Elanco Animal Health, the veterinary sector’s fourth-largest company measured by revenue, is poised to leap to number two through a $7.6 billion cash and stock deal for Bayer’s animal health unit.
The acquisition will help Elanco boost its business selling products for farm animals. But Elanco (NYSE: ELAN) notes that Bayer, which sells the popular Seresto flea and tick collar as well as the Advantage line of flea, tick, and worm control products, will also help the Greenfield, IN-based company strengthen its retail and online connections to pet owners as a confluence of trends point to growing demand for pet products.
Under the deal terms, Elanco will pay Bayer $5.32 billion in cash. Bayer will also receive 68 million Elanco shares valued at approximately $2.28 billion. Those shares are subject to a “collar” agreement that restricts their value to a 7.5 percent swing above or below $33.60, the average price of Elanco shares in the 30-day period ending Aug. 6.
After the deal was announced Tuesday, shares of Elanco dipped more than 8.76 percent in mid-day trading.
In an investor presentation, Elanco says that online sales of veterinary products are growing 15 percent annually. Bayer’s Seresto, which generated $300 million in 2018 sales, already has a strong foothold with brick and mortar retailers along with online sales of its products through channels such as Amazon (NASDAQ: AMZN). That online presence is key to reaching consumers where they are making their spending decisions, Elanco says. By acquiring Bayer’s animal health business, Elanco says it can better reach the estimated one third of pet owners who do not visit a vet. The company adds in the presentation that Bayer’s retail capabilities can help bridge these pet owners to veterinarians, who can prescribe additional pet care products.
Elanco’s pet products include osteoarthritis drug Galliprant, which came to the company through the 2015 acquisition of the animal health unit of Novartis (NYSE: NVS). The company also markets its own flea and tick killers, including Credelio, a chewable product approved for puppies. Elanco company says Bayer’s animal health unit will double its business in the fast-growing pet products market and expand its international reach for products sold for both pets and farm animals. Elanco also says the deal supports its research capabilities by bringing in eight new development projects, along with access to research from Bayer’s crop sciences and pharmaceuticals units. Elanco will have access to Bayer pharmaceutical assets that have been deemed lesser priorities for human health.
Meanwhile, Bayer says the deal completes a series of moves by the company to pare down its focus to pharmaceuticals, consumer health, and crop science. In announcing that focus last November, Bayer said it was assessing its options for leaving the animal health market. At that point, the company had already sold its prescription dermatology business and was evaluating options for certain consumer products, such as Coppertone and Dr. Scholl’s.
Elanco reported $3 billion in 2018 revenue. Approximately 35 percent of sales came from pet products. Bayer says its animal health unit accounted for $1.8 billion in 2018 sales. Combined, the two businesses would displace privately held Boehringer Ingelheim’s animal health business, trailing only Parsippany, NJ-based Zoetis (NYSE: ZTS), which reported $5.8 billion in 2018 revenue.
Elanco has been on dealmaking streak. In April, the company reached an agreement to acquire pet medicines developer Aratana Therapeutics for $234 million. Earlier this month, Elanco acquired swine vaccines company Prevtec Microbia for approximately $60 million.
The Bayer deal is subject to regulatory approvals, including an antitrust review. Elanco and Bayer expect to close the transaction in the middle of next year.