Bayer's $7.6B bid to offload animal health to Elanco draws extra FTC antitrust attention

Bayer’s eager to send its animal health unit to Elanco so it can focus its healthcare efforts on pharmaceuticals. But that $7.6 billion selloff, like many other recent life sciences deals, has hit an antitrust snag.

The U.S. Federal Trade Commission sent Elanco a second request for information about the deal, the Indiana-based veterinary specialist said Monday.

Despite the extra scrutiny, Elanco maintained that the request “was anticipated as part of the regulatory process,” and that it still expects to wrap the deal in mid-2020 as previously announced.

“We continue to work collaboratively with the FTC and other regulators around the world and are progressing as expected,” Jeff Simmons, president and CEO of Elanco, said in a statement.

A “second request” means the FTC’s initial review has raised some potential anti-competition questions, which the agency wants to delve into more deeply. While most deals are allowed through on first look, the FTC has issued a series of second requests to life sciences companies on recent deals.

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Roche’s $4.3 billion takeover of gene therapy biotech Spark Therapeutics still awaits an FTC decision after it unveiled a second request in early June. AbbVie and Allergan’s proposed $63 billion merger was hit with the same demand in September. And DNA-sequencing giant Illumina’s $1.2 billion purchase of competitor Pacific Biosciences has also been delayed by that additional antitrust scrutiny.

Combining Bayer's portfolio with Eli Lilly spinoff Elanco would create the world’s second-largest animal health provider, behind former Pfizer unit Zoetis but ahead of Boehringer Ingelheim’s and Merck & Co.’s related businesses.

While the FTC request spells trouble for Elanco—the buyer—it is Bayer that has more at stake should the transaction be blocked.

The German conglomerate decided to exit the franchise as part of a major restructuring aimed at channeling resources to its core pharma and crop science segments. The move comes as Bayer faces an ever-growing number of lawsuits over weedkiller Roundup, which Bayer took on via the Monsanto buyout. Potential damages or settlements paid to plaintiffs could take a toll on Bayer’s free cash.

Its pharma business looks fine now, though, thanks mainly to strong performance from anticoagulant Xarelto and vision med Eylea. But investors worry about those blockbusters' patent expirations—both around 2024—as Bayer’s pipeline doesn’t yet have any exciting programs that could fill the sales gaps.

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Meanwhile, Bayer’s cost-cutting has largely been going as planned. It sold its prescription dermatology business to LEO Pharma, transferred the Coppertone sunscreen brand to Beiersdorf for about $550 million and divested Dr. Scholl’s foot care line to Yellow Wood Partners for $585 million. It just finished shedding its 60% stake in Germany-based site services provider, Currenta, to an Australian firm at the base purchase price of about €1.2 billion ($1.3 billion).

The additional FTC attention might just be a minor setback for the Elanco deal. Given how the agency recently forced Celgene to chop off psoriasis drug Otezla for clearance of its $74 billion Bristol-Myers Squibb, the U.S. regulator appears to be looking simply at product overlap. Such concerns, if any, could be resolved easily with a divestment agreement.