Elanco pays $15M to settle SEC securities antifraud charges
Elanco Animal Health has agreed to pay a $15 million civil penalty to settle U.S. Securities and Exchange Commission (SEC) antifraud charges.
According to the SEC, following a spin-off from Eli Lilly and Company in September 2018, Elanco emphasized internally the importance of meeting revenue, core revenue growth, and earnings-per-share targets provided to investors and analysts, to prove that Elanco could succeed as a standalone entity.
From the first quarter of 2019 and the first quarter of 2020, the SEC said the Greenfield, Indiana-based company misled investors when it made statements about its revenue growth and end-user demand without also disclosing its reliance on certain quarter-end sales incentives that were necessary to achieve that revenue.
“More specifically, Elanco would entice distributors to make end-of-quarter purchases in excess of then-existing customer demand by offering them incentives such as rebates and extended payment terms,” the SEC said. “These incentives allowed Elanco to improve its revenue each quarter, but caused distributors to purchase products ahead of end-user demand. Without these Incentivized Sales, Elanco would have missed its internal revenue and core growth targets in each quarter in 2019.”
According to the SEC, these incentives allowed Elanco to meet internal revenue targets but led to internal concerns that relying on these sales could negatively impact distributor inventory levels, and consequently future revenue.
Despite these concerns, the SEC says Elanco misleadingly attributed its revenue growth to strong end-user demand and did not disclose the risk that its sales practices might negatively impact future revenue.
When Elanco decided to stop offering these incentivized sales, it caused a $160 million decline in revenue. The company cited the uncertainty of the COVID-19 pandemic as one of the causes for the revenue decline even though the decision to end the sales incentives had been made before the pandemic began, according to the SEC.
Elanco did not admit to or deny SEC’s findings, and consented to the entry of an order that it cease and desist from committing or causing any violations and any future violations of the federal securities laws and to pay a $15 million penalty.