  78.1  25.5  (48.7) 
Net income (loss)$67.9  $86.5  $(310.7) $(47.9) $(210.8) 
Net income (loss) as a percent of revenue%%(11)%(2)%(7)%
Net income (loss) per share - basic$0.18  $0.28  $(1.06) $(0.16) $(0.72) 
Net income (loss) per share - diluted0.18  0.28  (1.06) (0.16) (0.72) 
Weighted-average number of shares outstanding - basic369.0  313.7  293.3  293.3  293.3  
Weighted-average number of shares outstanding - diluted370.3  313.7  293.3  293.3  293.3  
Financial Position
Total assets$8,985.8  $8,956.7  $8,940.3  $8,099.7  $8,433.6  
Long-term debt2,330.5  2,443.3  —  —  —  
Total liabilities3,438.9  3,759.2  1,160.0  1,082.3  1,004.1  
Total equity5,546.9  5,197.5  7,780.3  7,017.4  7,429.5  

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction

Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operations and financial position. This discussion and analysis should be read in conjunction with the consolidated and combined financial statements and accompanying footnotes in Item 8 of Part II of this Annual Report on Form 10-K. Certain statements in this Item 7 of Part II of this Annual Report on Form 10-K constitute forward-looking statements. 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.
Overview
Founded For results of operations discussions related to years ended December 31, 2021 and 2020, refer to Item 7 of Part II in 1954 as part of Eli Lilly & Co. (Lilly), Elanco is a premier animal health company that innovates, develops, manufactures and markets products for companion and food animals. Headquartered in Greenfield, Indiana, we are the fourth largest animal health company in the world, with revenue of $3,071.0 millionour Annual Report on Form 10-K for the year ended December 31, 2019. Globally, we are #1 in medicinal feed additives, #2 in poultry,2021 filed with the Securities and #3 in other pharmaceuticals, which are mainly companionExchange Commission on February 28, 2022.
Overview
Elanco is a global animal therapeutics, measured by 2018 revenue, according to Vetnosis.
We have one of the broadest portfolios of pet parasiticides in the companion animal sector. We offer a diverse portfolio of more than 125 brandshealth company that make us a trusted partner to veterinariansdevelops products for pets and food animal producersfarm animals in more than 90 countries.
On September 24, 2018, With a heritage dating back to 1954, we completedrigorously innovate to improve the health of animals and to benefit our initial public offering (IPO), pursuant to which we issued and sold 19.8% of our total outstanding shares. On September 20, 2018, our common stock began trading on the New York Stock Exchange (NYSE) under the symbol “ELAN.” On September 24, 2018, immediately preceding the completion of the IPO, Lilly transferred to us substantially all of its animal health businesses in exchange for (i) all of the net proceeds (approximately $1,659.7 million) we received from the sale of our common stock in the IPO, including the net proceeds we received as a result of the exercise in full of the underwriters’ option to purchase additional shares, (ii) all of the net proceeds (approximately $2,000 million) we received from the issuance of our senior notes; and (iii) all of the net proceeds ($498.6 million) we received from the entry into our term loan facility. In addition, immediately prior to the completion of the IPO, we entered into certain agreements with Lilly that provide a frameworkcustomers while fostering an inclusive, cause-driven culture for our ongoing relationship with them.

On February 8, 2019, Lilly announced an exchange offer whereby Lilly shareholders could exchange all or a portion of Lilly common stock for shares of Elanco common stock owned by Lilly. On that date, we filed a Registration Statement on Form S-4 with the SEC in connection with that exchange offer. The disposition of Elanco shares was completed on March 11, 2019, and resulted in the full separation of Elanco along with the disposal of Lilly's entire ownership and voting interest in Elanco.

employees. 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 fourtwo primary categories: pet health and farm animal.
Companion Animal Disease Prevention (CA Disease Prevention):On August 27, 2021, we acquired KindredBio, a biopharmaceutical company that developed innovative biologics focused on saving and improving the lives of pets. We have one of the broadest parasiticide portfolioshad previously signed an agreement with KindredBio in the companionsecond quarter of 2021 to acquire exclusive global rights to KIND-030, a monoclonal antibody in development for the treatment and prevention of canine parvovirus. 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. 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 sector basedand pet health product categories. 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 indications, speciesthe acquisition. Subsequent to the acquisition date, our consolidated financial statements include the assets, liabilities, operating results and formulations, withcash 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. Our products that protect pets from worms, fleasare generally sold worldwide to third-party distributors and ticks. Combiningindependent retailers, and directly to farm animal producers and veterinarians. With the acquisition of Bayer Animal Health, we have expanded our parasiticide portfolio withpresence in retail and e-commerce channels, allowing our vaccines presence, we are a leader in the U.S. in the disease prevention category based on sharecustomers to shop where and how they want.
A summary of revenue.our 2022, 2021 and 2020 revenue and net loss is as follows:
Companion Animal Therapeutics (CA Therapeutics): We have a broad pain and osteoarthritis portfolio across species, modes of action, indications and disease stages. Pet owners are increasingly treating osteoarthritis in their pets, and our Galliprant product is one of the fastest growing osteoarthritis treatments in the U.S. We also have treatments for otitis (ear infections), as well as cardiovascular and dermatology indications.
Food Animal Future Protein & Health (FA Future Protein & Health): Our portfolio in this category, which includes vaccines, nutritional enzymes and animal only antibiotics, serves the growing demand for
Year Ended December 31,
202220212020
Revenue$4,411 $4,764 $3,271 
Net loss(78)(483)(574)
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protein and includes innovative products in poultry and aquaculture production, where demand for animal health products is outpacing overall industry growth. We are focused on developing functional nutritional health products that promote food animal health, including enzymes, probiotics and prebiotics. We areAs a leader in providing vaccines as alternatives to antibiotics to promote animal health based on shareglobal company, significant portions of revenue.
Food Animal Ruminants & Swine (FA Ruminants & Swine): We have developed a range of food animal products used extensively in ruminant (e.g., cattle, sheep and goats) and swine production.
For the years ended December 31, 2019, 2018 and 2017, our revenue was $3,071.0 million, $3,066.8 million and $2,889.0 million, respectively. Forexpenses are recorded in currencies other than the years ended December 31, 2019, 2018U.S. dollar. Accordingly, in any period, our reported revenue, expenses and 2017, our net incomeresulting earnings (loss) was $67.9 million, $86.5 million and $(310.7) million, respectively.are impacted by changes in the exchange rates of those currencies relative to the U.S. dollar.

Increases or decreases in inventory levels atin our channel distributorsdistribution channels can positively or negatively impact our quarterly and annual revenue results, leading to variations in quarterly revenues. This 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.conditions and the COVID-19 global pandemic.

Key Trends and Conditions Affecting Our Results of Operations
Industry Trends
The animal health industry, which focuses onincludes both food animalspets and companionfarm animals, is a growing industry that benefits billions of people worldwide.
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, foodfarm animal health is becoming increasingly important. FactorsWe believe that factors influencing growth in demand for foodfarm animal medicines and vaccines include:
onetwo in three people needneeding 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 foodfarm 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.
Growth in foodfarm animal nutritional health products (enzymes, probiotics and prebiotics) is influenced, among other factors, by demand for antibiotic alternatives that can promote animal health and increase productivity.
Factors influencing growth in demand for companion animal medicines and vaccines include:
increased pet ownership globally;
pets living longer; and
increased pet spending as pets are viewed as members of the family by owners.
Factors Affecting Our Results of Operations
Global Macroeconomic Environment
Our operations are conducted globally, and we are exposed to and are impacted by various global macroeconomic factors. 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. It has also led to volatility in consumer behavior, which has reduced demand due to consumption decreases and retailer destocking, particularly impacting our parasiticide products. We expect these global macroeconomic factors to continue in 2023.

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Russia-Ukraine Conflict

In February 2022, Russia commenced military action against Ukraine. In response, the U.S. and certain other countries imposed and continue to impose significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations. The U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions if the conflict continues or worsens. The broader consequences of the conflict, including related inflationary pressures, geopolitical tensions, additional retaliatory actions taken by the U.S. and other countries, and any counter retaliatory actions by Russia or Belarus in response, including, for example, potential cyberattacks or the disruption of energy and commodity exports, are likely to cause regional instability and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain and it is difficult to predict the impact that the conflict and actions taken in response to the conflict will have on our business; however, they could increase our costs, disrupt our supply chain, reduce our sales and earnings, or otherwise adversely affect our business and results of operations.

As a global animal health leader, we have an obligation to support the health of animals and people. 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. 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. 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.

COVID-19 Pandemic

We continue to closely monitor the impact of the COVID-19 pandemic, including its variants, and the related economic effects on all aspects of our business, including impacts on our operations, supply chain, and customer demand. The extent to which the COVID-19 pandemic may impact our financial condition and results of operations remains uncertain and is dependent on developments that are out of our control, including a resurgence in positive cases, the emergence of new variants, governmental actions in response to the pandemic (for example, the lockdown orders in China that were lifted in late 2022), and the successful administration of effective vaccines and boosters. We cannot predict the impact that the ongoing COVID-19 pandemic will have on our employees, customers, vendors and suppliers; however, the COVID-19 pandemic has had and may continue to have an adverse impact on our business.

Supply Chain

We continue to experience disruption and volatility in our global supply chain network. This disruption, combined with increased demand for key raw materials and labor constraints, has also impacted our suppliers, resulting in shortages of raw materials and components required to manufacture our products. We continue to work closely with suppliers and freight partners to mitigate impacts to our operations and customers, including the addition of new transportation routes, targeted increases of certain safety stocks, and alternative sources of materials. Although we regularly monitor the financial health of companies in our supply chain, prolonged financial hardship on our suppliers and labor shortages could continue to disrupt our ability to obtain key raw materials, adversely affecting our operations. The global industry freight environment has experienced, and could continue to experience, lead time disruptions and high shipping costs, negatively impacting our profitability.

Inflation

We are experiencing, and expect to continue to experience, inflationary pressures due to, among other things, the geopolitical events and macroeconomic factors noted above. Increased inflation rates primarily impact us by increasing our costs, including raw materials, labor, energy, transportation, and other input costs, adversely affecting our profit margins, operating results, and cash flows. In response to these inflationary costs, we have implemented price increases and may implement additional price increases in the future.


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Revision of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment

In connection with the preparation of our financial statements as of and for the year ended December 31, 2022, a cumulative error was identified relating to the valuation allowance for taxes for a Southeast Asia affiliate. While immaterial to prior years, correcting this cumulative error in 2022 would have caused the 2022 financial statements to be materially misstated. Therefore, immaterial revisions in relation to this item were made to our financial statements as of and for the years ended December 31, 2021 and 2020. The correction of this error was immaterial to our financial statements for those years.

As a result of having to make the revisions related to this error, we made other immaterial revisions to the consolidated financial statements as of and for the years ended December 31, 2021 and 2020. All of the revisions are reflected throughout this Form 10-K. See Note 2: Revision of Previously Issued Consolidated Financial Statements to the consolidated financial statements for additional information.

Acquisitions of Bayer Animal Health and KindredBio

We have incurred expenses in connection with our acquisitions of Bayer Animal Health and KindredBio, including fees for professional services such as legal, accounting, consulting, and other advisory fees and expenses. Expenses incurred in 2022 and 2021 are primarily related to integration activities. In addition, we have incurred and expect to continue to incur costs related to the build out of processes and systems to support finance and global supply and logistics and to expand administrative functions, including, but not limited to, information technology, facilities management, distribution, human resources, and manufacturing, to replace services previously provided by the former parent company of Bayer Animal Health. We anticipate that these additional costs will be partially offset by expected synergies. The ERP system integration of legacy Bayer Animal Health to the Elanco system is expected to be completed early in the second quarter of 2023. As a result, there may be a timeframe during which inventory shipments cannot occur. In response to this, we have built some additional inventory as of December 31, 2022 and expect to continue to increase our inventories on hand to ensure that our product is available to customers. Alternatively, we anticipate that certain customers may modify purchasing habits, which would cause a shift of revenue from the second quarter to the first quarter of 2023. In addition, we started extending payment terms in 2023 and may need to continue to extend payment terms to certain customers depending on the estimated timeframe during which shipments cannot occur and based on geography.

Product Development and New Product Launches
A key element of our targeted value creation strategy is to drive growth through portfolio development and product innovation, primarily in our three targeted growth categories of CA Disease Prevention, CA Therapeutics and FA Future Protein & Health. Since 2015, we have launched or acquired 14 new products, including the additions of Entyce, Nocita and Tanovea in 2019. Revenue from these products contributed $439.2 million to revenue for the
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year ended December 31, 2019.innovation. We continue to pursue the development of new chemical and biological molecules through our approach to innovation. Our future growth and success dependsdepend 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 licenselicenses or acquisition,acquisitions, and the expansion of the use of our existing products. We believe we are an industry leader in animal health R&D, with a track record of product innovation, business development and commercialization.
Impact of Changing Market Demand for Antibiotics
In recent years, our operational results have been, and will continue to be, affected by regulations and changing market demand relating to the use of antibiotics and other products intended to increase food animal production.
There are two classes of antibiotics used in animal health: (i) shared-class, or medically important, antibiotics; and (ii) animal-only antibiotics. Shared-class antibiotics are used to treat infectious disease caused by pathogens that occur in both humans and animals. As part of our antibiotic stewardship plan and in compliance with FDA guidance, shared-class antibiotics are labeled only for the treatment of an established need in animals and only with veterinarian oversight. However, not all pathogens that cause disease in animals are infectious in humans, and accordingly animal-only antibiotics are not used in human medicine (i.e., not medically important). From 2015 to 2019, our revenue from shared-class antibiotics declined at a CAGR of 10%, excluding the impact of foreign exchange. This was driven primarily by changing regulations in many markets, including the Veterinary Feed Directive, as well as changing market demand and Elanco’s tiered-approach to antibiotic stewardship, which included removing growth promotion from labels and requiring veterinary oversight in the U.S. and other markets.
Globally, during 2019, our revenue from shared-class antibiotics declined 13%, excluding the impact of foreign exchange, and represented 11% (4% from sales in the U.S. and 7% from sales outside of the U.S.) of our total revenue, down from 16% in 2015. From 2015 to 2019, our revenue from animal-only antibiotics grew at a CAGR of 4%, excluding the impact of foreign exchange, driven by sales outside the U.S., which offset a slight decline in the U.S. Globally, during 2019, our revenue from animal-only antibiotics declined 1%, excluding the impact of foreign exchange, and represented 24% of our total revenue, up from 23% in 2015. During 2019, 87% of our revenue from animal-only antibiotics resulted from the sale of ionophores. Ionophores are a special class of animal-only antimicrobials, and because of their animal-only designation, mode of action and spectrum of activity, their use, to date have not been impacted by regulations or changing market demand in many markets outside the U.S.Competition
We have intentionally shifted away from shared-class antibiotics,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 are focusing on animal-only antibiotics, as well as antibiotic-free solutions. When an animal-only antibiotic exists, we believe it should be the first, preferred antibiotic treatment. Antibiotic resistance concerns, or other health concerns regarding food animalproduct differentiation. Certain products, may result in additional restrictions, expanded regulations or changes in market demand to further reduce the use of antibiotics in food animals. We believe it is important to protect the benefits of antibiotics in human medicine, while responsibly protecting the health of food animalsboth existing and the safety of our food supply.
Impact of Competition
The animal health industry is competitive. Established animal health companies who consistently deliver high quality products enjoy brand loyalty from their customers, which often continues after the loss of patent-based or regulatory exclusivity. In 2019, approximately 67% of our revenue was fromnew products that did not have patent protection. In animal health, while potentially significant, erosion fromwe introduce, may compete with other branded or generic competition is often not as steep as in human health, withproducts already on the originator often retaining a significant market share. However, generic competition can nevertheless significantly affect our results. While our largest product, Rumensin (monensin), has been subject to generic competition from monensin outside the U.S. for more than 10 years, our revenue from Rumensin sales outside the U.S. grew at a CAGR of 5% from 2015 to 2019. In the third quarter of 2019, an established animal health company received U.S. approval for generic monensin in cattle and goats for certain indications. U.S. revenue from Rumensin may decline as a result of the generic competition. We have experienced significant competitive headwinds from generic ractopamine in the U.S. In the third quarter of 2013, a large, established animal health company received U.S. approval for ractopamine (the generic to our drugs Paylean and Optaflexx). U.S. revenue for Paylean and Optaflexx, our ractopamine beef and swine products, has declined at a CAGR of 44% and 21%, respectively, from 2015 to 2019 as a result of generic competition and the impact of international regulatory restrictions. In 2019, we had an estimated 70% market share of all U.S. ractopamine-treated beef cattle based on management estimates.
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Although we believe brand loyalty is an important contributor to a product's ongoing success, the animal health industry is also impactedor that are later developed by innovation. We experienced an innovation lag in the companion animal parasiticide space from 2015 to 2017. In the absence of a competitive combined oral flea and tick product, our U.S. companion animal parasiticide portfolio revenue declined 15% in 2017, excluding the impact on revenue resulting from a reduction in inventory levels within our distribution channel. In February 2018, we launched Credelio in the U.S. for the treatment of fleas and ticks. Since the launch of Credelio, our sales of parasiticides in the U.S. have begun to grow again.competitors. See "Item 1. Business — Competition."
Productivity
Our results during the periods presented have benefited from operational and productivity initiatives implemented following recent acquisitions and in response to changing market demand for antibiotics and other headwinds.
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Our acquisitions withinin the last six years prior to the acquisition of Bayer Animal Health added, in the aggregate, $1.4 billion in revenue, 4,600 full-time employees, and 12 manufacturing and eight R&D sites. The acquisitions of Bayer Animal Health on August 1, 2020 and KindredBio on August 27, 2021 added 3,950 full-time employees, 10 manufacturing sites, and five R&D sites (before company-wide restructuring activities initiated in 2020 and 2021). In addition, from 2015 to 2019,2022, changing market demand for antibiotics and other headwinds, such as competition with generics and innovation, affected some of our highest gross margin products, resulting in a change to our product mix and driving operating margin lower. In response, we implemented a number of initiatives across the manufacturing, R&D and marketing, selling general and administrative (SG&A) functions. Our manufacturing cost savings strategies included improving manufacturing processes and headcount through lean manufacturing (minimizing waste while maintaining productivity), closing of threeand selling manufacturing sites, consolidating our CMO network, strategically insourcing certain projects, and pursuing cost savings opportunities with respect to raw materials via a new procurement process.through alternate sources of supply. Additional cost savings have resulted from reducing the number of R&D sites, from 16 to nine, SG&A savings from sales force consolidation and reducing discretionary and other general and administrative (G&A) operating expense.expenses.
Foreign Exchange Rates
Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. 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, 20192022 and 2018,2021, approximately 44% and 52%, respectively,51% of our revenue was denominated in foreign currencies. As we operate in multiple foreign currencies, including the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, Chinese yuan, and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenue, cost of sales and expenses, and consequently, net income. 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 2%approximately 4% during the year ended December 31, 2019.2022. Currency movements had limited impact onincreased revenue by approximately 1% and decreased revenue by approximately 1% during the years ended December 31, 20182021 and 2017.
General Economic Conditions
In addition to industry-specific factors, we, like other businesses, face challenges related to global economic conditions. Growth in both the food animal and companion animal sectors is driven in part by overall economic development and related growth, particularly in many emerging markets. In recent years, certain of our customers and suppliers have been affected directly by economic downturns, which decreased the demand for our products.
The cost of our products to food animal producers is small relative to their other production costs, including feed, and the use of our products is intended to improve economic outcomes for food animal producers. Similarly, industry sources have reported that pet owners indicated a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on pet care. While these factors have mitigated the impact of recent downturns in the global economy, further economic challenges could increase cost sensitivity among our customers, which may result in reduced demand for our products and could have a material adverse effect on our financial condition and results of operations.
Weather Conditions and the Availability of Natural Resources
The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, varying weather patterns and weather-related pressures from pests, such as fleas and ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
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Food animal producers depend on the availability of natural resources, including large supplies of fresh water. Their animals' health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions.
Drought conditions could negatively impact, among other things, the supply of corn and the availability of grazing pastures. A decrease in harvested corn results in higher corn prices, which could negatively impact the profitability of food animal producers of ruminants, pork and poultry. Higher corn prices and reduced availability of grazing pastures contribute to reductions in herd or flock sizes that in turn result in less spending on animal health products. As such, a prolonged drought could have a material adverse effect on our financial condition and results of operations. Factors influencing the magnitude and timing of effects of a drought on our performance include, but may not be limited to, weather patterns and herd management decisions.
In addition, veterinary hospitals and practitioners depend on visits from and access to the animals under their care. Veterinarians' patient volume and ability to operate could be adversely affected if they experience prolonged snow, ice or other severe weather conditions, particularly in regions not accustomed to sustained inclement weather. Adverse weather conditions or a shortage of fresh water may cause veterinarians and food animal producers to purchase less of our products.
Disease Outbreaks
Sales of our food animal products could be adversely affected by the outbreak of disease carried by animals, such as African Swine Fever. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase.
Manufacturing and Supply
In order to sell our products, we must be able to reliably produce and ship our products in sufficient quantities. Many of our products involve complex manufacturing processes and are sole-sourced from certain manufacturing sites.
Minor deviations in our manufacturing or logistical processes, unpredictability of a product's regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites, and shifting customer demand increase the potential for capacity imbalances.2020, respectively.
Components of Revenue and Costs and Expenses
Revenue
Our revenue is primarily derived from salesa diversified portfolio of products across species consisting of dogs and cats (collectively, pet health) and cattle, poultry, swine and aqua (collectively, farm animal). We market our products to veterinarians, pet owners, and farm animal producers, then sell directly or indirectly through third-party distributors, and directly to food producers and veterinarians.retailers, or e-commerce outlets. For additional information regarding our products, including descriptions of our products,product categories, see "Item 1. Business — Commercial Operations" and "Item 1. Business — Products."
We aggregate our products into five categories to understand revenue growth:
CA Disease Prevention includes parasiticides and vaccine products for dogs and cats;
CA Therapeutics includes products for the treatment of pain, osteoarthritis, otitis, cardiovascular and dermatology indications in dogs and cats;
FA Future Protein & Health includes vaccines, antibiotics, parasiticides and other products used in poultry and aquaculture production, as well as functional nutritional health products, including enzymes, probiotics and prebiotics;
FA Ruminants & Swine includes vaccines, antibiotics, implants, parasiticides, and other products used in ruminants and swine production, as well as certain other food animal products; and
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Strategic Exits includes business activities that we have either exited or made the strategic decision to exit, including the transitional contract manufacturing activity that we acquired in connection with our acquisition of the BI Vetmedica U.S. vaccines portfolio, two terminated legacy U.S. distribution agreements, a terminated distribution agreement outside the U.S., an equine product not core to our business and a transitional contract manufacturing activity associated with the supply to Lilly of human growth hormone.
Costs, Expenses and Other
Cost of sales consists primarily of cost of materials, facilities and other infrastructure used to manufacture our products, shipping and handling, inventory losses and expired products.
Marketing, selling and administrative expenses consist of, among other things, the costs of marketing, promotion and advertising and the costs of administration (business technology, facilities, legal, finance, human resources, business development, external affairs and procurement).
Amortization of intangible assets consists of the amortization expense for intangible assets that have been acquired through business combinations.
R&D expenses consist of project costs specific to new product R&D and product lifecycle management, overhead costs associated with R&D operations, regulatory, product registrations and investments that support local market clinical trials for approved indications. We manage overall R&D based on our strategic opportunities and do not disaggregate our R&D expenses incurred by nature or by product as we do not use or maintain such information in managing our business.
Marketing, selling and administrative expenses consist of, among other things, the costs of marketing, promotion and advertising and the costs of administration (business technology, facilities, legal, finance, human resources, business development, external affairs and procurement).
Amortization of intangible assets consists of the amortization expense for intangible assets that have been acquired through business combinations and other business development arrangements.
Asset impairment, restructuring and other special charges consist primarily of severance costs resulting from actions taken as part of our productivity initiatives and to reduce our costs; long-lived asset impairment charges and write-downs primarily related to product rationalizations, site closures, the sale of long-term assets, restructuring charges,manufacturing sites; transaction
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and integration costs from acquired businesses and other related expenses, primarily Bayer Animal Health; costs associated with acquiringthe acquisition of KindredBio; and integrating businesses, and certain non-recurring expenses, including costs related to the build out of processes and systems to support finance and global supply and logistics, among others, to stand our organization up as an independent company.others.
Interest expense, net of capitalized interest consists of interest incurred on our long-term debt.
Other-net,Other (income) expense, (income)net consists primarily of various items including net (gains)/losses on asset disposals, realized orand unrealized foreign exchange translation (gains)/losses, (gains)/losses on equity investments, and loss or impairment on other investments.
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, includedincluding but not limited to the factors identified in "Key Trends and Conditions Affecting Our Results of Operations."
Our Relationship with Lilly and Additional Standalone Costs
During the period prior to the IPO, our business operated solely as part of a division of Lilly. Our combined financial statements have been derived from Lilly’s consolidated financial statements and accounting records. Our consolidated and combined financial statements reflect our financial position, results of operations and cash flows of the business that was transferred at the time of the separation and do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as an independent, publicly traded company during the periods presented prior to the IPO.
Our historical results reflect an allocation of costs for certain Lilly corporate costs for periods prior to the IPO, including, among others, executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. These allocations are not necessarily indicative of the expenses we may incur as a standalone public company. Although we entered into certain agreements with Lilly in connection with the IPO and the Separation, the amount and composition of our expenses may vary from historical levels since the fees charged for the services under these agreements may be higher or lower than the costs reflected in the historical allocations. The total allocations included in our results for the years ended December 31, 2019, 2018 and 2017 were $0.0 million, $105.2 million, and $151.7 million, respectively. See Note 20: Related Party Agreements and Transactions to our consolidated and combined financial statements.
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We are currently investing in expanding our own administrative functions, including, but not limited to, information technology, facilities management, distribution, human resources, and manufacturing, to replace services previously provided by Lilly. Because of initial stand-up costs and overlaps with services previously provided by Lilly, we have incurred and expect to continue to incur certain temporary, duplicative expenses in connection with the Separation. We have also incurred and expect to continue to incur costs related to the build out of processes and systems to support finance and global supply and logistics, among others. We currently estimate these costs taken together to be in a range from $240 million to $290 million, net of potential real estate dispositions and employee benefit changes, of which a portion will be capitalized and the remainder will be expensed.
Lilly utilizes a centralized treasury management system, of which we were a part until our IPO. For periods prior to the IPO, our consolidated and combined financial statements reflect cash held only in bank accounts in our legal name and no allocation of combined cash positions. Our consolidated and combined financial statements do not reflect an allocation of Lilly’s debt or any associated interest expense. In connection with the IPO, we incurred $2.5 billion of long-term borrowings. Our historical results reflect $29.6 million of interest expense during the year ended December 31, 2018 due to the timing of the borrowings, in comparison to our interest expense of $78.9 million during the year ended December 31, 2019.
For the periods prior to the IPO, our consolidated and combined financial statements reflect income tax expense (benefit) computed on a separate company basis, as if operating as a standalone entity or a separate consolidated group in each material jurisdiction in which we operate. Our consolidated and combined financial statements for the periods prior to the IPO also reflect certain deferred tax assets and liabilities and income taxes payable based on this approach that did not transfer to us upon the Separation, as the underlying tax attributes were used by Lilly or retained by Lilly. As a result of potential changes to our business model and the fact that certain deferred tax assets and liabilities and income taxes payable did not transfer to us, income tax expense (benefit) included in the consolidated and combined financial statements may not be indicative of our future expected tax rate. 
Our historical results prior to IPO also do not reflect the impact of costs we have incurred and expect to continue to incur as a consequence of becoming a standalone company, including incremental costs associated with being a publicly traded company.
Subsequent to the IPO, we have implemented competitive compensation policies and programs as a standalone public company. Our historical results prior to the IPO reflect compensation costs that were allocated by Lilly.
As a result of the IPO, we became subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act. We are continuing to establish or expand additional procedures and practices as a standalone public company. As a result, we will continue to incur additional costs as a standalone public company, including internal audit, external audit, investor relations, stock administration, stock exchange fees and regulatory compliance costs.
Recent Significant Acquisitions
Our financial results have been impacted by acquisitions and integrations. For the periods presented, these include primarily the acquisitions and integrations of Novartis Animal Health, which closed on January 1, 2015, Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine and rabies vaccine portfolio and other related assets (BIVIVP), which closed on January 3, 2017, Aratana Therapeutics, Inc., which closed on July 18, 2019, and Prevtec Microbia Inc., which closed on July 31, 2019. For more information, see Note 6: Acquisitions to our consolidated and combined financial statements.
Asset Impairment, Restructuring and Other Special Charges
During the years ended December 31, 2019, 2018 and 2017 including in connection with the productivity initiatives described above under "Key Trends and Conditions Affecting Our Results of Operations - Productivity," we incurred charges related to asset impairment, restructuring and other special charges, including integration of acquired businesses. These charges include severance costs resulting from actions taken to reduce our costs, asset impairment charges primarily related to competitive pressures for certain companion animal products, product rationalizations, site closures and integration costs related to acquired businesses, primarily Novartis Animal Health, and costs related to the build out of processes and systems to support finance and global supply and logistics, among others, as we stand our organization up as an independent company.
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For more information on these charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to our consolidated and combined financial statements.
Results of Operations
The following discussion and analysis of ourthe consolidated and combined statements of operations should be read along with ourthe consolidated and combined financial statements and the notes thereto included elsewhere in this report. For more information, see Note 2:3: Basis of Presentation to ourthe consolidated and combined financial statements.

Year Ended December 31,% Change
(Dollars in millions)(Dollars in millions)Year Ended December 31,% Change(Dollars in millions)20222021202022/2121/20
20192018201719/1818/17
RevenueRevenue$3,071.0  $3,066.8  $2,889.0  —%  6%  Revenue$4,411$4,764$3,271(7)%46%
Costs, expenses and other:Costs, expenses and other:Costs, expenses and other:
Cost of salesCost of sales1,470.3  1,573.8  1,493.9  (7)% 5%  Cost of sales1,9132,1321,667(10)%28%
% of revenue% of revenue48 %51 %52 %% of revenue43%45%51%
Research and developmentResearch and development270.1  246.6  251.7  10%  (2)% Research and development321369329(13)%12%
% of revenue% of revenue%%%% of revenue7%8%10%
Marketing, selling and administrativeMarketing, selling and administrative760.2  735.2  779.8  3%  (6)% Marketing, selling and administrative1,2651,403997(10)%41%
% of revenue% of revenue25 %24 %27 %% of revenue29%29%30%
Amortization of intangible assetsAmortization of intangible assets200.4  197.4  221.2  2%  (11)% Amortization of intangible assets528556360(5)%54%
% of revenue% of revenue%%%% of revenue12%12%11%
Asset impairment, restructuring and other special chargesAsset impairment, restructuring and other special charges185.5  128.8  375.1  44%  (66)% Asset impairment, restructuring and other special charges183634623(71)%2%
Interest expense, net of capitalized interestInterest expense, net of capitalized interest78.9  29.6  —  167%  NM  Interest expense, net of capitalized interest2412361502%57%
Othernet, expense (income)
27.4  41.3  (0.1) NM  NM  
Income (loss) before taxes78.2  114.1  (232.6) NM  NM  
Other (income) expense, netOther (income) expense, net325(178)NMNM
Loss before income taxesLoss before income taxes(72)(571)(677)87%16%
% of revenue% of revenue%%(8)%NM  NM  % of revenue(2)%(12)%(21)%NMNM
Income tax expense10.3  27.6  78.1  (63)% (65)% 
Net income (loss)$67.9  $86.5  $(310.7) NM  NM  
Income tax expense (benefit)Income tax expense (benefit)6(88)(103)107%15%
Net lossNet loss$(78)$(483)$(574)84%16%
Certain amounts and percentages may reflect rounding adjustments.
NM - Not meaningful
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Disaggregated Revenue
On a global basis, our revenue within ourby product categories was as follows:
(Dollars in millions)Year Ended December 31,% Change
20192018201719/1818/17
CA Disease Prevention$787.9  $804.6  $660.2  (2)% 22%  
CA Therapeutics (1)
348.0  283.1  260.8  23%  9%  
FA Future Protein & Health745.1  711.2  649.2  5%  10%  
FA Ruminants & Swine1,110.3  1,174.0  1,175.0  (5)% —%  
Subtotal2,991.3  2,972.9  2,745.2  1%  8%  
Strategic Exits (1)
79.7  93.9  143.8  (15)% (35)% 
Total$3,071.0  $3,066.8  $2,889.0  —%  6%  
(1) Represents revenue from business activities we have either exited or made a strategic decision to exit. On June 30, 2018, Elanco made the decision to exit an equine product not core to its business. Revenue from this product is reflected in Strategic Exitscategory for the years ended December 31 2019 and 2018 andis summarized as follows:
Revenue% of Total Revenue% Change
(Dollars in millions)20222021202020222021202022/2121/20
Pet Health$2,138 $2,350 $1,356 48 %49 %41 %(9)%73%
Farm Animal2,219 2,332 1,835 50 %49 %56 %(5)%27%
Subtotal4,357 4,682 3,191 99 %98 %98 %(7)%47%
Contract Manufacturing (1)
54 82 80 %%%(34)%3%
Total$4,411 $4,764 $3,271 100 %100 %100 %(7)%46%
Note: Numbers may not add due to rounding
(1)Represents revenue from arrangements in CA Therapeutics forwhich we manufacture products on behalf of a third party, including supply agreements associated with divestitures of products related to the year ended December 31, 2017. Revenue from this product was $0.4 million, $1.6 million and $3.4 million for the years ended December 31, 2019, 2018 and 2017, respectively.acquisition of Bayer Animal Health.
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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:
(Dollars in millions)
Full year 2019Revenue  Price  FX Rate  Volume  Total  CER*  
CA Disease Prevention$787.9  1%  (1)% (2)% (2)% (1)% 
CA Therapeutics348.0  5%  (2)% 20%  23%  25%  
FA Future Protein & Health745.1  4%  (3)% 4%  5%  8%  
FA Ruminants & Swine1,110.3  1%  (2)% (5)% (5)% (4)% 
Core Revenue$2,991.3  2%  (2)% 1%  1%  3%  
Strategic Exits79.7  —%  —%  (15)% (15)% (15)% 
Total Elanco$3,071.0  2%  (2)% —%  —%  2%  
Full year 2022
(Dollars in millions)

Revenue
PriceFX RateVolumeTotal
CER (1)
Pet Health$2,138 2%(4)%(7)%(9)%(5)%
Farm Animal2,219 2%(5)%(2)%(5)%—%
Subtotal4,357 2%(4)%(5)%(7)%(2)%
Contract Manufacturing54 —%(4)%(29)%(34)%(29)%
Total$4,411 2%(4)%(5)%(7)%(3)%

(Dollars in millions)
Full year 2018Revenue  Price  FX Rate  Volume  Total  CER*  
CA Disease Prevention$804.6  8%  —%  14%  22%  22%  
CA Therapeutics283.1  7%  1%  —%  9%  7%  
FA Future Protein & Health711.2  4%  —%  6%  10%  10%  
FA Ruminants & Swine1,174.0  (1)% —%  1%  —%  —%  
Core Revenue$2,972.9  3%  —%  5%  8%  8%  
Strategic Exits93.9  —%  —%  (34)% (35)% (35)% 
Total Elanco$3,066.8  3%  —%  3%  6%  6%  
Full year 2021
(Dollars in millions)
RevenuePriceFX Rate
Volume (2)
Total
CER (1)
Pet Health$2,350 4%1%68%73%72%
Farm Animal2,332 —%1%26%27%26%
Subtotal4,682 2%1%44%47%46%
Contract Manufacturing82 —%—%3%3%3%
Total$4,764 2%1%43%46%45%
Note: Numbers may not add due to rounding
*CER = (1)Constant exchange rate (CER), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange. 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.

Revenue
Total revenue
2019 vs. 2018
Total revenue increased $4.2 million or 0.1% in 2019 as compared to 2018, reflecting a 2% increase in price, offset by a 2% unfavorable impact from foreign exchange rates. Volume was flat as compared to prior year.
In summary, the total revenue increase was due primarily to:
an increase in revenue of $72.0 million or 25% from CA Therapeutics products, excluding the impact of foreign exchange rates; and
an increase in revenue of $59.5 million or 8% from FA Future Protein &Pet Health products, excluding the impact of foreign exchange rates;
partially offset by:
a decrease in revenue of $46.1 million or 4% from FA Ruminants & Swine products, excluding the impact of foreign exchange rates;
a decrease in revenue of $7.3 million or 1% from CA Disease Prevention products, excluding the impact of foreign exchange rates;
a decrease in revenue of $14.2 million or 15% from Strategic Exits, excluding the impact of foreign exchange rates; and
a decrease in revenue of $59.7 million due to the negative impact of foreign exchange rates.
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The detailed change in revenue by product category was as follows:
CA Disease Prevention revenue decreased by $16.7$212 million or 2%9%, driven by a declinedecrease in volume and to a lesser extent thean unfavorable impact offrom foreign exchange rates, partially offset by an increase in price. The revenueOn a constant currency basis, the decrease of 5% was a result of several unfavorable comparisonsprimarily attributable to 2018. In 2018, vaccines benefited from the initial stocking of a new customer agreement, customers purchased higher than normal levels of parasiticides and vaccines to achieve desired incentive levels across companion animal, and all remaining inventory for Parastar was sold prior to rationalizing the product, all contributing to the unfavorable comparison for the year. The decrease was also driven by declines in sales of older generation parasiticides, partially offset by the continued growth of Credelio and Interceptor Plus, including the initial stocking of a new customer agreement in the third quarter of 2019.
CA Therapeutics revenue increased by $64.9 million or 23%, driven by increased volume and to a lesser extent price, partially offset by the impact of foreign exchange rates. The revenue increase was driven by increasedlower demand for products across the therapeutics portfolio, primarily Galliprant, initial stocking for a new customer agreement in the third quarter of 2019, and inclusion of sales of Entyceand Nocita, as a result of increased competition impacting certain parasiticide products as well as the acquisitionoverall deterioration in global macroeconomic conditions, which particularly impacted sales of Aratana.over-the-counter U.S. parasiticide products. The impact was partially offset by growth in our global pain portfolio.
FA Future Protein & HealthFarm Animal revenue increaseddecreased by $33.9$113 million or 5%, driven by both increased volume and price, partially offset by an unfavorable impact from foreign exchange rates. Growth was driven by the aqua portfolio, poultry vaccinesrates and nutritional products, partially offset by the loss of sales for certain productsa decrease in China as a result of changing antibiotic policies.
FA Ruminants & Swine revenue decreased by $63.7 million or 5%, driven by a decline in volume, and to a lesser extent the unfavorable impact of foreign exchange rates, partially offset by an increase in price. TheOn a constant currency basis, revenue was flat year over year. Growth driven by increased demand for aqua products and the contribution from innovation was offset by a continued decline in revenue wasswine, particularly driven by softnessmarket conditions in swine products dueAsia and to African Swine Fever across Asia, a disruptionlesser extent competition in globalEurope, as well as the impact of generic competition for certain cattle brands and the impact of supply chain disruptions.
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Table of certain third-party produced injectable cattle products, reduced U.S. producer useContents
Contract Manufacturing revenue decreased by $28 million to $54 million and represented 1% of Paylean, decreased Rumensintotal revenue.
Cost of Sales
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Cost of sales$1,913 $2,132 $1,667 (10)%28 %
% of revenue43 %45 %51 %
Cost of sales as a resultpercentage of revenue decreased in 2022 as compared to 2021 primarily due to amortization of the generic entrant, and the impactfair value adjustment of $64 million recorded from the Australian drought. These decreases were partially offset by revenue generated from Posilac™acquisition of Bayer Animal Health in 2021. Excluding the $64 million fair value adjustment for the year ended December 31, 2021, cost of sales as a resultpercentage of the revised commercial agreement entered intorevenue would have been approximately 43%, consistent with 2022. Cost of sales decreased in the third quarter of 2019.
Strategic Exits revenue decreased by $14.2 million to $79.7 million and represented 3% of total revenue.

2018 vs. 2017
Total revenue increased $177.8 million or 6% in 2018 as compared to 2017, reflecting a 3% increase2022 primarily due to higher realized priceslower revenue, improvements in manufacturing productivity and a 3% increase due to higher volumes.
In summary, the total revenue increase was due primarily to:
an increase in revenue of $142.1 million or 22% from CA Disease Prevention products, excluding the impact of foreign exchange, rates;partially offset by inflationary impacts on input costs, freight, and conversion costs as well as unfavorable product mix.
an increaseResearch and Development
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Research and development$321 $369 $329 (13)%12 %
% of revenue%%10 %
R&D expenses decreased $48 million to $321 million in revenue2022 as compared to 2021. R&D expenses in the current year were favorably impacted by cost savings realized as a result of $18.4 million or 7% from CA Therapeutics products, excluding2021 restructuring activities, lower professional services costs due the rationalization of certain R&D projects, and the impact of foreign exchange rates;
an increase in revenue of $63.8 million or 10% from FA Future Protein & Health products, excluding the impact of foreign exchange rates and
partially offset by:
a decrease in revenue of $0.8 million or 0% from FA Ruminants & Swine, excluding the impact of foreign exchange rates and
a decrease in revenue of $49.9 million or 35% from Strategic Exits, excluding the impact of foreign exchange rates.
The detailed change in revenue by product category was as follows:
CA Disease Prevention revenue increased by $144.4 million or 22% due primarily to a reduction in channel inventory in 2017 providing a favorable year-on-year comparison, continued uptake of Credelio and Interceptor Plus, as well as realized price increases primarily impacting Trifexis, Capstar (a flea treatment) and Comfortis, partially offset by volume declines in certain parasiticides, primarily Trifexis and Comfortis volumes.
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CA Therapeutics revenue increased by $22.3 million or 9% due primarily to the continued uptake of Galliprant and Osurnia, as well as increased demand for Onsior, partially offset by a temporary supply shortage of Percorten™ V used for the treatment of canine Addison’s Disease.
FA Future Protein & Health revenue increased by $62.0 million or 10% due primarily to the launch of Imvixa and the growth in poultry animal-only antibiotics and poultry vaccines.
FA Ruminants & Swine revenue decreased by $1.0 million due primarily to competitive headwinds for ractopamine based products, offset by growth in animal-only antibiotics, primarily in cattle.
Strategic Exits revenue decreased by $49.9 million or 35% due primarily to the termination of a legacy U.S. distribution agreement in the third quarter of 2017, partially offset by revenue from the contract manufacturing agreement to supply human growth hormone to Lilly.
Costs, Expenses and Other
Cost of sales
2019 vs. 2018
Cost of sales decreased $103.5 million in 2019 as compared to 2018 due primarily to manufacturing productivity improvements and charges recorded during the year ended December 30, 2018 for inventory adjustments related to the suspension of commercial activities of Imrestor and the closure of the Larchwood, Iowa facility, partially offset by unfavorable product mix and logistics costs.
2018 vs. 2017
Cost of sales increased $79.9 million in 2018 as compared to 2017 primarily due to increased volume of products sold and the write-off of inventory related to the suspension of activities for Imrestor in 2018, partially offset by non-recurring costs incurred in 2017 associated with fair value adjustments to inventory acquired in the BIVIVP acquisition and subsequently sold.
Research and development
2019 vs. 2018
R&D expenses increased $23.5 million for 2019 as compared to 2018 primarily due to additional costs from acquired businesses during the year, including Aratana and Prevtec, increased costs from R&D infrastructure investments, and project spend as a result of pipeline progression.
2018 vs. 2017
R&D expenses decreased $5.1 million in 2018 as compared to 2017 due primarily to cost control measures and timing of projects leading to lower spend in 2018.exchange.
Marketing, sellingSelling and administrativeAdministrative
2019 vs. 2018
Marketing, selling and administrative expenses increased $25.0 million for 2019 as compared to 2018 due primarily to additional costs from acquired businesses during the year, primarily Aratana, and increased marketing efforts for our companion animal portfolio, and increased expenses as a result of operating as a standalone public company, partially offset by slightly lower selling costs and lower costs due to continued productivity initiatives and cost control measures across the business.
2018 vs. 2017
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Marketing, selling and administrative$1,265 $1,403 $997 (10)%41 %
% of revenue29 %29 %30 %
Marketing, selling and administrative expenses decreased $44.6$138 million in 2018 as2022 compared to 2017 due2021, primarily to productivity initiativesdriven by disciplined cost management across the business, cost savings realized as a result of 2021 restructuring activities, a decrease in salesadvertising and administrative functionspromotional costs, and reduced direct to consumer programs combined with new product launchesthe impact of foreign exchange, partially offset by increases in 2017.
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legal expenses during the period.
Amortization of intangible assetsIntangible Assets
2019 vs. 2018
Amortization of intangible assets increased $3.0 million for 2019 as compared to 2018 primarily due to the addition of amortization of intangible assets recorded from the acquisitions of Aratana and Prevtec in 2019 and the acceleration of the amortization of certain software assets to be retired prior to the end of their previously estimated respective useful lives due to our separation from Lilly.
2018 vs. 2017
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Amortization of intangible assets$528 $556 $360 (5)%54 %
Amortization of intangible assets decreased $23.8$28 million to $528 million in 20182022 as compared to 20172021, primarily due primarily to the accelerationimpact of amortization related to certain product exits in 2017.foreign exchange rates.
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Asset impairment, restructuringImpairment, Restructuring and other special chargesOther Special Charges
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Asset impairment, restructuring and other special charges$183 $634 $623 (71)%%
For additional information regarding our asset impairment, restructuring and other special charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to ourthe consolidated and combined financial statements.
2019 vs. 2018
Asset impairment, restructuring and other special charges increased $56.7 million in 2019 as compared to 2018 primarily due to higher transaction costs directly related to business acquisitions, including the pending acquisition of the animal health business of Bayer, higher integration costs of acquisitions, and costs associated with the implementation of new systems, programs, and processes due to the Separation from Lilly as well as severance costs, exit costs, impairment charges, and write-down charges recorded in 2019, as more fully described in Note 7.
2018 vs. 2017
Asset impairment, restructuring and other special charges decreased $246.3$451 million to $183 million in 20182022 as compared to 20172021, due in part to a $177 million year over year decrease in severance charges and overall acquisition-related expenses. Also contributing to the decrease were certain nonrecurring charges recorded during 2021, including a $279 million charge to write down assets at our Shawnee and Speke manufacturing sites that were classified as held for sale to an amount equal to fair value less costs to sell, $66 million of impairment charges for intangible assets that were subject to product rationalization, a $26 million charge to establish a liability for future royalty and milestone payments relating to our canine parvovirus license agreement with KindredBio, and an $8 million charge related to a litigation settlement for a matter that originated prior to our acquisition of Bayer Animal Health. These decreases were partially offset by $29 million of nonrecurring pension curtailment gains recorded during 2021 as well as a $22 million asset write-down charge recorded upon the final sale of our Speke manufacturing site and a one-time charge of $59 million related to the expensing of an IPR&D asset licensed from BexCaFe, LLC (BexCaFe) during 2022. See Note 6: Acquisitions, Divestitures and Other Arrangements for further discussion.
Interest Expense, Net of Capitalized Interest
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Interest expense, net of capitalized interest$241 $236 $150 %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.
Other (Income) Expense, Net
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Other (income) expense, net$32 $$(178)NMNM
Other expense increased $27 million in 2022 as compared to 2021, primarily due to a $14 million increase in foreign exchange losses and a $14 million decrease in severance related to the U.S. voluntary early retirement program offered in 2017 as well as a decrease in integration costs related to the BIVIVP acquisition in 2017,up-front payments received and milestones earned from business development arrangements.

Other expense recorded during 2022 primarily consisted of foreign exchange losses and mark-to-market adjustments on equity investments, partially offset by aup-front payments received in relation to license and asset assignment agreements, the gain recognized on the disposal of a site that was previously closed as partour microbiome R&D platform, and certain components of the acquisition and integration of Novartis Animal Health in 2017.
Interest expense, net of capitalized interest
2019 vs. 2018
Interest expense increased $49.3 million for the year ended December 31, 2019 dueperiodic benefit cost. See Note 19: Retirement Benefits to the timingconsolidated financial statements for further discussion related to net periodic benefit cost (income) recorded during the period. Other expense recorded during 2021 primarily consisted of the issuance of debt in the third quarter of 2018.
2018 vs. 2017
Interest expense was $29.6 million for the year ended December 31, 2018 due to our issuance of debt in the third quarter of 2018. There was no interest expense in 2017mark-to-market adjustments on equity investments and prior years.
Other–net, expense (income)

2019 vs. 2018
Other–net, expense decreased $13.9 million from $41.3 million in 2018 to $27.4 million in 2019. The decrease in expense is primarily due to the increase in the Aratana contingent consideration liability of $37.6 million associated with the Galliprant acquisition recorded in 2018,foreign exchange losses, partially offset by the impactgains on divestitures, certain components of $8.3 million of expense recordednet periodic benefit income, an up-front payment received in 2019 duerelation to the release ofan asset assignment agreement, a tax indemnitymilestone earned in relation to an existing asset relatedsale agreement, and up-front payments received, milestones earned, and equity issued to the 2015 acquisition of Novartis and $13.0 million of unfavorable adjustmentsus in relation to the contingent consideration liabilities recorded for Galliprant during 2019.

a license agreement.
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2018 vs. 2017Income Tax Expense (Benefit)
Other–net, expense (income) was expense of $41.3 million in 2018 compared to income of $0.1 million in 2017. The increase in expense is primarily due to the increase in the Aratana contingent consideration liability of $37.6 million associated with the Galliprant acquisition.
Year Ended December 31,% Change
(Dollars in millions)20222021202022/2121/20
Income tax expense (benefit)6(88)(103)107 %15 %
Effective tax rate(8)%15 %15 %
Income tax expense
Elanco’sOur historical income tax expense may not be indicative of itsour future expected tax rate. See “Comparability of Historical Results, Our Relationship with Lilly and Additional Standalone Costs.”
2019 vs. 2018Results” for further discussion.
Income tax expense decreased $17.3was $6 million in 2019 as2022 compared to 2018.an income tax benefit of $88 million in 2021. The decrease is primarily attributable to lower pre-tax earningschange was primarily due to restructuring charges,an increase in additiontaxes 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 releasetermination of tax reserves related to final resolutioninterest rate swaps and a $12 million net reduction in taxes associated with the divestiture of the Brazilian tax matter.Speke manufacturing site. See Note 15:16: Income Taxes to our consolidated and combined financial statements.
2018 vs. 2017
Income tax expense decreased $50.5 million in 2018 as compared to 2017. The decrease is primarily due to a decrease in the U.S. valuation allowance, which was recorded in 2017 based upon the pre-IPO separate return methodology. See Note 2: Basis of Presentation and Note 15: Income Taxes to our consolidated and combined financial statements.statements for further discussion.

Liquidity and Capital Resources
We historically participated in Lilly’s centralized treasury management system, including centralized cash pooling and overall financing arrangements. We have generated and expect to continue to generate positive cash flows from operations. In connection with the IPO, we entered into various long-term debt agreements as described below.
Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our Credit Facilities.credit facilities. As a significant portion of our business is conducted outside the U.S.,internationally, we hold a significant portion of cash outside of 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, following U.S. tax reforms, the income taxes associated with transferring cash to the U.S. See Note 15: Income Taxes to our consolidated and combined financial statements. We currently 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 structurebusiness evolves, as a standalone company, 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.
Our principalWe believe our primary sources of liquidity needs going forwardare 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 expensepayments as well as interest rate swaps, operating lease payments, purchase obligations, and costs associated with the integration of Bayer Animal Health. In addition, we have the ability to access capital markets to obtain debt refinancing for longer-term funding, the acquisition of the animal health business of Bayer. Weif required, to service our long-term debt obligations. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our cash and cash equivalents on hand, our operating cash flows, our existing financing arrangements and financing arrangements entered into in 2020 will be sufficient to support our cash needs for the foreseeable future, including for at least the next 12 months.debt covenants.
Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. 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. 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."
As of December 31, 2019, cash and cash equivalents was $334.0 million, a decrease of $140.8 million compared to $474.8 million at December 31, 2018. We also held $11.1 million of restricted cash at December 31, 2019, which is available solely to pay the remainder of the purchase for our businesses to Lilly. We have a corresponding liability recorded on our balance sheet and included in Payable to Lilly. Refer to the Consolidated and Combined
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Statements of Cash Flows for additional details on the significant sources and uses of cash for the years ended December 31, 2019, 2018 and 2017.
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented:
(Dollars in millions)(Dollars in millions)Year Ended December 31,% Change(Dollars in millions)Year Ended December 31,$ Change
Net cash provided by (used for):Net cash provided by (used for):20192018201719/1818/17Net cash provided by (used for):20222021202022/2121/20
Operating activitiesOperating activities$224.1  $487.3  $173.8  (54)%180 %Operating activities$452 $483 $(41)$(31)$524 
Investing activitiesInvesting activities(234.8) (127.0) (964.6) 85 %(87)%Investing activities(179)(530)(4,779)351 4,249 
Financing activitiesFinancing activities(304.8) (35.2) 847.5  766 %(104)%Financing activities(549)210 4,954 (759)(4,744)
Effect of exchange-rate changes on cash and cash equivalents(16.9) 29.0  7.9  (158)%267 %
Net (decrease) increase in cash, cash equivalents and restricted cash$(332.4) $354.1  $64.6  (194)%448 %
Effect of exchange rate changes on cash and cash equivalentsEffect of exchange rate changes on cash and cash equivalents(17)(31)27 14 (58)
Net increase (decrease) in cash, cash equivalents and restricted cashNet increase (decrease) in cash, cash equivalents and restricted cash$(293)$132 $161 $(425)$(29)
Operating activities
2019 vs. 2018Activities
Our cash flow from operating activities decreased by $263.2$31 million from $487.3to $452 million for the year ended December 31, 2018 to $224.12022 from $483 million for the year ended December 31, 2019.2021. The decrease is primarily the result of a decrease in cash due to changes in operating cash flowsassets and liabilities, particularly accounts receivable, inventories, and other assets, as compared to the prior year. This decrease was primarily attributable topartially offset by a decrease in net income, increases in accounts receivable and inventories, and changes in timingloss after adjusting for non-cash items, as well as proceeds of payments$207 million from interest rate swap settlements in the ordinary coursecurrent year. Due to the system integration scheduled to be completed in April 2023, we have and may need to further increase inventories on hand and extend payment terms for some customers during the first and second quarters of business.
We2023 to ensure that our product is available for a period of time during which there may be no shipments. In the past, we have extended our payment terms for distributors on occasion. Although we presently have no plans to do so in the pastfuture, except for those related to the system integration described above, it is also possible that we will need to extend payment terms in certain customer situations and may need to continue this practice going forward as a result of the COVID-19 global health pandemic, competitive pressures, macroeconomic factors and the need for certain inventory levels atin our channel distributorsdistribution channels to avoid supply disruptions. FurtherIf so, such extensions of customer payment terms could result in additional uses of our cash flow.
2018 vs. 2017
Our cash flow from operating activities increased by $313.5 million from $173.8 million for the year ended December 31, 2017 to $487.3 million for the year ended December 31, 2018. The increase is a result of an increase in net income, which was partially offset by cash used to finance working capital, primarily focused on accounts receivable and inventory.
Investing activities
2019 vs. 2018Activities
Our cash flow used for investing activities increased by $107.8decreased $351 million to $234.8$179 million for the year ended December 31, 20192022 compared to $127.0$530 million for the year ended December 31, 2018.2021. The changedecrease was primarily driven by cash paid for the acquisition of PrevtecKindredBio during 2019 and increasesthe year ended December 31, 2021, as well as a year over year decrease in cash paid for purchases of software from 2018 to 2019.intangible assets. These decreases were partially offset by a year over year increase in cash used for purchases of property and equipment.
2018 vs. 2017Financing Activities
Our cash flow used for investingin financing activities decreased from $964.6was $549 million for the year ended December 31, 2017 to $127.0 million for the year ended December 31, 2018. Our cash used in investing activities for the year ended December 31, 2017 included $882.1 million related to the acquisition of BIVIVP. This decrease was offset by a net increase of $35.9 million in capital expenditures from 2017 to 2018.
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Financing activities
2019 vs. 2018
Our cash used for financing activities increased by $269.6 million to $304.8 million in 2019 compared to $35.2 million in 2018. Cash used in financing activities during 2018 reflected the impact of our IPO and the issuance of long-term debt in connection with our Separation from Lilly during the period. $4.2 billion of cash was generated from those transactions, which was mostly offset by $4.1 billion of payments to Lilly in connection with local country asset purchases and other financing activities related to the Separation. During 2019, we made $121.1 million of payments on our term credit facility as well as $191.6 million of payments to Lilly in connection with local country asset purchases and other financing activities related to the Separation.
2018 vs. 2017
Our cash used for financing activities was a $35.2 million in 20182022 compared to cash provided by financing activities of $847.5$210 million in 2017, a changefor the year ended December 31, 2021. 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 $882.7 million. The cash flows in 2017 relate to net cashindebtedness outstanding under our term loan B credit facility, partially offset by proceeds from our newly issued incremental term facilities. Cash provided by transactionsfinancing activities during 2021 primarily reflected proceeds from our borrowings under our debt financing arrangement with LillyFarm Credit Mid-America, PCA, net proceeds from our revolving credit facility, and $64 million of $848.3 million compared to cash used in transactions with Lilly of $154.4 million in 2018, a reduction in financing of cash flows between periods of $1.0 billion. This, in addition tofunding received from the consideration paid to Lillydeveloper in connection with the Separation, wasconstruction of our new corporate headquarters in Indianapolis, Indiana, partially offset by net cash provided from financing transactions related to the Separation including the proceeds from long-term debt andrepayment of indebtedness outstanding under our IPO. The remainder of the proceeds from the financing related to the Separation will be paid to Lilly in future periods and is reflected as restricted cash in our consolidated balance sheet.Senior Notes.
Capital Expenditures and Software Purchases
Capital expenditures were $140.4$137 million during 2019,2022, an increase of $5.9$11 million compared to 2018.2021. Purchases of software were $34 million during 2022, an increase of $1 million compared to 2021. We expect 20202023 capital expenditures and software purchases to be approximately $150$165 million to $190 million.
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Description of Indebtedness
For a complete description of our debt and available credit facilities as of December 31, 2019,2022, see Note 9:10: Debt to ourthe consolidated and combined financial statements.
Contractual Obligations
Payments due under
Our contractual obligations and commitments as of December 31, 2019,2022 are set forth below:
Years
(Dollars in millions)
Total(1)
Less Than 1 Year1 - 3 Years4 - 5 YearsMore Than 5 Years
Long-term debt obligations, including interest payments(2)
$2,771.5  $77.6  $981.2  $1,578.2  $134.5  
Operating leases91.6  26.0  32.2  16.9  16.5  
Purchase obligations(3)
1,127.4  1,079.8  29.9  7.7  10.0  
Other long-term liabilities18.4  5.7  8.5  0.8  3.4  
Total$4,008.9  $1,189.1  $1,051.8  $1,603.6  $164.4  
(1) We excluded deferred taxes because we cannot reasonably estimate the timingprimarily comprised of future cash outflows associated with those liabilities.
(2)long-term debt obligations, operating leases, and purchase obligations. Our long-term debt obligations include bothare comprised of our expected principal and interest obligations. Purchase obligations and our interest rate swaps. We used current period assumptions for interest rates to compute expected interest payments on variable rate debt instruments and swaps.
(3) Representsconsist of open purchase orders as of December 31, 20192022 and contractual payment obligations with each of our significant vendors which are noncancelable and are not contingent.
In connection with our pending acquisition of the animal health business of Bayer as discussed These obligations are primarily short-term in Note 6: Acquisitions, in August 2019, we entered into a commitment letter that provides for financing consisting of up to $750 million in a revolving facility, $3.0 billion in a term facility, and $2.75 billion in a senior secured bridge facility. In connection with the financing commitment letter, we will incur fixed commitment fees of $40.4 million that will become due and payable upon the closing of the pending acquisition or the termination of the Purchase Agreement
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with Bayer. These fees have not been recorded on the consolidated balance sheet as of December 31, 2019.nature. See Note 22: Subsequent Events14: Leases to ourthe consolidated and combined financial statements for updatesfurther discussion regarding financing secured after the balance sheet date.contractual obligations related to our new corporate headquarters in Indianapolis, Indiana.

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. 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. Actual results that differ from our estimates could have an unfavorable effect on our financial position and results of operations. We apply estimation methodologies consistently from year to year. The following is a summary of accounting policies that we consider critical to the consolidated and combined financial statements.
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. 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 estimateestimates of the amount of time between shipment and return to estimate the impact of sales returns.
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. The sensitivity of our estimates can vary by program, type of customer and geographic location. Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.
See Note 4: Summary of Significant Accounting Policies and Note 5: Revenue to ourthe consolidated and combined financial statements for further discussion regarding our revenue recognition policy.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. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill.
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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 re-determineddetermined using information available at the acquisition date based on expectations and assumptions that are deemed reasonable by management. These fair value estimates require significant judgment with respect to future volumerevenues and prices,EBIT margins, use of working capital, the selection of appropriate discount rates, product mix, income tax rates and other assumptions and estimates. Such estimates and assumptions are determined based upon our business plans and when applicable, market participants' views of us and other similar companies. 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.
We determine fair value of any contingent consideration liability that results from a business combination by utilizing a market approach (i.e., based on quoted market values, significant other observable inputs for identical or comparable assets or liabilities) a discounted cash flow analysis, or a Monte Carlo simulation (i.e., based on multiple potential financial outcomes using estimated variables such as expected revenues, growth rates, and a
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discount rate). Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, revenue and the discount rate and will be remeasured every reporting period.
Impairment of Indefinite-Lived and Long-Lived Assets
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. If an impairment is identified, a loss is recorded that is equal to the excess of the asset's net bookcarrying value over its fair value generally utilizing a discounted cash flow analysis, and the cost basis is adjusted.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain impairment indicators are present. We have historically performed our annual goodwill and indefinite-lived intangible asset impairment assessment as of the last day of the fourth fiscal quarter of each year. During the fourth quarter of 2022, we elected to change the date of our annual impairment assessment from December 31st to October 1st. The change was made to more closely align the impairment assessment date with our annual planning and budgeting process as well as our long-term planning and forecasting process. We have determined that this change in accounting principle is preferable and will not affect the consolidated financial statements. Pursuant to this change in accounting principle, in 2022 we performed an impairment assessment as of the first day of our fourth fiscal quarter. The change in impairment assessment date did not delay or avoid an impairment charge. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change has been applied prospectively.
When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. In the third quarter of 2022, a significant change in our market capitalization relative to our book value, among other factors, triggered an impairment review. 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. As a result of the quantitative assessment, we concluded that no impairment existed with respect to our goodwill because the estimated fair value of our single reporting unit exceeded the carrying amount by more than 20%. Given the general worldwide economic conditions, we reevaluated our impairment testing from a qualitative perspective as December 31, 2022, which did not result in a change to our previous conclusion that no impairment exists.
The estimated cash flows andSignificant management judgment is required in estimating fair values used in our impairment reviews require significant judgment with respectand in the creation of forecasts of future operating results that are used in the discounted cash flow method of valuation. These include, but are not limited to, future volume; use of working capital; foreign currency exchange rates; the selection of appropriate discount rates; product mix; income tax rates and other assumptions and estimates. Such estimates and assumptions are determined based uponregarding (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, plans and when applicable, market participants' views(3) the determination of us and other similar companies. our weighted-average cost of capital, which is a factor in determining the discount rate. We make these judgments based on our historical experience, relevant market size, historical pricing of similar products, and expected industry trends. 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, and results of research and development.development, and changes in macroeconomic conditions, including rising interest rates and inflation. A change in these assumptions or the use of alternative estimates and assumptions could have a significant impact on the estimated fair values of the assets,value and may result in anexpose us to impairment of the existing assets in a future period.losses.
During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, we recorded asset impairments of $15.4$60 million, $81.9$66 million and $110.6$17 million, respectively, primarily due to product rationalization or changes in business strategy.respectively. For more information related to our impairment charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to ourthe consolidated and combined financial statements.
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Deferred Tax Asset Valuation Allowances

We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are typically included in our tax provision in the period of change. 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. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if we take operational or tax planning actions that could impact the future taxable earnings of a subsidiary. 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. We prepare a three-year cumulative pre-tax book income or loss analysis adjusted for certain permanent book to tax differences as a measure of our cumulative results in recent years. In the U.S. and certain foreign jurisdictions, our analysis indicates that we have cumulative three-year historical losses on this basis. This is considered significant negative evidence which is objective and verifiable and therefore, difficult to overcome. However, the three-year cumulative loss position is not solely determinative and accordingly, we consider all other available positive and negative evidence in our analysis. In making such judgments, significant weight is given to evidence that can be objectively verified.
As of December 31, 20192022 and 2018,2021, we had valuation allowances of $32.7$228 million and $21.4$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 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. Under current tax laws, the valuation allowance will not limit our ability to utilize U.S. deferred tax assets provided we can generate sufficient future taxable income in the U.S. 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.
Quantitative
Recently Issued Accounting Pronouncements
For discussion of our new accounting standards, see "Item 8. Financial Statements and Qualitative Disclosures About Market RiskSupplementary Data — Note 4: Summary of Significant Accounting Policies - Implementation of New Financial Accounting ."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk
We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange rates. We are primarily exposed to foreign exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, British pound,Brazilian real, Australian dollar, Japanese yen, Canadian dollar, Australian dollar and Brazilian real. As part of the TSA, Lilly maintained a foreign currency risk management program through a central shared entity, which entered into derivative contracts to hedge foreign currency risk associated with forecasted transactions for the entire company, including historically for our operations. Gains and losses on derivative contracts entered into by Lilly were previously allocated to our results to the extent they were to cover exposure related to our business and offset gains and losses on underlying foreign currency exposures. We implemented our own foreign currency risk management program and assumed all hedging activities in the second
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quarter of 2019.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 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, but our historical results prior to 2018 do not reflect the impact of any such derivatives related to our exposure to foreign currency impacts on translation.

periods.
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 decreaseincrease our net incomeloss by approximately $7.4less than $1 million for the year ended December 31, 2019.2022.
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We generally identify hyperinflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. 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. Assets held in Argentina as of December 31, 2022 represented less than 1% of our consolidated assets.
We also bear foreign exchange risk associated withDuring 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. 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. 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, cash settlementwe may incur larger currency devaluations, which could have a material adverse impact on our results of an existing NIH. In October 2018, we entered into a fixed interest rate, 5-year, 750 million Swiss franc NIH against Swiss franc assets. The NIH is expected to generate approximately $25 million in cash and contra interest expense per year; however, there is potential for significant 2023 settlement exposure on the 750 million Swiss franc notional if the U.S. dollar devalues versus the Swiss franc.operations.
Interest Risk
We areOur variable-rate debt is exposed to interest rate riskfluctuations based on LIBOR and Term SOFR. 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. As of December 31, 2022, $4,151 million and $1,749 million of our total long-term debt, we incurred in connection with our IPO.Priorincluding the current portion, is fixed-rate debt (including variable-rate converted to our IPO, we did not have anyfixed-rate through the use of interest rate exposure. We have cash flow risk associated with our $371.4swaps) and unhedged variable-rate debt, respectively. During the year ended December 31, 2022, we recorded a gain of $157 million, net of borrowings under the Term Credit Facility that pay interest basedtaxes on variable rates. We actively monitor our exposure and may enter into financial instruments to fix thethese interest rate based on our assessment of the risk.
Recently Issued Accounting Pronouncements
For discussion of our new accounting standards, see Note 4: Summary of Significant Accounting Policies - Implementation of New Financial Accounting Pronouncements to our consolidated and combined financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
You can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Quantitative and Qualitative Disclosures About Market Risk.” That information is incorporatedswaps in this Item 7A by reference.
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Itemother comprehensive loss. See "Item 8. Financial Statements and Supplementary Data — Note 11: Financial Instruments and Fair Value" for further information.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm



To the Shareholders and the Board of Directors of Elanco Animal Health Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Elanco Animal Health Incorporated (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated and combined statements of operations, comprehensive income (loss),loss, equity and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notes (collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2020March 1, 2023 expressed an unqualifiedadverse opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated and combined financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.





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Sales rebates and discounts
Description of the matter
At December 31, 2019,2022, the Company’s US sales rebates and discounts liability totaled $150.4$324 million. As explained in NoteNotes 4 and 5 to the consolidated and combined financial statements, the Company estimates a sales rebates and discounts liability for direct customers and other indirect customers in the distribution chain under the terms of their arrangementscontracts using the expected value approach. The sales rebates and discounts are recorded as a deduction to revenue atin the timesame period that the Company recognizes a sale to a customer.


Auditing the sales rebates and discounts liability in the US is complex because of the level of subjectivity involved in management’s assumptions used in the measurement process and the volume of rebate programs offered. For example, estimatesthe estimate of the expectedsales rebate ratesand discount liability is based on projected sales volumes derived fromhistorical experience with similar incentive programs, current sales data and recent trends, estimates of future rebates to be paid to indirect customers ininventory levels at the distribution chain based on inventory volumes and historical experience with similar rebate incentive programs.channel distributors.

How we addressed the matter in our audit

We tested the Company’s internal controls over the sales rebates and discounts liability process. This included testing controls over management’s review of the significant inputs and assumptions in the estimation of sales rebates and discounts, including rebate rates by product category, forecasted sales in to and out of the distribution channel, and channel inventory levels.


To test the Company’s sales rebates and discounts liability, our audit procedures included, among others, evaluating the inputs and assumptions discussed above and testing the completeness and accuracy of the underlying data used in management’s expected value analysis. For example, we compared the significant assumptionsinputs to third-party reports used by the Company to estimate indirect sales volumes during the period. Furthermore,period and we confirmed product remaining in the distribution channel at period end. In addition, we inspected the underlying rebate programs for direct and indirect customer rebate programscustomers and compared the rebate percentages used in the Company’s analyses with the program percentages. Additionally, on a sample basis, we assessed the historical accuracy of management’s sales rebates and discounts estimates by comparing the prior period sales rebates and discounts liability to the amount of actual payments made in subsequent periods. We also performed independent calculations of the rebate accruals and a sensitivity analysis of certain significant assumptions to evaluate the change in the sales rebates and discounts liability resulting from changes in the assumptions.













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AcquisitionValuation of Aratana Therapeutics, Inc.goodwill
Description of the matterDuring 2019,
At December 31, 2022, the Company completed its acquisition of Aratana Therapeutics, Inc. (“Aratana”) for net consideration of $238.0 million, as disclosedCompany’s goodwill was $5,993 million. As described in Note 612 to the consolidated and combined financial statements. Thestatements, goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition was accounted for as a business combination. Auditing the Company's accounting for its acquisition of Aratana was complex due to the significant estimation uncertainty in determiningand the fair value of identifiedthe net tangible and intangible assets which principally consistedacquired. Goodwill is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not that goodwill may be impaired.

Auditing management’s goodwill impairment test was complex and highly judgmental because the estimate underlying the determination of intellectual property related to marketed products and in-process research and development of $36.7 million and $31.9 million, respectively. The significant estimation uncertainty was primarily due to the sensitivityfair value of the respectivereporting unit involves management’s judgments on significant assumptions. In particular, management estimates fair valuesvalue using the income approach which is sensitive to the significant underlying assumptions about the future performance of the acquired business. The Company used a discounted cash flow model to measure the intellectual property related to marketed products and in-process research and development intangible assets. Thecertain significant assumptions, used to estimate the value of these intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates,such as future revenues, gross margins, earnings before interest, taxes, depreciation and selling, generalamortization (EBITDA) margins and administrative expenses). These significant assumptions are forward-looking and could be affected by future economic and market conditions.
the discount rate commensurate with the risks involved.
How we addressed the matter in our auditWe tested the Company's internal controls over its accounting for acquisitions.assessment of the fair value of the reporting unit. This included testing controls over management’s review of the recognition and measurement of consideration transferred and related intangible assets, includingsignificant assumptions used in the valuation modelsmodel including future revenues, gross margins, EBITDA margins and underlying assumptions discussed above used to develop such estimates.the discount rate.

To test the estimated fair value of the intellectual property related to marketed products and in-process research and development intangible assetsCompany’s reporting unit, our audit procedures included, among others, evaluatingassessing the Company’s use of the income approachvaluation methodology and testing the significant assumptions discussed above used in the models, including the completeness and accuracy of the underlying data.herein. For example, we compared the forecasted revenue, gross margins and selling, general and administrative expensessignificant assumptions in the prospective financial information used by management to current industry and economic trends as well asand historical performance. We assessed the historic financial performancereasonableness of the acquired business.future revenues, gross margins and EBITDA margins by comparing the forecasts to historical results and analyst expectations. We also performed sensitivity analyses of thecertain significant assumptions to evaluate the changeschange in the fair value of the intangible assets resulting from changes in the significant assumptions. We also involved our valuation specialists to assist in ourthe evaluation of the fair value methodology used by the Company and significant assumptions included in the fair value estimates. For example, comparingestimate. In addition, we tested management’s reconciliation of the discount ratefair value of the reporting unit to the acquired business’s weighted average cost of capital and evaluating the relationshipmarket capitalization of the weighted average cost of capital, internal rate of return and weighted-average return on assets.Company.


/s/ Ernst & Young LLP



We have served as the Company’s auditor since 2017.

Indianapolis, Indiana
February 28, 2020March 1, 2023

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Elanco Animal Health Incorporated
Consolidated and Combined Statements of Operations
(in millions, except per-share data)
 Year Ended December 31,
 201920182017
Revenue$3,071.0  $3,066.8  $2,889.0  
Costs, expenses and other:
Cost of sales1,470.3  1,573.8  1,493.9  
Research and development270.1  246.6  251.7  
Marketing, selling and administrative760.2  735.2  779.8  
Amortization of intangible assets200.4  197.4  221.2  
Asset impairment, restructuring and other special charges (Note 7)185.5  128.8  375.1  
Interest expense, net of capitalized interest78.9  29.6  —  
Other-net, expense (income)27.4  41.3  (0.1) 
2,992.8  2,952.7  3,121.6  
Income (loss) before income taxes78.2  114.1  (232.6) 
Income tax expense10.3  27.6  78.1  
Net income (loss)$67.9  $86.5  $(310.7) 
Earnings (loss) per share:
Basic$0.18  $0.28  $(1.06) 
Diluted$0.18  $0.28  $(1.06) 
Weighted average shares outstanding:
Basic369.0  313.7  293.3  
Diluted370.3  313.7  293.3  
 Year Ended December 31,
 202220212020
Revenue$4,411 $4,764 $3,271 
Costs, expenses and other:
Cost of sales1,913 2,132 1,667 
Research and development321 369 329 
Marketing, selling and administrative1,265 1,403 997 
Amortization of intangible assets528 556 360 
Asset impairment, restructuring and other special charges183 634 623 
Interest expense, net of capitalized interest241 236 150 
Other (income) expense, net32 (178)
4,483 5,335 3,948 
Loss before income taxes(72)(571)(677)
Income tax expense (benefit)(88)(103)
Net loss$(78)$(483)$(574)
Loss per share:
Basic$(0.16)$(0.99)$(1.30)
Diluted$(0.16)$(0.99)$(1.30)
Weighted average shares outstanding:
Basic488.3 487.2 441.4 
Diluted488.3 487.2 441.4 
See notes to consolidated and combined financial statements.
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Elanco Animal Health Incorporated
Consolidated and Combined Statements of Comprehensive Income (Loss)Loss
(in millions)
Year Ended December 31,
201920182017
Net income (loss)$67.9  $86.5  $(310.7) 
Other comprehensive income (loss):
Foreign currency translation19.8  (47.1) 210.1  
Defined benefit pension and retiree health benefit plans, net of taxes28.7  25.4  (9.8) 
Other comprehensive income (loss), net of taxes48.5  (21.7) 200.3  
Comprehensive income (loss)$116.4  $64.8  $(110.4) 
Year Ended December 31,
202220212020
Net loss$(78)$(483)$(574)
Other comprehensive income (loss):
Cash flow hedges, net of taxes157 86 (61)
Foreign currency translation(419)(613)558 
Defined benefit pension and retiree health benefit plans, net of taxes79 15 (21)
Other comprehensive income (loss), net of taxes(183)(512)476 
Comprehensive loss$(261)$(995)$(98)
See notes to consolidated and combined financial statements.

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Elanco Animal Health Incorporated
Consolidated Balance Sheets
(in millions)
December 31, 2019December 31, 2018
Assets 
Current Assets
Cash and cash equivalents$334.0  $474.8  
Accounts receivable, net of allowances of $6.2 (2019) and $8.4 (2018)816.9  651.8  
Other receivables73.0  57.6  
Inventories (Note 8)1,050.7  1,004.1  
Prepaid expenses and other87.4  113.9  
Restricted cash (Note 20)11.1  202.7  
Total current assets2,373.1  2,504.9  
Noncurrent Assets
Goodwill (Note 11)2,989.6  2,958.0  
Other intangibles, net (Note 11)2,482.8  2,504.8  
Other noncurrent assets185.0  66.6  
Property and equipment, net (Note 12)955.3  922.4  
Total assets$8,985.8  $8,956.7  
Liabilities and Equity
Current Liabilities
Accounts payable$222.6  $205.2  
Employee compensation99.6  98.9  
Sales rebates and discounts211.0  169.9  
Current portion of long term debt (Note 9)24.5  29.0  
Other current liabilities244.4  199.0  
Payable to Lilly (Note 20)16.4  268.7  
Total current liabilities818.5  970.7  
Noncurrent Liabilities
Long-term debt (Note 9)2,330.5  2,443.3  
Accrued retirement benefits (Note 18)82.5  109.1  
Deferred taxes (Note 15)100.8  114.6  
Other noncurrent liabilities106.6  121.5  
Total liabilities3,438.9  3,759.2  
Commitments and Contingencies (Note 16)
Equity
Preferred stock, 1,000,000,000 shares authorized, no par value; 0ne issued—  —  
Common stock, 5,000,000,000 shares authorized, no par value; 373,011,513 and 365,643,911 shares issued and outstanding as of December 31, 2019 and 2018, respectively—  —  
Additional paid-in capital5,636.3  5,403.3  
Retained earnings84.3  16.4  
Accumulated other comprehensive loss(173.7) (222.2) 
Total equity5,546.9  5,197.5  
Total liabilities and equity$8,985.8  $8,956.7  
millions, except share data)
December 31, 2022December 31, 2021
Assets
Current Assets
Cash and cash equivalents$345 $638 
Accounts receivable, net of allowances of $13 (2022) and $12 (2021)797 833 
Other receivables205 195 
Inventories1,538 1,371 
Prepaid expenses and other394 237 
Total current assets3,279 3,274 
Noncurrent Assets
Goodwill5,993 6,172 
Other intangibles, net4,842 5,587 
Other noncurrent assets378 390 
Property and equipment, net999 1,055 
Total assets$15,491 $16,478 
Liabilities and Equity
Current Liabilities
Accounts payable$390 $416 
Employee compensation146 185 
Sales rebates and discounts324 319 
Current portion of long-term debt388 294 
Other current liabilities454 433 
Total current liabilities1,702 1,647 
Noncurrent Liabilities
Long-term debt5,448 6,025 
Accrued retirement benefits161 271 
Deferred taxes662 765 
Other noncurrent liabilities229 262 
Total liabilities8,202 8,970 
Commitments and Contingencies
Equity
Preferred stock, 1,000,000,000 shares authorized, no par value; none issued— — 
Common stock, 5,000,000,000 shares authorized, no par value; 474,237,738 and 473,119,786 shares issued and outstanding as of December 31, 2022 and 2021, respectively— — 
Additional paid-in capital8,738 8,696 
Accumulated deficit(1,057)(979)
Accumulated other comprehensive loss(392)(209)
Total equity7,289 7,508 
Total liabilities and equity$15,491 $16,478 
See notes to consolidated and combined financial statements.
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Elanco Animal Health Incorporated
Consolidated and Combined Statements of Equity
(in millions)
Common StockAccumulated Other Comprehensive Income (Loss)
SharesAmountAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Cash Flow HedgeForeign Currency TranslationDefined Benefit Pension and Retiree Health Benefit PlansTotalTotal Equity
December 31, 2019373.0 $— $5,637 $79 $— $(198)$25 $(173)$5,543 
Net loss— — — (574)— — — — (574)
Adoption of Accounting Standards Update (ASU) 2016-13
— — — (1)— — — — (1)
Other comprehensive income (loss), net of tax— — — — (61)558 (21)476 476 
Separation activities (1)
— — 38 — — — — — 38 
Stock-based compensation— — 47 — — — — — 47 
Issuance of stock under employee stock plans, net1.0 — (15)— — — — (15)
Issuance of common stock and tangible equity units, net of issuance costs25.0 — 1,220 — — — — — 1,220 
Issuance of stock to Bayer for acquisition, net of issuance costs72.9 — 1,723 — — — — — 1,723 
December 31, 2020471.9 — 8,650 (496)(61)360 303 8,457 
Net loss— — — (483)— — — — (483)
Other comprehensive income (loss), net of taxes— — — — 86 (613)15 (512)(512)
Stock-based compensation— — 66 — — —  — 66 
Issuance of stock under employee stock plans, net1.2 — (20)— — — — — (20)
December 31, 2021473.1 — 8,696 (979)25 (253)19 (209)7,508 
Net loss— — — (78)— — — — (78)
Other comprehensive income (loss), net of taxes— — — — 157 (419)79 (183)(183)
Stock-based compensation— — 58 — — — — — 58 
Issuance of stock under employee stock purchase plan0.1 — — — — — — 
Issuance of stock under employee stock plans, net1.0 — (17)— — — — — (17)
December 31, 2022474.2 $— $8,738 $(1,057)$182 $(672)$98 $(392)$7,289 
Common StockAccumulated Other Comprehensive Income (Loss)
SharesAmountAdditional Paid-in CapitalNet Parent Company InvestmentRetained EarningsForeign Currency TranslationDefined Benefit Pension and Retiree Health Benefit PlansTotalTotal Equity
January 1, 2017293.3  $—  $—  $7,474.3  $—  $(437.3) $(19.6) $(456.9) $7,017.4  
Net (loss)—  —  —  (310.7) —  —  —  —  (310.7) 
Other comprehensive income (loss), net of tax—  —  —  —  —  210.1  (9.8) 200.3  200.3  
Transfers (to)/from Lilly, net—  —  —  873.3  —  —  —  —  873.3  
December 31, 2017293.3  —  —  8,036.9  —  (227.2) (29.4) (256.6) 7,780.3  
Net income—  —  —  70.1  16.4  —  —  —  86.5  
Adoption of Accounting Standards Update 2016-16—  —  —  (0.3) —  —  —  —  (0.3) 
Other comprehensive income (loss), net of tax—  —  —  —  —  (47.1) 25.4  (21.7) (21.7) 
Transfers (to)/from Lilly, net—  —  —  (226.3) —  —  —  —  (226.3) 
Separation adjustments (1)
—  —  —  43.5  —  56.1  —  56.1  99.6  
Issuance of common stock72.3  —  1,659.7  —  —  —  —  —  1,659.7  
Consideration to Lilly in connection with Separation—  —  (4,194.9) —  —  —  —  —  (4,194.9) 
Reclassification of net parent company investment—  —  7,923.9  (7,923.9) —  —  —  —  —  
Stock compensation—  —  1.8  —  —  —  —  —  1.8  
Capital contribution from Lilly—  —  12.8  —  —  —  —  —  12.8  
December 31, 2018365.6  —  5,403.3  —  16.4  (218.2) (4.0) (222.2) 5,197.5  
Net income—  —  —  —  67.9  —  —  —  67.9  
Other comprehensive income, net of tax—  —  —  —  —  19.8  28.7  48.5  48.5  
Separation activities (2)
—  —  (51.2) —  —  —  —  —  (51.2) 
Stock compensation—  —  40.7  —  —  —  —  —  40.7  
Issuance of stock under employee stock plans, net0.1  —  —  —  —  —  —  —  —  
Issuances of stock in connection with Aratana acquisition: (3)
Issuance to Aratana shareholders for acquisition7.2  —  238.0  —  —  —  —  —  238.0  
Accelerated vesting of equity awards0.1  —  3.6  —  —  —  —  —  3.6  
Other—  —  1.9  —  —  —  —  —  1.9  
December 31, 2019373.0  $—  $5,636.3  $—  $84.3  $(198.4) $24.7  $(173.7) $5,546.9  

(1) See Note 3: ImpactRepresent amounts associated with transactions between us and Lilly, related primarily to the completion of Separation for further discussion.the local country asset purchases, the finalization of assets and liabilities associated with the legal separation from Lilly, centralized cash management, and resulting impacts on deferred tax assets, that occurred subsequent to our initial public offering.
(2) See Note 20: Related Party Agreements and Transactions for further discussion.
(3) See Note 6: Acquisitions for further discussion.
See notes to consolidated and combined financial statements.

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Elanco Animal Health Incorporated
Consolidated and Combined StatementStatements of Cash Flows
(in millions)
Year Ended December 31,
201920182017
Cash Flows from Operating Activities
Net income (loss)$67.9  $86.5  $(310.7) 
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization314.5  296.0  318.4  
Change in deferred income taxes0.1  (60.7) (13.4) 
Stock-based compensation expense49.4  26.0  25.0  
Asset impairment charges32.6  120.5  110.6  
Gain on sale of assets—  (0.8) (19.6) 
Other non-cash operating activities, net(12.7) 49.0  10.0  
Other changes in operating assets and liabilities, net of acquisitions and divestitures:
Receivables(172.4) (122.0) 48.4  
Inventories(33.1) (20.1) (39.0) 
Other assets7.0  (3.2) 52.5  
Accounts payable and other liabilities(29.2) 116.1  (8.4) 
Net Cash Provided by Operating Activities224.1  487.3  173.8  
Cash Flows from Investing Activities
Purchases of property and equipment(140.4) (134.5) (98.6) 
Disposals of property and equipment0.3  9.4  37.6  
Purchases of software(57.0) (2.0) (18.5) 
Cash paid for acquisitions, net of cash acquired(32.8) —  (882.1) 
Other investing activities, net(4.9) 0.1  (3.0) 
Net Cash Used for Investing Activities(234.8) (127.0) (964.6) 
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt (Note 9)—  2,500.0  —  
Repayments of borrowings (Note 9)(121.1) (7.5) —  
Proceeds from issuance of common stock (Note 1)—  1,659.7  —  
Debt issuance costs—  (24.5) —  
Consideration paid to Lilly in connection with the Separation (Note 1)(191.6) (3,991.3) —  
Other financing activities, net1.6  (17.2) (0.8) 
Other net transactions with Lilly6.3  (154.4) 848.3  
Net Cash Provided by (Used for) Financing Activities(304.8) (35.2) 847.5  
Effect of exchange rate changes on cash and cash equivalents(16.9) 29.0  7.9  
Net (decrease) increase in cash, cash equivalents and restricted cash(332.4) 354.1  64.6  
Cash, cash equivalents and restricted cash at January 1677.5  323.4  258.8  
Cash, cash equivalents and restricted cash at December 31$345.1  $677.5  $323.4  

December 31,
201920182017
Cash and cash equivalents$334.0  $474.8  $323.4  
Restricted cash (Note 20)11.1  202.7  —  
Cash, cash equivalents and restricted cash at December 31$345.1  $677.5  $323.4  
Year Ended December 31,
202220212020
Cash Flows from Operating Activities
Net loss$(78)$(483)$(574)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization682 716 517 
Deferred income taxes(57)(148)(114)
Stock-based compensation expense59 66 47 
Asset impairment and write-down charges81 345 25 
Loss (gain) on sale of assets(51)
Loss (gain) on divestitures(3)(170)
Inventory fair value step-up amortization— 64 90 
Loss on extinguishment of debt20 — 
Proceeds from interest rate swap settlements207 — — 
Other non-cash operating activities, net(2)17 
Other changes in operating assets and liabilities, net of acquisitions and divestitures:
Receivables14 (35)24 
Inventories(269)29 (95)
Other assets(109)25 (122)
Accounts payable and other liabilities(98)(116)362 
Other changes in operating assets and liabilities— — 
Net Cash Provided by (Used for) Operating Activities452 483 (41)
Cash Flows from Investing Activities
Purchases of property and equipment(137)(126)(135)
Disposals of property and equipment— 17 72 
Purchases of software(34)(33)(176)
Purchases of intangible assets(13)(38)— 
Cash paid for acquisitions, net of cash acquired— (342)(5,001)
Divestiture proceeds13 — 435 
Other investing activities, net(8)(8)26 
Net Cash Used for Investing Activities(179)(530)(4,779)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt425 500 4,804 
Proceeds from revolving credit facility563 500 — 
Repayments of long-term borrowings(677)(573)(952)
Repayments of revolving credit facility(813)(250)— 
Proceeds from issuance of common stock and tangible equity units— — 1,220 
Debt issuance costs(2)(2)(102)
Early redemption and tender premiums paid(14)— — 
Funding related to construction of corporate headquarters(15)64 — 
Other financing activities, net(16)(29)(16)
Net Cash Provided by (Used for) Financing Activities(549)210 4,954 
Effect of exchange rate changes on cash and cash equivalents(17)(31)27 
Net increase (decrease) in cash, cash equivalents and restricted cash(293)132 161 
Cash, cash equivalents and restricted cash at January 1638 506 345 
Cash, cash equivalents and restricted cash at December 31$345 $638 $506 
See notes to consolidated and combined financial statements.


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Elanco Animal Health Incorporated
Notes to Consolidated and Combined Financial Statements
(Tables present dollars and shares in millions, except per-share and per-unit data)
Note 1. Nature of Business and Organization
Nature of BusinessBackground
Elanco was formed as a wholly-owned subsidiary of Lilly, and is a global animal health company that innovates, develops, manufactures and markets products for companionpets and foodfarm animals. We offer a diverse portfolio of more than 125approximately 200 brands to pet owners, veterinarians and foodfarm animal producers in more than 90 countries.
Organization Our products are generally sold worldwide directly to wholesalers, distributors, and independent retailers. Certain products are also sold directly to farm animal producers and veterinarians. We have a diversified business of products across species consisting of: dogs and cats (collectively, pet health) and cattle, poultry, swine and aqua (collectively, farm animal).
Elanco Parent was formedincorporated in Indiana on September 18, 2018, asand prior to that was a wholly-owned subsidiary of Lilly, to serve as the ultimate parent company of substantially all of the animal health businessesbusiness unit of Lilly.
On September 24, 2018, Elanco ParentAugust 1, 2020 and August 27, 2021, we completed an IPO resulting in the issuanceacquisitions of 72.3 million sharesBayer Animal Health and KindredBio, respectively. See Note 6: Acquisitions, Divestitures and Other Arrangements for additional information.

Note 2. Revision of its common stock (including shares issued pursuant to the underwriters’ option to purchase additional shares), which represented 19.8% of the outstanding shares, at $24 per share resulting in total net proceeds, after underwriting discounts and commissions, of $1.7 billion.  Previously Issued Consolidated Financial Statements
In connection with the completionpreparation of our financial statements as of and for the IPO, throughyear ended December 31, 2022, a seriescumulative error was identified relating to the valuation allowance for taxes for a Southeast Asia affiliate. While immaterial to prior years, correcting this cumulative error in 2022 would have caused the 2022 financial statements to be materially misstated. The cumulative impact related to the Southeast Asia tax matter was a $20 million increase in income tax expense, of which $14 million and $6 million related to 2021 and 2020, respectively. In conjunction with making these corrections, we made other adjustments to the prior years to revise uncorrected errors. These corrections resulted in a $4 million cumulative adjustment to equity as of January 1, 2020. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, and Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections, we assessed the materiality of these corrections and concluded that they were not material, individually or in the aggregate, to our prior period consolidated financial statements. Therefore, amendments of previously filed reports are not required.

The following tables represent revisions to our consolidated statements of operations, consolidated statements of equity and other transactions, Lilly transferredconsolidated statements of cash flows for the years ended December 31, 2021 and 2020, as well as revisions to Elanco Parent the animal health businesses that form its business. In exchange, Elanco Parent has paidour consolidated balance sheet as of December 31, 2021, in accordance with ASC 250. The revisions to Lilly approximately $4.2 billion, which includedour consolidated statements of comprehensive loss were limited to the net proceeds fromloss revisions outlined below. We have also updated all accompanying notes and disclosures impacted by the IPO,revisions. The tables below include only those line items that include revisions to previously reported amounts. Revisions to our unaudited interim consolidated financial statements for the net proceeds from the debt offering completed by Elanco Parentaffected prior periods are disclosed in August 2018 and the term loan facility entered into by Elanco Parent in September 2018 (see Note 9: Debt). These transactions are collectively referred to herein as the Separation.21: Selected Quarterly Data.
On February 8, 2019, Lilly announced an exchange offer whereby Lilly shareholders could exchange all or a portion






















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Table of Lilly common stock for sharesContents
Consolidated Statements of Elanco common stock owned by Lilly. The dispositionOperations

 Year Ended December 31, 2021Year Ended December 31, 2020
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Revenue$4,765 $(1)$4,764 $3,273 $(2)$3,271 
Cost of sales2,134 (2)2,132 1,667 — 1,667 
Research and development369 — 369 327 329 
Marketing, selling and administrative1,404 (1)1,403 996 997 
Asset impairment, restructuring and other special charges628 634 623 — 623 
Loss before income taxes(567)(4)(571)(672)(5)(677)
Income tax benefit(95)(88)(112)(103)
Net loss(472)(11)(483)(560)(14)(574)
Loss per share:
Basic$(0.97)$(0.02)$(0.99)$(1.27)$(0.03)$(1.30)
Diluted$(0.97)$(0.02)$(0.99)$(1.27)$(0.03)$(1.30)
Weighted average shares outstanding:
Basic487.2 487.2 487.2 441.4 441.4 441.4 
Diluted487.2 487.2 487.2 441.4 441.4 441.4 

Consolidated Balance Sheet
December 31, 2021
As ReportedRevisionsAs Revised
Inventories$1,373 $(2)$1,371 
Total current assets3,276 (2)3,274 
Other noncurrent assets387 390 
Property and equipment, net1,061 (6)1,055 
Total assets16,483 (5)16,478 
Accounts payable418 (2)416 
Sales rebates and discounts316 319 
Other current liabilities430 433 
Total current liabilities1,643 1,647 
Deferred taxes745 20 765 
Other noncurrent liabilities261 262 
Total liabilities8,945 25 8,970 
Accumulated deficit(949)(30)(979)
Total equity7,538 (30)7,508 
Total liabilities and equity16,483 (5)16,478 








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Table of Elanco shares was completed on March 11, 2019 and resulted in the full separationContents
Consolidated Statements of Elanco along with the disposalEquity

 Additional Paid-In CapitalRetained Earnings (Accumulated Deficit)
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
December 31, 2019$5,636 $$5,637 $84 $(5)$79 
Net loss— — — (560)(14)(574)
Stock-based compensation48 (1)47 — — — 
December 31, 20208,650 — 8,650 (477)(19)(496)
Net loss— — — (472)(11)(483)
December 31, 20218,696 — 8,696 (949)(30)(979)

Consolidated Statements of Lilly's entire ownership and voting interest in Elanco.Cash Flows

December 31, 2021December 31, 2020
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Net loss$(472)$(11)$(483)$(560)$(14)$(574)
Deferred income taxes(154)(148)(125)11 (114)
Stock-based compensation expense66 — 66 48 (1)47 
Asset impairment and write-down charges339 345 25 — 25 
Receivables(25)(10)(35)14 10 24 
Inventories27 29 (95)— (95)
Other assets22 25 (123)(122)
Accounts payable and other liabilities(120)(116)369 (7)362 

Note 2.3. Basis of Presentation
We have prepared the accompanying consolidated and combined financial statements in accordance with accounting principles generally accepted in the United States (GAAP). In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for fair presentation of the results of operations for the periods shown. The accounts of all wholly-owned and majority-owned subsidiaries are included in the consolidated financial statements, and allAll intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior periods in the unaudited condensed consolidated and combined financial statements and accompanying notes to conform with current presentation.
In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. We issued our financial statements by filing with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing.
For the periods after Separation, the financial statements are prepared on a consolidated basis and reflect the results of operations, comprehensive income, financial position, equity and cash flows resulting from our operations as an independent company. For periods prior to Separation, our financial statements are combined, have been prepared on a standalone basis, and are derived from Lilly's consolidated financial statements and accounting records. The consolidated and combined financial statements reflect the financial position, results of operations and cash flows related to the animal health businesses that were transferred to Elanco Parent and are prepared in conformity with GAAP.
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The combined financial statements include the attribution of certain assets and liabilities that historically have been held at the Lilly corporate level but which are specifically identifiable or attributable to the businesses that have been transferred to Elanco Parent. All intercompany transactions and accounts within Elanco have been eliminated. All transactions between us and Lilly are considered to be effectively settled in the combined financial statements at the time the intercompany transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the combined statements of cash flows as a financing activity and in the consolidated and combined statement of equity as net parent company investment.
Prior to Separation, these combined financial statements include an allocation of expenses related to certain Lilly corporate functions, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations, prior to IPO. These expenses were allocated to us based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis of revenue, headcount and other measures. We consider the expenses methodology and results to be reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred had we operated as an independent, publicly traded company for the periods presented. It is impractical to estimate what the standalone costs of Elanco would have been in the historical periods. After the Separation, a TSA between Lilly and Elanco went into effect. Under the terms of the TSA, we will be able to use these Lilly services for a fixed term established on a service-by-service basis. We are paying Lilly mutually agreed upon fees for the Lilly services provided under the TSA. Our consolidated and combined financial statements reflect the charges for Lilly services after the IPO. See Note 20: Related Party Agreements and Transactions for additional details.
The income tax amounts in the combined financial statements have been calculated based on a separate return methodology and presented as if our operations were separate taxpayers in the respective jurisdictions. We file income tax returns in the U.S. federal jurisdiction and various state, local and non-U.S. jurisdictions. Prior to full separation, certain of these income tax returns were filed on a consolidated or combined basis with Eli Lilly and Company and/or its subsidiaries.
Prior to Separation, Lilly maintained various benefit and combined stock-based compensation plans at a corporate level and other benefit plans at a country level. Our employees participated in such programs and the portion of the cost of those plans related to our employees is included in our financial statements. However, the consolidated balance sheets do not include any equity issued related to stock-based compensation plans or any net benefit plan obligations unless the benefit plan covers only our dedicated employees or where the legal obligation associated with the benefit plan transferred to Elanco. Upon Lilly's full divestiture of Elanco in March 2019, all Lilly share-based awards held by our employees were converted into awards that will be settled in Elanco shares.
Prior to Separation, the equity balance in the combined financial statements represents the excess of total assets over liabilities, including intercompany balances between Elanco and Lilly (net parent company investment) and accumulated other comprehensive income (loss). Net parent company investment is primarily impacted by contributions from Lilly which are the result of treasury activities and net funding provided by or distributed to Lilly. See Note 20: Related Party Agreements and Transactions for further information.

Note 3. Impact of Separation
In connection with the Separation, we issued $2.0 billion aggregate principal amount of senior notes in a private placement, and we also entered into a $750.0 million senior unsecured revolving credit facility and $500.0 million senior unsecured term credit facility. See Note 9: Debt for further information. In connection with the Separation, we entered into various agreements with Lilly, including a master separation agreement, a tax matters agreement and the TSA.
In connection with the terms of the Separation, there were certain assets and liabilities included in the pre-Separation balance sheet that were retained by Lilly and there were certain assets not included in the pre-Separation balance sheet that were transferred to us. The cumulative adjustment to the historical balance sheet increased net assets and total equity by approximately $99.6 million. The impact on net assets primarily represents the elimination of certain income tax assets and liabilities and the contribution of additional assets.
We will also continue to have certain ongoing relationships with Lilly as described in Note 20: Related Party Agreements and Transactions.
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Note 4. Summary of Significant Accounting Policies
Revenue recognition
Effective January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) and other related updates. The new standard has been applied to contracts for which performance had not been completed as of the date of adoption. Revenue presented for periods prior to 2018 was accounted for under previous standards and has not been adjusted. Revenue and net income for the years ended December 31, 2019 and 2018 do not differ materially from amounts that would have resulted from application of the previous standards.
Product Sales
We recognize revenue primarily from product sales to customers. Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which is generally is atonce the time we shipgoods have shipped and the product to the customer.customer has assumed title. Payment terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from 30 to 120 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a financing component as we expect, at contract inception, that the period between when we transfer control of the product and when we receive payment will be one year or less. Any exceptions are either not material or we collect interest for payments made after the due date. For arrangements with contract manufacturing organizationsorganization (CMO), arrangements, we recognize revenue over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or service. Revenue is recognized over time when we are creating or enhancing an asset that the customer controls. In this instance, revenue is recognized as the asset is created or enhanced or our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed.
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Provisions for rebates and discounts, as well as returns are established in the same period the related sales are recognized. We generally ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.
Significant judgments must be made in determining the transaction price for sales of products related to anticipated rebates, and discounts and returns. The following describe the most significant of these judgments:
Sales Rebates and Discounts - Background and Uncertainties
MostMany of our products are sold to wholesale distributors. We initially invoice our customers contractual list prices. Contracts with direct and indirect customers may provide for various rebates and discounts that may differ in each contract. As a consequence, to determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we must estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Judgments are required in making these estimates.
The rebate and discount amounts are recorded as a deduction to arrive at our net product sales. We estimate these accruals using an expected value approach.
In determining the appropriate accrual amount, we consider 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. Although we accrue a liability for rebates related to these programs at the time the sale is recorded, the rebate related to that sale is typically paid up to six months after the rebate or incentive period expires. Because of this time lag, in any particular period rebate adjustments may incorporate revisions of accruals for several periods.
Sales Returns - Background and Uncertainties
We estimate a reserve for future product returns related to product sales using an expected value approach. This estimate is based on several factors, including: local returns policies and practices; returns as a
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percentage of revenue; an understanding of the reasons for past returns; estimated shelf life by product; and estimateestimates of the amount of time between shipment and return. Adjustments to the returns reserve have been and may in the future be required based on revised estimates to our assumptions, which would have an impact on our consolidated results of operations. We record the return amountsReserves for sales returns are recorded concurrently with revenue recognition as a deduction to arrive at our net product sales.sales and a liability.
Research and development expenses and acquired in-process research and developmentDevelopment Expenses
Research and development expenses include the following:
Research and development costs, which are expensed as incurred.incurred; and

Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued when the event requiring payment of the milestone occurs.
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Goodwill and Intangible Assets
We have historically performed our annual goodwill and indefinite-lived intangible asset impairment assessment as of the last day of the fourth fiscal quarter of each year. During the fourth quarter of 2022, we elected to change the date of our annual impairment assessment from December 31Acquired in-process researchst to October 1st. The change was made to more closely align the impairment assessment date with our annual planning and development (IPR&D) expense, which includesbudgeting process as well as our long-term planning and forecasting process. We have determined that this change in accounting principle is preferable and will not affect the initialconsolidated financial statements. Pursuant to this change in accounting principle, in 2022 we performed an impairment assessment as of the first day of our fourth fiscal quarter. The change in impairment assessment date did not delay or avoid an impairment charge. This change was not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change has been applied prospectively. See Note 12: Goodwill and Intangibles for further accounting policy information.
Advertising Expenses
Costs associated with advertising are generally expensed as incurred and are included in marketing, selling and administrative expenses in the consolidated statements of operations. The costs of IPR&D projects, acquired directlyTV, radio, and other electronic media and publications are expensed when the related advertising occurs. Advertising and promotion expenses totaled approximately $201 million and $248 million in a transaction other than a business combination, that do not have an alternative future use.2022 and 2021, respectively. Expenses increased significantly in 2021 as compared to prior years due to the 2020 acquisition of Bayer Animal Health.
Foreign Currency Translation
Operations in our subsidiaries outside the U.S. are recorded in the functional currency of each subsidiary which is determined by a review of the environment where each subsidiary primarily generates and expends cash. The results of operations for our subsidiaries outside the U.S., where the U.S. dollar is not the functional currency, are translated from functional currencies into U.S. dollars using the weighted average currency rate for the period. Assets and liabilities are translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries are recorded in other comprehensive income (loss).
Other significant accounting policiesSignificant Accounting Policies
Our other significant accounting policies are described in the remaining appropriate notes to the combinedconsolidated financial statements.
Implementation of New Financial Accounting Pronouncements
The following table provides a brief description of an accounting standard that was effective January 1, 20192022 and was adopted on that date:
StandardDescriptionEffect on the financial statements or other significant matters
Accounting Standards Update 2016-02,ASU 2021-10, LeasesGovernment Assistance (Topic 832)
The amendments in this update require annual disclosure of transactions with governments that are accounted for by applying a grant or contribution model. The new pronouncement requires entities to provide information about the nature, terms and conditions associated with the transactions and the financial statement line items affected.This standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures about leasing arrangements.
We adopted the standard on January 1, 2019 using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transition practical expedients. UponThe adoption of the standard, we recorded $84.9 million of right-of-use assets and $85.3 million of operating lease liabilities on our consolidated balance sheet. Adoption of this standardguidance did not have a material impact on our consolidated statement of operations for the year ended December 31, 2019. See Note 13: Leases for further information.

financial statements.
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The following table provides a brief description of thean accounting standardsstandard applicable to us that havehas not yet been adopted:
StandardDescriptionEffective DateEffect on the financial statements or other significant matters
Accounting Standards Update 2016-13,ASU 2020-04, Financial InstrumentsReference rate reform (Topic 848) - Credit Losses (Topic 326): MeasurementFacilitation of Credit Lossesthe Effects of Reference Rate Reform on Financial InstrumentsReporting; ASU 2021-01, Reference Rate Reform (Topic 848): Scope; ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2021-01 clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions. ASU 2022-06 extends the period of time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from December 31, 2022 to December 31, 2024.This standard modifiesAdoption of the impairment model by requiring entities to useguidance is optional and effective as of March 12, 2020 through December 31, 2024. Adoption is permitted at any time during the period on a forward-looking approach based on expected losses to estimateprospective basis.Our current credit losses on certain types of financial instruments, including trade receivables. This may resultfacilities reference London Inter-Bank Offered Rate (LIBOR) as a benchmark rate. The underlying credit agreements include provisions which outline criteria for establishing a consistent replacement benchmark rate in the earlier recognition of allowances for losses.This standardevent that LIBOR is effective January 1, 2020, with early adoption permitted. We intenddiscontinued. Therefore, it is unlikely that we will need to adopt this standard on that date.We do not expect that the adoption of this standardoptional guidance. However, we will have a material impact on our consolidated financial statements based on financial instruments currently held.
Accounting Standards Update 2018-15, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
This guidance aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurredcontinue to develop or obtain internal-use software.This standard is effective January 1, 2020, with early adoption permitted. We intend to adopt this standard on that date.Adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
Accounting Standards Update 2019-12, Simplifying the Accounting for Income Taxes
The amendments in this update simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations.This standard is effective January 1, 2021, with early adoption permitted. We intend to adopt this standard on that date.We are currently evaluatingevaluate the impact of adoption of the new standard on our consolidated financial statements.as reference rate reform activities occur.

Note 5. Revenue
Our sales rebates and discounts are based on specific agreementsagreements. The most significant of our sales rebate and discount programs in terms of accrual and payment amounts, percentage of our products that are sold via these programs, and level of judgment required in estimating the appropriate transaction price, relate to our programs in the U.S., France and the majority relate to sales in the U.S.U.K. As of December 31, 20192022 and 2018,2021, the aggregate liability for sales rebates and discounts in the U.S. representsfor these countries represented approximately 71%77% and 70%74%, respectively, of our total liability with the next largest country representing approximately 8% of our total liability for 2019 and 2018.liability.
The following table summarizes the activity in theour global sales rebates and discounts liability in the U.S.:liability:
Year Ended December 31,Year Ended December 31,
2019201820222021
Beginning balanceBeginning balance$118.5  $114.8  Beginning balance$319 $297 
Reduction of revenueReduction of revenue316.3  221.0  Reduction of revenue682 674 
PaymentsPayments(284.4) (217.3) Payments(662)(645)
Foreign currency translation adjustmentsForeign currency translation adjustments(15)(7)
Ending balanceEnding balance$150.4  $118.5  Ending balance$324 $319 
Adjustments to revenue recognized as a result of changes in estimates for the judgments described above during the years ended December 31, 20192022, 2021 and 20182020 for product shipped in previous periods were not material.
Actual global product returns were 0.2% and 0.6%approximately 1% of net revenue for the years ended December 31, 20192022, 2021 and 2018, respectively, and have not fluctuated significantly as a percentage of revenue.2020.
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Disaggregation of Revenue
The following table summarizes our revenue disaggregated by product category for the years ended December 31:category:
201920182017
Companion Animal Disease Prevention$787.9  $804.6  $660.2  
Companion Animal Therapeutics348.0  283.1  260.8  
Food Animal Future Protein & Health745.1  711.2  649.2  
Food Animal Ruminants Swine1,110.3  1,174.0  1,175.0  
Strategic Exits(1)
79.7  93.9  143.8  
Total Revenue$3,071.0  $3,066.8  $2,889.0  
20222021
Pet Health$2,138 $2,350 
Farm Animal:
Cattle944 980 
Poultry716 744 
Swine384 464 
Aqua175 144 
Total Farm Animal2,219 2,332 
Contract Manufacturing (1)
54 82 
Revenue$4,411 $4,764 
(1)Represents revenue from business activitiesarrangements in which we manufacture products on behalf of a third party, including supply agreements associated with divestitures of products related to the acquisition of Bayer Animal Health
Pet Health, Farm Animal and Contract Manufacturing revenues were $1,356 million, $1,835 million and $80 million, respectively, for the year ended December 31, 2020. Further disaggregation of revenue is not available due to data limitations caused by our acquisition of Bayer Animal Health during that period. While we are able to accumulate certain Farm Animal species revenue in 2020 for internal reporting purposes, it requires significant estimations and assumptions, some of which rely on data that is neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have either exited or made a strategic decisionsufficiently reliable data to exit.disclose Farm Animal revenue by species in 2020.

Note 6. Acquisitions, Divestitures and Other Arrangements
During the year ended December 31, 2019,2021 and 2020, we completed the acquisitions of all outstanding shares of Aratana Therapeutics, Inc. (Aratana)KindredBio and Prevtec Microbia Inc. (Prevtec). During 2017, we completed the acquisition of BIVIVP.Bayer Animal Health, respectively. These transactions were accounted for as business combinations under the acquisition method of accounting. Under thisThe acquisition method therequires, among other things, that assets acquired and liabilities assumed were recordedin a business combination be recognized at their respective fair values as of the acquisition date in our consolidated and combined financial statements.date. The determination of estimated fair value requiredrequires management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of these acquisitions are included in ourthe consolidated and combined financial statements from the dates of acquisition.
Aratana Therapeutics, Inc.KindredBio Acquisition
On July 18, 2019,August 27, 2021, we acquired Aratana,KindredBio, a pet therapeuticspublicly traded biopharmaceutical company that developed innovative biologics focused on innovative therapies for dogssaving and cats, for stock and cash-based contingent value rights. Aratana isimproving the creatorlives of the canine osteoarthritis medicine,Galliprant, the rights to which we acquired in 2016.pets. The acquisition enhancesfurther accelerates our pet health expansion, particularly by expanding our presence in the areas of appetite stimulants in dogs, pain relief in dogs and cats, and treatments of other conditions in the U.S. and internationally.dermatology. In connection with the acquisition,merger agreement, we issued approximately 7.2 million sharesacquired all outstanding stock of KindredBio for $9.25 per share, or an aggregate cash purchase consideration of $444 million. We utilized our revolving credit facility and cash on hand to finance the acquisition.
In May 2021, we signed an agreement with KindredBio to acquire exclusive global rights to KIND-030, a monoclonal antibody that is being developed for the treatment and prevention of canine parvovirus. We calculated the fair value of $238.0 million to Aratana shareholders, based on our stock price on the last trading day immediately prior toliability associated with that agreement using an income approach leveraging the closing date. The purchase consideration also included up to $12 million in contingent value rights, which represent the rights of Aratana shareholders to receive a contingent payment of $0.25 per share in cash upon the achievement of a specifiedestimated sales royalty, sales milestone as outlined in the merger agreement. We calculated an immaterial fair value for the contingent value rights using the Monte Carlo simulation model.
Contingent consideration liabilities that we previously recorded for future royalty and technical milestone payments in relation toavoided, and settled the 2016 acquisition of rights to Galliprant were settled$29 million liability upon the closing of our acquisition of Aratana. The liabilities were valued at $84.7KindredBio. Refer to Note 7: Asset Impairment, Restructuring and Other Special Charges for further discussion.
We incurred transaction costs in connection with the KindredBio acquisition of $6 million as of the acquisition date using the Monte Carlo simulation model. The resulting $7.5 million loss upon settlement was recorded in Other - net, expense in the consolidated and combined statement of operations forduring the year ended December 31, 2019.2021. Transaction costs were primarily associated with legal and other professional services related to the acquisition and are reflected within asset impairment, restructuring and other special charges in the consolidated statements of operations.
Revenue and loss from KindredBio included in the consolidated statements of operations since the date of acquisition were immaterial.
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The following table summarizes the preliminary amounts recognized forfair value of assets acquired and liabilities assumed as of the acquisition date:
Estimated Fair Value at July 18, 2019August 27, 2021
Cash and cash equivalents$26.431 
InventoriesOther net working capital10.313 
AcquiredProperty and equipment33 
Intangible assets, primarily acquired in-process research and development (IPR&D)31.9333 
Marketed products (1)
36.7 
Other intangible assets (1)
13.2 
Other assets and liabilities -Deferred income taxes, net24.0 (30)
Total identifiable net assets142.5380 
Goodwill(2)
10.8 35 
Settlement of existing contingent consideration liabilitiesliability related to previous license agreement84.729 
Total consideration transferred$238.0444 
(1) These intangibleThe valuation of assets acquired and liabilities assumed was finalized during the third quarter of 2022. The measurement period adjustments recorded in 2022 and 2021, which are being amortizedwere made to reflect the facts and circumstances in existence as of the acquisition date, primarily related to the finalization of our fair value assessment of property and equipment, changes in the estimated fair value of acquired IPR&D and minor tax and working capital adjustments. The net impact of these adjustments was not material.
Property and equipment is mostly comprised of land, buildings, equipment (including laboratory equipment, furniture and fixtures, and computer equipment), and construction in progress. The estimated fair value of real and personal property was determined using the sales comparison data valuation technique, to the extent that market data for similar assets was available. When market pricing data was not available for a given asset or asset class, the direct replacement cost method was used.
The estimated fair values of acquired IPR&D were determined using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on a straight-line basismarket participant expectations of the cash flows an asset would generate over theirits remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated useful lives, are expectednet cash flows for each year for each asset (including revenues, cost of sales, R&D expenses, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to have a weighted average usefulmeasure the risk inherent in each future cash flow stream, the life cycle of approximately 12.5 years.each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
(2) The goodwill recognized from this acquisition is primarily attributable primarily to KindredBio's assembled workforce and expected synergies from combining the operations of Aratana with our legacy business.synergies. The majority of goodwill associated with this acquisition is not deductible for tax purposes.
Bayer Animal Health Acquisition
On August 1, 2020, we completed the acquisition of Bayer Animal Health. The accountingacquisition has 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. Our product portfolio and pipeline have been enhanced by the addition of Bayer Animal Health, which complements our commercial operations and international infrastructure while expanding our direct to retailer/e-commerce presence.
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Total consideration transferred to Bayer and its subsidiaries for thisthe acquisition is substantially complete, withsummarized as follows:
Cash consideration (1)
$5,054 
Fair value of Elanco common stock (2)
1,724 
Fair value of total consideration transferred$6,778 
(1)Includes initial cash consideration of $5,170 million less working capital and tax adjustments of $116 million.
(2)Represents the exceptionacquisition date fair value of 73 million shares of Elanco common stock at $23.64 per share. Per the terms of the finalizationstock and asset purchase agreement, the number of shares was based on approximately $2.3 billion divided by the 20-day volume-weighted average stock price as of the valuationlast day of intangible assets, tax-related amounts and minor working capital adjustments. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date.
We issued 0.1 million shares and recorded $3.6 million of stock-based compensation expense for the vesting of Aratana equity awards that was accelerated upontrading before the closing of the acquisition during(but subject to a 7.5% symmetrical collar centered on the yearbaseline share number of approximately $2.3 billion divided by an initial share price of $33.60).
We recognized transaction costs related to the acquisition of Bayer Animal Health of $3 million and $267 million for the years ended December 31, 2019.2021 and 2020 respectively. These costs were primarily associated with legal and professional services related to the acquisition and are reflected within asset impairment, restructuring and other special charges in the consolidated statements of operations.
OurThe amount of revenue attributable to Bayer Animal Health included in the consolidated statementstatements of operations since the date of acquisition for the year ended December 31, 2019 included revenues of $10.0 million from Aratana.
Had Aratana been acquired on January 1, 2018, the unaudited pro forma combined revenues of Elanco and Aratana would have been $3.1 billion for both the years ending December 31, 2019 and December 31, 2018, and income before income taxes would have been $63.2 million and $117.7 million for the years ending December 31, 2019 and December 31, 2018, respectively.
Prevtec Microbia Inc.
On July 31, 2019, we acquired Prevtec in a cash transaction for approximately $60.3 million, inclusive of certain post-closing adjustments. Prevtec is a Canadian biotechnology company specializing in the development of vaccines intended to help prevent bacterial diseases in food animals. The acquisition allows us to expand2020 was $592 million. Based on our previous distribution arrangementcurrent operational structure, we have not recorded standalone costs for Coliprotecand is consistent with our efforts to explore innovative antibiotic alternatives.
The purchase consideration included up to $16.3 million in additional cash consideration, contingent uponBayer Animal Health after the achievement of specific sales milestones by December 31, 2021. We have recorded a $4.7 million liability on the consolidated balance sheet asdate of the acquisition date based on the fair value of the contingent consideration as calculated using the Monte Carlo simulation model.
A previously existing $0.7 million receivable owed from Prevtecacquisition. As a result, we are unable to Elancoaccurately determine earnings or loss attributable to Bayer Animal Health UK Limited was settled uponsince the closingdate of our acquisition of Prevtec. The resulting immaterial gain upon settlement was recorded in Other - net, expense in the consolidated and combined statement of operations for the year ended December 31, 2019.
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acquisition.
The following table summarizes the preliminary amounts recognized forfair value of assets acquired and liabilities assumed as of the acquisition date:
Estimated Fair Value at July 31, 2019August 1, 2020
Cash and cash equivalents$0.9169 
Accounts receivable10 
Inventories487 
Prepaid expenses and other current assets60 
Property and equipment0.5315 
Intangible assets:
Acquired in-process research and development2.865 
Marketed products(1)
58.9 3,740 
Assets held for sale138 
Accounts payable and accrued liabilities(237)
Accrued retirement benefits(220)
Other intangible assets1.1 
Othernoncurrent assets and liabilities - net(10.3)(878)
Total identifiable net assets53.93,649 
Goodwill(2)
11.1 3,129 
Total consideration transferred$65.06,778 
(1)The valuation of assets acquired and liabilities assumed was finalized during the second quarter of 2021. The measurement period adjustments recorded during 2021, which were made to reflect the facts and circumstances in existence as of the acquisition date, primarily related to the finalization of our fair value assessment of property and equipment located at the Shawnee, Kansas site (Shawnee), revised cash flow assumptions for marketed products, adjustments related to changes in inventory balances and gross margin assumptions, tax adjustments, and minor working capital adjustments. These adjustments resulted in a decrease to marketed products intangible assets whichof $210 million, a decrease to property and equipment of $32 million, a net increase to working capital accounts and other non-current assets and liabilities of $26 million, and an increase to goodwill of $207 million.
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Inventories comprised of $311 million, $81 million and $95 million in finished products, work in process, and raw materials, respectively. The estimate of fair value of finished products was determined based on net realizable value adjusted for the costs to complete the sales process, a reasonable profit allowance from the sales process, and estimated holding costs. The estimate of fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the sales process, a reasonable profit allowance for the remaining manufacturing and sales process effort, and an estimate of holding costs. The fair value of raw materials was determined to approximate book value. The net fair value step-up adjustment to inventories of $152 million was amortized to cost of sales as the inventory was sold to customers. As of December 31, 2021, the fair value step-up adjustment was fully amortized.
Property and equipment is mostly composed of land, buildings, equipment (including machinery, furniture and fixtures, and computer equipment), and construction in progress. The estimated fair value of real property was determined using the sales comparison data valuation technique and personal property was determined using the direct replacement cost method. The estimated fair value of property and equipment located at the Shawnee, Kansas site was determined using the income approach.
Intangible assets relate to $65 million of IPR&D and $3,740 million of marketed products. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 10 years on a straight-line basisbasis. The estimated fair values of identifiable intangible assets were determined using the income approach. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of sales, R&D expenses, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Assets held for sale include $133 million of intangible assets, consisting of marketed products and IPR&D, and $5 million of inventory related to the divestitures of Drontal™, Profender™ and other products. See the Divestitures section below for further details.
Accrued retirement benefits primarily relate to certain Bayer Animal Health international subsidiaries that have underfunded defined benefit pension plans. We have recorded the fair value of these plans using assumptions and accounting policies similar to those disclosed in Note 19: Retirement Benefits. Upon acquisition, the excess of projected benefit obligation over their estimated useful lives, are expected to havethe fair value of plan assets was recognized as a weighted average useful life of 10 years.liability and previously existing deferred actuarial gains and losses and unrecognized service costs or benefits were eliminated.
(2) The goodwill recognized from this acquisition is attributable primarily to expectedrepresents the value of additional growth platforms and an expanded revenue base as well as anticipated operational synergies and cost savings from combining the operationscreation of Prevtec with our legacy business and future unidentified projects and products.a single combined global organization. The majority of goodwill associated with this acquisition is not deductible for tax purposes.
The accounting for this acquisition is substantially complete, with the exception of the finalization of the valuation of intangible assets, tax-related amounts and minor working capital adjustments. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date.
Boehringer Ingelheim Vetmedica, Inc. Vaccine Portfolio Acquisition
On January 3, 2017, we acquired BIVIVP in a cash transaction for $882.1 million. Under the terms of the agreement, we acquired a manufacturing and research and development site, a U.S. vaccine portfolio including vaccines used for the treatment of bordetella, Lyme disease, rabies and parvovirus, among others.Pro forma financial information (unaudited)
The following table summarizespresents the amounts recognizedestimated unaudited pro forma combined results of Elanco and Bayer Animal Health for assets acquired and liabilities assumedthe year ended December 31, 2020 as ofif the acquisition date:had occurred on January 1, 2019:
Estimated Fair Value at January 3, 20172020
Inventories Revenue(1)
$108.64,439 
Loss before income taxes(680)
The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Elanco and Bayer Animal Health. The supplemental pro forma financial information does not necessarily represent what the combined companies' revenue or results of operations would have been had the acquisitions been completed on January 1, 2019, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Elanco and Bayer Animal Health.
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The unaudited supplemental pro forma financial information reflects primarily pro forma adjustments related to divestitures, fair value estimates for intangibles, property and equipment, and inventory, and interest expense and amortization of debt issuance costs for the debt issuance to finance the acquisition of Bayer Animal Health. The unaudited supplemental pro forma financial information includes transaction charges associated with the acquisition. There are no material, nonrecurring pro forma adjustments directly attributable to the acquisition included in the reported pro forma revenue and loss before income taxes.
Pending Acquisitions
NutriQuest U.S.

On December 17, 2022, we entered into an asset purchase agreement to acquire certain U.S. marketed products, pipeline products and inventory of NutriQuest, LLC (NutriQuest). NutriQuest is a provider of swine, poultry, and dairy nutritional health products to animal producers. Pursuant to the terms and conditions set forth in the asset purchase agreement, total consideration includes a $19 million up-front payment, excluding the value of inventory, to be paid in two installments, as well as up to $85 million of additional cash consideration if specific development, sales, and geographic expansion milestones are achieved. The transaction closed on January 3, 2023, and the accounting for this acquisition was incomplete at the time the consolidated financial statements were issued. We anticipate that this transaction will be accounted for as a business combination under the acquisition method of accounting.

NutriQuest Brazil

On January 22, 2023, we entered into an asset purchase agreement to acquire inventory and distribution rights for certain marketed products and certain other assets of NutriQuest Nutricao Animal Ltda (NutriQuest Brazil). Pursuant to the terms and conditions set forth in the asset purchase agreement, total consideration is $24 million to be paid in two installments, subject to certain post-closing adjustments. The transaction is expected to close during the second quarter of 2023. We anticipate that this transaction will be accounted for as a business combination under the acquisition method of accounting.

Divestitures
Microbiome R&D platform carve-out

In April 2022, we signed an agreement to transfer assets associated with our microbiome R&D platform to a newly created, independent biopharmaceutical company, BiomEdit, focused on developing solutions for animal and human health. As part of the agreement, we retain a non-voting, minority stake in the company. Assets transferred include intellectual property and laboratory equipment. The book values of those assets were not material. In addition, we have entered into transitional services agreements with the company for certain services. We have determined that the disposal of the related net assets does not qualify for reporting as a discontinued operation because it does not represent a strategic shift that has or will have a major effect on our operations and financial results. During the year ended December 31, 2022, we recorded a gain on the disposal of approximately $3 million.

Shawnee and Speke divestitures

During 2021, as part of our strategy to optimize our manufacturing footprint, we announced an agreement with TriRx Pharmaceuticals (TriRx) to sell our manufacturing sites in Shawnee, Kansas (Shawnee) and Speke, U.K. (Speke), including the planned transfer of approximately 600 employees. In connection with these arrangements, we also entered into long-term manufacturing and supply agreements, under which TriRx will manufacture existing Elanco products at both sites upon the closing of the transactions. In August 2021 and February 2022, we completed the sales of our Shawnee and Speke sites, respectively. Upon closing the sale of the Speke site, we recorded a contract asset of $55 million for the favorable supply agreement, which is included in prepaid expenses and other and other noncurrent assets on our consolidated balance sheets. Our fair value assessment for the favorable supply agreement was estimated using a combined income and market approach which incorporated Level 3 inputs. The divestitures did not represent a strategic shift that has or will have a major effect on our operations and financial results, and therefore did not qualify for reporting as discontinued operations. See Note 7: Asset Impairment, Restructuring and Other Special Charges for further information.
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Based on the terms of the agreements, we expect to receive aggregate gross cash proceeds of $78 million from the sales of Shawnee and Speke over a period of three years, which began in the second half of 2022. During the year ended December 31, 2022, we received cash proceeds of $13 million. Receivables for the remaining expected cash proceeds are included in other receivables and other noncurrent assets on our consolidated balance sheets.
Elanco and Bayer Animal Health product divestitures
In connection with advancing our efforts to secure the necessary regulatory clearances for our acquisition of Bayer Animal Health, we signed agreements in 2020 to divest the rights to manufacture and commercialize certain legacy Elanco products. In 2020, we signed agreements to divest the worldwide rights to Osurnia and Vecoxanand the U.S. rights to Capstar. In July 2020, we completed these sales, along with certain other immaterial divestitures. The transactions were accounted for as asset divestitures.
In 2020, we also signed an agreement to divest the worldwide rights to the legacy Elanco products Itrafungol™ and Clomicalm™ in connection with the required disposal of an early stage IPR&D asset. We also made a payment during the year ended December 31, 2021 and accrued for future amounts we are required to pay to the buyer of the IPR&D asset to help fund their development costs for a set period of time. The divestiture closed during 2021. There were no proceeds received from the disposition of these assets and the resulting immaterial impact was recorded in other (income) expense, net in the consolidated statements of operations.
To allow the Bayer Animal Health acquisition to close on a timely basis, we signed agreements to divest the rights to the legacy Bayer Animal Health products Drontal and Profender within the U.K. and European Economic Area as well as other IPR&D. We completed the transactions, which were accounted for as asset divestitures, in August 2020. Drontal, Profender, and the IPR&D rights were acquired as part of the Bayer Animal Health acquisition. The related assets were classified as held for sale on the balance sheet as of the acquisition date and measured at fair value at the time of the acquisition; therefore, no gains were recognized on the sales. During the year ended December 31, 2020, a loss of $7 million was recorded on the sale of IPR&D as recognition of the potential income from the divestiture was constrained by revenue accounting standards.
There were additional marketed and pipeline products that we were required to dispose of in order to comply with regulatory requirements. These divestitures did not have a material effect on our operations, cash flows or financial position.
During the year ended December 31, 2020, we received gross cash proceeds of $435 million and recognized pre-tax gains of $156 million (net of transaction costs of $13 million) relating to the product divestitures described above. Pre-tax gains were included in other (income) expense, net in the consolidated statements of operations.
Assets Held For Sale
Assets considered held for sale in connection with the above divestitures were included in the respective line items on the consolidated balance sheet as follows:
December 31, 2021
Marketed products (2)
297.0 Inventories$31 
Property and equipment,148.2 
Other assets and liabilities — net8.250 
Total identifiable net assets562.0 
Goodwill (3)
320.1 
Total consideration transferred — net of cash acquired held for sale$882.181 
(1) The
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BexCaFe Arrangement

In June 2022, we signed a license agreement with BexCaFe for the development and commercialization of products related to Bexacat, an oral treatment intended to reduce glucose levels in diabetic cats. BexCaFe held the rights to the compound through a license agreement with similar terms and conditions. We will incur all development and regulatory costs associated with the products. Based on the guidance in Accounting Standards Codification (ASC) 810, Consolidation, we determined that BexCaFe represents a variable interest entity and that we are the primary beneficiary of BexCaFe because the terms of the license give us the power to direct the activities that most significantly impact the entity’s economic performance. As a result, we consolidated BexCaFe, a development-stage company with no employees that did not meet the definition of a business, as of the date we signed the license agreement. Upon initial consolidation of BexCaFe, we measured an IPR&D asset at its fair value for inventories include a purchase accounting adjustment to write upof $59 million and recorded liabilities totaling $59 million, which included contingent consideration of $49 million based on the inventory value, which resulted in incremental cost of sales of $42.7 million in 2017. The fair value was determined by estimatingof estimated future milestone payments and sales royalties owed under the expected sales pricelicense agreement. The initial fair value of the inventories, reducedcontingent payments was calculated based on an income approach, with payments adjusted for all costs expectedprobability of success and then discounted to a present value. There is no minimum payout due on the incurred and a profit on those costs.
(2) These intangible assets, which are being amortized on a straight-line basis over their estimated useful lives, were expected to have a weighted average useful life of 10 years.
(3) The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of BIVIVP with our legacy business, future unidentified projects and products,contingent consideration and the assembled workforcemaximum payout related to sales royalties is unlimited. Since BexCaFe did not meet the definition of BIVIVP. Thea business, no goodwill associated with this acquisitionwas recorded and immediately after initial consolidation, we expensed the IPR&D asset because we concluded that it did not have an alternative future use. This amount is deductible for tax purposes.
Our combinedincluded in asset impairment, restructuring, and other special charges in our consolidated statement of operations for the year ended December 31, 2017 included BIVIVP revenues of $216.7 million. We are unable to provide the results of operations attributable to BIVIVP as those operations were substantially integrated into our legacy business.2022.
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Pending Acquisition
Bayer Animal Health Business
In August 2019, we entered into the Purchase Agreement with Bayer, a German corporation,We paid $10 million to acquire Bayer's animal health business. Bayer's animal health business is a provider of products intended to improve the health and well-being of pets and farm animals. This acquisition is expected to expand our Companion Animal product category, advance our planned intentional portfolio mix transformation and create a better balance between our Food Animal and Companion Animal product categories. Pursuant to the Purchase Agreement and subject to the satisfaction of certain customary closing conditions, including the receipt of antitrust approvals and the absence of any law or order enjoining or otherwise prohibiting the transaction in specified jurisdictions, we will purchase Bayer’s animal health business for approximately $5.3 billion in cash and approximately $2.3 billion of our common stock, subject to certain customary adjustments. Unless the parties agree otherwise, the transaction will close no earlier than July 1, 2020, perBexCaFe under the terms of this agreement during the Purchase Agreement. See Note 16: Commitmentsyear ended December 31, 2022. Contingent consideration liabilities of $49 million are included in other current liabilities and Contingenciesother noncurrent liabilities on our consolidated balance sheet as of December 31, 2022. We will make $13 million of payments to BexCaFe in the first quarter of 2023 in connection with development/regulatory milestones achieved upon U.S. FDA approval of the original new animal drug application for discussion regarding certain commitments relatedBexacat in December 2022.

Subsequent to this transaction.the effective date of the license agreement, our consolidated financial statements include the assets, liabilities, operating results and cash flows of BexCaFe. Based on the guidance in ASC 810, income and expense between us and BexCaFe have been eliminated against the income or expense included in the financial statements of BexCaFe. The resulting amounts after the effect of these eliminations were included in our consolidated financial statements for the year ended December 31, 2022 and were not material.

Note 7. Asset Impairment, Restructuring and Other Special Charges
In recent years, we have incurred substantial costs associated with restructuring programs and cost-reduction initiatives designed to achieve a flexible and competitive cost structure. RestructuringAs discussed further below, restructuring activities primarily include charges associated with facility rationalization and workforce reductions. In connection with our recent acquisitions, including the acquisition of Bayer Animal Health, we have also incurred costs associated with executing transactions and integrating acquired operations, which may include expenditures for banking, legal, accounting, and other similar services. In addition, we have incurred costs to stand up our organization as an independent company. All operating functions can be impacted by these actions; therefore, non-cash expenses associated with our tangible and intangible assets can be incurred as a result of revised fair value projections and/or determinations to no longer utilize certain assets in the business on an ongoing basis.
For finite-lived intangible assetassets and other long-lived assets, whenever impairment indicators are present, we calculate the undiscounted value of projected cash flows associated with the asset, or group of assets, and compare it to the carrying amount. If the carrying amount is greater, we record an impairment loss for the excess of book value over fair value. Determinations of fair value can result from a complex series of judgments and rely on estimates and assumptions. See Note 2:3: Basis of Presentation and Note 4: Summary of Significant Accounting Policies for discussion regarding estimates and assumptions.
2021 Restructuring Programs
In 2021, we announced two separate restructuring programs to improve operating efficiencies.
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The actions proposed in January 2021 focused on streamlining processes and delivering increased efficiency in functional areas, while improving the productivity of our investments in innovation. As part of the restructuring plan, we closed our R&D sites in Manukau, New Zealand and Cuxhaven, Germany. We also reduced duplication and optimized structures in U.S. operations, marketing, manufacturing and quality central functions, and administrative areas. The restructuring resulted in the elimination of approximately 315 positions around the world. Activities related to this initiative resulted in net charges of $43 million during the year ended December 31, 2021, primarily consisting of severance costs and other cash charges. Restructuring charges under this program were substantially complete as of December 31, 2021.
The program announced in November 2021 included initiatives to consolidate certain international commercial operations into one organization, integrate our centralized global marketing organization into country level commercial organizations, transform and simplify our R&D organizational structure, and other organizational adjustments. In connection with the proposed restructuring, we eliminated approximately 380 positions. During the year ended December 31, 2021, activities related to this initiative resulted in charges of approximately $86 million, consisting of severance costs. During the year ended December 31, 2022, we recorded adjustments of $9 million to reduce severance accruals resulting from final negotiations and certain restructured employees filling open positions. Restructuring charges under this program were substantially complete as of December 31, 2022.

2020 Restructuring Program
In September 2020, following the closing of the Bayer Animal Health acquisition, we implemented a restructuring program designed to reduce duplication, drive efficiency and optimize our footprint in key geographies. As part of the restructuring plan, we eliminated approximately 900 positions across 40 countries, primarily in the commercial and marketing functions, but also in R&D, manufacturing and quality, and back-office support functions. During the years ended December 31, 2021 and 2020, we recorded favorable adjustments of $15 million and charges of $162 million, respectively. The favorable adjustments reflect adjustments to severance accruals resulting from favorable negotiations and certain restructured employees filling open positions. Charges in 2020 primarily related to severance and asset write-down expenses. Restructuring charges under this program were substantially complete as of December 31, 2021.
Components of asset impairment, restructuring and other special charges for the years ended December 31 are as follows:
201920182017202220212020
Restructuring charges: (1)
Severance and other costs$8.2  $15.5  $162.0  
Facility exit costs—  5.7  31.8  
Restructuring charges (credits):Restructuring charges (credits):
Severance and other costs (credits) (1)
Severance and other costs (credits) (1)
$(9)$110 $155 
Facility exit costs (credits)Facility exit costs (credits)— (3)
Acquisition related charges:Acquisition related charges:Acquisition related charges:
Transaction and integration costs (2)
Transaction and integration costs (2)
144.7  26.5  90.3  
Transaction and integration costs (2)
105 162 424 
Non-cash and other items:Non-cash and other items:Non-cash and other items:
Asset impairment (3)
Asset impairment (3)
15.4  81.9  110.6  
Asset impairment (3)
60 66 17 
Asset write-down (4)
Asset write-down (4)
17.2  —  —  
Asset write-down (4)
21 284 19 
Gain on sale of fixed assets (5)
Gain on sale of fixed assets (5)
—  (0.8) (19.6) 
Gain on sale of fixed assets (5)
— — (4)
Net periodic benefit income (Note 19)Net periodic benefit income (Note 19)— (29)— 
Settlements and other (5)
Settlements and other (5)
41 15 
Total expenseTotal expense$185.5  $128.8  $375.1  Total expense$183 $634 $623 
(1)For the year ended December 31, 2019, these charges2022 credits primarily relate to a new program that will eliminate certain positions across multiple locations and functions, including exiting R&D operations in Prince Edward Island, Canada, ceasing certain manufacturing operations in Wusi, China, and streamlining operations in Speke, England. We expect to substantially complete these restructuring activities by September 2020.
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Foradjustments resulting from the year ended December 31, 2018, these charges primarily relate to a program to streamline international operations, including  shifting focus and resources to priority areas. Among other actions, amounts reflect a change from having a physical location to a distribution model in certain countries in connection with the Separation. These activities were substantially complete asreversal of December 31, 2019.
We historically participated in Lilly’s cost-reduction initiatives, which resulted in restructuring charges in the period prior to our IPO. These restructuring charges include severance and other costsaccruals associated with the reductionNovember 2021 program. 2021 charges mainly represent employee termination costs for restructuring programs announced and initiated in January 2021 and November 2021. These costs were partially offset by the reversal of our workforce, including special termination benefits recognized in 2017severance accruals associated with the U.S. voluntary early retirement program offered by Lilly,January 2021 and September 2020 programs during the period. 2020 restructuring charges mainly represent employee termination costs for cost-reduction and productivity initiatives related to our employees and pension curtailment costs and facility exit costs. We also recorded certain impairment chargesa restructuring program initiated following the acquisition of Bayer Animal Health, partially offset by a favorable true-up of a lease termination related to the activities as described below.a previous restructuring program.
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(2)Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services. Integration costs represent internal and external incremental costs directly related to integrating acquired businesses, including the acquisitions of KindredBio and Bayer Animal Health (e.g., expenditures for consulting, system and process integration, and product transfers), as well as independent company stand-up costs related to the implementation of new systems, programs, and processes dueprocesses.
(3)2022 primarily includes a charge of $59 million related to the Separationexpensing of an IPR&D asset with no alternative future use licensed from Lilly .
(3)Asset impairment charges are associated withBexCaFe during the following:
Forsecond quarter. See Note 6: Acquisitions, Divestitures and Other Arrangements for further discussion. 2021 amounts represent the year ended December 31, 2019, write-off certain IPR&D and manufacturing assets inimpact of adjustments to the US, Canada and Speke, resulting from the adjustment to fair value of property and equipment and intangiblecertain IPR&D assets that were subject to product rationalization.rationalization, including a decision by management to terminate an IPR&D project and fully impair the related asset associated with a farm animal parasiticide. The decision was prompted by unfavorable efficacy results observed during the year. See Note 12: Goodwill and Intangibles for further information.
(4)For2022 primarily includes the year ended December 31, 2018,finalization of the decision to disposewrite-down charge upon the final sale of athe Speke manufacturing facility insite. 2021 primarily includes the U.S., the suspension of commercial activities for Imrestor, the write-off of certain idle assets in a U.S. manufacturing facility and product rationalization.
For the year ended December 31, 2017, intangible asset impairments related to revised projections of fair value due to product rationalization and to a lesser extent competitive pressures.
(4)Asset write-down expenses resulted from theinitial adjustments recorded to write down the Shawnee and Speke assets classified as held for sale as of June 30, 2021 to an amount equal to estimated fair value less costs to sell, as well as adjustments to values of assets sold in relation to the Shawnee manufacturing site sold on August 1, 2021 and assets classified as held for sale in relation to the Speke manufacturing site. See Note 6: Acquisitions, Divestitures and Other Arrangements for further discussion. Also included are charges recorded to write down assets in Belford Roxo, Brazil; Basel, Switzerland; Cuxhaven, Germany; and Manukau, New Zealand that were classified as held and used and held for sale down to their current fair values.value. These charges primarilywere recorded in connection with announced restructuring programs.
(5)2022 includes a $2 million measurement period adjustment to the charge associated with the settlement of a liability for future royalty and milestone payments triggered in connection with our acquisition of KindredBio. See Note 6: Acquisitions, Divestitures and Other Arrangements for further discussion. 2021 includes the initial charge associated with the settlement of the liability for future royalty and milestone payments triggered in connection with our acquisition of KindredBio, accounting and advisory fees related to fixed assetsthe sale of our manufacturing site in Prince Edward Island, Canada; Wusi, ChinaShawnee, and Indianapolis, Indiana. $11.2$10 million of Property and equipment, net in Prince Edward Island, Canada and Indianapolis, Indiana are classified as held for sale.
(5)Representslitigation settlements, partially offset by a gain recorded on the disposaldivestiture of a site that was previously closedan early stage IPR&D asset acquired as part of the acquisition and integration of NovartisBayer Animal Health beginning on January 1, 2015.acquisition. 2020 charges relate to a non-recurring litigation settlement for a matter that originated prior to our separation from Lilly and a one-time expense associated with our agreement to build a new corporate headquarters.
The following table summarizes the activity in our reserves established in connection with restructuring activities:
Exit costsSeveranceTotal
Balance at December 31, 2017$34.9  $43.1  $78.0  
Charges11.7  15.5  27.2  
Separation adjustment(5.9) —  (5.9) 
Reserve adjustment(6.0) —  (6.0) 
Cash paid(25.4) (23.5) (48.9) 
Balance at December 31, 20189.3  35.1  44.4  
Charges—  19.3  19.3  
Reserve adjustment (1)
—  (11.1) (11.1) 
Cash paid(3.9) (27.8) (31.7) 
Balance at December 31, 2019$5.4  $15.5  $20.9  
(1) Reserve adjustment represents the reversal of reserves for severance programs that are no longer active.

Severance
Balance at December 31, 2020$130 
Charges126 
Reserve adjustment(16)
Cash paid(111)
Foreign currency translation adjustments(3)
Balance at December 31, 2021126 
Charges— 
Reserve adjustment(9)
Cash paid(79)
Foreign currency translation adjustments(2)
Balance at December 31, 2022$36 
These reserves are included in other current liabilities in theand other noncurrent liabilities on our consolidated balance sheets. Substantially allsheets based on the timing of when the reservesobligations are expected to be paid, inwhich can vary due to certain country negotiations and regulations. As of December 31, 2022, we expect to pay approximately $29 million over the next twelve12 months. We believe that the reserves are adequate.

Note 8. Inventories
We state all inventories at the lower of cost or net realizable value. We use the last-in, first-out (LIFO) method for a portion of our inventories located in the continental U.S. Other inventories are valued by the first-in, first-out (FIFO) method. FIFOmethod or the weighted average cost approximates current replacement cost.

method.
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Inventories at December 31 consisted of the following:
2019201820222021
Finished productsFinished products$402.9  $400.7  Finished products$725 $598 
Work in processWork in process603.2  570.4  Work in process605 565 
Raw materials and suppliesRaw materials and supplies83.9  80.4  Raw materials and supplies266 254 
Total (approximates replacement cost)1,090.0  1,051.5  
TotalTotal1,596 1,417 
Decrease to LIFO costDecrease to LIFO cost(39.3) (47.4) Decrease to LIFO cost(58)(46)
InventoriesInventories$1,050.7  $1,004.1  Inventories$1,538 $1,371 
Inventories valued under the LIFO method comprised $197.2$288 million and $194.8$260 million of total inventories at December 31, 20192022 and 2018,2021, respectively.
During the year ended December 31, 2018, we recognized $38.6 million of inventory write-offs in cost of sales primarily related to the suspension of commercial activities for Imrestor.

Note 9. Equity
Common Stock Offering
In January 2020, we entered into an underwriting agreement in which we agreed to sell approximately 23 million shares of our common stock at a public offering price of $32.00 per share. In connection with the offering, we granted the underwriters an option to purchase up to an additional 2 million shares, which was exercised in full on January 23, 2020. As a result, we issued and sold a total of approximately 25 million shares of our common stock for $768 million, after issuance costs.
Tangible Equity Unit (TEU) Offering
In January 2020, we also completed our offering of 11 million, 5.00% TEUs. Total proceeds, net of issuance costs, were $528 million. Each TEU was comprised of a prepaid stock purchase contract (prepaid stock) and a senior amortizing note due February 1, 2023. Subsequent to issuance, each TEU was legally separable into the two components. The prepaid stock was considered a freestanding financial instrument, indexed to Elanco common stock, and met the conditions for equity classification.
The value allocated to the prepaid stock is reflected net of issuance costs in additional paid-in capital. The value allocated to the senior amortizing notes is reflected in debt on the consolidated balance sheets. Issuance costs related to the amortizing notes are reflected as a reduction of the carrying amount and are amortized through the maturity date using the effective interest rate method.
The proceeds from the issuance were allocated to equity and debt based on the relative fair value of the respective components of each TEU as follows:
Equity ComponentDebt
 Component
Total
Fair value per unit$42.80 $7.20 $50.00 
Gross proceeds$471 $79 $550 
Less: Issuance costs19 22 
Net proceeds$452 $76 $528 
The senior amortizing notes had an aggregate principal amount of $79 million bearing interest at 2.75% per year. On each February 1, May 1, August 1, and November 1 until the maturity date, we have paid equal quarterly cash installments of $0.6250 per each amortizing note with an initial principal amount of $7.2007 (except for the first installment payment of $0.6528 per amortizing note paid on May 1, 2020). Each installment constitutes a payment of interest and partial payment of principal, and in the aggregate is equivalent to 5.00% per year with respect to the $50 stated amount per TEU.
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Unless settled early at the holder’s or our election, each prepaid stock purchase contract automatically settled on February 1, 2023 (the mandatory settlement date) for a number of shares of common stock per contract based on the average of the volume-weighted average trading prices during the 20 consecutive trading day period beginning on, and including the 21st scheduled trading day immediately preceding February 1, 2023 (applicable market value) with reference to the following settlement rates:
Applicable Market ValueCommon Stock Issued
Equal to or greater than $38.401.3021 shares (minimum settlement rate)
Less than $38.40, but greater than $32.00$50 divided by applicable market value
Less than or equal to $32.001.5625 (maximum settlement rate)
The prepaid stock purchase contracts were mandatorily convertible into a minimum of 14 million shares or a maximum of 17 million shares of our common stock on the mandatory settlement date (unless redeemed by us or settled earlier at the unit holder's option). The 14 million minimum shares are included in the calculation of basic weighted average shares outstanding for the years ended December 31, 2022, 2021 and 2020. The difference between the minimum and maximum shares represents potentially dilutive securities, which are included in the calculation of diluted weighted average shares outstanding on a pro rata basis to the extent that the average applicable market value is higher than $32.00 but is less than $38.40 during the period. The entire additional 3 million shares are included in diluted weighted average shares outstanding if the applicable market value is at or below $32.00 and the impact is not anti-dilutive.

On February 1, 2023, holders of our TEUs received 1.5625 shares of our common stock based on the settlement rate for the applicable market value of below $32.00. In total, we issued approximately 17 million shares to holders in connection with this settlement of the prepaid stock purchase contracts.

Note 10. Debt
Long-term debt as of December 31 consisted of the following:
20192018
Term credit facility$371.4  $492.5  
3.912% Senior Notes due 2021500.0  500.0  
4.272% Senior Notes due 2023750.0  750.0  
4.900% Senior Notes due 2028750.0  750.0  
Other obligations0.4  0.5  
Unamortized debt issuance costs(16.8) (20.7) 
2,355.0  2,472.3  
Less current portion of long-term debt(24.5) (29.0) 
Total long-term debt$2,330.5  $2,443.3  
Revolving and Term Credit Facilities
20222021
Incremental Term Facility due 2025$175 $— 
Incremental Term Facility due 2028494 499 
Incremental Term Facility due 2029249 — 
Term Loan B due 20273,881 4,118 
Revolving Credit Facility (1)
— 250 
4.272% Senior Notes due 2023344 750 
4.900% Senior Notes due 2028750 750 
TEU Amortizing Notes due 202334 
Unamortized debt issuance costs(64)(82)
5,836 6,319 
Less current portion of long-term debt388 294 
Total long-term debt$5,448 $6,025 
On September 5, 2018,(1)In February 2023, we drew $100 million of net proceeds on our revolving credit facility.
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Maturities on the principal amount of debt outstanding as of December 31, 2022 consist of the following:
As of and for the years ending December 31
2023$401 
202450 
2025225 
202650 
20273,718 
2028 and thereafter1,456 
Total obligations and commitments5,900 
Unamortized debt issuance costs(64)
Total debt$5,836 
Cash payments for interest during the years ended December 31 were as follows:
202220212020
Interest paid$266 $221 $131 
2022 Financings
In April 2022, we entered into an incremental assumption agreement with Farm Credit Mid-America, PCA (Farm Credit) supplementing and amending our existing credit agreement dated August 1, 2020 relating to our senior secured credit facility. The incremental assumption agreement provides for an incremental term facility with an aggregate principal amount of $250 million maturing on April 19, 2029. The new incremental term facility bears interest at the Secured Overnight Financing Rate (Term SOFR), including a credit spread adjustment, plus 175 basis points and will be payable in quarterly installments of principal and interest with a final balloon payment due on April 19, 2029. The proceeds were used to repay a portion of our outstanding obligations under our revolving credit facility. The terms of the incremental term facility, including pledged collateral and financial maintenance covenants, are generally consistent with the terms of our existing term loan B credit facility (Term Loan B) and revolving credit facility.
In June 2022, we entered into an incremental assumption agreement with Bank of America, N.A. supplementing and amending our existing credit agreement dated August 1, 2020 relating to our senior secured credit facility. The incremental assumption agreement provides for an incremental term facility with an aggregate principal amount of $175 million. The new incremental term facility bears interest at Term SOFR, including a credit spread adjustment, plus 175 basis points and is payable in full on June 30, 2025. The proceeds were used to repay a portion of our outstanding obligations under our revolving credit facility. The terms of the incremental term facility, including pledged collateral and financial maintenance covenants, are generally consistent with the terms of our existing Term Loan B and revolving credit facility.
2021 Financing
In August 2021, we entered into an incremental assumption agreement with Farm Credit supplementing and amending our existing credit agreement dated August 1, 2020 relating to our senior secured credit facility. The incremental assumption agreement provides for an incremental term facility with an aggregate principal amount of $500 million. The incremental term facility bears interest at a floating rate of LIBOR plus 175 basis points and is payable in quarterly installments of principal and interest with a final balloon payment due on August 12, 2028. The proceeds were used to retire our existing Senior Notes due August 27, 2021. The terms of the incremental term facility, including pledged collateral and financial maintenance covenants, are generally consistent with the terms of our existing Term Loan B and revolving credit facility.
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2020 Financings
In connection with the acquisition of Bayer Animal Health, on August 1, 2020, we borrowed $4,275 million under a Term Loan B facility. The Term Loan B bears interest at a floating rate of LIBOR plus 175 basis points and is payable in quarterly installments through August 1, 2027.
Simultaneously, we entered into a revolving credit agreement withfacility providing up to $750 million (with incremental capacity available if certain conditions are met) and maturing over a syndicate of banks providing for a five-year $750.0 million senior unsecuredfive-year term. The revolving credit facility (Revolving Facility). The Revolving Facility bears interest at LIBOR plus an applicable margin ranging between 1.50% and 2.25% per annum based on our corporate family rating or corporate credit rating. We may draw on our revolving credit facility as a variable rate plus specified margin as defined insource of liquidity for certain operating activities and for additional flexibility to finance capital investments, business development activities, repayments of debt, and other cash requirements.
These senior secured first lien credit facilities are secured by a significant portion of our assets. They include two financial maintenance covenants which are solely for the agreement and is payable quarterly. There were 0 borrowings outstandingbenefit of lenders under the Revolving Facility at December 31, 2019 or 2018.revolving credit facility. There are no financial maintenance covenants for the benefit of the Term Loan B facility. The Revolving Facilitylenders under the Term Loan B facility have no enforcement rights with respect to the financial maintenance covenants for the revolving credit facility.
The first financial maintenance covenant for the revolving credit facility requires us to maintain a net total leverage ratio level (which is payable in full atnot subject to step-downs) as of the end of each quarter. The required level of this covenant is based on closing date pro forma net leverage and pro forma adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) not exceeding 7.71 to 1.00 of our pro forma adjusted EBITDA for the term.four fiscal quarters ended December 31, 2022.
On September 5, 2018, we also entered into a $500.0 million three-year term loan under a termThe second financial maintenance covenant for the revolving credit facility withrequires us to maintain a syndicateratio of banks (the Term Facility and collectively with the Revolving Facility, the Credit Facilities.) The Term Facility bearspro forma adjusted EBITDA to cash interest at a variable rate plus marginexpense of no less than 2.00 to 1.00, tested as defined in Term Facility (3.01% and 3.77% at December 31, 2019 and 2018, respectively) and is payable quarterly. The Term Facility also requires a quarterly principal payment equal to 1.5% of the aggregate initial principal less any prepayment. The Term Facility is payable in full at the end of the term.
The Credit Facilities are subject to various financial and other covenants, including restrictions on the level of borrowings based on a consolidated leverage ratio and a consolidated interest coverage ratio.each fiscal quarter. We were in compliance with all such covenants under the credit facility as of December 31, 2019.2022.
Senior Notes
OnIn August 28, 2018, we issued $2.0$2 billion of senior notes (Senior Notes) in a private placement.. The Senior Notes comprised of $500.0$500 million of 3.912% Senior Notes due August 27, 2021 $750.0(fully repaid as part of the August 2021 Farm Credit refinancing), $750 million of 4.272% Senior Notes due August 28, 2023 (partially repaid as part of our April 2022 tender offer discussed below), and $750.0$750 million of 4.900% Senior Notes due August 28, 2028. The interest rate
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payable on each series of Senior Notes is subject to adjustment if Moody's Investor Services, Inc. or Standard & Poor's Financial Services LLC downgrades, or subsequently upgrades, its ratings on the respective series of Senior Notes.
The indenture that governs the Senior Notes contains covenants including limitations onthat limit our, ability, and certain of our subsidiaries,subsidiaries' ability, to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets, in addition to other customary terms. We were in compliance with all such covenants under the indenture governing the Senior Notes as of December 31, 2019.2022.
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TEU Amortizing Notes
On January 22, 2020, we issued $550 million in TEUs. We offered 11 million, 5.00% TEUs at the stated amount of $50 per unit, comprised of prepaid stock purchase contracts and a senior amortizing note due February 1, 2023 (the mandatory settlement date). Total cash of $528 million was received, comprised of $452 million of prepaid stock purchase contracts and $76 million of senior amortizing notes, net of issuance costs. We paid $28 million representing partial payment of principal and interest on the TEU amortizing notes during the year ended December 31, 2022. The TEU amortizing notes were fully repaid on February 1, 2023. See Note 9: Equity for further information.
Debt Extinguishment
In April 2022, we completed a tender offer and retired $406 million in aggregate principal amount of our 4.272% Senior Notes due August 28, 2023, resulting in a debt extinguishment loss of approximately $17 million recognized in interest expense, net of capitalized interest in the consolidated statements of operations. The repayment was funded with proceeds received from a draw under our revolving credit facility.
In 2022, we repaid indebtedness outstanding under our Term Loan B. We paid $195 million in cash, composed of principal and accrued interest, resulting in a debt extinguishment loss of approximately $3 million recognized in interest expense, net of capitalized interest in the consolidated statements of operations.

On June 26, 2019,In January 2020, we completed an exchange offer pursuantrepaid indebtedness outstanding under our existing term loan facility. We paid $372 million in cash, composed of $371 million of principal and $1 million of accrued interest, resulting in a debt extinguishment loss of $1 million (recognized in interest expense, net of capitalized interest in the consolidated statements of operations for the year ended December 31, 2020), primarily related to which the privately issued Senior Notes were exchangedwrite-off of deferred debt issuance costs.
In September 2020, we made a repayment of principal of $100 million on the indebtedness outstanding under our Term Loan B facility. The repayment was accounted for publicly registered Senior Notes having substantially identical terms.as a partial debt extinguishment and resulted in a debt extinguishment loss of $2 million (recognized in interest expense, net of capitalized interest in the consolidated statements of operations for the year ended December 31, 2020), primarily related to the write-off of deferred debt issuance costs.

Note 10.11. Financial Instruments and Fair Value
Financial instruments that are potentially subject to credit risk consist principally of trade receivables. We evaluate the creditworthiness of our customers on a regular basis, monitor economic conditions, and calculate allowances for estimated credit losses on our trade receivables on a quarterly basis using an expected credit loss model. We assess whether collectability is probable at the time of sale and on an ongoing basis. Collateral is generally not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures.
A large portion of our cash is held by a few major financial institutions. We monitor the exposure with these institutions and do not expect any of these institutions to fail to meet their obligations. All highly liquid investments with a maturity of three months or less from the date of purchase are considered to be cash equivalents. The cost of these investments approximates fair value. We also consider the carrying value of restricted cash balances to be representative of its fair value.
As of December 31, 2019We had investments without readily determinable fair values and 2018, we had $18.8 million and $15.3 million, respectively, primarily related to equity method investments included in other noncurrent assets in ouron the consolidated balance sheet.sheets totaling $27 million and $22 million as of December 31, 2022 and 2021, respectively. We recorded net unrealized losses of $8 million and $10 million in other (income) expense, net in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively. Unrealized net gains in 2020 were $11 million.
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The following table summarizes the fair value information at December 31, 20192022 and 20182021 for contingent consideration liabilities,foreign exchange contract assets (liabilities), investments, and net investmentcash flow hedge assets/assets (liabilities) measured at fair value on a recurring basis in the respective balance sheet line items, as well as long-term debt (including TEU amortizing notes) for which fair value is disclosed on a recurring basis:
  Fair Value Measurements Using 
Financial statement line itemCarrying AmountQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Fair Value
December 31, 2019
Other noncurrent liabilities- contingent consideration$(4.7) $—  $—  $(4.7) $(4.7) 
Other noncurrent assets/(liabilities) - cross currency interest rate contracts designated as net investment hedges2.3  —  2.3  —  2.3  
Long-term debt - senior notes(2,000.0) —  (2,120.6) —  (2,120.6) 
Long-term debt - term credit facility(371.4) —  (371.4) —  (371.4) 
December 31, 2018
Other current liabilities- contingent consideration$(5.1) $—  $—  $(5.1) $(5.1) 
Other noncurrent liabilities- contingent consideration(69.0) —  —  (69.0) (69.0) 
Other noncurrent assets/(liabilities) - cross currency interest rate contracts designated as net investment hedges(7.4) —  (7.4) —  (7.4) 
Long-term debt - senior notes(2,000.0) —  (2,005.0) —  (2,005.0) 
Long-term debt - term credit facility(492.5) —  (492.5) —  (492.5) 
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  Fair Value Measurements Using 
Financial statement line itemCarrying AmountQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Fair Value
December 31, 2022
Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments$76 $— $76 $— $76 
Prepaid expenses and other - forward-starting interest rate contracts designated as cash flow hedges14 — 14 — 14 
Other noncurrent assets - forward-starting interest rate contracts designated as cash flow hedges10 — 10 — 10 
Other noncurrent assets - investments— — 
Other current liabilities - foreign exchange contracts not designated as hedging instruments(64)— (64)— (64)
Long-term debt, including current portion(5,900)— (5,711)— (5,711)
December 31, 2021
Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments$19 $— $19 $— $19 
Other noncurrent assets - forward-starting interest rate contracts designated as cash flow hedges— — 
Other noncurrent assets - investments13 13 — — 13 
Other current liabilities - foreign exchange contracts not designated as hedging instruments(20)— (20)— (20)
Long-term debt, including current portion(6,401)— (6,518)— (6,518)
We determine our Level 2 fair value measurements based on a market approach using quoted market values or significant other observable inputs for identical or comparable assets or liabilities.
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Derivative Instruments and Hedging Activities
We are exposed to market risks, such as changes in foreign currency exchange rates and interest rates. To manage the volatility related to these exposures, we have entered into various derivative transactions. We formally assess, designate and document, as a hedge of an underlying exposure, each qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, we assess, both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures. Derivative cash flows, with the exception of net investment hedges, are principally classified in the operating activities section of the consolidated statements of cash flows, consistent with the underlying hedged item. Cash flows related to net investment hedges are classified in the investing activities section of the consolidated statements of cash flows. Further, we do not offset derivative assets and liabilities on the consolidated balance sheets. Our outstanding positions are discussed below.
Derivatives Not Designated as Hedges
Contingent consideration liabilitiesWe may enter into foreign exchange forward or option contracts to reduce the effect of fluctuating currency exchange rates. These derivative financial instruments primarily offset exposures in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan. Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures and are recorded at fair value with the gain or loss recognized in other (income) expense, net in the consolidated statements of operations. Forward contracts generally have maturities not exceeding 12 months. As of December 31, 2019 related to contingent consideration associated2022 and 2021, we had outstanding foreign exchange contracts with aggregate notional amounts of $784 million and $1,212 million, respectively.
The amount of net losses on derivative instruments not designated as hedging instruments, recorded in other (income) expense, net were as follows:
For the Year Ended December 31,
202220212020
Foreign exchange forward contracts (1)
$(12)$(35)$(4)
(1)These amounts were substantially offset in other (income) expense, net by the acquisitionseffect of Aratana and Prevtec during the period. For Aratana, we will pay up to $12 million in contingent value rights that are dependentchanging exchange rates on the achievement of a specified milestoneunderlying foreign currency exposures.
Derivatives Designated as outlined in the merger agreement. For Prevtec, based on the terms of the purchase agreement, we will pay up to $16.3 million contingent upon the achievement of specific Coliprotec sales milestones by December 31, 2021. The fair value of both contingent consideration liabilities was estimated using the Monte Carlo simulation model and Level 3 inputs including historical revenue, discount rate, asset volatility, and revenue volatility. See Note 6: Acquisitions for further discussion.Hedges
Contingent consideration liabilities as of December 31, 2018 related to Galliprant for which the fair value was estimated using a discounted cash flow analysis and Level 3 inputs, including projections representative of a market participant view for the probability of achieving potential future payments to Aratana and an estimated discount rate. The amount to be paid as of December 31, 2018 was dependent upon certain development, success-based regulatory, and sales-based milestones. These liabilities were settled upon the closing of our acquisition of Aratana on July 18, 2019. See Note 6: Acquisitions for further discussion.

In October 2018, as a means of mitigating the impact of currency fluctuations on our operations in Switzerland, we entered into a five-yearfive-year cross-currency fixed interest rate swap with a 750 million Swiss Franc (CHF)CHF notional amount, which iswas designated as a NIHnet investment hedge against CHF denominated assets (the fair value of which was estimated based on quoted market values of similar hedges and was classified as Level 2). During the year ended December 31, 2020, we fully liquidated our cross-currency interest rate swaps for whicha cash benefit of $35 million (including $2 million in interest). Notwithstanding settlement, gains and losses within accumulated other comprehensive loss will remain in accumulated other comprehensive loss until either the sale or substantial liquidation of the hedged subsidiary.
Over the life of the derivative, gains or losses due to spot rate fluctuations were recorded in cumulative translation adjustment in other comprehensive income (loss). The amounts of net gains on interest rate swap contracts, recorded, net of tax, in other comprehensive income (loss), were as follows:
For the Year Ended December 31,
202220212020
Cross-currency interest rate swap contracts$— $— $24 
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We are subject to interest rate risk with regard to our existing floating-rate debt, and we utilize interest rate swap contracts to mitigate the variability in cash flows by effectively converting the floating-rate debt into fixed-rate debt. We recognize any differences between the variable interest rate payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense, net of capitalized interest over the life of the swaps. We have designated these swaps as cash flow hedges and record them at fair value on the consolidated balance sheets. Changes in the fair value wasof the hedges are recognized in other comprehensive income (loss). Fair value is estimated based on quoted market values of similar hedges and is classified as Level 2. The NIH is expected to generate approximately $25Our outstanding forward-starting interest rate swaps have maturities ranging between 2023 and 2025 with aggregate notional amounts of $3,050 million in cash and an offset to interest expense on an annual basis. For the years ended$3,800 million as of December 31, 20192022 and 2018, our interest expense was offset by $25.1 million and $5.6 million, respectively, as a result2021, respectively.
The amounts of the NIH. Over the lifenet gains (losses) on cash flow hedges recorded, net of the derivative, gains or losses due to spot rate fluctuations are recorded in cumulative translation adjustmenttax, in other comprehensive income. income (loss), are as follows:

For the Year Ended December 31,
202220212020
Forward-starting interest rate swaps, net of tax benefit of $0, $0, and $15, respectively$157 $86 $(61)

During the years ended December 31, 20192022, 2021 and 2018, we2020, activity on cash flow hedges recorded a gainin other comprehensive income (loss) included gains of $7.7$224 million and a loss$86 million and losses of $5.9$61 million, respectively, related to mark-to-market adjustments.

In April 2022 and September 2022, we took advantage of market opportunities to restructure our interest rate swap portfolio. We unwound the existing swaps and simultaneously entered into new agreements with the same notional amounts and covering the same tenors. As a result, we received cash settlements of $207 million. These gains were initially recognized in accumulated other comprehensive loss and are reclassified to interest expense, net of tax, oncapitalized interest over the NIH,period during which is included in the change inrelated interest payments are made.

During the cumulative translation adjustment. There is a potential for significant 2023 settlement exposure as the U.S. dollar fluctuates against the Swiss Franc. The risk management objective is to manage foreign currency riskyear ended December 31, 2022, we reclassified $49 million of gains relating to net investments in certain CHF denominated assets. Changes in fair value of the derivative instruments are recognized in a component ofour terminated interest rate swaps from accumulated other comprehensive loss to offset the changes in the valuesinterest expense, net of capitalized interest. Additionally, as a result of the net investments being hedged.April 2022 interest rate swap settlement, other comprehensive income (loss) for the year ended December 31, 2022 included a $17 million reclassification of a stranded tax benefit from accumulated other comprehensive loss to income tax expense (benefit), based on our policy to reclassify income tax effects from accumulated other comprehensive loss using the portfolio approach. Other than the reclassification of the stranded tax benefit, there was no tax effect recorded in relation to our cash flow hedges for the years ended December 31, 2022 and 2021 after the application of the U.S. valuation allowance. See Note 16: Income Taxes for further discussion.

During the years ended December 31, 2022, 2021 and 2020, we reclassified $15 million, $28 million and $7 million, respectively, of net losses into interest expense. Over the next 12 months, we expect to reclassify a gain of $105 million, which includes $89 million relating to the interest rate swap settlements, to interest expense, net of capitalized interest.
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Note 11.12. Goodwill and Intangibles
Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
Balance as of December 31, 2020$6,225 
Bayer Animal Health measurement period adjustments207 
Additions related to the KindredBio acquisition33 
Goodwill associated with Shawnee, Speke and other divestitures(64)
Foreign currency translation adjustments(229)
Balance as of December 31, 20216,172 
KindredBio measurement period adjustments
Goodwill associated with Speke divestiture(3)
Foreign currency translation adjustments(179)
Balance as of December 31, 2022$5,993 
Goodwill was $3.0 billionis recorded as of December 31, 2019the difference, if any, between the aggregate consideration paid for an acquisition and 2018. Goodwill results from excess consideration in a business combination over the fair value of identifiablethe net tangible and intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment at least annually and when certain qualitative impairment indicators are present. Goodwill may be impaired ifWhen required, a comparison of fair value to the carrying amount of aour single reporting unit exceedsis performed to determine the amount of any impairment. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of thatour single reporting unit calculated as basedis less than its carrying value. Based on discounted cash flows. Anthat qualitative assessment, if we conclude that it is more likely than not that the fair value of our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment charge would be recorded fortest, which involves comparing the excess, if any,estimated fair value of our single reporting unit to its carrying value, including goodwill. We estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit's carrying amount overunit exceeds its fair value, but not to exceed the total amount of goodwill allocated to the reporting unit. The estimated fair value, is based onwe recognize an impairment loss for the difference.
During the third quarter of 2022, a number of assumptions, including currentsignificant change in our market capitalization relative to our book value, among other factors, triggered the need for an impairment review. However, no impairment existed with respect to our goodwill because the estimated fair value of our single reporting unit exceeded the carrying amount by more than 20%. Given the general worldwide economic conditions, we reevaluated our impairment testing from a qualitative perspective as corroboration of fair value. See Note 6: Acquisitions for further discussion of goodwill resulting from recent business combinations. The remainingDecember 31, 2022, which did not result in a change in goodwill is primarily the result of foreign exchange translation adjustments.to our previous conclusion that no impairment exists.
NaN
No impairments have occurred with respect to the carrying value of goodwill for the years ended December 31, 2019, 20182022, 2021 and 2017. 2020. Since a significant portion of our goodwill is denominated in foreign currencies, changes to our goodwill balance can occur over time due to changes in foreign exchange rates. See Note 6: Acquisitions, Divestitures and Other Arrangements for further discussion related to goodwill resulting from recent business combinations and changes in the carrying amount of goodwill.

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Other Intangibles
The components of intangible assets other than goodwill atas of December 31 were as follows:
2019201820222021
DescriptionDescriptionCarrying Amount, GrossAccumulated AmortizationCarrying Amount, NetCarrying Amount, GrossAccumulated AmortizationCarrying Amount, NetDescriptionCarrying Amount, GrossAccumulated AmortizationCarrying Amount, NetCarrying Amount, GrossAccumulated AmortizationCarrying Amount, Net
Finite-lived intangible assets:Finite-lived intangible assets:Finite-lived intangible assets:
Marketed productsMarketed products$3,302.7  $(980.6) $2,322.1  $3,193.5  $(779.2) $2,414.3  Marketed products$6,561 $(2,275)$4,286 $6,828 $(1,837)$4,991 
SoftwareSoftware159.2  (72.2) 87.0  101.3  (49.5) 51.8  Software310 (135)175 285 (77)208 
OtherOther58.3  (34.0) 24.3  53.1  (34.0) 19.1  Other47 (31)16 47 (28)19 
Total finite-lived intangible assetsTotal finite-lived intangible assets3,520.2  (1,086.8) 2,433.4  3,347.9  (862.7) 2,485.2  Total finite-lived intangible assets6,918 (2,441)4,477 7,160 (1,942)5,218 
Indefinite-lived intangible assets:Indefinite-lived intangible assets:Indefinite-lived intangible assets:
Acquired in-process research and developmentAcquired in-process research and development49.4  —  49.4  19.6  —  19.6  Acquired in-process research and development365 — 365 369 — 369 
Other intangibles$3,569.6  $(1,086.8) $2,482.8  $3,367.5  $(862.7) $2,504.8  
Other intangible assetsOther intangible assets$7,283 $(2,441)$4,842 $7,529 $(1,942)$5,587 
Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction. ForAlso included in this category are post-approval milestone payments from transactions other than a business combination, we capitalize milestone payments incurred at or after the product has obtained regulatory approval for marketing.combination.
Software consists of certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees directly associated with the internal-use software projects and direct costs of external resources. These costs include software classified as "in process" until the project is substantially complete and the software is ready for its intended purpose, at which point the costs are amortized on a straight-line basis over the estimated useful life. DepreciationFor the years ended December 31, 2022, 2021 and 2020, depreciation expense includes $20.4 million in 2019, $18.4 million in 2018, and $17.4 million in 2017 forincluded software amortization of software.$65 million, $52 million, and $35 million, respectively.
Other finite-lived intangibles consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies and customer relationships from business combinations. Acquired IPR&D consists of the relatedcapitalized R&D costs, capitalized, adjusted for subsequent impairments, if any. The costs of acquired IPR&D projects acquired directly in a transaction other than a business combination are capitalized if the projects have an alternative future use; otherwise, they are expensed immediately. The fair values of acquired IPR&D projects acquired in business combinations are capitalized as other intangible assets.
Several methods may be used to determine the estimated fair value of marketed products, IPR&D, and other finite-lived intangibles acquired in a business combination. We utilize the "income method" for otherthese intangibles. This method is a Level 3 fair value measurement and applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each group of assets independently. The acquired IPR&D assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are tested for impairment and amortized over the remaining useful life or written off, as appropriate.
See Note 6: Acquisitions for further discussion
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Table of intangible assets acquired in recent business combinations.Contents
Other indefinite-livedIndefinite-lived intangible assets are reviewed for impairment at least annually and when impairment indicators are present. The fair value of the indefinite lived intangible assets (acquired IPR&D) is estimated using the same assumptions as those used for goodwill and by applying a probability weighting that reflects the risk of development and commercialization to the estimated future net cash flows that are derived from projected revenues and estimated costs. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is
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present. We compare the carrying amounts of the assets with the estimated undiscounted future cash flows. In the event the carrying amount exceeds the undiscounted cash flows, an impairment charge is recorded for the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows.
Impairment charges recorded in relation to our other intangible assets were as follows:
202220212020
Asset impairment, restructuring and other special charges$60 $66 $17 

During 2019,2022, we recorded impairment charges comprised of $11.4$59 million for acquired IPR&D and $1 million for an other finite-lived intangible asset. The charge for acquired IPR&D primarily related to indefinite-livedthe expensing of an IPR&D asset with no alternative future use licensed from BexCaFe during the second quarter of 2022. See Note 6: Acquisitions, Divestitures and Other Arrangements for further discussion. The charge recorded for the other finite-lived intangible assets which are included in asset impairment, restructuringresulted from the termination of a license, development and other special charges oncommercialization agreement during the consolidated and combined statementsfourth quarter of operations. The impairment2022. As a result of indefinite-lived intangible assets primarilythe termination of the arrangement, the related to product rationalization.technology had no alternative future use.
During 2018,2021, we recorded impairment charges comprised of $22.5$55 million (comprisedfor acquired IPR&D and $11 million for marketed products. The impairments to acquired IPR&D primarily related to adjustments to the fair value of $9.5IPR&D assets that were subject to product rationalization, including a decision by management to terminate a project and fully impair the related asset associated with a farm animal parasiticide. The decision was prompted by unfavorable efficacy results observed during the year. The impairments of marketed products related to a full impairment based on a reassessment of competitive viability and project priority for an approved asset and an adjustment to the fair value of a mature brand that is subject to near-term product rationalization.
During 2020, we recorded impairment charges comprised of $9 million for acquired IPR&D and $8 million for marketed products. The impairment to acquired IPR&D related to reassessments of finite-lived intangible assetsgeographic viability and $13.0 million impairmentproject priority, which were partially prompted by the addition of indefinite-lived intangible assets) which are included in asset impairment, restructuring and other special charges on the consolidated and combined statements of operations.Bayer Animal Health IPR&D pipeline. The impairment of finite-lived intangible assets primarilymarketed products related to competitive pressuresadjustments made to record assets classified as held for a certain marketed product resulting in a reductionsale at the lower of projected cash flows. The impairment of indefinite-lived intangible assets primarily relatedtheir carrying amounts or fair values less costs to revised projections of fair value due to competitive pressures and to a lesser extent product rationalization. The increase in the carrying amount of finite intangibles is primarily due to the receipt of full commercialization rights outside the U.S. for Galliprant.sell.
During 2017, we had impairment charges of $94.5 million (comprised of $56.5 million impairment of finite-lived intangible assets and $38.0 million impairment of indefinite-lived intangible assets) which are included in asset impairment, restructuring and other special charges on the consolidated and combined statements of operations. The impairment of finite-lived intangible assets primarily related to competitive pressures for a certain marketed product resulting in a reduction of projected cash flows. The impairment of indefinite-lived intangible assets primarily related to revised projections of fair value due to competitive pressures and to a lesser extent product rationalization.
Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging from 3 to 20 years. As of December 31, 2019,2022, the remaining weighted-average amortization periods for finite-lived intangible assets arewere as follows:
Weighted Average Life (Years)
Marketed products139
Software65
Other85
The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets as of December 31, 20192022 is as follows:
20202021202220232024
Estimated amortization expense$206.2  $205.4  $203.3  $203.0  $203.0  
20232024202520262027
Estimated amortization expense$512 $510 $491 $488 $456 

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Note 12.13. Property and Equipment
Property and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful lives (12 to 50 years for buildings and 3 to 25 years for equipment). We review the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net bookcarrying value over its fair value utilizing a discounted cash flow analysis, and the cost basis is adjusted.
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At December 31, property and equipment consisted of the following:
20192018
Land$28.3  $27.6  
Buildings608.5  567.2  
Equipment1,109.4  1,025.1  
Construction in progress139.1  181.1  
Finance lease asset0.5  —  
1,885.8  1,801.0  
Less accumulated depreciation(930.5) (878.6) 
Property and equipment, net$955.3  $922.4  

20222021
Land$40 $42 
Buildings578 543 
Equipment941 1,354 
Construction in progress163 157 
1,722 2,096 
Less accumulated depreciation(723)(1,041)
Property and equipment, net$999 $1,055 
The following provides property and equipment, less accumulated depreciation by geographic area:
20222021
United States$554 $557 
Germany224 211 
United Kingdom59 
France52 54 
Other foreign countries166 174 
Property and equipment, net$999 $1,055 
Depreciation expense related to property and equipment was as follows:
201920182017
Depreciation expense$93.7  $81.3  $79.8  
202220212020
Depreciation expense$89 $108 $122 

Note 13.14. Leases
We determine if an arrangement is a lease at inception. We have operating leases for corporate offices, research and development facilities, vehicles, and equipment. Our leasesWe generally have remaining lease terms ofranging from one to 1215 years, some of which have options to extend or terminate the leases. Finance leases are included in property and equipment, current portion of long-term debt, and long-term debt in ouron the consolidated balance sheet.sheets. Finance leases are not material to ourthe consolidated statements of operations, consolidated balance sheet,sheets, or consolidated statementstatements of cash flows. Beginning January 1, 2019, operatingOperating leases are included in noncurrent assets, other current liabilities, and other noncurrent liabilities in ouron the consolidated balance sheet.sheets.
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Right-of-use assets included in noncurrent assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable. The right-of-use asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain and there is a significant economic incentive to exercise that option.
Operating lease expense for right-of-use assets is recognized on a straight-line basis over the lease term. Variable lease payments, which represent lease payments that vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the obligation for these payments was incurred.
We elected not to apply the recognition requirements of ASC 842, Leases, to short-term leases, which are deemed to be leases with a lease term of 12 months or less. Instead, we recognize lease payments in the consolidated statements of operations on a straight-line basis over the lease term and variable payments in the period in which the obligation for these payments arewas incurred. We elected this policy for all classes of underlying assets. We elected not to apply the practical expedient related to the separation of lease and non-lease components or the practical expedient which allows entities to use hindsight when determining lease term.
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The impact of operating leases to ourthe consolidated financial statements for the year ended December 31, 2019 was as follows:
2019
Lease cost
Operating lease cost$26.1 
Short-term lease cost0.5 
Variable lease cost2.5 
Total lease cost (1)
$29.1 
Other information
Operating cash outflows from operating leases$24.0 
Right-of-use assets obtained in exchange for new operating lease liabilities20.1 
Weighted-average remaining lease term - operating leases5.1 years
Weighted-average discount rate - operating leases3.6 %
(1) Rental expense for all leases was $47.5 million and $47.1 million for the years ended December 31, 2018 and 2017, respectively.was as follows:
202220212020
Lease cost
Operating lease cost$45 $43 $38 
Short-term lease cost
Variable lease cost
Total lease cost$51 $48 $42 
Other information
Operating cash outflows from operating leases$33 $40 $36 
Right-of-use assets obtained in exchange for new operating lease liabilities32 36 138 
Weighted-average remaining lease term - operating leases7 years7 years8 years
Weighted-average discount rate - operating leases4.0 %3.8 %3.8 %
Supplemental balance sheet information related to our operating leases is as follows:
Asset/LiabilityBalance Sheet ClassificationDecember 31, 2022December 31, 2021
Right-of-use assetsOther noncurrent assets$141 $161 
Current operating lease liabilitiesOther current liabilities31 34 
Non-current operating lease liabilitiesOther noncurrent liabilities111 127 
Balance Sheet ClassificationDecember 31, 2019
Right-of-use assetsOther noncurrent assets$85.0 
Current operating lease liabilitiesOther current liabilities23.7 
Non-current operating lease liabilitiesOther noncurrent liabilities61.7 
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As of December 31, 2019,2022, the annual minimum lease payments offor our operating lease liabilities were as follows:
Year 1$26.0 
Year 220.3 
Year 311.9 
Year 49.7 
Year 57.2 
After Year 516.5 
Total lease payments91.6 
Less imputed interest(6.2)
Total$85.4 
2023$36 
202428 
202522 
202617 
202711 
2028 and thereafter50 
Total lease payments164 
Less imputed interest(22)
Total$142 
Lease contracts that have been executed but have not yet commenced are excluded from the tables above. As of December 31, 2022, we have a lease commitment that has not yet commenced for our new corporate headquarters in Indianapolis, Indiana. Total minimum lease payments are estimated to be approximately $378 million over a term of 25 years, excluding extensions. The increase in estimated minimum lease payments in comparison to the prior year estimate of $310 million is primarily due to higher expected costs. Final lease payments may vary depending on the actual cost of certain construction activities. Lease commencement is expected in 2025.
Australia Sale-Leaseback
On June 26, 2020, our wholly owned subsidiary, Elanco Australasia PTY LTD, sold land and an R&D facility located in New South Wales, Australia, for aggregate proceeds of $55 million, and leased the property back for an initial term of 15 years through a sale-leaseback transaction. Under the terms of the purchase and sale agreement, we determined that control of the assets was relinquished to the buyer-lessor. Therefore, we recognized a pre-tax gain on the sale of $46 million in other (income) expense, net in the consolidated statement of operations during the year ended December 31, 2020. Operating lease right-of-use assets and liabilities include the present value of $28 million for the associated lease payments, which are presented in other noncurrent assets and other noncurrent liabilities and other current liabilities on the consolidated balance sheet.

Note 14.15. Stock-Based Compensation
Elanco Stock Compensation Plans
The 2018 Elanco Stock Plan (Plan) provides long-term incentives to attract, motivate and retain employees and non-employee directors. The types of stock-based awards available include, but are not limited to, restricted stock units (RSUs), performance-based awards (PAs), and stock options. Our practices and policies specify that stock-based compensation awards are approved by the Compensation Committee of the Board of Directors. The Plan, initially authorized the issuance of up to 5.5 million common shares (subject to adjustments for certain events). Pursuant to the terms of the Plan, an additional 5.5 million common shares became automatically available for all awards upon completion of the Separation. The total number of shares authorized for stock-based compensation awards is 11 million asunder the plan was 20 million. As of December 31, 2019.
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2022, the aggregate number of remaining shares available for future grant was approximately 12.2 million.
Stock-Based Compensation Expense
We measure compensation expense for stock-based awards based on grant date fair value and the estimated number of awards that are expected to vest. For purposes of measuring stock-based compensation expense, we consider whether an adjustment to the observable market price is necessary to reflect material nonpublic information that is known to us at the time the award is granted. No adjustments were deemed necessary for the years ended December 31, 2022, 2021 or 2020. Forfeitures are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from those estimates.
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Components of stock-based compensation expense and related tax benefit for the years ended December 31 arewere as follows:
20192018202220212020
Stock-based compensation expense (1)
$40.7  $1.8  
Total stock-based compensation expense (1)
Total stock-based compensation expense (1)
$59 $66 $47 
Related tax benefitRelated tax benefit(9.8) (0.4) Related tax benefit(3)(11)(8)
(1)We include the impactSubstantially all of estimated forfeitures when determiningour stock-based compensation expense.expense relates to RSUs and PAs.
Restricted Stock Units
RSUs are granted to certain employees and are settled in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of the grant. The corresponding expense is amortized over the vesting period, typically three years. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures.
RSUs granted to employees for the years ended December 31 arewere as follows:
(Units in millions)(Units in millions)20192018(Units in millions)202220212020
Granted unitsGranted units2.9  0.2  Granted units1.3 1.1 1.3 
Weighted-average fair valueWeighted-average fair value$31.22  $31.09  Weighted-average fair value$28.17 $33.57 $27.44 
Changes in the nonvested portion of RSUs for 2019 is2022 are summarized below:
(Shares in millions)(Shares in millions)SharesWeighted-Average Fair Value(Shares in millions)SharesWeighted-Average Grant Date Fair Value
Nonvested units at January 1, 20190.2$31.09  
Nonvested units at January 1, 2022Nonvested units at January 1, 20222.2 $30.87 
GrantedGranted2.931.22  Granted1.3 28.17 
VestedVested(0.8)31.33  Vested(1.1)30.51 
ForfeitedForfeited(0.1)31.25  Forfeited(0.4)30.39 
Nonvested units at December 31, 20192.230.42  
Nonvested units at December 31, 2022Nonvested units at December 31, 20222.029.40 

The fair market value of RSUs vesting in 2022, 2021 and 2020 was $29 million, $30 million and $33 million, respectively.
As of December 31, 2019,2022, the total remaining unrecognized stock-based compensation expense related to nonvested RSUs was $25.5$24 million, which will amortizeis expected to be amortized over thea weighted-average remaining requisite service period of 1916 months.
Performance-Based Awards
PAs, which are granted to eligible officers and management, represent the right to receive a share of our common stock and are subject to forfeiture until restrictions lapse (including continued employment through the end of the vesting period and achievement of certain pre-established metrics). Payouts can vary depending on achievement. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement period. Stock-based compensation expense for PAs is recognized only if it is deemed probable that the performance condition will be achieved.
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PA activity during the year ended December 31, 20192022 is summarized below:
(Shares in millions)(Shares in millions)SharesWeighted-Average Fair Value(Shares in millions)SharesWeighted-Average Grant Date Fair Value
Nonvested awards at January 1, 2019—  $—  
Nonvested awards at January 1, 2022Nonvested awards at January 1, 20221.0 $30.53 
GrantedGranted0.8  25.75  Granted0.5 28.94 
VestedVested—  —  Vested(1.0)33.45 
ForfeitedForfeited—  —  Forfeited0.031.40 
Nonvested awards at December 31, 20190.8  25.75  
Nonvested awards at December 31, 2022Nonvested awards at December 31, 20220.5 28.94 
The fair market value of PAs vesting in 2022, 2021 and 2020 was $23 million, $22 million and $2 million, respectively.
As of December 31, 2019,2022, the total remaining unrecognized stock-based compensation expense related to nonvested PAs was $11.0$6 million, which will amortizeis expected to be amortized over thea weighted-average remaining requisite service period of 1312 months.

Stock Option Program

Stock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than 100% of the fair market value of the common stock on the date of the grant.
StockWe account for our employee stock options are accounted forunder the fair value method of accounting using a fair-value based methodBlack-Scholes-Merton valuation model to measure stock option expense at the date of the grant in the consolidated statement of operations.grant. The values determined through this fair-value-based methodcorresponding expense is generally are amortized on a straight-line basis over the vesting term.
Stock options were granted in 20182022 to our officers, management and board members at exercise prices equal to the fair market value of our stock at the date of the grant. Options fully vest 3three years from the grant date and have a term of 10 years. No stock options were granted in 2019.2021 and 2020.
The fair-value-based method for valuing each Elanco stock option grant on the grant date uses the Black-Scholes-Merton option-pricing model which incorporates a number of valuation assumptions, which are noted in the following table, shown at their weighted-average values for the year ended December 31:
20182022
Expected dividend yield(1)
0.70 %
Risk-free interest rate(2)
3.071.59 %
Expected stock price volatility(3)
28.2536.5 %
Expected term(4) (years)
6.56
(1)Determined usingWe have never declared nor paid any dividends on our common stock, and we do not anticipate paying dividends on our common stock for the expected quarterly dividend divided by the available three-month average stock price as of the valuation date, annualized and continuously compounded.foreseeable future.
(2)Determined using the term-matched, zero-coupon risk-free rate from the Treasury Constant Maturity yield curve, continuously compounded
(3)Determined using a leverage-adjusted historical volatility of peer companies
(4)Determined using SEC safe harbor approach, based on a 3-year cliff vesting schedule and 10-year contractual term.
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Stock option activity during the year ended December 31, 20192022 is summarized below:
(Shares in millions)(Shares in millions)Shares of Common Stock Attributable to OptionsWeighted-Average Exercise Price of OptionsWeighted-Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value(1)
(Shares in millions)Shares of Common Stock Attributable to OptionsWeighted-Average Exercise Price of OptionsWeighted-Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value(1)
Outstanding at January 1, 20190.4  $31.61  
Outstanding at January 1, 2022Outstanding at January 1, 20220.3 $31.61 
GrantedGranted—  —  Granted0.5 28.94 
ExercisedExercised(0.1) 31.61  Exercised— — 
Forfeited or expiredForfeited or expired—  —  Forfeited or expired— — 
Outstanding at December 31, 20190.3  $31.61  8.8$—  
Exercisable at December 31, 2019—  —  —  —  
Outstanding at December 31, 2022Outstanding at December 31, 20220.8 $30.11 7.7$— 
Exercisable at December 31, 2022Exercisable at December 31, 20220.3 31.61 5.8— 
(1)Market price of underlying Elanco common stock less exercise price. Options do not have an intrinsic value unless the market price exceeds the exercise price.
As of December 31, 2019,2022, there was approximately $2.2$2 million of unrecognized compensation costs related to nonvested stock options, which will be recognizedis expected to amortize over an expected remaining weighted-average period of 2218 months.
The following table summarizes data related to stock option activity:
20192018
Weighted-average grant date fair value per stock option$10.21  $10.21  
Aggregate intrinsic value on exercise0.10  —  
Cash received upon exercise1.9  —  
Treatment of Lilly Equity AwardsNote 16. Income Taxes
Prior to the Separation, our employees participated in Lilly stock-based compensation plans, the cost of which was allocated to us and recorded in costs of sales, research and development, and marketing, selling and administrative expense in the consolidated and combined statements of operations. The cost of such plans related to our employees was $5.1 million, $26.0 million and $25.0 millionOur income tax provision for the years ended December 31, 2019, 20182022, 2021 and 2017, respectively.
Following the IPO and until completion of the exchange offer, the equity awards previously granted to our employees by Lilly continued to vest with Elanco service counting toward the Lilly award's vesting provisions. On March 11, 2019, Elanco completed the exchange offer whereby Lilly disposed of all of its shares of Elanco common stock owned by Lilly. As a result, our employees' unvested Lilly equity awards were forfeited and replaced with Elanco RSUs (replacement awards), which were equivalent in value and vest on the same date as their forfeited Lilly equity awards. These replacement awards are included in the RSU activity described above.

Note 15. Income Taxes
Our income taxes for the year ended December 31, 2019 reflect the results on a stand-alone basis independent of Lilly, except for the period during which we were included in a combined tax return until full separation. In the jurisdictions in which we were included in a combined tax return, our income taxes were determined based on the tax matters agreement between us and Lilly. During the periods presented in the consolidated and combined financial statements for the year ended December 31, 2018 and December 31, 2017, our operations were generally included in the tax grouping of other Lilly entities within the respective entity's tax jurisdiction; however, in certain jurisdictions, we filed separate tax returns. Prior to the Separation, the2020 includes income tax expense included in these financial statements has been calculated using the separate return basiscosts and benefits such as if Elanco filed separatevaluation allowances, uncertain tax returns.
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2017 Tax Act
In 2017, the U.S. enacted the Tax Cutspositions, audit settlements, and Jobs Act (2017 Tax Act), which significantly revised U.S. tax law. Guidance related to the 2017 Tax Act, including Notices, Proposed Regulations, and Final Regulations, has been issued, and we expect additional guidance will be issued in 2020. This additional guidance could materially impact our assumptions and estimates used to record our U.S. federal and state income tax expense resulting from the 2017 Tax Act.other items.
We are included in Lilly's U.S. tax examinations by the Internal Revenue Service through the full separation date of March 11, 2019. Pursuant to the tax matters agreement we executed with Lilly in connection with the IPO, the potential liabilities or potential refunds attributable to pre-IPO periods in which Elanco was included in a Lilly consolidated or combined tax return remain with Lilly. Certain matters of Lilly’sThe U.S. examination of tax years 2013 - 2015 effectively settled duringby the second quarter of 2019 and the resulting adjustments will not require any cash tax payments by Elanco. During the fourth quarter of 2019, certain matters for tax year 2015 were effectively settled upon conclusion of the IRS' examination and the resulting adjustments will not require any cash tax payments by Elanco. In the fourth quarter of 2019, the IRS began its examinationInternal Revenue Service of tax years 2016 - 2018.to 2018 began in 2019 and is ongoing. It is possible that the examination of these tax years could conclude within the next 12 months. Final resolution of certain matters is dependent upon several factors, including the potential for formal administrative proceedings.

Effective January 1, 2022, the Tax Cuts and Jobs Act of 2017 (2017 Tax Act) requires the capitalization of research and development (R&D) costs for tax purposes, which can be amortized over five years and 15 years for domestic and foreign costs, respectively. The implementation of this provision in 2022 resulted in the capitalization of $161 million in costs, of which $154 million will be amortized over five years and $7 million will be amortized over 15 years.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. We recognize theThe tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Following is theThe composition of income (loss)loss before income tax expense (benefit): is as follows:
201920182017202220212020
FederalFederal$55.5  $12.2  $(133.2) Federal$(350)$(341)$(491)
ForeignForeign22.7  101.9  (99.4) Foreign278 (230)(186)
Income (loss) before income taxes$78.2  $114.1  $(232.6) 
Loss before income taxesLoss before income taxes$(72)$(571)$(677)
Following is the
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The composition of income tax expense (benefit): is as follows:
201920182017
Current:
Federal$(5.5) $45.1  $—  
Foreign13.4  45.5  91.6  
State2.3  (2.3) (0.1) 
Total current tax expense10.2  88.3  91.5  
Deferred:
Federal14.5  (56.8) 42.6  
Foreign(7.5) (5.6) (16.6) 
State(6.9) 1.7  (6.3) 
2017 Tax Act—  —  (33.1) 
Total deferred tax expense (benefit)0.1  (60.7) (13.4) 
Income taxes$10.3  $27.6  $78.1  
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202220212020
Current:
Federal$11 $— $(36)
Foreign51 59 54 
State(7)
Total current tax expense63 60 11 
Deferred:
Federal(20)(11)(6)
Foreign(36)(136)(116)
State(1)(1)
Total deferred tax benefit(57)(148)(114)
Income tax expense (benefit)$$(88)$(103)
Significant components of our deferred tax assets and liabilities as of December 31 are as follows:
20192018
Deferred tax assets:
Compensation and benefits$25.3  $32.2  
Accruals and reserves13.7  26.9  
Tax credit carryovers12.8  6.2  
Tax loss carryovers69.5  17.4  
Inventories20.1  18.3  
Restructuring and other reserves24.6  6.0  
Operating lease liabilities20.5  —  
Other2.3  20.1  
Total gross deferred tax assets188.8  127.1  
Valuation allowances(32.7) (21.4) 
Total deferred tax assets156.1  105.7  
Deferred tax liabilities:
Right-of-use assets(20.5) —  
Intangibles(134.5) (130.8) 
Property and equipment(56.4) (50.8) 
Other(0.6) (2.7) 
Total deferred tax liabilities(212.0) (184.3) 
Deferred tax liabilities - net$(55.9) $(78.6) 
Deferred tax assets and liabilities reflect the impact of re-measurement resulting from the 2017 Tax Act.
20222021
Deferred tax assets:
Compensation and benefits$32 $58 
Accruals and reserves54 41 
Tax credit carryovers53 53 
Tax loss carryovers329 311 
Business interest deduction limitation120 55 
Inventories30 18 
Restructuring and other reserves13 31 
R&D capitalized assets42 — 
Operating lease liabilities34 42 
Other assets13 34 
Total gross deferred tax assets720 643 
Valuation allowances(228)(182)
Total deferred tax assets492 461 
Deferred tax liabilities:
Right-of-use assets(34)(42)
Intangibles(920)(995)
Property and equipment(70)(80)
Cash flow hedge deferred gain(42)— 
Other liabilities(6)— 
Total deferred tax liabilities(1,072)(1,117)
Deferred tax liabilities - net$(580)$(656)
The deferred tax assets and related valuation allowance amounts for U.S. federal and state net operating losses and tax credits shown above have been reducedadjusted for differences between financial reporting and tax return filings.
At December 31, 2019,2022, we have tax credit carryovers of $14.0$53 million available to reduce future income taxes. The amount is comprised of foreign, U.S. federal and state credits. The foreign credits total $5.1$8 million and if unused, will begin to expire in 2030.2036. The U.S. federal credits total $3.2$30 million and if unused, will begin to expire in 2030.2029. The state credits total $5.7$15 million and if unused, will begin to expire in 2020.2023. The U.S. federal credits are subject to a partial valuation allowance and state credits are subject to a full valuation allowance.
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At December 31, 2019,2022, we hadhave net operating loss carryovers and other carryovers for foreign, U.S. federal and state income tax purposes of $348.4 million: $285.5$329 million. $112 million will expire between 20202023 and 2039;2041, and $62.9$217 million of the carryovers have an indefinite carryforward period. Net operating losses and other carryovers for foreign, U.S. federal and state income tax purposes are subject to afull and partial valuation allowance.allowances.
The movementsMovements in the valuation allowance are summarized as follows:
2019201820222021
January 1$(21.4) $(127.7) 
Adjustment related to Separation—  110.4  
January 1January 1(21.4) (17.3) January 1$(182)$(100)
Increase (1)
Increase (1)
(23.2) (5.8) 
Increase (1)
(49)(88)
ReleaseRelease11.9  1.7  Release
December 31December 31$(32.7) $(21.4) December 31$(228)$(182)
(1)
The increase in the valuation allowance during 2019 is2022 was primarily attributable to the acquisitionlikelihood of Aratana Therapeutics, Inc.not realizing the benefit of U.S. federal and Prevtec Microbia Inc. (see Note 6: Acquisitions).state deferred tax assets because of U.S. pre-tax losses. The total net increase in the valuation allowance recorded in income tax expense (benefit) in the consolidated statements of operations was $80 million, $76 million and $72 million in 2022, 2021 and 2020, respectively with the remaining change in balance primarily recorded through accumulated other comprehensive loss.

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Prior to the IPO, we prepared the income tax amounts and balances based upon a separate return methodology, as if we were separate taxpayers from Lilly.  As a result, certain tax credits and net operating loss carryoversDeferred taxes are not available for use in future periods as they were used in Lilly consolidated or combined tax return filings. Accordingly, as a result ofprovided on the Separation, the tax credit and net operating loss carryovers and related valuation allowance have been adjusted to reflect the balance after Separation. These adjustments had no impact on income tax expense in the consolidated and combined financial statements. The separation entries related to the valuation allowance were offset by $133.7 million, prior to tax effect, of separation entries related to the removal of the net operating losses.
The 2017 Tax Act introduced international tax provisions that significantly change the U.S. taxation of foreign earnings.  At December 31, 2019, 0 U.S. taxes or foreign withholding taxes have been accrued with respect to the $496.7 million in unremitted earnings of our foreign subsidiaries as they are consideredoutside of the U.S. because it is expected that these earnings will be reinvested indefinitely. For the amount deemed indefinitely reinvested, for continued use in our foreign operations. Itit is not practicable to determine the unrecognizedamount of the related deferred income tax liability relateddue to these earnings.the complexities in the tax laws and assumptions required to be made. Deferred taxes, including U.S. or foreign withholding taxes, would be provided when we no longer consider our subsidiary earnings to be permanently invested, such as in situations where our subsidiaries plan to make future dividend distributions.

In accordance with the 2017 Tax Act, we treat taxes due on future Global Intangible Low-Taxed Income (GILTI) inclusions in U.S. taxable income as a current period expense when incurred.

Cash payments of income taxes were as follows:
201920182017
Cash payments of income taxes$42.5  $26.9  $35.7  
202220212020
Cash payments of income taxes$93 $151 $97 
Income taxes receivable included in prepaid expenses and other on our consolidated balance sheets as of December 31 were as follows:
202220212020
Income taxes receivable$180 $130 $116 
The following is a reconciliation of the income tax expense (benefit) applying the U.S. federal statutory rate to income before income taxes to reported income tax expense:
201920182017
Income tax at the U.S. federal statutory tax rate$16.4  $24.0  $(81.4) 
Add (deduct):
Taxation of international operations20.7  20.5  59.8  
State taxes2.9  4.4  5.4  
Income tax credits(9.8) (17.3) (1.8) 
Non-deductible employee compensation4.2  (1.9) —  
IPO and separation costs—  2.3  —  
Other permanent adjustments(4.2) (1.0) 0.8  
Change in uncertain tax positions(14.7) (1.7) 6.2  
Change in valuation allowance(5.2) (1.7) 122.2  
2017 Tax Act—  —  (33.1) 
Income taxes$10.3  $27.6  $78.1  
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202220212020
Income tax benefit at the U.S. federal statutory tax rate$(15)$(120)$(143)
Add (deduct):
Taxation of international operations(27)(16)(15)
State taxes(11)(8)(10)
Income tax credits(13)(14)(24)
Non-deductible employee compensation
Other permanent adjustments(2)(8)23 
Change in uncertain tax positions(2)(7)
Change in valuation allowance80 76 72 
Brazil receivable(16)— — 
Income tax expense (benefit)$$(88)$(103)
The Brazil receivable is attributable to an income tax refund claim resulting from a Brazil Supreme Court decision rendered in 2022 that determined certain Brazil state value-added tax (VAT) incentives were not subject to federal tax.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
201920182017202220212020
Beginning balance at January 1Beginning balance at January 1$14.7  $29.6  $25.7  Beginning balance at January 1$$$
Adjustments related to Separation(2.2) (17.6) —  
Adjusted beginning balance at January 112.5  12.0  25.7  
Additions based on tax positions related to the current yearAdditions based on tax positions related to the current year1.3  2.2  7.9  Additions based on tax positions related to the current year— — 
Changes for tax positions of prior yearsChanges for tax positions of prior years(1.2) 4.0  —  Changes for tax positions of prior years— (1)(2)
Additions related to acquisitionAdditions related to acquisition— 
SettlementsSettlements(4.3) (3.0) (4.0) Settlements— — (3)
Changes related to the impact of foreign currency translation(0.1) (0.5) —  
Ending balance at December 31Ending balance at December 31$8.2  $14.7  $29.6  Ending balance at December 31$16 $$
The total amount of unrecognized tax benefits that, if recognized, would affect tax expense was $8.2$2 million, $6 million, and $12.8$3 million at December 31, 20192022, 2021, and 2018,2020, respectively. There were $1.9 million of 2018 unrecognized tax benefits whichAdditions related to temporary differences which did not impact the effective tax rate. Adjustments related to the Separationacquisition represent unrecognized tax benefits assumed by Lilly inrelated to the Separation and have no impact2021 KindredBio acquisition that were recorded on income tax expense in the consolidated and combined financial statements.
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We file income tax returns in the U.S. federal jurisdiction and various state, local and non-U.S. jurisdictions. Prior to full separation, certain of these income tax returns were filed on a consolidated or combined basis with Lilly.opening balance sheet.
We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit). We recognizedInterest and penalties related to income tax expense (benefit) related to interest and penalties as follows:
201920182017
Income tax expense (benefit)$(10.6) $(2.5) $2.5  
Atmatters were not material for the years ended December 31, 20192022, 2021 and 2018, our accruals for the payment of interest and penalties totaled $3.0 million and $13.3 million, respectively.2020.

Note 16.17. Commitments and Contingencies
Legal mattersMatters
We are party to various legal actions that arise in the normal course of business. In determining whetherThe most significant matters are described below. Loss contingency provisions are recorded when it is deemed probable that we will incur a pending matter is significant for financial reportingloss and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality. We accrue for certain liability claims to the extent we can formulate a reasonable estimate of their coststhat loss. For the litigation matters discussed below for which a loss is reasonably possible, we are unable to estimate the possible loss or range of loss, if any. The process of resolving these matters is inherently uncertain and there is a reasonable probabilitymay develop over an extended period of incurring significant costs or expenses. Attime; therefore, at this time, the
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ultimate resolutions cannot be predicted. As of December 31, 20192022 and December 31, 2018,2021, we had 0no material liabilities established related to litigation as there were no significant claims which were probable and estimable.

On May 20, 2020, a shareholder class action lawsuit captioned Hunter v. Elanco Animal Health Inc., et al. was filed in the United States District Court for the Southern District of Indiana (the Court) against Elanco and certain executives. On September 3, 2020, the Court appointed a lead plaintiff, and on November 9, 2020, the lead plaintiff filed an amended complaint adding additional claims against Elanco, certain executives, and other individuals. The lawsuit alleges, in part, that Elanco and certain of its executives made materially false and/or misleading statements and/or failed to disclose certain facts about Elanco’s supply chain, inventory, revenue and projections. The lawsuit seeks unspecified monetary damages and purports to represent purchasers of Elanco securities between September 30, 2018 and May 6, 2020, and purchasers of Elanco common stock issued in connection with Elanco's acquisition of Aratana. We filed a motion to dismiss on January 13, 2021. On August 17, 2022, the Court issued an order granting our motion to dismiss the case without prejudice. On October 14, 2022, the plaintiffs filed a motion for leave to amend the complaint. We filed an opposition to the plaintiffs' motion on December 7, 2022. We believe the claims made in the case are meritless, and we intend to vigorously defend our position.

On October 16, 2020, a shareholder class action lawsuit captioned Saffron Capital Corporation v. Elanco Animal Health Inc., et al. was filed in the Marion Superior Court of Indiana against Elanco, certain executives, and other individuals and entities. On December 23, 2020, the plaintiffs filed an amended complaint adding an additional plaintiff. The lawsuit alleges, in part, that Elanco and certain of its executives made materially false and/or misleading statements and/or failed to disclose certain facts about Elanco’s relationships with third party distributors and revenue attributable to those distributors within the registration statement on Form S-3 dated January 21, 2020 and accompanying prospectus filed in connection with Elanco’s public offering which closed on or about January 27, 2020. The lawsuit seeks unspecified monetary damages and purports to represent purchasers of Elanco common stock or 5.00% TEUs issued in connection with the public offering. From February 2021 to August 2022, this case was stayed in deference to Hunter v. Elanco Animal Health Inc. On October 24, 2022, we filed a motion to dismiss. The plaintiffs filed their opposition to the motion to dismiss on December 23, 2022. We believe the claims made in the case are meritless, and we intend to vigorously defend our position.

Claims seeking actual damages, injunctive relief, and/or restitution for allegedly deceptive marketing have not historically hadbeen made against Elanco Animal Health Inc. and Bayer HealthCare LLC, along with other Elanco and Bayer entities, arising out of the use of Seresto™, a non-prescription flea and tick collar for cats and dogs. During 2021, putative class action lawsuits were filed in federal courts in the U.S. alleging that the Seresto collars contain pesticides that can cause serious injury and death to cats and/or dogs wearing the product. The cases mention the existence of incident reports involving humans, but no plaintiff has claimed personal harm from the product. In August 2021, the lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation, and the cases were transferred to the Northern District of Illinois. We are vigorously defending these lawsuits. In January 2023, an international lawsuit seeking damages for alleged negligence, breach of statutory regulations, breach of statutory duties, and deceptive marketing was filed against Elanco among other parties, arising out of the use of Seresto and Foresto™, a flea and tick collar for cats and dogs that is marketed and sold in Europe and in Israel. We intend to defend our position vigorously.

Further, in March 2021, a U.S. House of Representatives subcommittee chair requested that Elanco produce certain documents and information related to the Seresto collar and further made a request to temporarily recall Seresto collars from the market. On June 15, 2022, the subcommittee held a hearing at which our CEO testified. During and after the hearing, the subcommittee chair repeated his request that Elanco voluntarily recall the collars and also requested that the Environmental Protection Agency (EPA) commence administrative proceedings that would allow the EPA to remove Seresto from the market.

Seresto is a pesticide registered with the EPA. A non-profit organization submitted a petition to the EPA requesting that the agency take action to cancel Seresto’s pesticide registration and suspend the registration pending cancellation. The EPA is considering this petition and asked for public comment. We submitted a comment to the EPA supporting the safety profile of Seresto. Data and scientific evaluation used during the product registration process and through pharmacovigilance review supports the product’s positive safety profile and efficacy. Therefore, we believe no removal, recall, or cancellation of the pesticide registration is warranted, nor has it been suggested by any significant litigation expenseregulatory agency. We continue to stand behind the safety profile for Seresto, and are not currently subjectit remains available to consumers globally.

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In the third quarter of 2019, Tevra Brands, LLC (Tevra) filed a significant claim.
complaint in the U.S. District Court of the Northern District of California, alleging that Bayer Animal Health acquisition financing
In connection with our pending acquisition of the animal health business of Bayer as discussed in Note 6: Acquisitions,(acquired by us in August 2019,2020) had been involved in unlawful exclusive dealing and tying of its flea and tick products Advantage, Advantix, and Seresto and maintained a monopoly in the market. The complaint was amended in March 2020 and then dismissed in September 2020 with leave to amend. A second amended complaint was filed in March 2021 and realleges claims of unlawful exclusive dealing related to Advantage and Advantix and monopoly maintenance. A motion to dismiss the second amended complaint was denied in January 2022. Tevra’s demands include both actual and treble damages. We intend to defend our position vigorously.

Regulatory Matters

On July 1, 2021, we entered intoreceived a commitment lettersubpoena from the SEC relating to our channel inventory and sales practices prior to mid-2020. We have cooperated in providing documents and information to the SEC and will continue to do so. Management believes that its actions were appropriate. At this stage, we are unable to estimate the range of any potential loss associated with this matter.

Other Matters
Corporate Headquarters
The land for our new corporate headquarters is located in a Tax Increment Finance District, and the project is, in part, funded through Tax Incremental Financing (TIF) through an incentive agreement between us and the City of Indianapolis. The agreement provides for financing consistingan estimated total incentive of up$64 million to $750 millionbe funded by the City of Indianapolis in a revolving facility, $3.0 billion in a term facility, and $2.75 billion in a senior secured bridge facility. In connection with the financingfuture tax increment revenue generated from the developed property. In December 2021, as part of a funding and development agreement entered into between us and the developer, we made a commitment letter,to use the expected TIF proceeds towards the cost of developing and constructing the headquarters. In exchange, the developer reimbursed us up to the $64 million commitment in 2021. During the year ended December 31, 2022, we will incur fixed commitment fees of $40.4refunded approximately $15 million that will become due and payable upon the closing of the pending acquisition orTIF proceeds to the termination ofdeveloper. As a result, it is our expectation that our future lease payments will be reduced. The remaining accrued incentive is included in other noncurrent liabilities on our consolidated balance sheets and will be amortized over the Purchase Agreement with Bayer. These fees have not been recordedlease term beginning on the consolidated balance sheet as of December 31, 2019. See Note 22: Subsequent Events for updates regarding financing secured after the balance sheet date.commencement date and offset future rent expense.

Note 17.18. Geographic Information
We operate as a single operating segment engaged in the development, manufacturing, marketing and sales of animal health products worldwide for both food animalspets and companionfarm animals. Consistent with our operational structure, our President and Chief Executive Officer (CEO),CEO, as the chief operating decision maker, makes resource allocation and business process decisions globally across our consolidated business. Strategic decisions are managed globally with global functional leaders responsible for determining significant costs/investments and with regional leaders responsible for overseeing the execution of the global strategy. Our global research and development organization is responsible for development of new products. Our manufacturing organization is responsible for the manufacturing and supply of products and for the optimization of our supply chain. Regional leaders are responsible for the distribution and sale of our products and for local direct costs. The business is also supported by global corporate staff functions. Managing and allocating resources at the global corporate level enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions, product types, regional commercial organizations and research and development projects in line with our overarching long-term corporate-wide strategic goals, rather than on a product or geographic basis. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.
Our products include AviPro, Baytril, Catosal, Clynav, Cydectin Denagard, Maxiban, Rumensin, Optaflexx, Denagard, Tylan, MaxibanPulmotil and other products for livestock, poultry and poultry,aquaculture, as well as TrifexisAdvantage, Advantix, Advocate ,(collectively referred to as the Interceptor, ComfortisAdvantage Family), Credelio, TruCan, Galliprant, Interceptor Plus,Seresto, Trifexis and other products for companion animals.pets.
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We have a single customer that accounted for 12.9%11%, 11.9%10% and 12.9%11% of revenue for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. The product sales resulted in accounts receivable with this customer of $90.5$73 million and $96.4$74 million as of December 31, 20192022 and 2018,2021, respectively.
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We are exposed to the risk of changes in social, political and economic conditions inherent in foreign operations and our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates.
Selected geographic area information was as follows:
201920182017
Revenue — to unaffiliated customers(1):
United States$1,524.7  $1,483.2  $1,373.0  
International1,546.3  1,583.6  1,516.0  
Revenue$3,071.0  $3,066.8  $2,889.0  
Long-lived assets(2):
United States$709.8  $602.6  $604.7  
United Kingdom192.6  187.5  204.4  
Other foreign countries244.7  195.8  190.2  
Long-lived assets$1,147.1  $985.9  $999.3  
(1) Revenue is attributed to the countries based on the location of the customer.
(2) Long-lived assets consist of property and equipment, net, and certain noncurrent assets, including right-of-use assets.
202220212020
United States$1,965 $2,124 $1,475 
International2,446 2,640 1,796 
Revenue$4,411 $4,764 $3,271 

Note 18.19. Retirement Benefits
Pension Plans
There are certainWe sponsor various defined benefit pension plans, that ourwhich cover certain employees participate in 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 Elanco at the time of our separation from Lilly. Theworldwide. Our plans in Switzerland and Germany represent approximately 80% 91% of our global benefit obligation. We use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets, funded status and amounts recognized inrecorded on the consolidated balance sheets at December 31 for our defined benefit pension plans, which were as follows:
  20222021
Change in benefit obligation:
Benefit obligation at beginning of year$462 $560 
Service cost14 18 
Interest cost
Actuarial gain(123)(25)
Benefits paid(12)(4)
Plan amendments(1)— 
Curtailment gain— (19)
Settlements(1)(38)
Foreign currency exchange rate changes and other adjustments(19)(32)
Benefit obligation at end of year324 462 
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  20192018
Change in benefit obligation:
Benefit obligation at beginning of year$234.8  $258.6  
Service cost9.3  11.3  
Interest cost2.2  2.5  
Actuarial loss (gain)56.4  (44.7) 
Benefits paid(5.5) (2.7) 
Plan amendments(74.7) —  
Foreign currency exchange rate changes and other adjustments1.9  9.8  
Benefit obligation at end of year224.4  234.8  
Change in plan assets:
Fair value of plan assets at beginning of year207 234 
Actual return on plan assets(26)13 
Employer contribution12 12 
Benefits paid(12)(4)
Settlements(1)(38)
Foreign currency exchange rate changes and other adjustments(5)(10)
Fair value of plan assets at end of year175 207 

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Change in plan assets:
Fair value of plan assets at beginning of year131.6  131.5  
Actual return on plan assets15.3  (10.2) 
Employer contribution5.3  5.7  
Benefits paid(5.5) (2.7) 
Foreign currency exchange rate changes and other adjustments2.0  7.3  
Fair value of plan assets at end of year148.7  131.6  
Funded status(148)(255)
Unrecognized net actuarial (gain) loss(82)13 
Unrecognized prior service cost(30)(34)
Net amount recognized$(260)$(276)

Funded status(75.7) (103.2) 
Unrecognized net actuarial loss45.9  0.5  
Unrecognized prior service cost(74.1) 0.8  
Net amount recognized$(103.9) $(101.9) 
Amounts recognized in the consolidated balance sheet consisted of:
Other noncurrent assets$$— 
Other current liabilities— (1)
Accrued retirement benefits(150)(254)
Accumulated other comprehensive income before income taxes(112)(21)
Net amount recognized$(260)$(276)

Amounts recognized in the consolidated balance sheet consisted of:
Noncurrent assets$2.1  $2.3  
Other current liabilities(0.3) (0.3) 
Accrued retirement benefits(77.5) (105.2) 
Accumulated other comprehensive (income) loss before income taxes(28.2) 1.3  
Net amount recognized$(103.9) $(101.9) 
The unrecognized net actuarial (gain) loss and unrecognized prior service cost for these pension plans have not yet been recognized in net periodic pension costs and are included in accumulated other comprehensive lossincome (loss) at December 31, 2019.
Pension plan amendment
In September 2019, we signed agreements under which certain defined pension benefits in Switzerland transferred from the previous Lilly pension fund as of December 31, 2019 to a new Elanco pension fund effective January 1, 2020. This resulted in a plan amendment during the period. The plan amendment decreased our pension benefit obligation by approximately $21 million, consisting primarily of a decrease in prior service costs of approximately $75 million, partially offset by a loss of approximately $54 million driven by changes in certain assumptions. The net impact to accumulated other comprehensive income was a gain of approximately $21 million, which will be amortized over the average remaining service period of employees expected to receive benefits under the plans.2022.
We do not expect any plan assets to be returned to us in 2020.2023.
The following represents our weighted-average assumptions related to these pension plans as of December 31:
(Percents)201920182017
(Percentages)(Percentages)202220212020
Discount rate for benefit obligationDiscount rate for benefit obligation0.6%  1.5%  1.1%  Discount rate for benefit obligation3.4 %1.1 %0.6 %
Discount rate for net benefit costsDiscount rate for net benefit costs1.4  1.1  1.0  Discount rate for net benefit costs1.1 0.6 0.6 
Rate of compensation increase for benefit obligationRate of compensation increase for benefit obligation2.3  2.2  2.1  Rate of compensation increase for benefit obligation3.0 2.7 3.1 
Rate of compensation increase for net benefit costsRate of compensation increase for net benefit costs2.2  2.1  3.1  Rate of compensation increase for net benefit costs2.7 3.1 2.3 
Expected return on plan assets for net benefit costsExpected return on plan assets for net benefit costs4.0  4.0  4.4  Expected return on plan assets for net benefit costs3.1 2.9 3.2 
The assumptions above are used to estimate our pension benefit obligations at year-end, which are reviewed on at least an annual basis. We annually evaluaterevise these assumptions based on a yearly evaluation of long-term trends and market conditions that may impact the expected return oncost of providing retirement benefits.
The weighted-average discount rates for our defined benefit plans are set by benchmarking against investment grade corporate bonds where available, including, when there is sufficient data, a yield curve approach. For countries that lack a sufficient corporate bond market, a government bond index is used to establish the plan assetsdiscount rate. Overall, the yield curves used to measure the benefit obligations as of December 31, 2022 and 2021 resulted in these pension plans. higher discount rates as compared to their prior years.
In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions; asset returns and asset allocations; and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the assumptions and trend rates utilized by similar plans, where applicable.
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The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
202020212022202320242025-2029
Benefit payments$7.9  $8.6  $8.4  $8.0  $8.1  $48.4  
202320242025202620272027-2031
Benefit payments$12 $13 $14 $14 $16 $85 
Amounts relating to these pension plans with projected benefit obligations in excess of plan assets were as follows at December 31:
20192018 20222021
Projected benefit obligationProjected benefit obligation$218.2  $229.2  Projected benefit obligation$301 $455 
Fair value of plan assetsFair value of plan assets140.3  124.1  Fair value of plan assets150 200 
Amounts relating to these defined benefit pension plans with accumulated benefit obligations in excess of plan assets were as follows at December 31:
20192018 20222021
Accumulated benefit obligationAccumulated benefit obligation$203.9  $194.3  Accumulated benefit obligation$289 $441 
Fair value of plan assetsFair value of plan assets140.3  124.1  Fair value of plan assets146 200 
The total accumulated benefit obligation for theseour defined benefit pension plans was $210.1$314 million and $199.9$446 million at December 31, 20192022 and 2018,2021, respectively.
Net pension expense (benefit) related to theseour defined benefit pension plans included the following components:
201920182017 202220212020
Service costService cost$9.3  $11.3  $10.5  Service cost$14 $18 $14 
Interest costInterest cost2.2  2.5  1.8  Interest cost
Expected return on plan assetsExpected return on plan assets(4.2) (6.2) (2.4) Expected return on plan assets(6)(6)(6)
Amortization of prior service costAmortization of prior service cost(1.7) 0.2  0.1  Amortization of prior service cost(5)(6)(8)
Amortization of net actuarial lossAmortization of net actuarial loss1.1  1.9  1.4  Amortization of net actuarial loss
Other—  0.5  —  
Net pension expense$6.7  $10.2  $11.4  
Net curtailments and settlements (Note 7)Net curtailments and settlements (Note 7)— (29)— 
Net pension expense (benefit)Net pension expense (benefit)$$(19)$
The components of net periodic benefit cost other than service cost and net curtailments and settlements are included in other (income) expense, net in the consolidated statements of operations. Net curtailments and settlements relate to the remeasurement of our pension benefit obligation as a result of workforce reductions in connection with our restructuring programs. See Note 7: Asset Impairment, Restructuring and Other Special Charges for further information.
The following represents the pre-tax amounts recognized for these plans in other comprehensive loss:income (loss):
201920182017202220212020
Actuarial gain (loss) arising during periodActuarial gain (loss) arising during period$(45.6) $28.3  $(17.0) Actuarial gain (loss) arising during period$92 $29 $(18)
Prior year service cost during the yearPrior year service cost during the year74.7  —  —  Prior year service cost during the year— — 
Amortization of prior service cost included in net loss(1.7) 0.2  0.1  
Amortization of net actuarial loss included in net loss1.1  1.9  1.4  
Amortization of prior service cost, including settlements, in net lossAmortization of prior service cost, including settlements, in net loss(5)(36)(8)
Amortization of net actuarial loss, including curtailments, in net lossAmortization of net actuarial loss, including curtailments, in net loss22 
Foreign currency exchange rate changes and otherForeign currency exchange rate changes and other1.0  (1.9) 3.5  Foreign currency exchange rate changes and other— 
Total other comprehensive income (loss) during periodTotal other comprehensive income (loss) during period$29.5  $28.5  $(12.0) Total other comprehensive income (loss) during period$90 $15 $(22)
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We recognized $11 million of income tax expense in other comprehensive income (loss) related to our defined benefit plans during the year ended December 31, 2022. Amounts recognized in 2021 and 2020 were immaterial.
Benefit Plan Investments
Our benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. Our plan assets in our Switzerland and German pension plans represent approximately 87% of our plan assets for these pension plans. Given the long-term nature of our liabilities, these plans have the flexibility to manage an above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically prohibited investments. However, within individual investment manager mandates, restrictions and limitations are contractually set to align with our investment objectives, ensure risk control and limit concentrations.
We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition, within a category we use different managers with various management objectives to eliminate any significant concentration of risk.
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The investment strategy for the legacy Elanco plans is to diversify in five major categories with a designated percentage invested in each including 5% liquidity, 36% fixed income35% fixed-income securities, 32%30% equity securities, a share of 21%22% in real estate and 6%13% in other alternative investments.
The acquired Bayer Animal Health plans are managed separately. The underlying investments are classified in the same categories with designated percentages in each of the following: 51% fixed-income securities, 26% equity securities and 23% in other alternative investments

Each category is diversified and comprised of the following:
Liquidity - cash and cash equivalents
Fixed-income securities - Swiss bonds, global aggregates, global aggregate corporates, global government bonds, emerging market local currencies and emerging markets hard currencies.
Equity investmentssecurities - Swiss equities, global equities, low volatility equities (to reduce risk), and emerging market equities.
Real estate - Swiss real estate and global real estate funds.
Other alternative investments - represents primarilycash, cash equivalents and investments in senior secured loans.
We determine the fair value of the investments based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analysis for allliabilities.
Real estate is mostly comprised of public holdings. Real estate investments except hedge funds, private equity-like investments and real estate.
We determinein registered investment companies that trade on an exchange are classified as Level 1 on the fair value of investments using the value reported by the partnership, adjusted for known cash flows and significant events through our reporting date. Values provided by the partnerships are primarily based on analysis of and judgments about the underlying investments. Inputs to these valuations include underlying NAVs, discounted cash flow valuations, comparable market valuations, and may also include adjustments for currency, credit, liquidity and other risks as applicable. The vast majority of these private partnerships provide us with annual financial statements including their compliance with fair valuation procedures consistent with applicable accounting standards.
We determine the fair value ofhierarchy. Other real estate investments based on the NAV provided by the fund manager. These NAVs are developed with inputs including discounted cash flow, independent appraisal and market comparable analyses.
The fair values of these pension plan assets as of December 31, 2019 by asset category are as follows:
  Fair Value Measurements Using
Asset ClassTotalQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Observable 
Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Investments Valued at Net Asset Value(1)
Cash and cash equivalents (2)
$129.0  $129.0  $—  $—  $—  
Public equity securities3.8  1.9  —  —  1.9  
Fixed income:
Developed markets2.5  2.1  —  —  0.4  
Emerging markets9.1  8.8  0.3  —  —  
Other4.3  0.9  3.4  —  —  
Total$148.7  $142.7  $3.7  $—  $2.3  
(1)Certain investments that are measured atmarked to fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
(2)Switzerland plan assets were exiting the Lilly pension plan as of December 31, 2019. As a result, assets were converted to cash and transferred to the new Elanco pension fund effective January 1, 2020.

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2019. The activity in the Level 3 investments during the year ended December 31, 2019 was not material.models that are supported by observable market-based data (Level 2).
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The fair values of these pension plan assets as of December 31, 20182022 by asset category are as follows:
Fair Value Measurements Using  Fair Value Measurements Using
Asset ClassAsset ClassTotalQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Investments Valued at Net Asset Value(1)
Asset ClassTotalQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Observable 
Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Investments Valued at NAV(1)
Public equity securitiesPublic equity securities$2.2  $1.0  $—  $—  $1.2  Public equity securities$49 $47 $— $— $
Fixed income:Fixed income:Fixed income:
Developed marketsDeveloped markets29.9  7.8  0.1  —  22.0  Developed markets64 63 — — 
Emerging marketsEmerging markets6.4  0.7  0.4  —  5.3  Emerging markets— — — 
Private alternative investments:
Hedge funds6.6  —  —  —  6.6  
Equity-like funds49.0  —  —  —  49.0  
Real estateReal estate20.1  0.1  —  —  20.0  Real estate23 17 — — 
OtherOther17.4  0.3  2.3  —  14.8  Other30 25 — — 
TotalTotal$131.6  $9.9  $2.8  $—  $118.9  Total$175 $161 $11 $— $
(1)Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2018. 2022.
The activityfair values of these pension plan assets as of December 31, 2021 by asset category are as follows:
Fair Value Measurements Using
Asset ClassTotalQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Observable
 Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Investments Valued at NAV(1)
Public equity securities$63 $60 $— $— $
Fixed income:
Developed markets76 75 — — 
Emerging markets11 11 — — — 
Real estate26 21 — — 
Other31 26 — — 
Total$207 $193 $10 $— $
(1)Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
No material transfers between Level 1, Level 2, or Level 3 investmentsoccurred during the year ended December 31, 2018 was not material.2021.
Contributions of $6.5$11 million to these pension plans are expected in 2020.
Retiree Health Benefit Plan
There are 2 retiree health benefit plan where the plan liabilities that relate to our employees were legally required to transfer to Elanco at the time of separation from Lilly. The accrued retirement benefits for these plans were $4.7 million and $3.9 million as of December 31, 2019 and 2018, respectively.2023.
Defined Contribution Plans
Elanco has defined contribution savings plans that include certain employees worldwide. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save. Our contributions to the plans are based on our employee contributions and the level of our match. Expenses related to our employees under the plans totaled $32.234 million, $20.939 million and $22.1$35 million for the years ended December 31, 2019, 2018,2022, 2021 and 2017,2020, respectively. The expense for our 401(k) plan increased in 2019 primarily due to an increase our match and participant headcount.
TreatmentMultiemployer Plans
Through the acquisition of Lilly Plans
PriorBayer Animal Health, we acquired participation in certain multiemployer arrangements with Bayer-Pensionskasse VVaG, Leverkusen (Germany) (Bayer-Pensionskasse) and Rheinishche Pensionskasse VVaG, Leverkusen (Germany) (Rheinishche Pensionskasse). These plans provide for basic pension benefits to the Separation,majority of our employees participated in definedGermany. Up to a certain salary level, the benefit pensionobligations are covered by our
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contributions and the contributions from employees to the plan. Contributions made to the multi-employer plan are expensed as incurred and were as follows:
20222021
Bayer-Pensionskasse$$
Rheinische-Pensionskasse
Total$$
The Company-specific plan information for the Bayer-Pensionskasse and Rheinische-Pensionskasse is not publicly available, and the plans are not subject to a collective-bargaining agreement. The plans provide fixed, monthly retirement payments on the basis of the credits earned by the participating employees. To the extent that the Bayer-Pensionskasse or Rheinische-Pensionskasse is underfunded, the future contributions to the plan may increase and may be used to fund retirement benefits for employees related to other postretirement plans sponsored by Lilly, which include participants of Lilly's other business. Such plans were accounted for as multiemployer plans in the combinedemployers.
The Bayer-Pensionskasse financial statements and as a result, no asset or liability was recorded by us to recognize the funded status of these plans.
We recorded expense of $4.0 million and $73.7 million for the years ended December 31, 20182021 and 2017, respectively, relating2020 indicated total assets of $10,818 million and $11,476 million, respectively; total actuarial present value of accumulated plan benefits of $10,328 million and $10,950 million, respectively; and total contributions for all participating employers of $128 million and $134 million, respectively. Our plan contributions in 2022 and 2021 did not exceed 5% of the total contributions.
The Rheinische-Pensionskasse financial statements for the years ended December 31, 2021 and 2020 indicated total assets of $1,054 million and $1,026 million, respectively; total actuarial present value of accumulated plan benefits of $1,002 million and $972 million, respectively; and total contributions for all participating employers of $52 million each year. Our plan contributions in 2022 and 2021 did not exceed 5% of the total contributions.
Contributing to these types of plans creates risk that differs from providing benefits under our employees’ participationsponsored plans, in Lilly sponsored plans. The expense recorded in 2017 included $67.0 million relatedthat if another participating employer ceases to contribute to a curtailment loss and special termination benefits for early retirement incentives offeredmultiemployer plan, additional unfunded obligations may need to be funded over time by Lilly to our employees as part of a voluntary early retirement program for the U.S. plan and which has been recorded in asset impairment, restructuring and other special charges.remaining participating employers.

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Note 19. Earnings20. Loss Per Share
Basic Earnings Per Share
As discussed in Note 1, Elanco Parent was formed for the purpose of facilitating the IPO. Lilly held all shares of Elanco Parent from the time of formation until the IPO.
Prior to IPO, there were an aggregate of 293,290,000 shares of our common stock held by Lilly (which represents the 100 shares held by Lilly prior to giving effect to the 2,932,900-for-1 stock split that occurred on September 19, 2018). In connection with the completion of the IPO, an additional 72,335,000 shares of our common stock were issued. Earnings per share was calculated based on the assumptions that the shares held by Lilly were outstanding for all periods prior to IPO.
We compute basic earnings (loss) per share by dividing net earnings (loss) available to common shareholders by the actual weighted average number of common shares outstanding for the reporting period. For the year ended December 31, 2019, weighted average number of common shares outstanding used to calculate basic earnings per share includes the impact of approximately 7.3 million shares that were issued during the period in connection with the acquisition of Aratana. See Note 6: Acquisitions for further discussion.
Diluted Earnings Per Share
Elanco has variable common stock equivalents relatedrelating to certain equity awards in stock-based compensation arrangements. We also had variable common stock equivalents related to the TEU prepaid stock purchase contracts (see Note 9: Equity for further discussion). Diluted earnings per share reflects the potential dilution that could occur if holders of the unvested RSUs, PAsequity awards and stock optionsunsettled TEUs converted their holdings into common stock. The weighted average number of potentially dilutive shares outstanding is calculated using the treasury stock method.
Weighted average diluted shares outstanding included common stock equivalents of 1.3 million for 2019. The dilutive impact for 2018 was immaterial.
Potential common shares that would have the effect of increasing diluted earnings per share (or reducing loss per share) are considered to be anti-dilutive and as such, these shares are not included in the calculation of diluted earnings (loss) per share.
Basic and diluted loss per share are calculated as follows:
202220212020
Net loss available to common shareholders$(78)$(483)$(574)
Determination of shares:
Weighted average common shares outstanding488.3 487.2441.4 
Assumed conversion of dilutive common stock equivalents (1)
— — — 
Diluted weighted average shares outstanding488.3 487.2441.4 
Loss per share (2)
Basic$(0.16)$(0.99)$(1.30)
Diluted$(0.16)$(0.99)$(1.30)
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(1)During the years ended December 31, 2022, 2021 and 2020, we reported a net loss. Therefore, dilutive common stock equivalents are not assumed to have been issued since their effect is anti-dilutive. As a result, basic and diluted weighted average shares are the same, causing diluted net loss per share to be equivalent to basic net loss per share. For the yearyears ended December 31, 2019,2022, 2021 and 2020, approximately 0.13.3 million, shares3.2 million and 4.1 million, respectively, of potential common shares were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
(2)Due to rounding conventions, earnings (loss) per share may not recalculate precisely based on the amounts presented within this table.

Note 21. Selected Quarterly Data (unaudited)
In connection with the corrections discussed in Note 2: Revisions of Previously Issued Consolidated Financial Statements, we revised our unaudited interim consolidated financial statements for the affected prior periods as follows:
Condensed Consolidated Statements of Operations

 Three Months Ended March 31, 2022Three Months Ended June 30, 2022Three Months Ended September 30, 2022
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Revenue$1,225 $$1,226 $1,177 $(2)$1,175 $1,028 $(2)$1,026 
Marketing, selling and administrative320 322 343 — 343 298 — 298 
Asset impairment, restructuring and other special charges46 (6)40 86 — 86 26 — 26 
Other (income) expense, net— — (6)(6)— 
Income (loss) before income taxes71 75 (18)(14)(42)(2)(44)
Income tax expense (benefit)23 24 (8)(4)14 21 
Net income (loss)48 51 (22)12 (10)(49)(16)(65)
Earnings (loss) per share:
Basic$0.10 — $0.10 $(0.04)0.02 $(0.02)$(0.10)(0.03)$(0.13)
Diluted$0.10 — $0.10 $(0.04)0.02 $(0.02)$(0.10)(0.03)$(0.13)
Weighted average shares outstanding:
Basic488.0 488.0 488.0 488.4 488.4 488.4 488.4 488.4 488.4 
Diluted492.2 492.2 492.2 488.4 488.4 488.4 488.4 488.4 488.4 
Amounts presented may not recalculate in total due to rounding.
 Three Months Ended March 31, 2021Three Months Ended June 30, 2021
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Revenue$1,242 $$1,243 $1,279 $(1)$1,278 
Cost of sales569 (3)566 551 — 551 
Marketing, selling and administrative348 349 385 — 385 
Asset impairment, restructuring and other special charges108 — 108 299 305 
Interest expense, net of capitalized interest61 — 61 60 — 60 
Income (loss) before income taxes(80)(77)(236)(7)(243)
Income tax expense (benefit)(19)(13)(26)(11)(37)
Net income (loss)(61)(3)(64)(210)(206)
Earnings (loss) per share:
Basic$(0.12)(0.01)$(0.13)$(0.43)0.01 $(0.42)
Diluted$(0.12)(0.01)$(0.13)$(0.43)0.01 $(0.42)
Weighted average shares outstanding:
Basic486.7 486.7 486.7 487.3 487.3 487.3 
Diluted486.7 486.7 486.7 487.3 487.3 487.3 
Amounts presented may not recalculate in total due to rounding.
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 Three Months Ended September 30, 2021Three Months Ended December 31, 2021
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Revenue$1,131 $— $1,131 $1,113 $(1)$1,112 
Marketing, selling and administrative342 — 342 329 (2)327 
Income (loss) before income taxes(130)— (130)(121)(120)
Income tax expense (benefit)(26)(22)(24)(15)
Net loss(104)(4)(108)(97)(8)(105)
Loss per share:
Basic$(0.21)(0.01)$(0.22)$(0.20)(0.02)$(0.22)
Diluted$(0.21)(0.01)$(0.22)$(0.20)(0.02)$(0.22)
Weighted average shares outstanding:
Basic487.3 487.3 487.3 487.4 487.4 487.4 
Diluted487.3 487.3 487.3 487.4 487.4 487.4 
Amounts presented may not recalculate in total due to rounding.

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2022Six Months Ended June 30, 2022Nine Months Ended September 30, 2022
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Net income (loss)$48 $$51 $26 $15 $41 $(23)$(1)$(24)
Deferred income taxes(11)(7)(40)(34)(36)(28)
Asset impairment and write-down charges28 (6)22 87 (6)81 87 (6)81 
Changes in operating assets and liabilities(331)(1)(332)(369)(15)(384)(384)(1)(385)
Year-to-date amounts presented in the table above may not equal the sum of quarter-to-date amounts due to rounding.

Three Months Ended March 31, 2021Six Months Ended June 30, 2021Nine Months Ended September 30, 2021
As ReportedRevisionsAs RevisedAs ReportedRevisionsAs RevisedAs ReportedRevisionsAs Revised
Net loss$(61)$(3)$(64)$(271)$— $(271)$(375)$(3)$(378)
Deferred income taxes(32)(28)(114)(6)(120)(119)(3)(122)
Asset impairment and write-down charges— 278 284 334 340 
Changes in operating assets and liabilities(183)(1)(184)(190)— (190)(243)— (243)
Year-to-date amounts presented in the table above may not equal the sum of quarter-to-date amounts due to rounding.

Note 20.22. Related Party Agreements and Transactions
Transactions and Agreements with Lilly Subsequent to Separation and Related toBayer
While Bayer is no longer considered a related party, we transacted with Bayer during the Separation
Amounts due from/(due to) Lillyperiod after the acquisition of Bayer Animal Health, including the period in connection with the Separation and agreed upon services as of December 31 were as follows:
20192018
TSA$10.5  $(28.0) 
Other activities(15.8) (38.0) 
Local country asset purchases(11.1) (202.7) 
Total receivable from/(payable to) Lilly$(16.4) $(268.7) 

As described in Note 1, we completed an IPO in September 2018 and Lilly fully divested all ownershipwhich Bayer was considered a principal owner of Elanco in March 2019. In connection with the Separation, we entered into various agreements with Lillyfrom August 2020 to December 2020. Those transactions primarily related to the form of our separation and certain ongoing activities that will continue for a period of time. These included, among others, a master separation agreement (MSA), a TSA and a tax matters agreement. In addition, there was a portion of our operations for which the legal transfer of our net assets did not occur prior to the Separation due to certain regulatory requirements in each of these countries.
Transitional Services Agreement (TSA)
Historically, Lilly has provided us significant shared services and resources related to corporate functions such as executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information
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technology and investor relations, which we refer to collectively as the "Lilly Services." Under the terms of the TSA, we will be able to use Lilly Services for a fixed term established on a service-by-service basis. We will pay Lilly mutually agreed-upon fees for the Lilly Services provided under the TSA, which will be based on Lilly's cost (including third-party costs) of providing the Lilly Services through March 31, 2021, and subject to a mark-up of 7% thereafter, with additional inflation-based escalation beginning January 1, 2022. The fees under the TSA became payable for all periods beginning after October 1, 2018.
Separation Activities
Subsequent to our IPO, there continue to be transactions between us and Lilly related primarily to the completion of the local country asset purchases and finalization of assetsvarious transitional services agreements (TSAs), contract manufacturing arrangements, and liabilities associated withcertain lease agreements to ensure business continuity after the legal separation from Lilly, combined income tax returns and the impact of the tax matters agreement, historical Lilly retirement benefits, and centralized cash management. The net impact of these activities of $51.2 millionacquisition.
For regulatory purposes in certain jurisdictions, consideration was required to be paid locally at closing in addition to amounts paid globally for the year ended December 31, 2019 has been reflected as Separation Activities within shareholders' equity.acquisition. Pursuant to the stock and asset purchase agreement, Bayer provided a refund for payment amounts duplicated in these regions. The most significant of these activities includes the finalization of the local country valuation of businesstotal amount paid to and the resulting impact on deferred tax assetsreceived from Bayer in 2021 and the impact of combined tax returns.

Other Activities
We continue to share certain services and back office functions with Lilly, which in certain instances result in Lilly paying costs2020 for Elanco (e.g., utilities, local country operating costs, etc.) that are then passed through to Elanco for reimbursement. These amounts are included in cash flows from operating activities in our consolidated and combined statements of cash flows. In addition, we operate through a single treasury settlement process and prior to thethose local country asset purchases (as described below) continued to transact through Lilly's processes in certain instances. As a result of these activities, there were certain amounts of financing that occurred between Lilly and Elanco during the year ended December 31, 2019. These amounts are included in cash flows from financing activities in our consolidated and combined statements of cash flows.

Local Country Asset Purchases
The legal transfer of certain of our net assets did not occur prior to the Separation due to certain regulatory requirements in each of these countries. The related assets, liabilities, and results of operations have been reported in our consolidated and combined financial statements, as we are responsible for the business activities conducted by Lilly on our behalf and are subject to the risks and entitled to the benefits generated by these operations and assets under the terms of the MSA. We held restricted cash, and the associated payable to Lilly, at the date of Separation to fund the acquisition of these assets. As of December 31, 2019, the majority of these assets have been legally acquired and the remainder are expected to be purchased during 2020. Restricted cash and Payable to Lilly of $11.1 million are recorded in the consolidated balance sheet for the remainder of the assets expected to be purchased by the end of 2020.
Intellectual Property and Technology License Agreement.
We entered into an intellectual property and technology license agreement with Lilly immediately prior to the completion of the IPO. Under the intellectual property and technology license agreement, Lilly granted Elanco an exclusive, perpetual license to exploit products in the animal health field that utilize or use certain of Lilly's intellectual property (excluding trademarks). In addition, Lilly granted Elanco non-exclusive, non-sublicensable license to screen certain compounds in Lilly's compound libraries to exploit products in the animal use certain of Lilly's intellectual property. This screening license has an initial term of two years, subject to 3 one-year extensions, each of which requires Lilly's consent.
We also entered into a tax matters agreement (TMA), an employee matters agreement, a toll manufacturing and supply agreement and a registration rights agreement with Lilly in connection with the Separation.
Our consolidated and combined financial statement of operations includes revenue related to a toll manufacturing agreement of $17.8was approximately $16 million and $7.0 million for the years ended December 31, 2019 and 2018, respectively. Also included are approximately $93.7 million and $28.1 million related to TSA charges for 2019 and 2018, respectively.
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Transactions with Lilly Prior to Separation
Prior to the IPO, we did not operate as a standalone business and had various relationships with Lilly whereby Lilly provided services to us. The impact on our historical combined financial statements includes the following:
Transfers to/from Lilly, net
As discussed in Note 2: Basis of Presentation, net parent company investment is primarily impacted by contributions from Lilly, which are the result of treasury activity and net funding provided by or distributed to Lilly. For the years ended December 31, 2018 and 2017, net transfers (to)/from Lilly were $(226.3) million and $873.3$633 million, respectively. The most significant activity impacting the 2017 transfer was the financing by Lilly of our acquisition in the amount of $882.1 million for the acquisition of BIVIVP as described in Note 6: Acquisitions. Other activities that impacted the net transfers (to)/from Lilly include corporate overhead and other allocations, income taxes, retirement benefits, and centralized cash management.

Corporate Overhead and Other Allocations
Prior to full separation, Lilly provided us certain services, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. We provide Lilly certain services related to manufacturing support. Our financial statements reflect an allocation of these costs. When specific identification is not practicable, the remainder have been allocated primarily on a proportional cost method on a basis of revenue or headcount.
The allocations of services from Lilly, prior to IPO, to usAll local country asset purchases were reflected as follows in the combined statements of operations:
2018(1)
2017
Cost of sales$21.8  $31.8  
Research and development2.2  2.8  
Marketing, selling and administrative81.2  117.1  
Total$105.2  $151.7  
(1) Through September 30, 2018
There were no allocations from Lilly to us reflected in the consolidated and combined statement of operations for the year ended December 31, 2019.
We provided Lilly certain services related to manufacturing support. Allocations of manufacturing support from us to Lilly were $3.7 million and $6.2 million for the years ended December 31, 2018 and 2017, respectively, which reduced the cost of sales in the consolidated and combined statements of operations.
The financial information herein may not necessarily reflect our consolidated financial position, results of operations and cash flows in the future or what they would have been if we had been a separate, standalone entity during the periods presented. Management believes that the methods used to allocate expenses are reasonable.
Stock-based Compensation
As discussed in Note 14: Stock-based Compensation, prior to full separation, our employees participated in Lilly stock-based compensation plans, the costs of which were allocated to us and recorded in cost of sales, research and development, and marketing, selling and administrative expenses in the consolidated and combined statements of operations. The costs of such plans related to our employees were $5.1 million, $26.0 million and $25.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Retirement Benefits
As discussed in Note 18: Retirement Benefits, prior to full separation, our employees participated in defined benefit pension and other post retirement plans sponsored by Lilly, the costs and benefits of which were recorded in the consolidated and combined statement of operations in cost of sales, research and development, and marketing, selling and administrative expenses. The costs/(benefits) of such plans related to our employees were $(6.3) million and $73.7 million for the years ended December 31, 2018 and 2017, respectively.
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Centralized Cash Management
Lilly uses a centralized approach to cash management and financing of operations. Until Separation, the majority of our business was party to Lilly’s cash pooling arrangements to maximize Lilly's availability of cash for general operating and investing purposes. Under these cash pooling arrangements, cash balances were swept regularly from our accounts. Cash transfers to and from Lilly’s cash concentration accounts and the resulting balances at the end of each reporting period were reflected in net parent company investment in the consolidated balance sheets.
Debt
Lilly’s third-party debt and the related interest expense were not allocated to us for any of the periods presented as we were not the legal obligor of the debt and Lilly borrowings were not directly attributable to our business.

Note 21. Selected Quarterly Data (unaudited)
2019FourthThirdSecondFirst
Revenue$787.0  $771.3  $781.6  $731.1  
Cost of sales410.1  360.4  356.0  343.8  
Operating expenses(1)
253.2  262.2  269.7  245.2  
Asset impairment, restructuring, and other special charges51.6  77.2  31.8  24.9  
Interest expense, net of capitalized interest18.7  18.7  20.7  20.8  
Income (loss) before income taxes(4.3) (12.5) 50.2  44.8  
Income tax (benefit) expense5.2  (22.5) 14.3  13.3  
Net income (loss)(9.5) 10.0  35.9  31.5  
Earnings (loss) per share—basic and diluted(0.03) 0.03  0.10  0.09  

2018Fourth  Third  Second  First  
Revenue$799.3  $761.1  $770.2  $736.2  
Cost of sales412.5  369.8  431.5  360.0  
Operating expenses(1)
246.2  237.9  252.5  245.2  
Asset impairment, restructuring, and other special charges46.0  12.4  68.0  2.4  
Interest expense, net of capitalized interest21.0  8.6  —  —  
Income (loss) before income taxes(2.2) 78.8  (40.0) 77.5  
Income tax (benefit) expense(18.6) 18.6  22.8  4.8  
Net income (loss)16.4  60.2  (62.8) 72.7  
Earnings (loss) per share—basic and diluted0.04  0.20  (0.21) 0.25  
(1)Includes research and development and marketing, selling, and administrative expenses.
Numbers may not add up to totals for each year due to rounding.

Note 22. Subsequent Events
Bayer Animal Health acquisition financing
Equity offerings
On January 22, 2020, we entered into an underwriting agreement in which we agreed to sell approximately 22.7 million shares of our common stock at a public offering price of $32.00 per share. In connection with the offering, we granted the underwriters an option to purchase up to an additional 2.3 million shares, which was exercised in full on January 23, 2020. As a result, we issued and sold a total of approximately 25.0 million shares of our common stock. Total cash of $769.9 million was received upon closing on January 27, 2020.
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In addition, on January 22, 2020, we issued $550 million in tangible equity units (TEUs). We offered 11 million 5.00% TEUs at the stated amount of $50 per unit, composed of a prepaid stock purchase contract and a senior amortizing note due February 1, 2023 (the mandatory settlement date). Total cash of $530.1 million was received upon closing on January 27, 2020, which was comprised of $453.8 million of prepaid stock purchase contracts and $76.3 million of senior amortizing notes, net of debt issuance costs. Unless the stock purchase contracts are redeemed by us or settled earlier at the unit holder’s option, they are mandatorily convertible into shares of our common stock at a minimum of 1.3021 shares per purchase contract or a maximum of 1.5625 shares per purchase contract on the mandatory settlement date. This corresponds to a minimum of 14.3 million shares and a maximum of 17.2 million shares.
Debt activity
On January 31, 2020, we used a portion of the proceeds from the common stock and TEU issuances to repay indebtedness outstanding under our existing term loan facility. We paid $372.4 million in cash, composed of $371.4 million of principal and $1.0 million of accrued interest, resulting in a debt extinguishment loss of $0.8 million, primarily related to the write-off of deferred debt issuance costs.
On February 4, 2020, we successfully priced our senior secured credit facilities, consisting of the following:
Term loan B facility with an aggregate principal amount of $4,275.0 million and a maturity of seven years.
Revolving loan facility providing up to $750.0 million and a maturity of five years.
The term loan B facility was priced at par at LIBOR plus 175 basis points, and the revolving loan facility is expected to bear interest at LIBOR plus an applicable margin ranging between 1.50% and 2.25% per annum based on our corporate family rating or corporate credit rating.
We intend to use the proceeds from the equity and debt activities to finance the cash portion of the pending acquisition of Bayer's animal health business and to pay related fees and expenses. As a result, we have obtained substantially all of the financing necessary to consummate the acquisition and do not currently intend to pursue any additional financing previously provided under the commitment letter obtained in August 2019 (see Note 16: Commitments and Contingencies).
Divestitures
Osurnia and Capstar
In January 2020, we signed agreements to divest the worldwide rights to Osurnia and the U.S. rights to Capstar for an aggregate of $230 million in all cash deals, with the intent to advance our efforts to secure the necessary regulatory clearances for the pending acquisition of the Bayer animal health business. The closing of these transactions is contingent on us entering into consent decrees with certain agencies in connection with the pending acquisition as well as customary closing conditions. Both divestitures are expected to close by the end of 2020.
The related assets met the assets held for sale criteriacompleted as of December 31, 2019. No adjustment was required to record the assets at the lower of their carrying amounts or fair values less costs to sell on the consolidated balance sheet. Assets and liabilities considered held for sale in connection with the divestitures as of December 31, 2019 were included in the respective line items in the consolidated balance sheet as follows:2021.

Inventories$10.6 
Other intangibles, net61.2 114

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Property and equipment, net0.2 
Total assets held for sale72.0 
Deferred taxes(1.4)
Total liabilities held for sale$(1.4)

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None.
Other intangibles, net classified as held for sale primarily consist of marketed products. We determined that the disposal of these net assets does not qualify for reporting as a discontinued operation because it does not represent a strategic shift that has or will have a major effect on our operations and financial results.
Vecoxan
In February 2020, we signed an agreement to divest the worldwide rights to Vecoxan for $55 million in an all cash deal, with the intent to advance our efforts to secure the necessary regulatory clearances for the pending acquisition of the Bayer animal health business. The closing of this transaction is contingent on us entering into consent decrees with certain agencies in connection with the pending acquisition as well as customary closing conditions. This divestiture is expected to close by the end of 2020.

ITEM 9A. CONTROLS AND PROCEDURES
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange(the “Exchange Act”)) as of the end of the period covered by this report.Based on the evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that as of the end of such period our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act, and that information is accumulated and communicatedwere ineffective due to the Chief Executive Officermaterial weakness in internal control over financial reporting described below. Notwithstanding this material weakness, management concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial condition, results of operations and ChiefFinancial Officer,cash flows for the periods covered by this report and our external auditors have issued an unqualified opinion on our consolidated financial statements as appropriate, to allow timely discussions regarding required disclosure.of and for the year ended December 31, 2022.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)).Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). The Company acquired Aratana and Prevtec in July 2019, and management has excluded Aratana and Prevtec’sinternal control over financial reporting from our assessment ofIn connection with the effectivenessaudit of our internal control as of December 31, 2019.Aratana and Prevtec represent approximately 3 percent of consolidated total assets and less than 1 percent of consolidated net sales as of andfinancial statements for the fiscal year ended December 31, 2019. Based on this evaluation,2022, we identified a material weakness related to the ineffective review of the annual income tax provision, including the valuation allowance related to deferred tax assets. This resulted in the immaterial revisions to our management has concluded that, as ofpreviously-reported financial results for the years ended December 31, 2019, our internal control over financial reporting was effective.2021 and 2020, as detailed within this report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated and combined financial statements and the effectiveness of our internal controls over financial reporting as of December 31, 20192022 and has issued an adverse report thereon as stated in their report which is included herein.
Remediation of Material Weakness
As discussed above, the material weakness related to the ineffective review of the annual income tax provision was identified in connection with the audit of our financial statements for the fiscal year ended December 31, 2022. We are in the process of identifying all issues contributing to this material weakness and developing a remediation plan.
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Changes in Internal Control
During the fourth quarter of 2019, thereThere were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
reporting during the quarter ended December 31, 2022 other than the identification of the material weakness discussed above.
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ItemITEM 9B. Other InformationOTHER INFORMATION


Report of Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors of Elanco Animal Health Incorporated

Opinion on Internal Control Over Financial Reporting

We have audited Elanco Animal Health Incorporated’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Elanco Animal Health Incorporated (the Company) has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on the COSO criteria.

As indicatedA material weakness is a deficiency, or combination of deficiencies, in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting, didsuch that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not include the internal controls of Aratanabe prevented or detected on a timely basis. The following material weakness has been identified and Prevtec, which are included in management’s assessment. Management has identified a material weakness related to the 2019 consolidated and combined financial statementsineffective review of the Company and constituted 3% of total assets as of December 31, 2019 and less than 1% of net sales forannual income tax provision, including the year then ended.Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Aratana and Prevtec.

valuation allowance related to deferred tax assets.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20192022 and 2018,2021, the related consolidated and combined statements of operations, comprehensive income (loss),loss, equity and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notesnotes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated February 28, 2020March 1, 2023, which expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
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assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Ernst & Young LLP



Indianapolis, Indiana
February 28, 2020March 1, 2023

PartITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.

PART III
ItemITEM 10. Directors, Executive Officers, and Corporate GovernanceDIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information on Directors, Executive Officers and Corporate Governance can be found in the Proxy Statement under "Governance."Proposal No. 1: Election of Directors," "Corporate Governance," and "Executive Officers." That information is incorporated in this report by reference.    
ItemITEM 11. Executive CompensationEXECUTIVE COMPENSATION

Information on director compensation, executive compensation, and compensation committee matters can be found in the Proxy Statement under “Director“Non-Employee Director Compensation,” "Committees of the"Corporate Governance – Board of Directors - Compensationand Committee Information – Board Committees," "Compensation Discussion and Analysis," and “Executive Compensation Tables.” That information is incorporated in this report by reference.

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Item
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ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
Information relating to ownership of the company’s common stock by management and by persons known by the company to be the beneficial owners of more than five percent of the outstanding shares of common stock is found in the Proxy Statement under “Ownership of Company Stock.“Stock Ownership Information.” That information is incorporated in this report by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our compensation plans under which shares of our common stock have been authorized for issuance as of December 31, 20192022 can be found in the Proxy Statement under “Securities Authorized for Issuance Under Equity“Equity Compensation Plans”Plan Information” and is incorporated in this report by reference.

ItemITEM 13. Certain Relationships and Related Transactions, and Director IndependenceCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Person Transactions
Information relating to related person transactions and the board’s policies and procedures for approval of related person transactions can be found in the Proxy Statement under “Transactions with“Corporate Governance – Related Persons.Party Transactions.” That information is incorporated in this report by reference.
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Director Independence
Information relating to director independence can be found in the Proxy Statement under “Director“Corporate Governance – Director Independence” and is incorporated in this report by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Item 14. Principal Accountant Fees and Services
Information related to the fees and services of our principal independent accountants, Ernst & Young LLP, Auditor Firm ID: 42, can be found in the Proxy Statement under “Proxy Item“Proposal No. 2. Proposal to Ratify the Appointment2: Ratification of PrincipalSelection of Independent Auditor.” That information is incorporated in this report by reference.

PartPART IV
ItemITEM 15. Exhibits and Financial Statement SchedulesEXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1. Financial Statements
The following consolidated combined financial statements of the company and its subsidiaries are found at Item 8:
Consolidated and Combined Statements of Operations—Years Ended December 31, 2019, 2018,2022, 2021 and 20172020
Consolidated and Combined Statements of Comprehensive Income—Loss—Years Ended December 31, 2019, 2018,2022, 2021 and 20172020
Consolidated Balance Sheets—December 31, 20192022 and 20182021
Consolidated and Combined Statements of Equity—Years Ended December 31, 2019, 2018,2022, 2021 and 20172020
Consolidated and Combined Statements of Cash Flows—Years Ended December 31, 2019, 2018,2022, 2021 and 20172020
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Notes to Consolidated and Combined Financial Statements
2. Financial Statement Schedules
The consolidated and combined financial statement schedules of the company and its subsidiaries have been omitted because they are not required, are inapplicable, or are adequately explained in the financial statements.
Financial statements of interests of 50 percent or less, which are accounted for by the equity method, have been omitted because they do not, considered in the aggregate as a single subsidiary, constitute a significant subsidiary.
3. Exhibits
The following exhibits are either filed or furnished herewith (as applicable) or, if so indicated, incorporated by reference to the documents indicated in parentheses, which have previously been filed or furnished with the Securities and Exchange Commission.

Exhibit Number Description
Agreement and Plan of Merger by and among Elanco Animal Health Incorporated, Elanco Athens Inc. and Aratana Therapeutics, Inc., dated April 26, 2019 (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on April 26, 2019).
Share and Asset Purchase Agreement, dated as of August 20, 2019, between Bayer Aktiengesellschaft and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on August 20, 2019).
Amendment No. 1 to Share and Asset Purchase Agreement, dated as of October 15, 2019, between Bayer Aktiengesellschaft and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on October 17, 2019).
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Amendment No. 2 to Share and Asset Purchase Agreement, dated as of January 17, 2020, between Bayer Aktiengesellschaft and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on January 17, 2020).
Amendment No. 3 to Share and Asset Purchase Agreement, dated as of June 15, 2020, between Bayer Aktiengesellschaft and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on June 18, 2020).
Amendment No. 4 to Share and Asset Purchase Agreement, dated as of July 30, 2020, between Bayer Aktiengesellschaft and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 2.5 of the Current Report on Form 8-K filed with the SEC on August 3, 2020).
Annex 27 to the Share and Asset Purchase Agreement, dated as of August 20, 2019, between Bayer Aktiengesellschaft and Elanco Animal Health Incorporated (Incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-3 (File No. 333-235991) filed with the SEC on January 21, 2020).
Agreement and Plan of Merger, dated as of June 15, 2021, by and among Elanco Animal Health Incorporated, Knight Merger Sub, Inc., and Kindred Biosciences, Inc. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on June 16, 2021).
First Amendment to Agreement and Plan of Merger, dated as of June 30, 2021, by and among Elanco Animal Health Incorporated, Knight Merger Sub, Inc., and Kindred Biosciences, Inc. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on July 1, 2021).
 Amended and Restated Articles of Incorporation of Elanco Animal Health Incorporated, effective SeptemberMay 18, 20182022 (incorporated by reference to Exhibit 3.1 of the CurrentQuarterly Report on Form 8-K10-Q filed with the SEC on September 26, 2018)August 8, 2022).
 Amended and Restated Bylaws of Elanco Animal Health Incorporated, effective August 8, 2019May 18, 2022 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on August 9, 2019)May 19, 2022).
 Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on August 28, 2018).
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 Indenture, dated August 28, 2018, between Elanco Animal Health Incorporated and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.2 of Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on August 28, 2018).
 First Supplemental Indenture, dated August 28, 2018, between Elanco Animal Health Incorporated and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.3 of Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on August 28, 2018).
Second Supplemental Indenture, dated as of January 27, 2020, between Elanco Animal Health Incorporated and Deutsche Bank Trust Company Americas, as trustee, including the form of amortizing note (incorporated by reference to Exhibit 4.4 of Current Report on Form 8-K filed with the SEC on January 27, 2020).
Purchase Contract Agreement, dated as of January 27, 2020, between Elanco Animal Health Incorporated and Deutsche Bank Trust Company Americas, as purchase contract agent, as attorney-in-fact for holders of the purchase contracts referred to therein and as trustee under the indenture referred to therein, including the form of unit and form of purchase contract (incorporated by reference to Exhibit 4.1 of Current Report on Form 8-K filed with the SEC on January 27, 2020).
Description of Securities (filed herewith)
Master SeparationCredit Agreement, dated September 24, 2018, between Eli Lilly and Company andas of August 1, 2020, among Elanco Animal Health Incorporated, as borrower, Elanco US Inc., as co-borrower, the lenders party thereto from time to time, Goldman Sachs Bank USA, as term loan administrative agent, and as collateral agent and security trustee, and JPMorgan Chase Bank, N.A., as revolver administrative facility agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on September 26, 2018)August 3, 2020).
Transitional Services Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on September 26, 2018).
Tax Matters Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on September 26, 2018).
Employee Matters Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed with the SEC on September 26, 2018).
Toll Manufacturing and Supply Agreement, dated September 24, 2018, between Eli Lilly Export S.A. and Elanco UK AH Limited (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed with the SEC on September 26, 2018).
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Transitional Trademark LicenseIncremental Assumption Agreement, dated September 24, 2018, among Eli LillyAugust 12, 2021, by and Company, Elanco Animal Health Incorporated and Elanco US Inc. (incorporated by reference to Exhibit 10.7 of the Current Report on Form 8-K filed with the SEC on September 26, 2018).
Intellectual Property and Technology License Agreement, dated September 24, 2018, among Eli Lilly and Company, Elanco Animal Health Incorporated and Elanco US Inc. (incorporated by reference to Exhibit 10.8 of the Current Report on Form 8-K filed with the SEC on September 26, 2018).
Revolving Loan Credit Agreement, dated as of September 5, 2018, among Elanco Animal Health Incorporated, as borrower, JPMorgan Chase Bank, N.A.Elanco US Inc., as administrative agent and the other Lenderssubsidiary loan parties party thereto, (incorporated by reference to Exhibit 10.24 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed withFarm Credit Mid-America, PCA, as incremental term lender, and Goldman Sachs Bank USA, as the SEC on September 6, 2018).
First Amendment to Revolving Loan Credit Agreement, dated as of September 5, 2018, among Elanco Animal Health Incorporated, as borrower, JPMorgan Chase Bank, N.A., as administrativeterm facility agent and the other Lenders party thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 20, 2019)August 12, 2021).
Term Loan CreditIncremental Assumption Agreement, dated as of September 5, 2018,April 19, 2022, by and among Elanco Animal Health Incorporated, as borrower, JPMorgan Chase Bank, N.A.Elanco US Inc., as administrative agent and the other Lenderssubsidiary loan parties party thereto, Farm Credit Mid-America, PCA, as incremental term lender, and Goldman Sachs Bank USA, as the term facility agent (incorporated by reference to Exhibit 10.25 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018).
First Amendment to Term Loan Credit Agreement, dated as of September 5, 2018, among Elanco Animal Health Incorporated, as borrower, JPMorgan Chase Bank, N.A., as administrative agent and the other Lenders party thereto (incorporated by reference to Exhibit 10.210.1 of the Current Report on Form 8-K filed with the SEC on DecemberApril 20, 2019).2022)
2018Incremental Assumption Agreement, dated June 28, 2022 by and among Elanco Stock PlanAnimal Health Incorporated, Elanco US Inc., the subsidiary loan parties party thereto, Bank of America, N.A., as incremental term lender, each other person party thereto as incremental term lender, and Goldman Sachs Bank USA, as the term facility agent. (incorporated by reference to Exhibit 4.310.1 of Registration Statementthe Current Report on Form S-8 (Registration No. 333-227447)8-K filed with the SEC on September 20, 2018).*June 29, 2022)
Elanco Animal Health Incorporated Directors’ Deferral Plan as amended (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on May 14, 2019)*
Director Letter Agreement between Emu Holdings Company and R. David Hoover, dated as of May 25, 2018 (incorporated by reference to Exhibit 10.19 of Elanco Animal Health Incorporated's registration statement on Form S-1 (File No. 333-226536) filed with the SEC on August 2, 2018)*
Form of 2018 Change in Control Severance Pay Plan for Select Employees (incorporated by reference to Exhibit 10.20 of Amendment No. 1 to Elanco Animal Health Incorporated's registration statement on Form S-1 (File No. 333-226536) filed with the SEC on August 28, 2018).*
Form of Elanco Animal Health Incorporated Restricted Stock Unit Awards Agreement (incorporated by reference to Exhibit 10.21 of Amendment No. 1 to Elanco Animal Health Incorporated's registration statement on Form S-1 (File No. 333-226536) filed with the SEC on August 28, 2018).*
Form of Elanco Animal Health Incorporated Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.22 of Amendment No. 1 to Elanco Animal Health Incorporated's registration statement on Form S-1 (File No. 333-226536) filed with the SEC on August 28, 2018).*
Retention Bonus Agreement, dated October 18, 2018, by and between Elanco US Inc. and Todd S. Young (incorporated by reference to Exhibit 10.2 to Elanco Animal Health Incorporated's Report on Form 8-K filed with the SEC on October 30, 2018).*
Employment Offer Letter with Mr. Todd S. Young, dated October 15, 2018, by and between Elanco US Inc. and Todd S. Young (incorporated by reference to Exhibit 10.1 to Elanco Animal Health Incorporated's Report on Form 8-K filed with the SEC on October 30, 2018).*
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Form of Performance Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on February 19, 2019)*
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on February 19, 2019)*
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.22 to Annual ReportingReport on Form 10-K filed with the SEC on February 20, 2019)*
Form of Replacement Performance Award Agreement for Certain Named Executive Officers (incorporated by reference to Exhibit 10.23 to Annual Report on Form 10-K filed with the SEC on February 20, 2019)*
Form of Replacement Performance Award Agreement for Jeffery N. Simmons (incorporated by reference to Exhibit 10.24 to Annual Report on Form 10-K filed with the SEC on February 20, 2019)*
Form of Replacement Restricted Stock Unit Award Agreement for Certain Named Executive Officers (incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K filed with the SEC on February 20, 2019)*
The Elanco Corporate Bonus Plan (incorporated by reference to Exhibit 10.16 of Elanco Animal Health Incorporated's registration statement on Form S-1 (File No. 333-226536))*
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Form of Elanco Animal Health Incorporated Restricted Stock Unit Award Agreement for non-employee directors with respect to annual awards (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q with the SEC on May 14, 2019).*
Form of Elanco Animal Health Incorporated Restricted Stock Unit Award Agreement for non-employee directors with respect to one-time founder award (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on May 14, 2019).*
Elanco Animal Health Incorporated Replacement Restricted Stock Unit Award Agreement, dated March 12, 2019, by Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 14, 2019).*
Elanco Animal Health Incorporated Executive Deferral Plan (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on August 13, 2019)
Form of Elanco Animal Health Incorporated Restricted Stock Unit Award Agreement for executives with respect to 2020 annual awards (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on May 7, 2020)*
Form of Elanco Animal Health Incorporated Performance-Based Award Agreement for executives with respect to 2020 annual awards (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed with the SEC on May 7, 2020).*
Form of Elanco Animal Health Incorporated Sign-On Restricted Stock Unit Award Agreement for executives (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 7, 2020).*
Elanco Executive Severance Pay Plan and Summary (filed incorporated by reference to Exhibit 10.31 of the Annual Report on Form 10-K filed with the SEC on March 1, 2021)*
Form of Elanco Animal Health Incorporated Restricted Stock Unit Award Agreement for executives with respect to 2021 annual awards (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on May 7, 2021).*
Form of Elanco Animal Health Incorporated Performance-Based Award Agreement for executives with respect to 2021 annual awards (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed with the SEC on May 7, 2021).*
Elanco Animal Health Incorporated Amended and Restated Corporate Bonus Plan (filed herewith).*
Elanco Animal Health Incorporated Amended and Restated 2018 Elanco Stock Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on May 21, 2021).*
Form of Elanco Animal Health Incorporated Restricted Stock Unit Award Agreement for executives with respect to annual awards (filed herewith).*
Form of Elanco Animal Health Incorporated Performance-Based Award Agreement for executives with respect to annual awards (filed herewith).*
Form of Elanco Animal Health Incorporated Nonqualified Stock Option Award Agreement for executives with respect to annual awards (filed herewith).*
Elanco Animal Health Incorporated Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on May 19, 2022).*
Subsidiaries of Elanco Animal Health Incorporated (filed herewith).
Consent of Ernst & Young LLP (filed herewith).
Section 302 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Section 302 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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101Interactive Data Files.
104The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL.
*Management contracts or compensatory plans or arrangements

ItemITEM 16. FormFORM 10-K SummarySUMMARY

Not applicable.

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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
ELANCO ANIMAL HEALTH INCORPORATED
(Registrant)
Date:February 28, 2020March 1, 2023/s/ Jeffrey N. Simmons
Jeffrey N. Simmons
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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/s/ Jeffrey N. SimmonsDate:February 28, 2020March 1, 2023
Jeffrey N. Simmons
President and Chief Executive Officer (principal executive officer) and Director
/s/ Todd S. YoungDate:February 28, 2020March 1, 2023
Todd S. Young
Executive Vice President, Chief Financial Officer (principal financial officer)
/s/ James M. MeerDate:February 28, 2020March 1, 2023
James M. Meer
Senior Vice President, Chief Accounting Officer (principal accounting officer)
/s/ R. David HooverDate:February 28, 2020March 1, 2023
R. David Hoover
Chairman of the Board
/s/ Kapila Kapur AnandDate:February 28, 2020March 1, 2023
Kapila Kapur Anand
Director
/s/ John P. BilbreyDate:February 28, 2020March 1, 2023
John P. Bilbrey
Director
/s/ William F. DoyleDateMarch 1, 2023
William F. Doyle
Director
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/s/ Art A. GarciaDate:February 28, 2020March 1, 2023
Art A. Garcia
Director
/s/ Michael J. HarringtonDate:February 28, 2020March 1, 2023
Michael J. Harrington
Director
/s/ Paul HerendeenDate:March 1, 2023
Paul Herendeen
Director
/s/ Deborah T. KochevarDate:February 28, 2020March 1, 2023
Deborah T. Kochevar
Director
/s/ Lawrence E. KurziusDate:February 28, 2020March 1, 2023
Lawrence E. Kurzius
Director
/s/ Kirk McDonaldDate:February 28, 2020March 1, 2023
Kirk McDonald
Director
/s/ Denise Scots-Knight Ph.D.Date:February 28, 2020March 1, 2023
Denise Scots-Knight Ph.D.
Director

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