UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box: 

ELANCO ANIMAL HEALTH INCORPORATED

2500 Innovation Way

Greenfield, Indiana 46140

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

May 21, 2020

The 2020 Annual Meeting of Shareholders of ELANCO ANIMAL HEALTH INCORPORATED, an Indiana corporation (the “company” or “Elanco” or “we” or “our”), will be a virtual meeting of shareholders, conducted via live audio webcast at www.virtualshareholdermeeting.com/ELAN2020 on Thursday, May 21, 2020, at 8:00 a.m. Eastern Time (the “meeting”), to consider and act upon the following matters:

  Items of Business

  Voting

Only shareholders of record at the close of business on March 16, 2020 are entitled to notice of, and to vote at, the meeting. At least five days prior to the meeting, a complete list of shareholders will be available for inspection by any shareholder entitled to vote at the meeting, during ordinary business hours, at the office of the Secretary of the company at 2500 Innovation Way, Greenfield, Indiana 46140. You are cordially invited to participate in the meeting via live audio webcast and vote on the business items described in this proxy statement. Regardless of whether you expect to participate in the meeting online, please either complete, sign and date the enclosed proxy card and mail it promptly in the enclosed envelope, or vote electronically by telephone or the Internet as described in greater detail in the proxy statement. Returning the enclosed proxy card or voting electronically or telephonically will not affect your right to vote online if you participate in the meeting.

By Order of the Board of Directors

Michael-Bryant Hicks

Executive Vice President, General Counsel and Corporate Secretary

April 8, 2020

Even though you may plan to participate in the meeting online, please vote by telephone or the Internet, or execute the enclosed proxy card and mail it promptly. A return envelope (which requires no postage if mailed in the United States) is enclosed for your convenience. Telephone and Internet voting information is provided on your proxy card. Should you participate in the meeting online, you may revoke your proxy and vote your shares electronically during the meeting.

Table of Contents

PROXY STATEMENT

ELANCO ANIMAL HEALTH INCORPORATED

2500 Innovation Way

Greenfield, Indiana 46140

2020 ANNUAL MEETING OF SHAREHOLDERS

PROXY STATEMENT

This proxy statement is furnished in connection with the solicitation of proxies by the board of directors of Elanco Animal Health Incorporated (the “Board”), an Indiana corporation, to be voted at the 2020 Annual Meeting of Shareholders, which we refer to as the “annual meeting” or the “meeting,” and any adjournment or postponement of the meeting. The meeting will be a virtual meeting, conducted via live audio webcast on Thursday, May 21, 2020, at 8:00 a.m. Eastern Time, for the purposes contained in the accompanying Notice of Annual Meeting of Shareholders and as set forth in this proxy statement. On April 8, 2020, we made this proxy statement and form of proxy available online and mailed to our shareholders a notice containing instructions on how to access this proxy statement and our 2020 Annual Report.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on May 21, 2020: The Annual Report and Notice & Proxy Statement are available at www.proxyvote.com. (All website addresses given in this document are for informational purposes only and are not intended to be an active link or to incorporate any website information into this document).

2020 PROXY SUMMARY

This summary highlights information contained in this proxy statement. This summary does not contain all of the information that you should consider, and you should carefully read the entire proxy statement before voting.

Annual Meeting of Shareholders

Voting Matters and Board Recommendations

ELECTION OF DIRECTORS: Board Nominees

DIRECTORS CONTINUING IN OFFICE

Terms expiring in 2021

Terms expiring in 2022

PROPOSAL TO RATIFY THE APPOINTMENT OF PRINCIPAL Independent AUDITOR for 2020

Although not required, we are asking shareholders to ratify the selection of Ernst & Young LLP as our principal independent auditor for 2020.

ADVISORY VOTE TO APPROVE COMPENSATION OF Named Executive Officers

Our named executive officers for this proxy statement are:

We are asking our shareholders to approve on an advisory basis the compensation of our named executive officers. Our Board recommends a FOR vote because we believe our compensation program aligns the interests of our named executive officers with those of our shareholders. We also believe that our compensation program achieves our compensation objective of rewarding management based upon individual and company performance and the creation of shareholder value over the long term. Although shareholder votes on executive compensation are non-binding, the Board and the Compensation Committee consider the results when determining whether any changes should be made to our compensation program and policies.

SEPARATION and EXCHANGE OFFER

Elanco was founded in 1954 as part of Eli Lilly & Company (“Lilly”). On September 24, 2018, we completed our initial public offering (the “IPO”), pursuant to which we issued and sold 19.8% of our total outstanding shares, with Lilly retaining the remaining shares. On March 11, 2019, Lilly completed an exchange offer pursuant to which it transferred its remaining holdings in us to its shareholders in exchange for shares of Lilly common stock. We refer to this transaction in this proxy statement as the “exchange offer” or the “separation.” Following the exchange offer, Lilly no longer owns any shares in us, and we are an independent, publicly traded company.

ABOUT THE MEETING

1. Why Did I Receive this Proxy Statement?

2. What Am I Voting On?

3. How Do I Vote?

Shareholders of record

 

If you are a shareholder of record, there are three ways to vote:

 

	BY INTERNET www.proxyvote.com*   You may also attend the annual meeting online, including to vote and/or submit questions, at www.virtualshareholdermeeting.com/ELAN2020
	BY TELEPHONE toll-free 1-800-690-6903*
	BY MAIL completing and returning your proxy card

 

*

The deadline to vote by telephone or Internet is 11:59 p.m. Eastern Time on May 20, 2020.

4. What Are the Voting Recommendations of the Board of Directors?

5. Will Any Other Matters Be Voted On?

ABOUT THE MEETING

6. Who Is Entitled to Vote at the Meeting?

7. How Many Votes Do I Have?

8. How Many Votes Can Be Cast By All Shareholders?

9. How Many Votes Must Be Present to Hold the Meeting?

10. What Vote Is Required to Approve Each Proposal?

11. Can I Change My Vote or Revoke My Proxy?

12. How Can I Attend the Annual Meeting?

13. How Will My Shares Be Voted if I Submit a Proxy Without Indicating My Vote?

GOVERNANCE

Overview of Our Corporate Governance

Our company is committed to the values of effective corporate governance and high ethical standards. These values are conducive to long-term performance and the Board reevaluates our policies on an ongoing basis to ensure they sufficiently meet the company’s needs. We believe our key corporate governance and ethics policies enable us to manage our business in accordance with the highest standards of business practice and in the best interests of our shareholders.

The following sections provide information about our governance profile, directors, including their qualifications, the director nomination process, and director compensation. 

Proxy Item No. 1: Election of Directors

GOVERNANCE

Director Nominees

The ages, principal occupations, directorships held and other information about our nominees and directors are shown below as of April 8, 2020.

Michael J. Harrington	Michael J. Harrington has served as a member of the Board since September 2018. Mr. Harrington served in various legal roles for Lilly, including Senior Vice President and General Counsel from 2013 until his retirement in January 2020, Vice President and Deputy General Counsel of Global Pharmaceutical Operations from 2010 to 2012 and Vice President and General Counsel, Corporate from 2004 to 2010.   Skills and Experience   Mr. Harrington’s roles at Lilly have provided him with extensive business development experience, experience with regulatory agencies around the world, and experience with managing intellectual property matters globally. In addition, Mr. Harrington has global operations and leadership experience as he led one of Lilly’s operating affiliates in New Zealand, and has had other leadership roles in the Asia Pacific region. In addition, Mr. Harrington has led Lilly’s information security program, and has experience with negotiating transitional services agreements (TSAs), and experience with the oversight of implementing enterprise resource planning (ERP) systems. Mr. Harrington has also had oversight of Lilly’s enterprise risk management (ERM) program. Mr. Harrington’s experience described above, including his knowledge of Elanco and the animal health industry, provides him with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 57 Director since: 2018
Committees: Finance

 

Deborah T. Kochevar	Deborah T. Kochevar, D.V.M., Ph.D., DACVCP, has served as a member of the Board since March 2019. Dr. Kochevar is a Senior Fellow at Fletcher School of Law and Diplomacy, and Dean Emerita of Cummings School of Veterinary Medicine at Tufts University. Dr. Kochevar served as the Provost and Senior Vice President ad interim at Tufts University from 2018-2019. She served as the Dean of the Cummings School of Veterinary Medicine at Tufts University from 2006 through 2018. Previously, Dr. Kochevar was a long-time faculty member and administrator at the College of Veterinary Medicine and Biomedical Sciences, Texas A&M University, where she held the Wiley Chair of Veterinary Medical Education. Dr. Kochevar is a past-president of the Association of American Veterinary Medical Colleges and American College of Veterinary Clinical Pharmacology. Dr. Kochevar is active in the American Veterinary Medical Association, having chaired its Council on Education and the Educational Commission for Foreign Veterinary Graduates. Dr. Kochevar currently serves on the board of directors of Charles River Laboratories International, Inc.
Age: 63 Director since: 2019
Committees: Compensation Nominating and Corporate Governance
	Skills and Experience    Dr. Kochevar’s experience described above, including her deep animal health expertise and One Health approach, adds to Elanco’s focus on delivering best-in-class innovation across the portfolio, and provides her with the qualifications and skills to serve as a director on Elanco’s Board.

 

GOVERNANCE

Directors Continuing in Office

Terms Expiring in 2021

Art A. Garcia	Art A. Garcia has served as a member of the Board since May 2019. Mr. Garcia served in various leadership roles at Ryder System, Inc., an American provider of transportation and supply chain management products, and is especially known for its fleet of rental trucks (“Ryder’’). At Ryder, Mr. Garcia held the positions of Executive Vice President and Chief Financial Officer from 2010 until his retirement in April 2019, Senior Vice President and Controller from 2005 to 2010, and Vice President and Controller from 2002 to 2005, Mr. Garcia is a certified public accountant. Mr. Garcia currently serves on the board of directors of ABM Industries Incorporated and American Electric Power.   Skills and Experience   Mr. Garcia’s experience described above and his extensive strategic, financial and technical expertise, as well as strong focus on growth, provides him with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 59 Director since: 2019
Committees: Audit Finance

 

Denise Scots-Knight	Denise Scots-Knight, PhD, has served as a member of the Board since March 2019. Dr. Scots-Knight was the co-founder of, and has served as the Chief Executive Officer and member of the board of Mereo BioPharma Group plc, a specialty biopharmaceutical Company, since 2015. From 2010 until 2015, she was the Managing Partner of Phase4 Partners Ltd., a global life science venture capital firm. From 2004 to 2010, Dr. Scots-Knight was head of Nomura Phase4 Ventures, a venture capital affiliate of Nomura International plc, a leading Japanese financial institution. Dr. Scots-Knight has served on the boards of directors of Oncomed Pharmaceuticals, Inc., Idenix Pharmaceuticals, Inc. and Nabriva Therapeutics AG.   Skills and Experience   Ms. Scots-Knight’s experience described above, including her extensive previous board leadership, history leading an innovation and growth-oriented company, and expertise building innovation models and partnerships, provides her with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 60 Director since: 2019
Committees: Compensation Finance

 

Jeffrey N. Simmons	Jeffrey N. Simmons has served as Elanco’s President and Chief Executive Officer and as a member of the Board since July 2018. Mr. Simmons served as the President of the Elanco Animal Health division of Lilly and Senior Vice President of Lilly from 2008 until September 2018. Prior to 2008, Mr. Simmons held various leadership roles for Elanco, including District Sales Manager, International Marketing Manager, Country Director for Brazil, Area Director for Western Europe and Executive Director for U.S. and Global Research & Development.   Skills and Experience   Mr. Simmons’ experience described above, including his knowledge of Elanco and the animal health industry and his business and management experience, provides him with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 52 Director since: 2018
Committees: Finance

GOVERNANCE

Terms Expiring in 2022

Kapila Kapur Anand	Kapila Kapur Anand has served as a member of the Board since September 2018. Ms. Anand is a C.P.A. and has served as a Senior Advisor to KPMG LLP, an accounting firm, since 2016. Prior to that, Ms. Anand served in various leadership roles as a partner at KPMG LLP, including Industry Segment Leader - Travel, Leisure and Hospitality from 2011 to 2017, Partner in Charge - Public Policy Business Initiatives from 2009 to 2013, KPMG LLP Board member from 2005 to 2010, Advisory Leader - Private Equity, Real Estate and Hospitality from 2002 to 2009 and Audit Partner - Real Estate and Hospitality from 1989 to 2002. Ms. Anand currently serves as a member of  the board of directors of Extended Stay America, Inc. and Omega Healthcare Investors, Inc.   Skills and Experience   Ms. Anand’s experience described above, including her extensive financial, managerial and corporate governance experience, provides her with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 66 Director since: 2018
Committees: Audit (Chair) Finance

 

John P. Bilbrey	John P. Bilbrey, also known as J.P., has served as a member of the Board since March 2019. He served as the CEO and President of The Hershey Company, a multinational consumer food company, from 2011 until his retirement in 2017, and as Chairman of the Board from 2015 until 2018. Previously, Bilbrey served in various roles at The Hershey Company, including as the Chief Operating Officer and EVP from 2010 to 2011, the President of North America from 2007 to 2010, the President of International Commercial group from 2005 to 2007. Prior to joining The Hershey Company, he held leadership positions at Mission Foods, Danone Waters of North America, Inc., Bilbrey Farms and Ranch and Procter & Gamble Company. Mr. Bilbrey currently serves on the board of directors of Colgate-Palmolive Company and Campbell Soup Company, and has previously served on the boards of directors of The Hershey Company and McCormick & Company, Incorporated.   Skills and Experience   Mr. Bilbrey’s experience described above, including the unique combination of livestock production, food industry and consumer insights experience, provides him with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 63 Director since: 2019
Committees: Finance (Chair) Audit

 

R. David Hoover	R. David Hoover has served as the chairman of the Board since May 2018. Mr. Hoover has been retired since 2013. Prior to that, Mr. Hoover served in various roles at Ball Corporation, a company supplying innovative, sustainable packaging solutions and other technologies and services, including Chairman from 2002 to 2013, Chief Executive Officer from 2010 to 2011, President and Chief Executive Officer from 2001 to 2010, Chief Operating Officer from 2000 to 2001 and Chief Financial Officer from 1998 to 2000. Mr. Hoover currently serves on the board of directors of Edgewell Personal Care Company and has previously served on the board of directors of Ball Corporation and of Lilly.   Skills and Experience   Mr. Hoover’s experience described above, including his extensive management experience as Chief Executive Officer and Chief Financial Officer at Ball Corporation and corporate governance experience through his service on other public boards, including nine years he previously served as a director for Lilly, provides him with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 74 Director since: 2018
Committees: Audit Nominating and Corporate Governance (Chair)

 

Lawrence E. Kurzius	Lawrence E. Kurzius has served as a member of the Board since September 2018. Mr. Kurzius has served in various leadership roles at McCormick & Company, a global food company, including director since 2015 and Chairman of the Board of Directors since 2017, Chief Executive Officer since 2016, President since 2015, Chief Operating Officer from 2015 to 2016, Chief Administrative Officer from 2013 to 2015, President, International Businesses from 2008 to 2013, President, Europe, Middle East and Africa from 2007 to 2008 and President, U.S. Consumer Foods from 2005 to 2006.   Skills and Experience   Mr. Kurzius’ experience described above, including his extensive management experience and corporate governance experience, provides him with the qualifications and skills to serve as a director on Elanco’s Board.
Age: 62 Director since: 2018
Committees: Compensation (Chair) Finance

GOVERNANCE

Committees of the Board of Directors

Our Board is responsible for establishing broad corporate policies and for overseeing the overall management of the company. In addition to considering various matters which require its approval, our Board provides advice and counsel to, and ultimately monitors the performance of, our senior executives.

	Audit Committee	Compensation Committee	Finance Committee	Nominating and Corporate Governance Committee
Kapila K. Anand
John P. Bilbrey
Art A. Garcia
Michael J. Harrington
R. David Hoover
Deborah T. Kochevar
Lawrence E. Kurzius
Kirk P. McDonald
Denise Scots-Knight
Jeffrey N. Simmons

 Chairperson                  Member 

Our Board has four standing committees: the Audit Committee, the Compensation Committee, the Finance Committee and the Nominating and Corporate Governance Committee. Each committee has a written charter.

Our Board met nine times in 2019. Each director attended at least 75% of the total number of meetings of the Board and the Board committees of which he or she was a member in 2019. In addition, the non-executive members of the Board meet in executive session at least after every regularly scheduled quarterly Board meeting, and the Board’s Chairman presides over these executive sessions.

While we do not have a formal policy requiring members of the Board to attend the annual meeting of shareholders, we encourage all directors to attend. Each member of the Board was in attendance at our 2019 annual meeting of shareholders.

The following table lists the members, primary functions, and number of meetings held with respect to each committee.

GOVERNANCE

Compensation Committee

Compensation Committee Report

The Compensation Committee evaluates and establishes compensation for executive officers and oversees the company’s stock plans, and other management incentive and benefit programs. Management has the primary responsibility for the company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, the Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis (CD&A) below. The Compensation Committee recommended to the Board that the CD&A be included in this proxy statement for filing with the SEC.

Compensation Committee Interlocks and Insider Participation

Elanco does not have any interlocking relationships between any members of its Compensation Committee and any of its executive officers that would require disclosure under the applicable rules promulgated under the federal securities laws.

GOVERNANCE

Risk Assessment

As part of the company’s overall enterprise risk management program, the Compensation Committee is responsible for evaluating the company’s incentive compensation policies and practices. The Compensation Committee’s independent compensation consultant, Willis Towers Watson (“WTW”), performed an assessment on Elanco’s 2019 Corporate Bonus Plan and the Long-Term Incentive Awards that were granted under Elanco’s Stock Incentive Plan in 2019. WTW used certain evaluation criteria for these incentive awards to determine whether or not these incentive plans were reasonably likely to incentivize risk-taking among those who participate in them, including, amongst other things, the following:

WTW reviewed its assessment of these incentive plans with the Compensation Committee. Based on its evaluation, the Compensation Committee has determined, in its reasonable judgment, that such programs and practices are not reasonably likely to incentivize risk-taking among those who participate in such plans.

Director Independence

The Board annually determines, taking into consideration the recommendations of the Nominating and Corporate Governance Committee, and discloses the independence of directors. No director is considered independent unless the Board has determined, based on all relevant facts and circumstances, that he or she has no material relationship with the company, either directly or as a partner, significant shareholder, or officer of an organization that has a material relationship with the company. The Board has adopted the categorical independence standards for directors established in the NYSE listing standards.

On the recommendation of the Nominating and Corporate Governance Committee, the Board determined that each of Ms. Anand, Mr. Bilbrey, Mr. Garcia, Mr. Hoover, Dr. Kochevar, Mr. Kurzius, Mr. McDonald and Dr. Scots-Knight is independent. The Board determined that none of the non-employee directors, other than Mr. Harrington, has had during the last three years (i) any of the relationships identified in the company’s categorical independence standards or (ii) any other material relationship with the company that would compromise his or her independence.

The Board also determined that each of the members of the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee also meet our independence standards.

Leadership Structure of the Board of Directors

The Board currently has a strong, independent, non-executive chairman to further strengthen the company’s governance structure. R. David Hoover has served as the Chairman of our Board since May 2018. The Chairman of our Board presides over all meetings of our Board, including its executive sessions, and performs such other duties as may be designated in our bylaws or by the Board. The Board believes this provides an effective leadership model for the company to assure effective independent oversight at this time.

However, no single leadership model is right for all companies and at all times. Depending on the circumstances, other leadership models, such as combining the roles of the CEO and chairman of the Board, might be appropriate. Accordingly, the Board periodically reviews its leadership structure.

Governance Documents

Corporate Governance Guidelines and Committee Charters

Elanco has adopted corporate governance guidelines in accordance with the corporate governance rules of the NYSE, which serve as a flexible framework within which the Board and its committees operate. These guidelines cover a number of areas, including the role of the Board, Board composition, director independence, director selection, qualification and election, director compensation, executive sessions, key Board responsibilities, CEO evaluation, succession planning, risk management, Board leadership and operations, conflicts of interest, annual Board assessments, Board committees, director orientation and continuing education, Board agenda, materials, information and presentations, director access to management and independent advisers, and Board communication with shareholders and others. A copy of Elanco’s corporate governance guidelines as well as the charter for each committee of the Board is available on Elanco’s website at investor.elanco.com under “Governance.”

GOVERNANCE

Code of Ethics

Elanco has adopted a code of conduct and code of ethical conduct for financial management that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is available on Elanco’s website at investor.elanco.com under “Governance.” Any amendments to or waivers from Elanco’s code of ethical conduct for financial management will be disclosed on its website within the time period required by applicable law following the date of such amendment or waiver.

Selection of Nominees for the Board of Directors

The Board is responsible for selecting candidates for board membership and for establishing the general criteria to be used in identifying potential candidates. The Nominating and Corporate Governance Committee leads the director succession planning process. The Nominating and Corporate Governance Committee makes recommendations to the Board for nominations, identifies and screens potential new candidates, including by reviewing recommendations from other Board members, management and shareholders, and assesses the ongoing contributions of incumbent directors whose terms are expiring with input from all other Board members. The Nominating and Corporate Governance Committee may also retain search firms to assist in identifying and screening candidates.

The committee employs the same process for evaluating all candidates, including those submitted by shareholders. The committee initially evaluates a candidate based on publicly available information and any additional information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection criteria and the committee’s initial evaluation is favorable, the committee, assisted by management or a search firm, gathers additional data on the candidate’s qualifications, availability, probable level of interest, and any potential conflicts of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the Chairman of the Board and one or more of the independent directors, for direct discussions to determine the mutual level of interest in pursuing the candidacy. If these discussions are favorable, the committee makes a final recommendation to the Board to nominate the candidate for election by the shareholders (or to select the candidate to fill a vacancy, as applicable).

The committee intends to perform periodic assessments of the overall composition and skills of the board in order to ensure that the Board and management are actively engaged in succession planning for directors, and that our Board reflects the appropriate viewpoints, diversity, and expertise necessary to support our complex and evolving business. The committee, with input from all Board members, also considers the contributions of the individual directors at least every three years when considering whether to nominate the director to a new three-year term. The results of these assessments inform the Board’s recommendations on nominations for directors at the annual meeting each year and help provide us with insight on the types of experiences, skills, and other characteristics we should be seeking for future director candidates. Pursuant to our corporate governance guidelines, the Board selects director candidates who represent a mix of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. We believe that the Board membership should reflect diversity in its broadest sense, including persons diverse in geography, gender, and ethnicity.

Since our last annual meeting in 2019, one director has been elected to our Board: Art A. Garcia. Mr. Garcia was identified as a potential candidate by Russell Reynolds Associates, a third party search firm, which provided us assistance in evaluating potential candidates.

Director Compensation

Elanco Non-Employee Director Compensation Program

Directors who are employed by Elanco or any of its affiliates are not eligible to receive compensation for their service on the Board. Currently, all members of the Board, other than those employed by Elanco, receive an annual retainer of $70,000 in cash and an annual equity award granted under the Elanco Directors’ Deferral Plan in the number of shares of our common stock having a grant date value equal to $180,000, both pro-rated based upon the amount of time in the year the director served. The Board’s chairman also receives an annual retainer of $100,000 in cash, the chairman of the Audit Committee also receives an annual retainer of $18,000 in cash, and the chairman of the Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee each also receive an annual retainer of $16,000 in cash. The annual equity awards granted to directors are subject to mandatory deferral under the Elanco Directors’ Deferral Plan and the cash compensation is subject to elective deferral under such plan, as described below.

Elanco’s directors may be reimbursed for reasonable out-of-pocket travel expenses incurred in connection with attendance at Board and committee meetings and other Board-related activities. The Compensation Committee will review director compensation from time to time and make recommendations to the Board.

GOVERNANCE

2019 Director Compensation

Directors who were not also employees Elanco received the following compensation for their service in 2019:

On April 11, 2019, each non-employee director (except Mr. Garcia, who joined the Board in May 2019) received a one-time award of stock valued at $90,002 (2,783 shares of our common stock) as a Founders’ Award, which vest on April 11, 2022. On June 3, 2019, Mr. Garcia received such a one-time Founders’ Award of stock valued at $90,010.67 (2,819 shares of our common stock), which vest on June 3, 2022. This award was intended to recognize the Board members who were serving during Elanco’s first year as an independent company following its separation from Lilly. These shares vest after three years of service on the Board, and are then deferred until the director leaves the Board.

On November 29, 2019, each non-employee director received an award of stock valued at $180,004 (6,496 shares), except Mr. Bilbrey, Ms. Kochevar, Mr. McDonald and Dr. Scots-Knight (who each joined the Board in March 2019) and Mr. Garcia (who joined the Board in May 2019), who each received a pro-rated award for a partial year of service, which awards are mandatorily deferred and not issued until the second January following the director’s departure from service under the Elanco Directors’ Deferral Plan.

Elanco Directors’ Deferral Plan

Under the Elanco Directors’ Deferral Plan, non-employee directors’ equity compensation (but no more than the lesser of 30,000 shares or the number of shares equal in value to $800,000 (as of the applicable valuation date) less the directors’ cash compensation for the applicable plan year) are credited annually in a deferred stock account (as described below). The Elanco Directors’ Deferral Plan also allows non-employee directors to defer receipt of all or part of their cash compensation until after their service on our Board has ended. Each director can choose to invest their deferred cash compensation in one or both of the following two accounts:

Deferred Stock Account. This account allows the director, in effect, to invest his or her deferred cash compensation in company stock. Funds in this account are credited as hypothetical shares of company stock based on the closing stock price on pre-set dates. The number of shares credited in respect of deferred cash compensation is calculated by the amount deferred divided by the closing stock price on pre-set dates. In addition, the annual stock compensation awards described above is also credited to this account. Deferred stock accounts are also credited for dividends as if the credited shares were actual shares, with such credited dividends credited in additional shares.

Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the applicable federal long-term rate, compounded monthly, as established the preceding December by the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code of 1986 (the Internal Revenue Code).

Both accounts may generally only be paid in a lump sum in January of the second plan year following the plan year in which the director separates from service or in annual installments over between two and ten years, beginning at the same time the lump sum payment would be made. Amounts credited to the director’s deferred stock account would generally be paid in shares of company stock and amounts credited to the director’s deferred compensation account would be paid in cash.

GOVERNANCE

Stock Ownership Guidelines

Pursuant to our corporate governance guidelines, directors should hold meaningful equity ownership positions in the company. Accordingly, a significant portion of director compensation is made in the form of company equity. The Board will consider from time to time equity ownership requirements for non-employee directors.

Hedging/Pledging Policy

Elanco’s Board adopted a hedging and pledging policy under which our non-employee directors and employees are not permitted to hedge their economic exposures to Elanco stock through short sales or derivative transactions. Non-employee directors and all members of senior management are prohibited from pledging any Elanco stock (i.e., using Elanco stock as collateral for a loan or trading shares on margin).

The Board’s Role in Enterprise Risk Management

The Board, together with its committees, oversees the processes by which the company conducts its business to ensure the company operates in a manner that complies with laws and regulations and reflects the highest standards of integrity.

The company also has an enterprise risk management program overseen by our chief ethics and compliance officer, who is supported by our internal auditor. Enterprise risks are identified and prioritized by management through both top-down and bottom-up processes. The top priorities are overseen by a Board committee or the full Board. Company management is charged with managing risk through robust internal processes and controls. The enterprise risk management program as a whole is reviewed annually at a full Board meeting, and enterprise risks are also addressed in periodic business function reviews and at the annual Board and senior management strategy session.

Communicating with the Board

You may send written communications to one or more members of the Board, addressed to:

Board of Directors

Elanco Animal Health Incorporated

c/o Corporate Secretary

2500 Innovation Way

Greenfield, Indiana 46140

Transactions with Related Persons

Relationship between Elanco and Lilly

On September 24, 2018, immediately prior to the completion of the IPO, Elanco entered into a master separation agreement and a number of other agreements with Lilly to effect the separation of Elanco’s business from Lilly and to provide a framework for Elanco’s ongoing relationship with Lilly after the IPO and the separation, each of which remain in effect following the completion of the exchange offer. The following is a summary of the terms of the master separation agreement and other material agreements between us and Lilly.

Master Separation Agreement

Elanco entered into a master separation agreement with Lilly immediately prior to the completion of the IPO. The master separation agreement governs certain pre-IPO transactions, as well as the ongoing relationship between Lilly and Elanco following the IPO and the separation.

The separation of Elanco’s business; contribution of entities. The master separation agreement generally allocates certain assets and liabilities between Elanco and Lilly according to the business to which such assets or liabilities relate. Prior to the completion of the IPO, Lilly or its affiliates, as applicable, conveyed, contributed, assigned, distributed, delivered or otherwise transferred ownership of substantially all of the assets that are used exclusively in, relate exclusively to, or arise exclusively out of, the operation or conduct of its animal health businesses, to certain direct and indirect subsidiaries of Lilly.

Effective as of the closing of the IPO on September 24, 2018, Lilly contributed to Elanco, pursuant to the master separation agreement, the equity interests of certain entities that held, either directly or indirectly through the equity ownership of additional entities, substantially all of the assets of Lilly’s animal health businesses, which now forms the Elanco business. The master separation agreement also generally provides for the assumption by Elanco or the entities that are now its subsidiaries pursuant to foregoing contribution, as applicable, of all historical and future liabilities to the extent relating to, arising out of or resulting from the ownership or operation of such animal health business. In exchange for the transfer to Elanco of the entities holding substantially all of the assets and liabilities of Lilly’s animal health businesses, Lilly received (i) all of the net proceeds ($1,659.7 million) that Elanco received from the sale of Elanco common stock in the IPO, including the net proceeds received as a result of the exercise of the underwriters’ option to purchase additional shares, (ii) all of the net proceeds (approximately $2,000 million) received in the Senior Notes Offering and (iii) all of the net proceeds ($498.6 million) received from the entry by Elanco into a term loan facility. Following the IPO, Elanco made a payment to Lilly of $359.9 million pursuant to the terms of the master separation agreement, which required that Elanco pay additional amounts to Lilly to the extent that Elanco’s total unrestricted cash for working capital and other general corporate purposes exceeded $300 million following the completion of the IPO. A portion of the total consideration to be paid to Lilly was temporarily retained by Elanco as restricted cash in connection with the anticipated transfer to Elanco from Lilly of certain animal health assets in certain jurisdictions.

Except as expressly set forth in any of the transaction documents, or as required by law, the assets that have been or will be conveyed, contributed or assigned, transferred, distributed or delivered to Elanco or its subsidiaries (including entities the equity interests of which have been or will be transferred to Elanco by Lilly) are being so transferred on an “as is,” “where is” basis, without any representations or warranties, and Elanco has agreed to bear the economic and legal risks that any conveyance was insufficient to vest in it good title, free and clear of any security interest, that any necessary consents or approvals were not obtained or that any conveyance was not done in compliance with any requirements of law or judgments.

GOVERNANCE

Delayed transfers and further assurances. To the extent that the transfers of the assets and the assumptions of the liabilities allocated to Elanco under the master separation agreement were not completed on or prior to the IPO, Elanco and Lilly agreed to cooperate with each other and use commercially reasonable efforts to effect such transfers and assumptions as promptly as practicable thereafter or at such other time as Elanco and Lilly have agreed. Under the master separation agreement, until the transfer of such assets and the assumption of such liabilities have occurred, the benefits and burdens relating to any such assets and liabilities generally will inure, after the IPO, to the entity who would have received such asset or liability, had it been transferred prior to completion of the IPO, including, in the case of the jurisdictions in which Lilly and Elanco have agreed to defer the applicable transfers and assumptions, by calculating the net economic benefit and detriment attributable to such assets and liabilities and making payments in connection therewith in the manner agreed upon by Elanco and Lilly. If, despite Lilly and Elanco’s cooperating with one another and using their respective commercially reasonable efforts, the transfers and assumptions of the applicable assets and liabilities in one or more of such jurisdictions has not occurred on or prior to the date previously agreed upon in writing by Elanco and Lilly, then Lilly shall be paid any remaining consideration retained by Elanco as restricted cash, and shall be entitled to retain, sell, transfer or otherwise dispose of any such remaining asset or liability, in its sole discretion.

Elanco and Lilly have agreed to cooperate with each other and use their respective commercially reasonable efforts to take or cause to be taken all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable law, regulations and agreements to consummate and make effective the transactions contemplated by the master separation agreement and the other transaction documents.

Distribution. The master separation agreement provides that Elanco would cooperate with Lilly in all respects to make a distribution to its shareholders of all or a portion of its equity interests in Elanco, including in connection with the exchange offer.

Insurance. Following the time that Lilly holds 50% or less of Elanco’s common stock, subject to certain exceptions, Elanco will arrange for its own insurance policies and will no longer seek benefit from any of Lilly’s or its affiliates’ insurance policies that may provide coverage for claims relating to the animal health business prior to the date on which Elanco obtains its own insurance coverage. The master separation agreement contains procedures for the administration of insured claims and allocates the right to claim coverage and control over the prosecution and defense of claims between Elanco and Lilly.

Mutual releases and indemnification. Except for each party’s obligations under the master separation agreement, the other transaction documents and certain other specified liabilities, under the master separation agreement, Elanco and Lilly have released and discharged the other from any and all liabilities existing or arising from acts or events that occurred (or failed to occur) prior to the completion of IPO.

Elanco will indemnify, defend and hold harmless Lilly, each of its affiliates and each of its and their respective directors, officers, managers, members, employees and agents from and against any and all losses relating to, arising out of or resulting from, among others:

Lilly will indemnify, defend and hold harmless Elanco, each of its affiliates and each of its and their respective directors, officers, managers, members, employees and agents from and against any and all losses relating to, arising out of or resulting from, among others:

GOVERNANCE

Exchange of Information. The master separation agreement provides for the mutual sharing of information between Lilly and Elanco in order to comply with applicable law, reporting, filing, audit or tax requirements or other applicable obligations, or for use in judicial or other proceedings.

Financial Reporting Covenants. Under the master separation agreement, Elanco agreed to comply with certain covenants relating to its financial reporting for so long as Lilly was required to consolidate Elanco’s results of operations and financial position or to account for its investment in Elanco under the equity method of accounting.

Elanco has also agreed that, for so long as Lilly provides Elanco services under the transitional services agreement, Elanco will not change its auditor, nor will Elanco engage its auditor for any non-audit services, in each case, without Lilly’s prior consent, and Elanco will generally implement and maintain Lilly’s business practices and standards in accordance with certain policies and procedures specified by Lilly, subject to appropriate materiality thresholds.

Other covenants and approval rights. The master separation agreement also contained certain other covenants that placed restrictions on Elanco’s actions, or required Lilly’s prior written approval to such actions, until Lilly disposed of its Elanco shares in the exchange offer.

Board representation. The master separation agreement provided that, for so long as Lilly and its affiliates beneficially owned at least 10% of Elanco voting shares, Lilly was entitled to designate for nomination certain representatives on the Board. Following the completion of the exchange offer, Lilly no longer has such rights.

No solicitation of employees. The master separation agreement included an employee non-solicitation covenant for a period of 12 months following the date on which Lilly and its affiliates no longer owned a majority of Elanco’s outstanding shares of common stock.

Dispute resolution. The master separation agreement provides that Elanco and Lilly will use their respective commercially reasonable efforts to resolve disputes expeditiously and on a mutually acceptable negotiated basis by our respective senior level representatives. Any disputes unable to be resolved through such process will be referred to mediation, for non-binding resolution. Subject to compliance with the terms of the master separation agreement, either Elanco or Lilly, following the escalation and mediation procedures in the master separation agreement, may submit a dispute to a court of competent jurisdiction in Indiana.

Term. The master separation agreement will continue unless terminated by the mutual consent of Elanco and Lilly, although certain rights and obligations terminated upon a reduction in Lilly’s ownership of Elanco’s outstanding common stock.

Transitional Services Agreement

Historically, Lilly has provided Elanco significant shared services and resources related to corporate functions such as executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations, which are referred to collectively as the “Lilly Services.” The transitional services agreement became operative as of the completion of IPO and the agreement will continue until the expiration or termination of the last Lilly Service to expire or be terminated, unless the agreement is earlier terminated according to its terms.

Under the transitional services agreement, Elanco is able to use Lilly Services for a fixed term established on a service-by-service basis. Partial reduction in the provision of any Lilly Service or termination of a Lilly Service prior to the expiration of the applicable fixed term requires Lilly’s consent. In addition, either party can 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.

Elanco will pay Lilly mutually agreed-upon fees for the Lilly Services provided under the transitional services agreement, 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, 2020.

Tax Matters Agreement

Allocation of taxes. Elanco entered into a tax matters agreement with Lilly immediately preceding the completion of the IPO that governs the parties’ respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. In general, under the agreement:

GOVERNANCE

Elanco is not generally entitled to receive payment from Lilly in respect of any of Elanco’s tax attributes or tax benefits or any reduction of taxes of Lilly. Neither party’s obligations under the agreement are limited in amount or subject to any cap. The agreement also assigns responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.

Lilly is primarily responsible for preparing and filing any tax return with respect to the Lilly affiliated group for U.S. federal income tax purposes and with respect to any consolidated, combined, unitary or similar group for U.S. state or local or foreign tax purposes that includes Lilly or any of its subsidiaries (including those that also include Elanco and/or any of its subsidiaries), as well as any tax return that includes only Lilly and/or any of its subsidiaries (including such tax returns that reflect taxes attributable to Elanco’s business). Elanco is generally responsible for preparing and filing any tax returns that include only Elanco and/or any of its subsidiaries.

The party responsible for preparing and filing a given tax return generally has exclusive authority to control tax contests related to any such tax return. Elanco generally has exclusive authority to control tax contests with respect to tax returns that include only Elanco and/or any of its subsidiaries.

Preservation of the tax-free status of certain aspects of the separation. Elanco and Lilly intend the separation, the transfer of net cash proceeds from the IPO and certain related financing transactions (which we refer to as the Debt Transactions) to Lilly and the exchange offer to qualify as a tax-free transaction under Section 355, Section 368(a)(1)(D) and related provisions of the Code. In addition, Elanco and Lilly intend for the separation, the transfer of net cash proceeds from the IPO and the Debt Transactions to Lilly, the exchange offer and certain related transactions to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax law.

In connection with certain opinions obtained by Lilly from its outside tax attorneys and advisors, Elanco has made representations regarding the past and future conduct of its business and certain other matters. Elanco has also agreed to certain covenants that contain restrictions intended to preserve the tax-free status of the separation, the transfer of net cash proceeds from the IPO and the Debt Transactions to Lilly, the exchange offer and certain related transactions. Elanco may take certain actions prohibited by these covenants only if Lilly receives a private letter ruling from the IRS or Elanco obtains and provides to Lilly an opinion from a U.S. tax counsel or accountant of recognized national standing, in either case acceptable to Lilly in its sole and absolute discretion, to the effect that such action would not jeopardize the tax-free status of these transactions. Elanco is barred from taking any action, or failing to take any action, where such action or failure to act adversely affects or could reasonably be expected to adversely affect the tax-free status of these transactions, for all time periods. In addition, during the time period ending two years after the date of the exchange offer these covenants include specific restrictions on Elanco’s:

Elanco has generally agreed to indemnify Lilly and its affiliates against any and all tax-related liabilities incurred by them relating to the separation, the transfer of net cash proceeds from the IPO and the Debt Transactions to Lilly, the exchange offer and/or certain related transactions to the extent caused by an acquisition of Elanco stock or assets or by any other action undertaken by Elanco. This indemnification provision applies even if Lilly has permitted Elanco to take an action that would otherwise have been prohibited under the tax-related covenants described above.

Employee Matters Agreement

Elanco entered into an employee matters agreement with Lilly immediately prior to the completion of IPO. The employee matters agreement governs Lilly’s, Elanco’s and the parties’ respective subsidiaries’ and affiliates’ rights, responsibilities and obligations after the IPO with respect to employees, compensation, employment, employee benefit plans and related matters. Below is a summary of the terms of the employee matters agreement.

GOVERNANCE

Employment. Prior to the completion of the IPO, Elanco generally offered employment to certain employees who provided services to its business and who did not otherwise transfer to Elanco entities by operation of law. The date on which any such transferring employee is considered to be employed by Elanco (either by operation of law or of an offer) for purposes of the employee matters agreement is referred to as the “Employee Transfer Date.” To the extent that severance or termination obligations were triggered by or as a result of such transfers or Elanco’s failure to make offers or continue employment as required by the employee matters agreement or are required to be paid under applicable law or a Lilly plan, Lilly will administer the severance pay or termination pay obligations in accordance with the terms and conditions of the applicable Lilly severance pay or termination pay plan or policy, or as otherwise required by applicable law, and Elanco will indemnify Lilly for such liability. If any of Elanco’s U.S. employees began receiving long-term disability leave benefits under Lilly’s disability plan before the applicable Plan Transition Date, such employees remain eligible for such benefits after the Plan Transition Date, subject to all applicable requirements of the disability plan. For the period starting as of the completion of the IPO and ending on December 31, 2019, Elanco employees were entitled to receive: (A) (i) at least the same salary or wages, and cash bonus opportunities at target, (ii) equity incentive commitments equal to the equity budget value and (iii) other material terms and conditions of employment as such employees were provided immediately before January 1, 2019; and (B) employee benefits and perquisites (other than cash bonus opportunities, equity incentive commitments, defined benefit pension, retiree medical and nonqualified benefits) that are substantially comparable in the aggregate to the employee benefits and perquisites that such employees were provided under applicable plans of Lilly before January 1, 2019. Elanco was required to use reasonable efforts to assume, as of the Employee Transfer Date, any applicable employment agreements or other individual benefit or compensation agreement entered into between Lilly and a transferring employee and will indemnify Lilly for all liabilities under such agreements.

Unions and collective bargaining agreements. The parties will cooperate to inform and consult with any applicable representative of a labor union, or similar organization, covering any transferring employee, to the extent required by law or the applicable collective bargaining agreement or similar arrangement. As of the Employee Transfer Date, Elanco will assume any collective bargaining, or similar, agreements or arrangements covering any such employees and indemnify Lilly for all related liabilities.

Credited service. Elanco was required to cause its employee benefit plans to credit its employees, without duplication of benefits, for service with Lilly on or prior to the Employee Transfer Date, and for service with Elanco on or following the Employee Transfer Date, for purposes of eligibility and vesting under all of Elanco’s employee benefit plans and arrangements and computation of vacation, sick days or severance benefits, or as may otherwise be required by applicable law.

U.S. defined benefit and retiree medical plans. Following the Plan Transition Date, U.S. employees are generally be eligible to receive credit for service with Elanco for vesting and eligibility service (but not benefit service) under the Eli Lilly Retirement Plan and the Eli Lilly and Company Retiree Health Plan through a date not later than December 31, 2023, to the extent permitted by and subject to the terms of such plans.

U.S. defined contribution plans. Elanco established a 401(k) plan for its U.S. employees effective as of the Plan Transition Date with terms that are substantially similar to Lilly’s 401(k) plan, except that it will provide for a 6% company match and 3% non-elective company contribution. Any transferring employee whose Employee Transfer Date was on or before January 1, 2019 is 100% vested in Elanco’s 401(k) plan. Elanco accepted the transfer from the U.S. Lilly qualified defined contribution plan to its qualified defined contribution plan of any assets and liabilities allocable to the participants transferring to Elanco. Elanco’s employees are 100% vested in their account balances under the Lilly qualified defined contribution benefit plan as of the Plan Transition Date, and ceased being eligible to receive any employer contributions from Lilly effective December 31, 2018.

U.S. Lilly nonqualified plans. As of the Plan Transition Date, any transferring employee ceased being eligible for contributions from Lilly under the Eli Lilly Excess Savings Plan and Deferred Compensation Plan for services rendered after December 31, 2018. Following the Plan Transition Date, U.S. employees will generally be eligible to receive credit for service with Elanco for vesting and eligibility service (but not benefit service) under the Eli Lilly Excess Benefit Retirement Plan through a date not later than December 31, 2023, to the extent permitted by and subject to the terms of the plan.

Non-U.S. retirement benefit arrangements. The employee matters agreement provides for the transfer from Lilly to Elanco of any retirement benefit arrangement covering Elanco employees located outside of the U.S. and of any related obligations or liabilities, unless otherwise agreed by the parties.

Lilly equity compensation. The employee matters agreement provides that, prior to the completion of the IPO, the board of directors of Lilly would determine how any Lilly equity, equity-related and long-term performance awards granted to Elanco’s transferring employees will be treated under the applicable Lilly plans.

Toll Manufacturing and Supply Agreement

Elanco entered into a toll manufacturing and supply agreement with Lilly immediately prior to the completion of the IPO. Lilly has historically manufactured Humatrope drug substance for use in the human health field at its Speke manufacturing site, which site is being transferred to Elanco in connection with the separation. Under the toll manufacturing and supply agreement, Elanco will continue to exclusively manufacture Humatrope for Lilly at the Speke site until December 31, 2020; provided, however, that such obligation may continue through December 31, 2023 (through the exercise of three one-year extensions) if Lilly’s replacement third party supplier of Humatrope has not received all necessary governmental approvals or cannot meet Lilly’s volume requirements.

The tolling fee that Elanco charges Lilly for the provision of such manufacturing and supply services is based on local value added plus a reasonable arm’s length mark-up. By October 1 of each calendar year during the term of the toll manufacturing and supply agreement, Elanco will mutually agree upon a new tolling fee to be effective for the following calendar year.

Under the toll manufacturing and supply agreement, Elanco agrees not to manufacture or sell any product that is competitive to Humatrope for a period of five years after the expiration or termination of the agreement. In addition, during the term of the agreement, Elanco agrees not to manufacture any product other than Humatrope at certain buildings of the Speke manufacturing site without Lilly’s consent.

GOVERNANCE

Intellectual Property and Technology License Agreement

Elanco 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 a non-exclusive, non-sublicensable license to screen certain compounds in Lilly’s compound libraries to exploit products in the animal health field that utilize or use certain of Lilly’s intellectual property. This screening license has an initial term of two years, subject to three one-year extensions, each of which requires Lilly’s consent.

If Elanco makes any improvements to the licensed intellectual property, Elanco shall retain ownership of such improvements and provide Lilly with a non-exclusive, perpetual license to use the intellectual property in fields outside animal health (including human health).

For a period of two years following the effective date of the intellectual property and technology license agreement, each party has a right of first offer with respect to third-party offers that the other party receives to license such other party’s intellectual property in the first party’s field (animal health versus human health). In connection with such right, Elanco will negotiate exclusively as to such offer for the use of the other party’s intellectual property in the first party’s field.

Under the intellectual property and technology license agreement, Elanco will provide quarterly reports to Lilly describing any know-how generated under the agreement, including inventions, patentable subject matter, discoveries, and technical data. Elanco will retain ownership of such generated know-how and will provide Lilly with a non-exclusive, perpetual license to use the know-how in fields outside animal health (including human health).

Transitional Trademark License Agreement

Elanco entered into a transitional trademark license agreement with Lilly immediately prior to the completion of the IPO. Under the transitional trademark license agreement, Lilly granted Elanco a transitional license to use certain of Lilly’s trademarks for a period of time following the IPO. Such license is non-exclusive and royalty-free, and allows Elanco to use certain of Lilly’s trademarks on Elanco’s product packaging, any advertising materials used in connection with the sale and distribution of Elanco products, and generally in connection with the sale and distribution of its products and in the day-to-day operation of its business (including in Elanco’s books and records).

Such license will terminate on a product-by-product and country-by-country basis. The term of the license will not extend beyond four years; provided, however, that the license can extend for one additional year (beyond such four years) if the parties mutually agree upon such extension. Lilly can terminate the transitional trademark license agreement due to our breach of such agreement, upon prior written notice, subject to a limited cure period.

Registration Rights Agreement

Elanco entered into a registration rights agreement with Lilly immediately prior to the completion of the IPO, pursuant to which Elanco agreed that, upon the request of Lilly, Elanco would use its reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of Elanco common stock retained by Lilly following the IPO. Prior to the commencement of the exchange offer, we filed a registration statement on Form S-4 registering the shares of our common stock exchanged by Lilly in the exchange offer. Pursuant to the registration rights agreement, we were generally responsible for all registration expenses in connection with the performance of our obligations under the registration rights provisions in the registration rights agreement. Lilly is responsible for its own internal fees and expenses, any applicable underwriting discounts or commissions and any stock transfer taxes. The agreement contains indemnification and contribution provisions by us for the benefit of Lilly and, in limited situations, by Lilly for the benefit of us with respect to the information provided by or failed to be provided by Lilly included or omitted, as applicable, in the registration statement, prospectus or related document.

Policy Concerning Related Person Transactions

Elanco’s Board has adopted a written policy, which is referred to as the “related person transaction policy,” for the review of any transaction, arrangement or relationship in which Elanco is a participant, if the amount involved exceeds $120,000 and one of Elanco’s executive officers, directors, director nominees or beneficial holders of more than 5% of Elanco’s total equity (or their immediate family members), each of whom is referred to as a “related person,” has a direct or indirect material interest. This policy was not in effect when Elanco entered into the transactions described above.

Each of the agreements between Elanco and Lilly and its subsidiaries that were entered into prior to the completion of the IPO, and any transactions contemplated thereby, were deemed to be approved and not subject to the terms of such policy. If a related person, other than Lilly and its affiliates, proposes to enter into such a transaction, arrangement or relationship, which is referred to as a “related person transaction,” the related person must report the proposed related person transaction to Elanco’s Audit Committee. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by the Audit Committee. In approving or rejecting such proposed transactions, the Audit Committee will be required to consider relevant facts and circumstances. The Audit Committee will approve only those transactions that, in light of known circumstances, are deemed to be in Elanco’s best interests. In the event that any member of the Audit Committee is not a disinterested person with respect to the related person transaction under review, that member will be excluded from the review and approval or rejection of such related person transaction; provided, however, that such Audit Committee member may be counted in determining the presence of a quorum at the meeting of the Audit Committee at which such transaction is considered. If Elanco becomes aware of an existing related person transaction which has not been approved under the policy, the matter will be referred to the Audit Committee. The Audit Committee will evaluate all options available, including ratification, revision or termination of such transaction. In the event that management determines that it is impractical or undesirable to wait until a meeting of the Audit Committee to consummate a related person transaction, the chairman of the Audit Committee may approve such transaction in accordance with the related person transaction policy. Any such approval must be reported to the Audit Committee at its next regularly scheduled meeting.

A copy of Elanco’s related person transaction policy is available on Elanco’s website at investor.elanco.com under “Governance.”

GOVERNANCE

GOVERNANCE

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This compensation discussion and analysis (“CD&A”) provides detailed information regarding the 2019 compensation for Elanco’s Chief Executive Officer, Chief Financial Officer and three most highly-compensated executive officers who are named below (collectively, the “Named Executive Officers”):

This CD&A discusses the compensation programs applicable to the Named Executive Officers and their compensation thereunder in 2019, including a description of Elanco’s compensation philosophy, the elements of each compensation program, the factors that the Compensation Committee considered in setting compensation, and how the company’s financial results affected payouts under the 2019 short-term and long-term incentive plans for each of the Named Executive Officers.

Our Philosophy on Compensation

Our compensation programs are designed to help achieve the goals of attracting, engaging and retaining highly talented individuals who are committed to our core values of integrity, excellence and respect for people, while balancing the long-term interests of our shareholders and customers.

Our compensation and benefits programs are based on the following objectives:

We will achieve these objectives by:

Compensation Processes and Analysis

Process for Setting Compensation

The independent, post-separation Compensation Committee considered individual performance assessments, compensation recommendations from senior leadership, Elanco’s company performance, Elanco’s peer group data, input from its compensation consultant and its own judgment when determining compensation for Elanco’s executive officers. When determining the compensation for employees who were not executive officers of Elanco, Elanco’s senior management considered similar factors consistent with Elanco’s philosophy, focusing on individual performance assessments, compensation recommendations from senior leadership, Elanco’s performance, and their own judgment.

In addition, the Compensation Committee charter was amended in August 2019, to provide for the Board’s ratification of CEO Compensation based upon Compensation Committee recommendation.

Elanco Peer Group and Benchmarking

Elanco’s peer group for 2019 was comprised of companies that were direct competitors of Elanco, operated in a similar business model and employed people with the unique skills required to operate an established biopharmaceutical company. The Compensation Committee selected a peer group whose median revenues were broadly similar to that of Elanco’s, with none being larger than three times Elanco’s size. Based on the advice of Willis Towers Watson, the following group of 17 companies were identified as Elanco’s peers for 2019:

The Compensation Committee periodically reviews Elanco’s peer group and makes adjustments to its size and composition, when appropriate.

To determine the elements of Elanco’s compensation programs for its Named Executive Officers, the Board approved compensation derived from following benchmarks, among others:

Components of Executive Compensation

Elanco’s 2019 executive compensation program, in which certain key employees participate, including the Named Executive Officers was primarily comprised of base salary, annual cash bonus and long-term equity awards.

Elanco employees, which included the Named Executive Officers, also received a company benefits package, described below under “Other Elanco Compensation Practices and Information — Employee Benefits.”

Base salaries for Elanco employees, including for the Named Executive Officers, are reviewed and established annually by Elanco and may be adjusted upon promotion, following a change in job responsibilities or to maintain market competitiveness. Salaries are based on each person’s level of contribution, responsibility, expertise and competitiveness with respect to Elanco peer group data.

Base salary increases for 2019 were established based upon our corporate budget for salary increases, which were set considering our performance over the prior year, expected performance for the following year and general external trends. In setting salaries, Elanco seeks to retain, motivate and reward successful performers, while maintaining affordability within the company’s business plan.

During 2019, the base salaries of certain of the Named Executive Officers were adjusted as described in the table below. As such, the table below reflects the actual annual salary earned by the Named Executive Officers in 2018 and 2019. See also the Summary Compensation Table in the section entitled “Executive Compensation Tables” below.

The Named Executive Officers participated in the Elanco Bonus Plan during 2019. The Elanco Bonus Plan for 2019 was designed to reward the achievement of Elanco’s financial goals and innovation objectives for the year. The bonus was based on three areas that are measured relative to internal targets: revenue, EBIT, and certain innovation targets set by Elanco (“Elanco innovation progress”).

Elanco’s performance goals under the Elanco Bonus Plan and individual bonus targets are set at the beginning of each year. Actual payout can range from 0% to 200% of an individual’s bonus target. The Elanco Bonus Plan for 2019 allowed for adjustments to Elanco’s 2019 fiscal performance based on unforeseen events, which adjustments needed to be recommended by management for consideration and approval by the Compensation Committee.

Performance targets and the assessment of the relative weighting for each objective is based upon annual operating plans with a threshold, target and maximum set for each objective (with straight line interpolation for achievement between relevant levels). The 2019 weightings were as follows:

Elanco Bonus Plan

Based on this weighting, the Elanco Bonus Plan multiple is calculated as follows:

(0.30 × revenue multiple) + (0.40 × EBIT multiple) + (0.30 × innovation progress multiple) = Elanco Bonus Plan multiple

The annual Elanco Bonus Plan payout for each individual is calculated as follows:

Elanco Bonus Plan multiple × individual bonus target × base salary = payout

Bonus targets for 2018 and 2019 are shown in the table below as a percentage of the Named Executive Officer’s actual base salary earnings. Elanco continued the existing Elanco Bonus Plan for all of the Named Executive Officers for the period from the completion of the IPO through December 31, 2018, and the Board adjusted bonus targets for certain of the Named Executive Officers for that period.

The 2019 results described below reflect Elanco’s 2019 performance with respect to the Elanco Bonus Plan targets and are not presented on the same basis as, and are not directly comparable to, our combined financial results presented in our financial statements included in our Annual Report on Form 10-K.

Performance targets for the Elanco Bonus Plan were based on Elanco’s 2019 operating plan. Elanco’s performance compared to the 2019 targets for revenue, EBIT, and innovation progress, as well as the resulting bonus multiple, is set forth below. Adjustments to revenue, and therefore, EBIT targets, were made to account for unforeseen events throughout the year, including, amongst other things, the effect of Elanco’s 2019 revenue from African Swine Fever, a one-time expense from a settlement, the acquisitions of Aratana Therapeutics, Inc. and Prevtec Microbia, Inc., and other unforeseen circumstances related to a supply disruption with one of our contract manufacturers.

Elanco’s 2019 innovation progress target was 3.0 on a scale of 1.0 to 5.0. Elanco’s innovation progress multiple was comprised of the following factors: (i) achievement of certain product approvals, (ii) the number of entrants into early and late stage development, (iii) adherence to approval timelines and (iv) a qualitative assessment of overall performance by Aaron Schacht, Elanco’s Executive Vice President, Innovation, Regulatory and Business Development. Based on the weighted outcomes of these factors, Elanco achieved a 3.60 score, which correlates to a 1.30 innovation progress multiple for use in the calculation of the 2019 Elanco Bonus Plan.

When combined, Elanco’s revenue, EBIT, and innovation multiples yielded a 2019 Elanco Bonus Plan multiple of:

(0.30 × 0.8497) + (0.40 × 0.9937) + (0.30 × 1.30) = 1.04 bonus multiple

The 2019 bonuses paid to the Named Executive Officers under the 2019 Elanco Bonus Plan are as follows:

Elanco primarily grants two types of equity incentives to executives and certain other employees under its long-term incentive plans — Elanco PAs and Elanco RSUs. Elanco PAs are designed to focus leaders on achieving certain determined company financial performance objectives. Equity issued under our long-term incentive plans are issued pursuant to the terms of The 2018 Elanco Stock Plan (the “Elanco Stock Plan”). The Compensation Committee has the discretion to adjust downward (but not upward) any equity award payout, including executive officers’ payout from the amount yielded by the applicable formula.

Performance Awards (Elanco PAs)

All of our Named Executive Officers received Elanco PAs under Elanco’s 2019 Long-Term Incentive Plan that vest over a two-year performance period. In November 2018, the Compensation Committee established two one-year EBIT targets for the 2019-2020 performance period, based on Elanco’s business plan at that time. The EBIT target is subject to adjustments which may include impacts of divestitures, acquisitions, non-GAAP adjustments, or other adjustments approved by the Compensation Committee over the two-year performance period. These awards do not accumulate dividends. The Compensation Committee believes that EBIT growth is an effective measure of operational performance given the transitional nature of Elanco’s IPO and unknown market response, while focusing on delivery on planned financials.

Payouts for the 2019-2020 Elanco PAs range from 0% to 200% of the target, based on the achievement of the EBIT targets, which we believe to be rigorous and challenging. The specific EBIT metrics and the range of awards related to the achievement of such metrics are reflective of Elanco’s confidential business plan, the disclosure of which would cause Elanco competitive harm.

Performance-Based Replacement Awards

In 2019, the Compensation Committee approved one-time performance-based Replacement Awards to Messrs. Simmons, Kinard, Urbanek, and Schacht to replace unvested Lilly Performance Awards from the performance period January 1, 2018 to December 31, 2019, that would have otherwise been forfeited at the time of separation. These awards were granted on February 12, 2019, to certain executive officers who were former Lilly employees, with 40% of the amount of the award being subject to a one-year performance period. The remaining 60% of the award shares were issued taking into account Lilly performance from January 1, 2018 until the grant date. These one-year Replacement Awards also utilized an EBIT multiple. Possible payouts ranged from 0% to 200% of the target, depending on Elanco EBIT performance over the performance period.

 The Elanco EBIT target for this performance period set by the Compensation Committee was $590 million, of which $589.5 million was attained.

For the Named Executive Officers who participated in these awards, the number of Elanco shares earned under the performance-based Replacement Awards is set forth in the table below. Details on the vesting schedule of these awards appears below, in the section Outstanding Equity Awards at December 31, 2019.

Restricted Stock Unit Awards (Elanco RSUs)

All of our Named Executive Officers received Elanco RSUs under Elanco’s 2019 Long-Term Incentive Plan. These awards vest over a three-year period, with 33% of the award vesting on the first anniversary of the grant date, 33% of the award vesting on the second anniversary of the grant date, and 34% of the award vesting on the third anniversary of the grant date. In addition, some of the Replacement Awards, which were part of Elanco’s 2019 Long-Term Incentive Plan, were issued as Elanco RSUs with the same vesting schedule as previously forfeited Lilly awards.

Elanco Equity Program — Target Grant Values

For the 2019 equity awards, excluding the Replacement Awards, Elanco set the total target value for Messrs. Simmons, Young, Urbanek, Kinard and Schacht based on internal pay equity, Elanco performance, individual performance and Elanco peer group data. Total target values for the 2018 and 2019 equity grants to the applicable Named Executive Officers were as follows:

Other Elanco Compensation Practices and Information

Elanco Employee Benefits

Elanco offers core employee benefits coverage to:

The benefits that were available to the Named Executive Officers during their employment with Elanco were generally the same as those available to all U.S. Elanco employees and included medical and dental insurance, disability insurance and life insurance. In addition, The Elanco Employee 401(k) plan (the “Elanco 401(k) Plan” or the “Plan”) provides U.S. Elanco employees a competitive level of retirement income reflecting employees’ careers with Elanco.

The Elanco 401(k) Plan and Other Retirement Benefits

Elanco provides retirement income to eligible employees, which includes the Named Executive Officers, through The Elanco 401(k) Plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Participants may elect to contribute a portion of their base salary to the plan, and Elanco provides matching contributions on employees’ contributions up to 6% of base salary up to IRS limits. In addition, Elanco provides a non-elective contribution in the amount of 3% of base salary earnings, pending active employment on December 31 of each year. The employee contributions, Elanco contributions and earnings thereon are paid out in accordance with elections made by the participant under the terms and conditions of the Plan.

Neither Elanco nor its subsidiaries sponsor (1) a nonqualified deferred compensation plan, or (2) a nonqualified savings plan. Elanco, through one of its subsidiaries, sponsors a defined benefit retirement plan for certain of its employees at one of its manufacturing sites. Other than this one defined benefit retirement plan, neither Elanco nor any of its subsidiaries sponsor defined benefit retirement plans, although eligible employees may receive transition service credit for vesting and eligibility purposes under certain retirement plans sponsored by Eli Lilly and Company.

The Elanco Deferred Compensation Plan

Elanco’s executive officers may defer receipt of all or part of their cash bonus under The Elanco Deferred Compensation Plan, which allows participants to save for retirement in a tax-effective way at minimal cost to Elanco. Under this unfunded plan, amounts deferred by the participant are credited at an interest rate of 120% of the applicable federal long-term rate, as described in more detail following the “Nonqualified Deferred Compensation in 2019” table.

Stock Ownership and Holding Guidelines

Elanco’s Board has adopted stock ownership guidelines for Elanco’s executive officers. These stock ownership guidelines require the Chief Executive Officer to hold the number of shares of Elanco common stock equal to six times (6x) his or her base salary, and other executive officers to hold the number of shares of Elanco common stock equal to three times (3x) their base salaries. The Named Executive Offers were compliant with the stock ownership guidelines with respect to the annual equity awards granted to them, which requires the retention of 50% of all equity awards granted until their stock ownership requirements are satisfied, as they each build toward their respective ownership requirements.

Hedging/Pledging Policy

Elanco’s Board adopted a hedging and pledging policy under which our non-employee directors and employees are not permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) or otherwise engage in transactions that hedge or offset any decrease in the market value of a company’s equity securities granted to the employee or director as compensation or held directly or indirectly by the employee or director.

Executive Compensation Recovery Policy

All Elanco incentive awards generally are subject to forfeiture upon termination of employment prior to the end of the performance or vesting period or for disciplinary reasons. In addition, the Compensation Committee has adopted an executive compensation recovery policy that gives the Compensation Committee broad discretion to claw back Elanco incentive payouts from any member of Elanco senior management, which includes our Named Executive Officers, whose misconduct results in a material violation of law or company policy that causes significant harm to Elanco or who fails in his or her supervisory responsibility to prevent such misconduct by others. The Elanco recovery policy covers any Elanco incentive compensation awarded or paid to an employee at a time when he or she is a member of Elanco senior management. Subsequent changes in status, including retirement or termination of employment, do not affect Elanco’s rights to recover compensation under the policy. Recoveries under the Elanco plan can extend back as far as three years.

Executive Compensation Tables

All amounts included in the tables below represent compensation paid to or earned by the applicable Named Executive Officers in 2019 or the year indicated in the applicable table.

Summary Compensation Table

The “Stock Awards” column also includes one-time Elanco PAs and Elanco RSUs awards as follows:

The “Stock Awards” column also includes Founders’ Award Elanco RSUs for Messrs. Simmons, Urbanek, Kinard and Schacht. These awards were granted on October 20, 2018, after the IPO, and will vest on October 20, 2021. The grant date fair values were $1,119,454 for Mr. Simmons and $215,302 for Messrs. Kinard, Urbanek, and Schacht.

The supplemental table below shows the total target grant date fair values of the annual equity awards approved by the Compensation Committee in 2019 for all Named Executive Officers, and the Lilly compensation committee in 2018 for Mr. Simmons and approved by Lilly management for the remaining Named Executive Officers, as applicable:

The table below shows the minimum, target and maximum payouts for the 2019 Replacement Performance Awards included in this column of the “Summary Compensation Table.”

The table below shows the minimum, target and maximum payouts for the 2019 Performance Awards included in this column of the “Summary Compensation Table.”

Grants of Plan-Based Awards During 2019

The following table reflects grants of plan-based awards described in the CD&A under each of the following plans: the Elanco Bonus Plan (a non-equity incentive plan), and the Elanco Stock Plan, which provides for the grant of Elanco PA, Elanco RSUs, and Elanco stock options. To receive a payout under the Elanco PAs and Elanco RSUs, a participant must remain employed with Elanco through the end of the relevant performance period or vesting date (except in the case of death, disability, retirement or redundancy). No dividends accrue on either the Elanco PAs or the Elanco RSUs prior to payout or vesting, as applicable.

Outstanding Equity Awards at December 31, 2019

The closing price of Elanco’s common stock on December 31, 2019, which was $29.45, was used to calculate the values in the table below.