Lilly weighs spinoff of bulked-up Elanco even as it beats Street estimates in Q3

Eli Lilly is reviewing options for animal health business Elanco that could include a sale.

Already working to slim down with thousands of job cuts, Eli Lilly announced on Tuesday it's looking at options for animal health business Elanco that could include a sale. At the same time, the drugmaker reported Street-beating sales for the third quarter, prompting it to boost its guidance for the year. 

Lilly says it is "reviewing strategic alternatives" for Elanco the animal health business that it has considerably bulked up with its $5.4 billion deal for Novartis' animal health business in 2014, followed by a 2016 acquisition of Vetmedica, from Boehringer Ingelheim for $885 million. 

The company has "grown Elanco to a size and scale that now allows us to consider a variety of options to maximize future value," CEO David Ricks said in a statement.

Lilly said it might still keep the business but is also weighing an IPO or sale of Elanco. It'll make an announcement on its decision by the middle of next year, according to its third-quarter earnings release.
 

Overall, Lilly reported sales of $5.66 billion in the third quarter, a 9% increase over last year to beat consensus estimates of $5.52 billion, even getting some benefit from insulin sales which have been under pressure from payers. Humalog beat sales estimates by $53 million. Lilly raised its 2017 sales guidance to $22.4 billion to $22.7 billion, from a previous range of $22 billion to $22.5 billion.

But third-quarter earnings took a hit on the recent large-scale slimdown the company announced that will cut 3,500 jobs in an effort to save $500 million in annual expenses. That move cost the drugmaker $1.2 billion up front. Reported EPS was 53 cents per share for the quarter, down 29% from the same period last year. Non-GAAP income and earnings per share were up 19% each versus last year's third quarter.

In Puerto Rico, where many top drugmakers have manufacturing operations, Lilly reports its plants suffered "minimal damage" from Hurricane Maria. The company doesn't expect "product supply risk or other significant financial impact at this time," according to the release. 

The Indianapolis drugmaker's decision to review alternatives for Elanco comes as many Big Pharmas do the same for some of their business units. Over the years, the trend has come and gone as drugmakers periodically face challenges that can force them to rein in their focus. Pfizer recently said it'd consider options for its consumer health business, while Shire has said it might sell its ADHD offerings.

So far this year, Lilly's Elanco has generated $2.3 billion in sales. A year ago, some market watchers wondered if Lilly might move to unload Elanco as the unit's sales dragged. But former CEO John Lechleiter defended the unit, saying it was important to diversify the drugmaker's revenues.

Since taking the helm this year, new CEO Ricks has been on a turnaround mission, focusing on new drug launches and tweaking the company to be more efficient.