Lilly separates animal health manufacturing but insists it's not prepping a spinoff

Eli Lilly's ($LLY) animal health business, Elanco, charted $2.35 billion in sales last year, but that didn't stop Wall Street investors from speculating that the company was planning to divest the unit. On Dec. 8, the company sought to put the rumors to rest once and for all, telling investors at a meeting in Boston that even though it is separating Elanco's manufacturing capabilities from the rest of the company--a move that would make it easier to cast off the unit--it has no plans to do so.

Elanco's executives told attendees at the meeting that by 2017, Elanco would be growing faster than the average growth rate in animal health of 4% to 5%, and that they felt the unit was a good fit with the rest of the company, according to Bloomberg. "We couldn't have been more clear today on the value and the synergy we see as being part of Lilly," a spokeswoman told the news organization.

In January, Lilly bought Novartis Animal Health for $5.4 billion, creating the second-largest animal health company behind Zoetis ($ZTS), which was spun off from Pfizer ($PFE). Although Elanco has suffered recently from unfavorable foreign currency fluctuations, the Novartis ($NVS) acquisition helped drive its sales up 33% year-over-year to $779 million in the third quarter of this year.

Lilly began separating Elanco's manufacturing shortly after the Novartis acquisition, said Steve Jenison, its head of manufacturing, in an interview with Bloomberg. The reason, he said, was related to the volume of products the unit makes as compared to what's manufactured on the human side of the business.

Rumors that Lilly might be weighing an Elanco spinoff emerged in June, when its president, Jeffrey Simmons, spoke at an investor conference and implied that the company would consider alternate business models for the unit. The speculation intensified after Lilly rival Sanofi ($SNY) said it was exploring options for its animal health unit, Merial. In late November, Reuters reported that Sanofi had hired investment bank Lazard to explore a $12.7 billion spinoff of the animal health company.

Still, at Tuesday's investor meeting, Lilly's executives insisted the company would continue to benefit from Elanco's rapid growth. They said they expected Elanco to launch 7 new products by early 2017, according to Reuters, and that the synergies from the purchase of Novartis Animal Health would come sooner than expected and would outperform their previous predictions.

Tim Anderson, an analyst for Sanford C. Bernstein, said in a report following the meeting that he was optimistic about Elanco's prospects. "The Novartis [animal health] acquisition is proceeding well, and from here there should be continued margin expansion," he wrote. He noted that Elanco's operating margin is around 25%, which is comparable to Sanofi's Merial division but slightly lower than Zoetis' margins.

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