Elanco to buy Bayer's animal health business for $7.6B, as dealmaking gathers steam in the sector
Last week, Elanco explicitly dodged answering questions about its rumored interest in Bayer’s animal health business in its post-earnings call. On Tuesday, the Eli Lilly spinoff disclosed it was purchasing the German drug maker’s veterinary unit in a cash-and-stock deal worth $7.6 billion.
Elanco $ELAN has been busy on the deal-making front. In April, it laid out plans to swallow its partner, Kansas-based pet therapeutics company Aratana $PETX. A July report by Reuters suggested a potential Bayer deal was being explored, and Bloomberg last week said the deal was imminent, citing sources.
Deal making within the AH space is particularly attractive — versus the field of human healthcare — product portfolios are more sustainable, exposure to generic threats is limited, and there is essentially no direct exposure to payor reimbursement cuts.
When the Elanco/Bayer rumors were swirling, Credit Suisse’s Erin Wright analyzed the rationale behind the deal in a note earlier this month.
“The theorized deal represents a meaningful departure from the previous thesis for ELAN, which was largely predicated on its meaningful margin expansion story (~1,000 bps by 2023) and innovation efforts, where it boasts >100 R&D programs with 36 novel “shots on goal” over the next 5 years, with also support from recent (PETX) and other M&A/partnerships, leveraging its flexibility as a standalone entity,” she wrote. “The scale of the deal is also clearly surprising…given BAH’s meager growth trajectory, unless there are hidden gems in its R&D pipeline, we aren’t entirely sure how this will advance ELAN as a standalone entity.”
Bayer is under pressure to raise cash and lift its market value following its $63 billion purchase of agrochemical company Monsanto. Last November, the German drug giant announced it was planning to exit the animal health business, which is skewed towards companion animal (60%) versus livestock (40%), relative to its peers.
“While it boasts a portfolio of >100 products and presence across 120 countries (3,500 employees globally), it has disproportionate exposure to key products, with 62% of sales derived from four product lines, representing a relatively concentrated portfolio,” Wright noted.
Under the terms of the deal, Bayer will get $5.32 billion in cash and roughly 68 million Elanco Animal Health common shares. The deal is set to expand Elanco’s arsenal of products, including the addition of parasiticides (topical treatments, collars), enable companion health to account for half of its business, and augment its R&D pipeline.
The transaction, which is expected to close in mid-2020, will create the second-largest animal health company in the field, Elanco said. Last year, Elanco generated sales of about $3.1 billion, while Bayer’s AH unit raked in about $1.6 billion. The leading firm in the sector — Zoetis — brought in roughly $5.8 billion in 2018 sales.
The animal health space is ripe for consolidation, and M&A will continue — as industry players look to expand their market share across geographies and in “tangential businesses to lower exposure to any one region, product line, or species,” Wright added on Tuesday.