That was fast.
Little more than a week after investors applauded Eli Lilly's plan to spin off its animal health unit, Elanco, the company has delivered. It filed a registration statement with the SEC Thursday, saying it expected to maintain an ownership of less than 20% of the spinoff. It has not yet determined the size or price range for the offering but expects to complete the IPO by the end of the year.
As excited as investors were to see Lilly separate its human and animal health businesses, Elanco’s registration statement reveals a company with plenty of growing pains. Elanco’s sales in the first half of this year were $1.5 billion, up just slightly from the same period last year. Its 2017 sales came in at about $3 billion, down 2% from the prior year, and pretax profits amounted to just $552 million—well short of its goal of $3.6 billion in revenue and $943 million in earnings.
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Elanco has traditionally derived most of its revenue from farm animals—those products represented 63% of sales last year, according to the registration statement—but it has been working in recent years to boost its presence in the fast-growing companion animal side of the business. It picked up Novartis’ animal health unit for $5.4 billion in 2015, and then acquired Boehringer Ingelheim’s dog and cat vaccines in 2016.
Lilly’s companion animal sales grew 10% in 2017, thanks largely to Galliprant, a treatment for osteoarthritis in dogs that Elanco licensed from Aratana Therapeutics in 2016. It’s one of four new products Elanco has launched in the companion animal market since 2015.
But the company has been slow to catch onto emerging trends in veterinary medicine, and that's taken a hit out of sales. Between 2015 and 2017 Elanco suffered an “innovation lag” in flea and tick products, it said in the registration statement. Competitors were launching oral parasiticides, which grabbed market share from topical products. “In the absence of a competitive combined oral flea and tick product, our U.S. companion animal parasiticide portfolio revenue declined 15% in 2017,” excluding inventory reductions, the company said. Elanco launched a new chewable flea-and-tick preventer, Credelio, in February of this year.
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And Elanco’s reliance on the farm sector is evident. Its top product is Rumensin, a feed additive for cattle, which contributed a full 10% to the company’s total 2017 revenue. Elanco claims the top spot in the market for medicinal feed additives, and it’s No. 2 and 3 in poultry and cattle respectively, according to Vetnosis data cited in the registration statement.
Elanco’s ability to drive growth going forward will depend on its ability to deliver on its pipeline, which includes 36 products that could be launched between now and the end of 2023, the company said. Still, it has a long way to go to catch up to the largest pure-play animal health company on the Street, Zoetis, which was spun off from Pfizer in 2013. Zoetis brought in $2.8 billion in revenues in the first six months of 2018, up 11% year over year, it reported Thursday. That continued a strong growth trend: Zoetis’ 2017 revenues grew 9% to $5.4 billion.
As for the impact of the spinoff on Lilly, CEO David Ricks is optimistic it will improve the company’s focus on creating innovating therapies for human health. Lilly had a strong second quarter, beating analysts’ expectations for both revenues and earnings and upping its full-year sales forecast by about $300 million. But it faces some challenges there, including pricing pressure in the diabetes market and broader concerns about whether President Donald Trump’s blueprint to lower drug prices will force companies to exercise more self-control when it comes to pricing.
Saying goodbye to Elanco wasn’t easy, Lilly CEO David Ricks said in the second-quarter conference call last week. Animal health, after all, has been part of Lilly since 1954. But the decision is part of a larger strategy, he said, “to take concrete actions to focus our resources and allocate capital to best serve our customers and create value for our stakeholders.”