REPORT- Eli Lilly and Company carves-out of its animal health business into Elanco Animal Health Inc
On September 20th, Eli Lilly and Company (NYSE:LLY) completed the carve-out of its animal health business into a separate public company, Elanco Animal Health Inc (ELAN). Lilly retained ~82.3% interest (or 80.2% post underwriter dilution) in ELAN. The IPO was priced at $24/share. In our view, the separation follows a similar move taken by other pharma companies such as Pfizer, which separated its animal business under the name Zoetis.
LLY reported strong 2018 earnings and raised its FY18 earnings guidance. We are optimistic about the diabetes and non-diabetes parts of the business given strong performance of its key drugs - Trulicity, Jardiance, Talz, and Verzenio. However, we remain cautious ahead of the data from Trulicity's REWIND cardiovascular (CV) outcomes trial. Moreover, the stock trades at a premium to the peer group, reflecting the opportunities around its portfolio are fully priced.
ELAN is the fourth largest animal health company in the world, with leading presence in categories - #1 in medicinal feed additives, #2 in poultry and #3 in cattle. New product launches (3 new introductions in 2018) should provide tailwind to revenue going forward. We see margins expanding driven by productivity initiatives and integration of acquisitions. We expect the stock to benefit from sales growth, widening margins and advancement in its pipeline. The stock rose ~50% on the day of the IPO and we see the positives fully reflected in the stock price.
In our view, both LLY and ELAN are fairly priced.
Elanco Animal Health is an animal health company. The company groups its products into four principal categories: Companion Animal (CA) Disease Prevention, which includes parasiticides and vaccine products for canines and felines; CA Therapeutics, which includes products for the treatment of pain, osteoarthritis, otitis, cardiovascular and dermatology indications in canines and felines; Food Animal (FA) Future Protein and Health, which includes vaccines, antibiotics, parasiticides and other products used in poultry and aquaculture production; and FA Ruminants and Swine, which includes vaccines, antibiotics, implants, parasiticides and other products used in ruminants and swine production.
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