Elanco Animal Health Inc. has reported financial results for the second quarter of 2019, which reflect underlying price and volume growth and improved profitability through execution of the company's targeted, three-pillar strategy focused on "Innovation, Portfolio & Productivity."
“We continue to be pleased with the delivery of our productivity agenda driving the significant increase in adjusted gross margin as a percent of sales. We are encouraged by the 9% constant currency growth in our targeted growth categories and continue to make strategic investments that advance all three pillars of our strategy," Elanco president and chief executive officer Jeff Simmons said. "While discrete external events provide headwinds to our global business, we continue to leverage our portfolio approach to respond and deliver to our expectations."
Elanco said in the second quarter of 2019, total revenue was $781.6 million, up 1% -- or an increase of 4% without the impact of foreign exchange rates -- compared with the second quarter of 2018. Revenue, excluding strategic exits, totaled $754.1 million, flat with the prior year and up 3% without the impact of foreign exchange rates.
Elanco said second-quarter 2019 gross profit increased 26% to $425.6 million compared with the second quarter of 2018.
Gross margin as a percent of revenue increased 1,050 basis points to 54.5% versus the second quarter of 2018, Elanco said in the announcement. The increase was primarily due to continued improvements in manufacturing productivity and, to a lesser extent, price improvement and the favorable impact of foreign exchange rates. Additionally, the second-quarter 2018 gross margin was lower due to net inventory adjustments related to the suspension of commercial activities for Imrestor and the closure of the Larchwood, Iowa, facility, while the 2019 gross margin improvement included the benefit of high plant utilization that likely will not persist throughout the year.
For its business segments, Elanco reported that:
- Companion Animal Disease Prevention revenue increased 4% for the quarter, driven by both increased volume and price, partially offset by an unfavorable impact from foreign exchange rates. Without the impact of foreign exchange rates, the category grew 6%, the company said. The revenue increase was driven by the continued uptake of Interceptor Plus and Credelio but partially offset by declines in certain older-generation parasiticides.
- Companion Animal Therapeutics revenue increased 22% for the quarter, driven by increased volume and, to a lesser extent, price, which was partially offset by an unfavorable impact from foreign exchange rates. Without the exchange rate impact, the category grew 26%. The revenue increase was driven by increased demand for products across the therapeutics portfolio, including the continued uptake of Galliprant.
- Food Animal Future Protein & Health revenue increased 2% for the quarter, driven by increased volume and price and offset by an unfavorable impact from foreign exchange rates. Without the exchange rate impact, the category grew 7%. Growth was driven by the aqua portfolio as well as the poultry portfolio and nutritional health products.
- Food Animal Ruminants & Swine revenue decreased 9% for the quarter, driven by flat prices, a decline in volume and, to a lesser extent, an unfavorable impact from foreign exchange rates. Without the exchange rate impact, the category declined 6%. International business was affected by softness in swine products due to African swine fever — particularly in Asia — the continued implementation of antimicrobial policies in certain Asian countries and product rationalizations aligned with Elanco's productivity agenda. In the U.S., unfavorable purchasing patterns for Rumensin (monensin) were offset by favorable purchasing patterns in other cattle products, primarily Optaflexx (ractopamine). A global supply disruption of certain cattle products also provided a headwind in the quarter.
- Strategic Exits are businesses Elanco has exited or has made the decision to exit. Revenue from Strategic Exits increased 52% for the quarter and represented 4% of total revenue. The increase is due to higher contract manufacturing demand from Boehringer Ingelheim for companion animal vaccines and a favorable comparison in the second quarter related to the manufacturing of human growth hormone for Lilly, as this contract manufacturing agreement was not in place until the fourth quarter of 2018.
The total operating expense increased 7% in the second quarter, Elanco said. Marketing, selling and administrative expense increased 5% to $200.9 million, reflecting increased direct-to-consumer marketing efforts in the companion animal portfolio and, to a lesser extent, increased expenses as a result of operating as a public company. Research and development expenses increased 12% to $68.8 million, or 8.8% of revenue, due to the timing of spending within the year, increased project spend as a result of pipeline progression and increased costs as a result of operating as a stand-alone company, Elanco reported.
Elanco also updated its full-year guidance for revenue and earnings per share to reflect underlying market dynamics in its business, primarily the increased headwind from African swine fever and anticipated supply disruption of certain injectable cattle products offset by the positive impact from business development actions. The company is lowering the top end of the revenue range by $20 million, which reflects up to 4% growth in core revenue, excluding the impact of foreign exchange rates.
"Elanco is delivering on our Innovation, Portfolio & Productivity strategy, and the stand-up of the independent company is on track. We are narrowing our full-year guidance to reflect discrete events in the external market but are pleased with our margin expansion progress and confident in the growth of our underlying business," Simmons said.
Elanco is a global animal health company that develops products and knowledge services to prevent and treat disease in food animals and pets in more than 90 countries. With a 64-year heritage, it innovates to improve the health of animals and benefit customers while fostering an inclusive, cause-driven culture for more than 5,800 employees.