China Animal Healthcare creates embarrassment for stakeholder Lilly

Elanco President Jeff Simmons

China's stock market may have crashed at the start of the new year, but one of the country's largest animal health players, drugmaker China Animal Healthcare, ran into trouble before that--creating a headache for shareholder Eli Lilly's ($LLY) Elanco, which invested $100 million in the company in 2013 and owns a 20% stake.

China Animal Healthcare (CAH), which is traded on the Hong Kong exchange, announced on December 28 that it has lost 5 years' worth of financial statements. The documents disappeared when a truck driver transporting them to the company's Beijing office stopped for lunch, according to the Financial Times. This would be a problem for any company, but it's a particular concern for CAH, which was partway through a forensic audit when the loss occurred.

Trading in shares of CAH had been suspended since March, when the company missed the deadline for filing its 2014 financial results. In September, Deloitte Touche Tohmatsu stepped down as CAH's auditor, alleging misconduct by an employee and an inability for the two companies to agree on bank balances, according to The Wall Street Journal.

The company's problems seemed to keep building from there. In October, some of its production permits and manufacturing certificates were revoked due to environmental and safety concerns, the WSJ reports. Then came the document theft, which is now being investigated by a special group that CAH has assembled.

An Elanco spokesperson told the FT that it expressed concerns about the mishaps to CAH back in March and has "urged the board and company chairman since that time to take steps to properly resolve the situation."

It's quite a turn of events for Lilly, which had been counting on CAH to help expand Elanco's presence in China. "In China, we are working with local stakeholders to improve the health and performance of animals and help to ensure a growing supply of safe, affordable and abundant food," said Jeff Simmons, president of Elanco, in a 2013 statement announcing the partnership. "Our sizable financial investment in China Animal Healthcare builds on our long-term commitment to China."

Lilly is far from the only animal health player to spot potential in China. Zoetis ($ZTS) and Merck ($MRK) have both expanded their activities there. In 2013, Elanco said it was supporting veterinary training at four Chinese universities and expanding its R&D hub in Shanghai--and counting on CAH to help it accomplish those goals and more. But if the troubles at CAH aren't resolved soon, Elanco may need to find another ally in one of the world's fastest growing markets for animal health.

- here's the FT story
- read more at the WSJ (sub. req.)

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