Lilly's weak animal health results in Q3 revive spinoff speculation

Eli Lilly ($LLY) was fresh off its announcement of weaker-than-expected third-quarter earnings when CEO John Lechleiter found himself dodging a question that first emerged over a year ago: Will the company consider spinning off its animal health unit, Elanco? The question, posed on Bloomberg TV the morning of October 25, came in the context of Lechleiter’s impending retirement at the end of this year.

Lechleiter, a longtime supporter of Lilly’s animal health unit, dismissed the idea of an Elanco spinoff. “I’ve been very clear, we like having that animal health business as part of Lilly,” he said. “Not so long ago, it was about 5 or 6% of our revenue. Today it’s about 15%. I think that’s a meaningful [form] of diversification that comes with a business that we know a lot about.”

Maybe so, but Elanco’s performance during the quarter raised concerns among analysts listening in on the company’s conference call after the earnings release. The company reported that its animal health revenues fell 9% year-over-year to $706.2 million. In the U.S., Elanco’s revenues were down 14% to $338.6 million, which the company blamed on irregularities in wholesaler buying patterns for companion animal products, coupled with falling revenues on the food-animal side of the business. Outside of the U.S., animal health revenues fell 5% to $367.6 million, which the company attributed largely to poor macroeconomic conditions in Latin America.

When asked during the conference call for more details about Elanco’s performance during the quarter, Jeff Simmons, president of Elanco, pointed out that the company has made some key moves to bolster its position in the animal health industry. Indeed, earlier this month, Lilly bought Boehringer Ingelheim’s vaccines for companion animals, plus a manufacturing and R&D site in Iowa, for $885 million. The deal was made as BI prepares to close an asset swap with Sanofi ($SNY) in which it will trade its consumer health business for Sanofi’s animal health unit.

Simmons told analysts Lilly is confident about its ability to remain competitive in animal health, pointing to “growth engines like our vaccine business. Elanco animal well positioned in the top tier,” he said.

Last year, Lilly launched itself to the No. 3 spot on Fierce Animal Health’s list of the top companies in the industry, thanks to its $5.4 billion acquisition of Novartis ($NVS) Animal Health. The BI deal will help the company to further balance its portfolio between food animals and pets, bringing in a suite of vaccines, including the recently introduced Ultra Hybrid FVRCP to prevent herpes virus and distemper in cats and Ultra Duramune Lyme to guard against Lyme disease in dogs. Lilly predicts the BI transaction will close early next year and add to adjusted earnings in 2018.

Questions about whether Elanco will be better off separated from its parent will likely persist nonetheless. Those rumors emerged last June, when Simmons commented during an investment conference that the company might consider alternative business models for Elanco. And Lechleiter might not have much power to sway the decision-making after he steps down and is replaced by David Ricks, a senior vice president at the company.

Still, Lechleiter has made his opinion on the spinoff issue clear. “There are some tremendous synergies and parallels between human health and animal health,” he said on Bloomberg TV. “That’s another market that’s growing. It’s a cash-paying market that’s not subject to the government payment regulations that you see in human healthcare. We like that business and we intend to stick with it.”

- here's Lilly's earnings release
- watch Lechleiter on Bloomberg TV here

Special Report: Top 10 Animal Health Companies of 2016 – Eli Lilly’s Elanco

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