Canine club: Elanco Animal Health makes takeover play for partner Aratana in up to $245M deal

Basking in the success of their painkiller partnership, Elanco Animal Health, on Friday, laid out plans to swallow its collaborator Aratana Therapeutics in a deal potentially worth up to $245 million.

Elanco Animal Health $ELAN,  a spin off from parent company Lilly $LLY last year, has been eyeing Kansas-based pet therapeutics company Aratana $PETX since its inception, when it was investing as a limited partner in Cultivian, a venture capital funds that participated in Aratana’s early financing rounds. In 2016, Elanco and Aratana joined forces to develop, manufacture and commercialize Galliprant, a canine osteoarthritis pain medicine — which generated 2018 sales of $44 million, and is steadily gaining market share, driven by a need for safer pain alternatives to NSAIDs, an expanded dose option, and launch in Europe.

Aratana has also contributed two more marketed products to Elanco’s arsenal: Entyce, the only FDA-approved appetite-stimulating therapeutic in dogs, and Nocita, a long-acting local anesthetic that provides up to 72 hours of post-operative pain relief following certain surgeries in dogs and cats.

Elanco’s revenue is driven by three targeted areas: companion animal disease prevention, companion animal therapeutics, and food animal future protein and health, which currently account for 61% of sales, Cowen analysts wrote in a note last month, predicting that contribution will grow to 66% by 2024.

The deal will strengthen Elanco’s foothold in the companion animal market, which accounts for 36% of sales, Credit Suisse’s Erin Wright wrote in a note on Friday.

Aratana is a tempting prospect, with its pipeline of five product candidates in development for conditions such as atopic dermatitis, which will potentially accelerate Elanco’s entry into the fast-growing market to compete with Zoetis’s $ZTS blockbuster Apoquel and Cytopoint, Wright said.

Aratana’s existing products could also benefit from Elanco’s broader on-the-ground US presence and the potential to pursue international approvals, Elanco said.

The animal health (AH) space is ripe for consolidation, Credit Suisse analysts wrote in March.

“(I)ndustry consolidation is predicated on the need for AH companies to expand their market opportunities across geographies and in tangential businesses to lower exposure to any one region, product line, or species. Clearly, this view is shared by the animal health industry constituents, which have been active on the transaction front…We continue to view AH as an attractive alternative healthcare play, with inherent advantages over human healthcare with more efficient R&D operations, more sustainable product portfolios, limited generic threats, and essentially no direct exposure to payor reimbursement cuts.”

The Elanco/Aratana deal — expected to close in mid-2019 — is structured as a stock-for-stock transaction, with a cash contingent value right (CVR) of $0.25 to be granted to Aratana shareholders as of the closing date if Entyce achieves certain sales levels before the end of 2021. This stock portion of the deal is valued at about $234 million, but with the addition of the CVR it could climb to $245 million.

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