No. 1:20-cv-01460-SEB-MG
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`ELANCO ANIMAL HEALTH
`INCORPORATED,
`JEFFREY N. SIMMONS,
`TODD S. YOUNG,
`JAMES M. MEER,
`R. DAVID HOOVER,
`KAPILA K. ANAND,
`JOHN P. BILBREY,
`ART A. GARCIA,
`MICHAEL J. HARRINGTON,
`DEBORAH T. KOCHEVAR,
`LAWRENCE E. KURZIUS,
`KIRK MCDONALD,
`DENISE SCOTS-KNIGHT,
`
`
`v.
`
`Defendants.
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`
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`
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`
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 1 of 58 PageID #: 1047
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF INDIANA
`INDIANAPOLIS DIVISION
`
`
`SANDRA HUNTER Individually and on behalf of
`all others similarly situated,
`MARLA STRAPPE,
`
`
`Plaintiffs,
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`ORDER GRANTNG DEFENDANTS' MOTION TO DISMISS
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`Investors in Elanco Animal Health, Inc.—a publicly traded company based in
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`Greenfield, Indiana—have filed this purported class action for federal securities
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`violations on behalf of all persons who purchased or otherwise acquired Elanco stock
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`between September 20, 2018, and May 6, 2020. Plaintiffs allege that Elanco and its
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`officers engaged in a scheme to deceive and defraud investors of the true value of
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`Elanco's common stock in violation of federal securities law. Specifically, Plaintiffs
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 2 of 58 PageID #: 1048
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`allege that Defendants artificially boosted Elanco's earnings and growth by "stuffing"
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`product distribution channels "far in excess of end-user demand." This, Plaintiffs argue,
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`combined with Defendants' false and misleading representations about Elanco's growth
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`and financial situation, led to the artificial inflation of Elanco's stock prices during the
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`class period. Due to Defendants' allegedly unlawful actions, Plaintiffs claim that they
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`were injured by purchasing or acquiring Elanco stock during the class period. We
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`consider here Defendants' Motion to Dismiss this cause of action for failure to state a
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`claim, and failure to meet the heightened pleading standards required by these specific
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`securities violations.
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`I.
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`ALLEGATIONS OF FACT
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`Faced with a Rule 12(b)(6) motion to dismiss a federal securities action, "courts must,
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`as with any motion to dismiss for failure to plead a claim on which relief can be granted,
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`accept all factual allegations in the complaint as true," Tellabs, Inc. v. Makor Issues &
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`Rights, Ltd., 551 U.S. 308, 322 (2007) ("Tellabs II"), and draw all inferences in Plaintiffs'
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`favor, Bielanski v. County of Kane, 550 F.3d 632, 633 (7th Cir. 2008). However, "we are
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`not bound to accept as true a legal conclusion couched as a factual allegation." Papasan
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`v. Allain, 478 U.S. 265, 286 (1986). We are also not required to "cast a blind eye to 'facts
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`alleged in the complaint that undermine the plaintiff's claim.'" Gaines v. Guidant Corp.,
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`2004 WL 2538374 (S.D. Ind. 2004) (Barker, J.) (quoting Arazie v. Mullane, 2 F.3d 1456,
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`1465 (7th Cir. 1993)). Except where explicitly noted, the facts described herein are those
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`alleged by Plaintiffs in their First Amended Complaint.
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`

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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 3 of 58 PageID #: 1049
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`A. BACKGROUND AND PARTIES
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`Plaintiffs include both those persons and entities who purchased Elanco securities
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`between September 20, 2018, and May 6, 2020, as well as those who acquired Elanco
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`common stock pursuant to Elanco's merger with Aratana Therapeutics on July 18, 2019.
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`Lead Plaintiff, Sandra Hunter, filed this class action complaint alleging that Elanco, its
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`Chief Executive Officer Jeffery N. Simmons, and its Chief Financial Officer Todd S.
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`Young, made fraudulent misrepresentations by omitting material information relating to
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`"systemic and undisclosed channel stuffing practices" that caused distributors to purchase
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`inventory "far in excess of demand" from dozens of public statements.1 Compl. ¶¶ 77, 94-
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`96, 100-01, 103-11, 113-24, 128-29, 131-43, 145-54, 156-69, 171-81, 184-89, 191-203,
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`206-13. Plaintiffs argue the omission of this information made Elanco's growth and
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`revenue figures throughout the class period materially misleading. Plaintiffs also allege
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`that Elanco's Chief Account Officer James M. Meer and the nine members of Elanco's
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`Board of Directors, by omitting this information regarding channel stuffing from the
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`offering materials for Elanco's merger with Arantana Therapeutics, rendered the growth
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`and revenue calculations within these documents materially misleading as well.2
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`
`1 Because we decline to reproduce here the twenty-seven challenged statements in their
`entirety—which span sixty pages and consist of single-spaced, block quotations with large
`swathes of unchallenged portions of text—we have summarized and extracted relevant portions
`of the facts section of the briefs. We will address the challenged statements more thoroughly in
`the analysis section.
`2 The individual Defendants from the Elanco's Board of Directors are the Chairman R. David
`Hoover, Kapila K. Anand, John P. Bilbrey, Art A. Garcia, Michael J. Harrington, Deborah T.
`Kochevar, Lawrence E. Kurzius, Kirk McDonald, and Denise Scots-Knight. Compl. ¶¶ 23–33.
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`

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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 4 of 58 PageID #: 1050
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`Formerly a business unit of Eli Lilly and Company, Elanco was spun-off into a
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`standalone, public company after its initial public offering on September 20, 2018.
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`Elanco develops, manufactures, and markets animal health products for both companion
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`animals, such as dogs and cats, and food animals, i.e., cattle and poultry. Prior to its
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`initial public offering, Elanco was the fourth largest animal health company in the world,
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`with $2.9 billion in revenue in 2017. Docket. No. 38-1, at 7.3 Elanco had reported net
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`income losses for the three years preceding its initial public offering, with $310.7 million,
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`$47.9 million, and $210.8 million net income loss in 2017, 2016, and 2015, respectively.
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`Elanco expected to "continue to incur substantial expenditures to develop, manufacture,
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`and market our products and implement [their] business strategies." Id. at 12.
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`Elanco generates revenue primarily through product sales to customers, who are
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`generally not end-users, but rather third-party wholesale distributors of Elanco's products.
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`These distributors, in turn, sell to customers like veterinary clinics for companion animal
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`products, or cattle and dairy farms for food animal products. Consistent with generally
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`accepted accounting principles (GAAP), Elanco generally recognizes revenue at the time
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`the product is shipped their customers. Id. at 46. Payment terms "differ by jurisdiction
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`and customer, but payment terms in most of [Elanco's] major jurisdictions typically range
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`from 30 to 100 days from date of shipment." Id. at 47. Going into the IPO, Elanco had
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`3 Docket No. 38-1 references Elanco's Form S-1 Registration Statement attached to the
`Declaration of Stacy Nettleton in support of Defendants' Motion to Dismiss. In ruling on a
`motion to dismiss, courts may consider judicially noticed documents, including publicly filed
`SEC filings, without converting the motion to dismiss into a motion for summary judgment. See
`In re Guidant Corp. Sec. Litig., 536 F. Supp. 2d 913, 921 (S.D. Ind. 2008) (Barker, J.), aff'd sub
`nom. Fannon v. Guidant Corp., 583 F.3d 995 (7th Cir. 2009).
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`

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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 5 of 58 PageID #: 1051
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`eight primary customers: MWI Animal Health, Covetrus, Inc., Patterson Veterinary,
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`Midwest Veterinary Supply, K+K Vet Supply Inc., Penn Veterinary Supply, Inc., Victor
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`Medical Company, Veterinary Service, Inc., and Nutra Blend LLC.
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`Elanco's contracts with "direct and indirect customers may provide for various rebates
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`and discounts that may differ in each contract." Id. To determine the appropriate
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`transaction price for Elanco's product sales at the time it recognizes a sale to a direct
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`customer, Elanco "must estimate any rebates or discounts that ultimately will be due to
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`the direct customer and other customers in the distribution chain under the terms of
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`[their] contracts." Id. "The rebate and discount amounts are recorded as a deduction to
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`arrive at [their] net product sales." Elanco estimates these accruals using an expected
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`value approach. Actual product returns were less than two percent of Elanco's net revenue
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`between January 1, 2017, and June 30, 2018. Id. at 48. During the first six months of
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`2018, Elanco's sales rebates and discounts liability in the United States reached $88.6
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`million, compared to $108.2 million in liability for the first six months of the prior year,
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`2017. Id.
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`In the animal health sector, companion animal products generally have higher gross
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`margins relative to food animal products. Elanco began as a food animal-focused
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`company, but in the ten years preceding its initial public offering, it had "intentionally
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`transformed" into a diversified global company. Id. at 7. In addition to Elanco's
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`established position in Food Animal Ruminants & Swine, the company had sought to
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`increase its profitability and grow its revenue by establishing positions in three "targeted
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`growth categories": Companion Animal Disease Prevention, Companion Animal
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 6 of 58 PageID #: 1052
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`Therapeutics, and Food Animal Future Protein and Health. Id. To establish market
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`positions in these higher margin categories, Elanco had made "strategic acquisitions" to
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`expand its product portfolio, increase its sales presence, and obtain Research &
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`Development and manufacturing capabilities. Id. For example, Elanco licensed
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`Galliprant—a canine osteoarthritis drug from Aratana Therapeutics in 2016—which
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`generated ten percent sales growth in their Companion Animal sector in 2017. "As a
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`result of these acquisitions as well as organic growth," Elanco grew their Companion
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`Animal categories "from a minimal presence in 2007 to more than $900 million in
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`revenue in 2017." Id. However, an estimated one-third of Elanco's revenue still came
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`from its medicated feed additives within its Food Animal Ruminants & Swine category.
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`Moreover, Elanco's top product, Rumensin, a feed additive for cattle, generated
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`approximately ten percent of Elanco's total revenue that year. Id.
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`B. LEAD UP TO ELANCO'S INITIAL PUBLIC OFFERING
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`During 2017, according to Confidential Witness 1, Elanco employed a "move out"
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`style business model which focuses on "creating incentives and opportunities to increase
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`sales by distributors to the ultimate end-users." Compl. ¶ 48. Confidential Witness 1 was
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`described as a Corporate Account Manager in Elanco's Large Animal division and was
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`responsible for managing Elanco's relationship with four distributors—MWI, Midwest,
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`K+K, and Veterinary Service, Inc. Confidential Witness 1 reported to Director of Food
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`Animal Channel & Distribution, Courtney Shriver, who reported to Senior Director of
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 7 of 58 PageID #: 1053
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`Channel Strategy and Sales Force Excellence for North America, Julia Loew, who
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`reported to Vice President, Companion Animal US, Shawn McKee.
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`Towards the end of 2017, according to Confidential Witness 2, Elanco introduced a
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`"sliding scale of margins, adjusted quarterly, based on the amount of product distributors
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`purchased." Id. ¶ 49. Confidential Witness 2 was a Corporate Account Manager in
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`Elanco's Companion Animal division and was responsible for contract negotiations and
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`overseeing the day-to-day management of Elanco's relationship with MWI. Confidential
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`Witness 2 also reported to Shriver, the Director of Food Animal Channel & Distribution.
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`Confidential Witness 2 stated, "MWI was held to a certain amount of buy from us, and if
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`they didn't make it, then their margin dropped." Id. According to Confidential Witness 2,
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`"[n]obody does this," instead "[y]ou should be able to give your client at least annually
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`[sic] visibility" on their margins. Id. When making a presentation on the sliding scale of
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`margins at a conference in 2018, Confidential Witness 2 recalled that MWI executives'
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`"jaws dropped." Id. This was a transition to a "move in" sales model, which incentivizes
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`sales to Elanco's direct customers—the distributors.4
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`In the months leading up to Elanco's initial public offering in September of 2018,
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`Confidential Witness 2 recounted that Elanco's top management became so consumed
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`with hitting sales numbers to meet market expectations that the pressure to "stuff the
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`channel" correspondingly ramped up. Id. ¶ 50. In February of 2018, Confidential Witness
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`1, recalled being asked by Shriver "to bring in a million here, an extra $2 million there, to
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`4 While we accept as true Plaintiffs' factual allegation that Elanco switched sales models, we
`have sidestepped Plaintiffs' editorialized description of the "move in" sales model.
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 8 of 58 PageID #: 1054
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`close the gap on another business segment that wasn't doing well." Id. ¶ 51. Confidential
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`Witness 2 was directed by Shriver to "figure out which products [MWI could] take and
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`stuff it in," and "it doesn't matter how you get it in." Id. ¶ 52. Ultimately, Shriver directed
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`Confidential Witness 2 to "stuff the MWI channel with an additional $3 million of
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`Interceptor Plus and Trifexus, two popular Companion Animal medications . . . even
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`though MWI was already holding 75-80 days of both products." Id. The industry standard
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`practice, we were told, is to hold between 45 and 60 days' worth of inventory.
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`Confidential Witness 2 increased MWI's margin on Trifexus from eighteen to twenty
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`percent.
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`Regarding these months leading up to the September initial public offering,
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`Confidential Witness 4 recalled that "[w]hen 'move out' started to come short of
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`projections, that's when [Elanco] start [sic] to 'move in' more." Id. ¶ 50. Specifically,
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`Confidential Witness 4 recalled that "by mid-2018" the shift to selling as much of
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`Elanco's products to distributors as possible, regardless of end-user demand, had "started
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`again." Id. ¶ 53. Confidential Witness 4 was identified as the Global Head of Animal
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`Care Expansion, Business Development & Licensing and Alternate Innovation from
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`September of 2018 to January of 2020, and then a Vice President from January of 2020
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`until July of 2020. It is thus unclear how Confidential Witness 4 came to possess this
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`information reflecting business activity occurring months before his or her being
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`employed at Elanco.
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`C. ELANCO'S INITIAL PUBLIC OFFERING
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 9 of 58 PageID #: 1055
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`In Elanco's registration statement for its initial public offering, Elanco stated its
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`intention to "continue to grow our business and create value for our shareholders through
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`a targeted value-generating strategy with three key pillars: a Portfolio Strategy for our
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`marketed products, an Innovation Strategy for our R&D pipeline and a Productivity
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`Strategy for our margin expansion initiatives." Id. ¶ 95. Elanco's Portfolio Strategy
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`promised to focus "the majority of our resources, including more than 75% of our R&D
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`funding, on our three targeted growth categories": Companion Animal Disease
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`Prevention, Companion Animal Therapeutics and Food Animal Future Protein & Health,
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`"where we believe we are well positioned to grow faster than the market." Id. For its
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`Companion Animal Disease Prevention category, Elanco believed it was well positioned
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`to drive additional growth through "continued product innovation and sales channel
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`expansion." Id. For its well-established Food Animal Ruminants & Swine category,
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`Elanco expected to "continue to be a leader," believing it had "created long-standing
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`customer relationships [that] provide[s] an important revenue source for our business and
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`for investment capital to support future growth." Docket No. 38-1, at 7.
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`Elanco's Innovation strategy included "strong" in-house Research & Development
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`capabilities in addition to acquiring products through acquisitions or venture capital
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`investment. Id. at 8. "This inclusive approach to innovation allows us to identify, attract,
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`fund, and develop new ideas in a manner that enhances our pipeline while, we believe,
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`reducing the risk associated with an in-house only innovation model." Id. Pursuant to this
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`strategy, Elanco had launched nine products from 2015 to 2017 that delivered revenue of
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`$24.7 million in 2015, $97.9 million in 2016, and $143.8 million in 2017, and $136.6
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 10 of 58 PageID #: 1056
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`million during the first half of 2018. Elanco believed its new products would continue to
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`be an "important source of revenue." Id. However, Elanco cautioned that generic
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`competitors were "becoming more aggressive in terms of lauching products before patent
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`rights expire, and, because of attractive pricing, sales of generic products are an
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`increasing percentage of overall animal health sales in certain regions." Id. at 12. Elanco
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`also disclosed that approximately seventy-five percent of its revenue in 2017 came from
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`products that did not have patent protection, including revenue from some of its top
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`products like Rumensin. Id. at 16. As a result, Elanco already had faced competition from
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`lower-priced generics or other alternatives to some of its products and warned that it
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`could continue to face such competition for more of its products.
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`Elanco's Productivity Strategy focused, in part, on sales growth, which entailed plans
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`by Elanco to significantly increase its operating margins by increasing productivity
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`within its sales force. To accomplish this level of growth, Elanco would rely on both its
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`"sales force's strong customer relationships" and Elanco's "strategic distributor
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`partnerships to efficiently grow demand for [its] products." Compl. ¶ 46. Elanco's
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`registration statement identified "increased use of alternative distribution channels,"
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`"changes within existing distribution channels," and changes within its existing
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`distributor relationships as risk factors for its Companion Animal products. Id. ¶ 97.
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`Elanco's registration statement included the disclosure that in 2017, a change in their
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`"inventory management practices resulted in a revenue lag as existing inventory was sold
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`down, which management estimates decreased our revenue by approximately $35
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`million." Id.
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 11 of 58 PageID #: 1057
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`D. ELANCO'S 2018 FINANCIAL PERFORMANCE
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`i. THIRD QUARTER PERFORMANCE
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`Confidential Witness 4 recalled that the "move in" model was in full force by late
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`2018, with Elanco offering discounts, additional rebates, and extended payment terms to
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`induce distributors to purchase more inventory. Id. ¶ 54. On November 6, 2018, Elanco
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`announced its third quarter 2018 financial results and reported that revenue had grown
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`nine percent—as compared to the third quarter of 2017—to $761.1 million. Revenue
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`from the Companion Animal Disease Prevention and Therapeutics categories grew thirty-
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`four and twenty-seven percent, respectively, growth that was driven by increased volume
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`and price. Food Animal Ruminants & Swine increased eight percent for the quarter,
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`while Food Animal Future Protein & Health grew two percent for the quarter.
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`On an earnings call conducted that same day, Elanco's President and Chief Executive
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`Officer Jeffery Simmons explained that Elanco "saw strong performance in our targeted
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`growth categories, and we continue delivering on our commitments to achieve a
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`sustainable flow of innovation with new product approvals, several new launches, and an
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`R&D collaboration." Id. ¶ 104. He further explained that Elanco's "margin expansion
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`efforts continue to progress," and ultimately, "we met our expectations for delivery in our
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`first quarter as a publicly traded company." Id. Simmons commented that while some of
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`the growth rates in this quarter were "quite large due to purchasing patterns, the year-to-
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`date results are more in line with our goals and strategy." Id. For example, Elanco's then-
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`Chief Financial Officer explained that part of the Companion Animal Disease
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`Prevention's high growth rate was due to "a favorable comparison to the prior year,
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`including an anticipated stock out in [quarter three] in 2017, which shifted sales to the
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`second quarter." Id. ¶ 105. Simmons concluded that these results demonstrated that "our
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`strategy is performing as expected and we are tracking towards our goals." Id. ¶ 104.
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`i. FOURTH QUARTER AND YEAR END PERFORMANCE
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`During the fourth quarter of 2018, Shriver directed Confidential Witness 1 to push
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`$10 to $12 million worth of excess feed additive and vaccine inventory onto MWI, over
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`and above MWI's typical monthly purchase of $12 million in feed additive. Id. ¶ 60.
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`Confidential Witness 1 recalled that by the fourth quarter of 2018, inventory levels of
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`feed additives and cattle vaccines were at 120 days at Elanco's major distributors, double
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`the industry standard. On February 6, 2019, Elanco announced its financial results for
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`both the fourth quarter and the full year of 2018, reporting revenue growth of six percent,
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`to $799.3 million and $3.1 billion, respectively. Net income and earnings per share (EPS)
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`had reached $86.5 million and $0.28, respectively. Docket No. 38-3, at 9. For the year,
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`the deduction for estimated rebates and discounts totaled $221 million. Docket No. 38-11,
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`at 6. These results, according to Elanco, reflected "strong volume growth and the
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`execution of the company's targeted, three-pillar strategy focused on Portfolio,
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`Innovation and Productivity" as well as a "strong full year performance in its three
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`targeted growth categories." Compl. ¶ 119. Food Animal Ruminants & Swine still
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`accounted for thirty-eight percent of Elanco's revenue for the year, with Food Animal
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`Future Protein & Health accounting for twenty-three percent, Companion Animal
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`Disease Prevention accounting for twenty-six percent, and Companion Animal
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`Therapeutics accounting for just nine percent. Id. ¶ 43.
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`For the fourth quarter of 2018, the constant currency core revenue growth rate reached
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`six percent. Companion Animal Disease Prevention revenue was up forty-three percent
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`for the quarter, which "improved in comparison to [the] prior year due to a reduction in
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`channel inventory in the fourth quarter of 2017." Id. ¶ 119. However, Elanco reported
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`that revenue for Companion Animal Therapeutics had decreased by six percent due to the
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`timing and availability of Galliprant shipments. Elanco attributed this decrease to "a
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`planned shipment in late 2018 [which] was delayed until early 2019 to appropriately
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`complete the quality release process," and demand for Galliprant has exceeded supply
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`capacity "resulting in Galliprant backorders at the end of the year." Id. Elanco was
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`"working diligently to expand production and expects to clear remaining backorders by
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`late first quarter or early second quarter 2019." Id. Food Animal Future Protein & Health
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`revenue had increased eight percent, driven by volume and increased price. Revenue for
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`Food Animal Ruminants & Swine, Elanco's largest revenue category, had decreased by
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`eight percent, driven by "softness in swine antibiotics, particularly in Asia, and a stock-
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`outage of Micotil, an injective treatment for Bovine Respiratory Disease, now resolved."
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`Docket No. 38-3, at 8.
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`E. ELANCO'S 2019 FINANCIAL PERFORMANCE
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`On December 18, 2018, Elanco announced its financial guidance for 2019, with
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`included stated expectations of annual revenue of between $3.10 and $3.16 billion and
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`earnings per share of between $0.36 to $0.48 on a reported basis and $1.02 to $1.12 on an
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`adjusted basis. During a call with investors held that day, Simmons said the company was
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`pleased with the progress made in 2018, and was "meeting our expectations, achieving
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`sales growth, delivering innovation, executing our margin expansion priorities and
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`carrying momentum into 2019." Compl. ¶ 115. "On a like-for-like comparison across
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`years," Simmons stated that the company expected to "grow 2019 earnings at a double-
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`digit pace." Id. He further explained that "the fundamentals of our industry are strong,
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`and our strategy sets us up to grow revenue, expand margins and bring new innovation."
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`Id. Elanco's Chief Financial Officer Todd Young explained on that call that "underlying
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`operational growth and the benefits of the restructuring actions provide an expected 15%
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`increase in adjusted EPS for 2019, well above the expected constant currency core
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`revenue growth rate of 4% to 6%." Id. ¶ 116.
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`During an unspecified quarter in 2019, Confidential Witness 3 reportedly "sold $10
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`million of product to Animal Health International, a Patterson subsidiary, in exchange for
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`a 5% rebate, while Nutra Blend received a 20% rebate to incentivize Nutra Blend to make
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`a larger purchase in excess of its needed inventory." Id. ¶ 57. However, Confidential
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`Witness 3 was a National Accounts Manager in Elanco's Food Animal Division and was
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`responsible for Elanco's relationships with MWI, Covetrus, and Patterson. There is no
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`mention of Confidential Witness 3 working with Nutra Blend, so it is unclear whether
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`this information provided here by him or her was first-or second-hand. Confidential
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`Witness 3 reported to Shriver.
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`i. FIRST QUARTER PERFORMANCE
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`On April 26, 2019, Elanco announced its agreement to acquire Aratana, the pet
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`therapeutics company from whom Elanco had previously licensed Galliprant. On May 9,
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`2019, Elanco announced its first quarter financial results, reporting that revenue declined
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`one percent to $731.1 million. Elanco reduced its revenue expectations for the year to a
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`range of $3.08 and $3.14 billion. Companion Animal Disease Prevention revenue was
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`down eight percent for the quarter, while Companion Animal Therapeutics revenue was
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`up thirty-one percent, "primarily driven by sales of Galliprant" as "backorders in the
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`channel were resolved and the product was launched in several European markets." Id. ¶
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`116. Food Animal Future Protein & Health revenue was flat for the quarter, while Food
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`Animal Ruminants & Swine decreased three percent as growth from the resolution of
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`certain backorders and favorable purchasing patterns in cattle products was offset by
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`other external factors such as the African Swine Fever.
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`On an earnings call conducted that day, CFO Todd Young explained that there is a lot
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`of variability in the stocking dynamics of distributors, especially between the Companion
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`Animal Therapeutics and Companion Animal Disease Prevention categories. Young
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`further explained that there were incentives for distributors to buy more vaccines and
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`parasiticides to meet the tiering incentives in the fourth quarter of 2018, so "they were
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`pretty fully stocked on those" versus in the first quarter of 2019, when "the incentive was
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`to buy Galliprant given [Elanco had] resolved all the backorders and had lots of
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`production on that side." Id. ¶ 135. Young emphasized that he felt "very good about the
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`underlying demand at the vet channel," and, while the sixteen percent six-month growth
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 16 of 58 PageID #: 1062
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`rate was "certainly not what we project for the full year, we do feel very good about our
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`position with our companion animal portfolio for the rest of 2019." Id.
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`ii. SECOND QUARTER PERFORMANCE
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`During the second quarter of 2019, Shriver instructed Confidential Witness 3 to sell
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`an additional $5 million of products to Confidential Witness 3's distributors. After filing
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`the necessary merger registration documents with the SEC, Elanco's merger with Aratana
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`was declared effective on June 17, 2019. At the end of the second quarter, when MWI
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`was already holding more than 60 days of inventory for feed additives, Shriver directed
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`Confidential Witness 1 to sell an "additional $10 million that quarter on top of MWI's
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`normally scheduled $9-$10 million purchase." Id. ¶ 61. "In order to convince MWI to
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`make such a large additional purchase," Confidential Witness 1 "offered an additional
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`rebate of 3%, which grew to an additional 5% on top of the standard discount as the year
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`progressed." Id. Confidential Witness 1 also recalled that by around mid-2019, MWI had
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`taken on so much extra inventory that MWI had to rent warehouse space and use tractor-
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`trailers in Amarillo, Texas to store the surplus product MWI purchased from Elanco.
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`On August 13, 2019, Elanco announced its second quarter 2019 financial results,
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`reporting a revenue increase of one percent to $781.6 million, with four percent constant
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`currency rate revenue growth. Simmons stated the company was "encouraged by the 9
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`percent constant currency growth in our targeted growth categories." Id. ¶ 156. However,
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`Elanco again reduced its 2019 financial guidance, lowering the top end of the revenue
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`range by $20 million, "primarily [from] the increased headwind from [the] African Swine
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 17 of 58 PageID #: 1063
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`Fever and anticipated supply disruption of certain injectable cattle products." Docket No.
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`38-5, at 8. Revenue for the Companion Animal Disease Prevention category grew six
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`percent from both volume and price. Revenue for Companion Animal Therapeutics
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`increased twenty-six percent, with twenty-one percent of the growth attributable to
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`increased sales volume. Young explained on the earnings call that day that this "growth is
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`driven by demand for products across the therapeutics portfolio, primarily the continued
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`uptake for Galliprant in the U.S. and now a strong launch in Europe as well." Compl. ¶
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`158. Future Protein and Health's revenue grew seven percent, but Food Animal
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`Ruminants & Swine's revenue was down nine percent, with unfavorable purchasing
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`patterns for Rumensin in the United States, and the continued impact from external
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`factors such as the African Swine Fever on Elanco's international business, particularly in
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`Asia. Docket No. 38-5, at 7. Moreover, during that same earnings call, Young discussed
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`the recent approval of a generic version of Rumensin as well as the pending launch of a
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`competitor to two of Elanco's best-performing Companion Animal Disease Prevention
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`products.
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`iii. THIRD QUARTER PERFORMANCE
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`Confidential Witness 3 recalled a telephone conversation occurring in September of
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`2019 with Shriver, in which Shriver told him or her that during a meeting Shriver had
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`with Simmons at Elanco's headquarters, Simmons told him to "make the quarter, no
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`matter what." Compl. ¶ 63. In or around that same time, Confidential Witness 3 also
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`recalled Shriver telling them that Simmons was particularly worried about the
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`Case 1:20-cv-01460-SEB-MG Document 62 Filed 08/17/22 Page 18 of 58 PageID #: 1064
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`introduction of a generic form of Rumensin and was thus eager to push out Elanco's
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`Rumensin inventory. Shriver directed Confidential Witness 3 to sell an additional $5
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`million for the third quarter among MWI, Covetrus, and Patterson, even though each
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`customer was already "bursting" with inventory. Id. In September of 2019, Shriver also
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`directed Confidential Witness 3 to push an extra $10 million in cattle feed additives—
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`including Rumensin—to meet Elanco's third quarter 2019 revenue forecast. Confidential
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`Witness 3 recalled that a fellow Account Manager, using the 10% rebate incentive Elanco
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`offered to distributors purchasing in the last week of a quarter, managed to sell an extra
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`$20 million of inventory to Nutra Blend.
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`On November 6, 2019, Elanco announced its third quarter 2019 financial results,
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`reporting a revenue increase of one percent to $771.3 million, and core revenue at
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`constant currency rates