Elanco’s IPO Would Free Eli Lilly to Focus on Pharmaceuticals

Xconomy Indiana — 

Elanco, the animal health business of Eli Lilly, has filed for an IPO, setting in motion the process of splitting from its parent company of more than 60 years.

Greenfield, IN-based Elanco set a preliminary $100 million target in the IPO filing, a figure used to calculate the registration fee. IPO research firm Renaissance Capital estimates that Elanco’s IPO—if it happens—could raise as much as $2.5 billion. Elanco has yet to determine how many shares it will sell and at what price. It has applied for a New York Stock Exchange listing under the stock symbol “ELAN.”

The Elanco IPO plans are the culmination of a months-long review Lilly (NYSE: LLY) undertook to decide whether to keep the animal health unit, sell it, or spin it off via IPO. During a July 24 conference call to discuss second quarter financial results, Lilly CEO David Ricks said the company concluded that spinning off Elanco supported by an IPO offered the best opportunity for that business to grow while also freeing Lilly to hone its focus on human health. He also said that an Elanco IPO would offer the best after-tax value for shareholders.

In a statement issued Thursday, Lilly said that the IPO would represent less than a 20 percent ownership stake in Elanco. When Lilly announced last month that a minority share of Elanco would be sold in an IPO, the Indianapolis drug giant said it would sell its remaining ownership in the animal health business through a “tax-efficient transaction.”

According to the separation plans detailed in the IPO filing, Elanco will issue to Lilly all of the net proceeds from the IPO in exchange for all of the assets of the animal health business. Elanco also says that Lilly plans to make a “distribution” to Lilly shareholders following the Elanco IPO. That distribution could be a dividend payment, or an offer to exchange Lilly shares for shares in Elanco. Elanco says in the filing that it expects that the separation and the distribution will be considered tax-free for income tax purposes. If the Internal Revenue Service or the courts decide otherwise, Lilly shareholders could face additional tax liabilities, the filing says.

Tax considerations aside, Lilly is likely hoping that Elanco’s IPO replicates the success that Pfizer (NYSE: PFE) had spinning off its animal health division, Zoetis, in 2013. Zoetis (NYSE: ZTE) priced its IPO at $26 per share and raised $2.2 billion. Shares of Zoetis, which is based in Parsippany, NJ, and operates its global research and development headquarters in Kalamazoo, MI, now trade for more than three-and-a-half times the IPO price.

Founded in 1954 as part of Eli Lilly, Elanco now sells its animal health products in more than 90 countries. Elanco’s financial statements show that the company reported a $310.7 million loss on $2.9 billion in 2017 revenue. Elanco’s biggest revenue generator is the cattle feed additive Rumensin, which accounted for 10 percent of its 2017 sales. The company has made several deals in recent years to diversify its product portfolio. Acquisitions include the animal health subsidiary of Johnson & Johnson (NYSE: JNJ), German poultry vaccines and feed additive maker Lohmann, and the animal health business of Novartis (NYSE: NVS).

Elanco has also diversified through deals focused specifically on pet health products. In 2016, Elanco paid $885 million to acquire the pet vaccines of Germany-based Boehringer Ingelheim. Although such products for companion animals were minimal contributors to Elanco’s top line 10 years ago, the company now says they accounted for more than $900 million in 2017 sales.

Photo by Flickr user Oregon State University via a Creative Commons license