Elanco digs in for fight with activist investor

Ancora Holdings Inc. might be the scrappiest investment firm you’ve never heard of.

In recent years, it has pushed for big changes at Kohl’s, Hasbro, Norfolk Southern and Disney, often calling for the CEO’s ouster and a board shakeup. And several times it got results, with CEOs and board members shoved to the curb.

Now the Cleveland-based organization has set its sights on Greenfield-based Elanco Animal Health Inc. It says the company, under the leadership of CEO Jeffrey Simmons, has underperformed its peers and destroyed billions of dollars in shareholder value since its 2018 spinoff from Indianapolis-based drugmaker Eli Lilly and Co.

It’s a claim Simmons vehemently disputes. He told IBJ—and is telling analysts and stockholders—that the maker of animal vaccines, antibiotics and other health products is growing, developing innovative health products for pets and livestock, and improving its financial performance.

Still, Elanco can’t ignore Ancora, which holds about 3% of the company’s shares, worth roughly $250 million. The investor is pushing for a shakeup in leadership that it accuses of delivering poor margins, sluggish product commercialization, negative shareholder returns and poor governance policies for years.

Ancora is seeking to replace four of Elanco’s directors with its own nominees at the company’s upcoming annual meeting. The investor group is also pushing for the retirement of Simmons next year. Simmons, 56, has led the company since it went public more than five years ago and for a decade before that when it was part of Lilly.

Ancora said Elanco just has not delivered on its promises and has watched its stock sink 57% from its all-time high in 2021.

“Based on extensive analysis and good faith engagement with Elanco, it appears that the biggest barriers to success are the company’s insular board and unaccountable CEO,” the investor group said in a statement two weeks ago, when it took the fight public.

Simmons, however, responded that Elanco is on the right track.

“We’ve got the right strategy; we’ve got the right board, the right leadership team; and we are executing,” Simmons told IBJ. “And the vision for me has never been clearer. We are building a global animal health company to reach the world’s animals.

“We’re staying the course with the right team and the right strategy,” he said. “Hear the conviction in my voice.”

And Simmons has a small army of believers on Wall Street. Of the 13 analysts who follow the company, seven have a “buy” rating on the stock, one has an “overweight” rating, four have “hold” ratings, and one has a “sell” rating.

The proxy fight could last for months, with unpredictable outcomes. Elanco has yet to announce the date of its annual shareholder meeting, where the matter could come to a head.

For central Indiana, the stakes are high. The company has about 1,000 employees here, most of them spread out in five buildings at the headquarters campus in Greenfield, highly visible from Interstate 70.

In the meantime, the company is continuing work on a new $150 million headquarters at the former General Motors stamping plant property on the west side of downtown. Simmons said he expects workers to move in by early 2025.

But if Ancora or another activist investor succeeds in pushing out Simmons or winning up to four of the 12 board seats coming up for election, there is no guarantee the company will “stay the course,” as Simmons wants.

‘We like to win’

Some outside experts say the challenge for Elanco is to show investors that things are moving in the right direction and improvements are on the way.

“The question is, is there anything moving in a positive direction, anything promising that you can get support from other shareholders?” said Jun Yang, director of the Institute for Corporate Governance at Indiana University’s Kelley School of Business in Bloomington.

As far as Simmons is concerned, the answer is resoundingly yes. In public letters the company filed with the Securities and Exchange Commission in recent weeks, Simmons pointed out that Elanco has returned to growth “and is progressing a robust and innovative pipeline that will generate further growth.”

“Importantly, shareholders have been rewarded,” he wrote on Feb. 29. “Elanco stock is up 39% over the past year, reaching a 52-week high earlier this week and significantly outperforming its peers.”

In a letter to employees the same day, he wrote in tight prose: “Ancora targets Elanco. Nothing changes. This is a process that may continue for several months.”

Yet Ancora officials take a longer look back and point out that Elanco’s stock is down more than 50% since its 2018 spinoff. During the same time, the company has underperformed peers, such as New Jersey-based competitor Zoetis Inc., and market indexes “by a significant margin.”

“This campaign is about bringing execution and accountability to an insular board that has not properly overseen management and [has] destroyed billions in shareholder value in the process,” Ancora wrote last month.

So who is Ancora? And what is its track record for shaking up companies?

The firm, founded in 2003, calls itself a “boutique investment services firm” whose clients include pension funds and individual investors saving for retirement. Ancora has $9 billion in assets under management.

For about a decade, it flew beneath the radar, quietly servicing its wealthy clients. It often beat the market indexes and won numerous awards for being a top workplace.

“We like to win here,” CEO Fred DiSanto said in a video on the firm’s website. “And it’s not individuals winning. It’s the team winning.”

The firm declined to make DiSanto or any other senior executive at Ancora available to IBJ to speak on the record.

Ancora’s strategy in becoming an activist investor appears to have happened in about 2014, when it hired hedge-fund veteran James Chadwick to lead its newly formed Ancora Alternatives group. In that role, he oversees the firm’s shareholder activist strategy and has worked in the shareholder activist arena for over 20 years, according to Ancora’s website.

Unlike passive investors, such as BlackRock or Vanguard, which often buy stock in public companies on behalf of retirement funds and then wait for the value of shares to rise, activist investors look for undervalued companies, buy up to 5% of a company’s stock, then try to shake up management and boardrooms in an effort to make the companies more profitable and their investments more valuable.

Activist investors such as Ancora have “stronger opinions about things that need to be changed,” Greg Harmon, a professor of banking and finance at the Weatherhead School of Management at Case Western Reserve University, told news site Cleveland.com last month.

And in the process, they spell out all the ways they think the companies are underperforming and alert the press to shakeup efforts.

The latest battle

Elanco is just the latest battle for Ancora—and not even the highest-profile one at the moment. Ancora also has its hands full in taking on Norfolk Southern, where it has built a roughly $1 billion stake in the railroad and is pushing a slate of eight candidates for the 13-member board. It also wants to replace the company’s CEO and chief operating officer.

The fight at Norfolk Southern comes after a freight train derailed last year in eastern Ohio, releasing toxic chemicals and setting off a political fight about railroad safety.

On strictly business terms, the Atlanta-based railroad has underperformed both its peers and the broader market over the last year. That proxy fight is continuing.

In late 2022, Ancora pushed Kohl’s, the Wisconsin-based department store chain, to replace its CEO with someone “with turnaround experience.” It argued that the company’s “dramatic decline” in sales, credit downgrades and elevated costs helped push down share prices 45% over the previous year.

About two months later, Kohl’s announced that CEO Michelle Gass would leave her job as CEO. The same day, San Francisco-based apparel company Levi’s said it hired Gass as president. Two months ago, she was promoted to CEO at Levi’s.

Ancora has also pushed for change and won board seats at discount merchandiser Big Lots in 2020 and housewares retailer Bed, Bath and Beyond in 2019.

It is also pushing for changes at toy-and-game company Hasbro and entertainment giant Walt Disney Co. Neither of those efforts have yet been resolved.

When it is not waging high-visibility fights with well-known companies, Ancora is pushing for changes at lesser-known ones, including Minneapolis-based freight broker C.H. Robinson Worldwide, where it succeeded in placing two representatives on the board and forcing out CEO Bob Biesterfeld.

“Ancora often partners with founders or former executives to launch its campaigns at related companies,” according to a profile of the firm published last month in The Wall Street Journal.

The strategy

In its shakeup attempt at Elanco, the investment firm has nominated four members for the 12-member board who have varying degrees of industry experience. One spent 27 years at Chicago-based Abbott Laboratories and is a former marketing officer at IDEXX Laboratories, an animal-health company based in Westbrook, Maine. Another is the former CEO of Ceva Santa Animale, a French animal health company. A third is the former chief financial officer of C.H. Robinson, the freight broker Ancora successfully battled a few years ago. And the fourth is Chadwick, the head of Ancora’s activist investing unit.

“Ancora has nominated four highly qualified director candidates who possess direct industry experience, supply chain expertise and corporate governance acumen to replace four underperforming directors up for election,” Ancora said last month in a government filing.

One of the four “underperforming” directors is Simmons, who sits on the board along with serving as president and CEO. The other Elanco board members whose terms expire this year don’t work at the company.

Ancora said Elanco has shown an “appalling disregard” for good governance, with some of its directors winning uncontested elections with less than a majority of the vote. Institutional Shareholder Services Inc., a proxy advisory firm, has recommended that shareholders vote against re-electing nine of 13 directors at the last three annual meetings, Ancora said.

Elanco declined to comment on that.

“We’re not going to go point by point through these claims,” said Colleen Dekker, Elanco’s executive director of global corporate communications. “There will be a time when we get to a definitive proxy statement that we’ll be happy to talk with you about that. But we won’t start that today.”

Dekker said the company is still six to eight weeks from filing its proxy statement, a detailed document that gives investors necessary information to help them vote on directors, shareholder proposals and other board business.

Until that point, it’s uncertain whether Simmons or other directors whose terms are about to expire will run for re-election, although Simmons repeated several times during an interview with IBJ that the company has the right leadership and board in place.

Ancora said it provided Elanco with a detailed analysis of its concerns pertaining to corporate governance, finance, operations and product development, along with an “orderly succession” plan for the CEO position.

“Unfortunately, this framework seemed to be of no interest to the board, which refused to engage in substantive principal-to-principal negotiations and a real two-way discussion regarding changes that would benefit the company,” Ancora said.

Elanco responded that it has actively engaged with Ancora, but the investor group has refused to allow its Elanco board to meet Ancora’s board candidates.

“Instead, Ancora has demanded that the board agree to add three of Ancora’s candidates, sight unseen, to the Elanco board and to significantly overhaul the leadership of the board and the company,” Elanco said in a written statement. “Our interest in meeting with their candidates still stands.”

Drivers of growth

In January, Elanco announced that David Hoover, its board chair, would step down this year but would remain on the board as an independent director. It named Lawrence Kurzius, executive chair of Baltimore food giant McCormick & Co. Inc., as its next chair, effective at the conclusion of this year’s annual meeting.

Elanco has also announced plans to begin declassifying the board, providing shareholders the right to amend the bylaws and enabling them, under certain circumstances, to call special meetings.

While Ancora is lobbying shareholders to shake up the company, Simmons appears to be working equally hard to win over investors and analysts. Since the beginning of the year, he has made presentations at conferences hosted by JP Morgan, Bank of America, TD Cowen and Barclay’s, among others.

His message: Big things are happening now at Elanco. At a March 4 conference at TD Cohen, he pointed out the company returned to a revenue increase of 1% last year, after a 7% decline in 2022.

He also boasted of the company’s late-stage pipeline, where three “potential blockbusters”—a dermatology treatment for pets, a feed additive for cattle to reduce methane and a broad-spectrum pet parasiticide—are awaiting approval by federal regulators.

“And then the next wave of innovation, we had a pretty significant year in ’23 of new products going into development that will actually drive the innovation growth of the second half of the decade,” Simmons said.

And last: More cash from the new products and from the recent $1.3 billion sale of Elanco’s aqua business to Merck will help pay down debt and fund operations.

“Those are the three drivers,” Simmons said. “These aren’t things that are coming. These things are in the works that are happening.”

The company took on more than $5 billion in debt when it acquired the animal health business of German conglomerate Bayer AG in 2020.

Paying down Elanco’s huge debt load remains a priority for Simmons—as well as a major concern of Ancora. Slow revenue growth has hampered Elanco’s ability to shrink the debt faster. In Ancora’s terms, Elanco has an over-leveraged balance sheet, for which it says “shareholders have paid dearly for over the past 24 months.”

More upbeat

But some analysts view Elanco as poised for growth.

“We see the company as well positioned to deliver improved growth, driven by secular trends, as well as an internal innovation engine that has positioned the company for several key launches in 2024-25,” Jefferies analyst Glen Santangelo wrote in a March 4 report to clients.

Jefferies is one of the seven analysts with a “buy” rating on the stock.

William Blair analyst Brandon Vazquez also gave clients an optimistic viewpoint. “We are encouraged by relative stability in the business … with potential levers for upside from new products,” he wrote in a Feb. 26 note.

Others who study the company, though, are cautious about what the next few years will bring.

“We still see operating risk in 2024 and 2025, especially related to the new launches,” Standard & Poor’s analyst Matthew Dodd wrote on Feb. 13, about two weeks before the Ancora proxy fight became public. “Nearly all the new launches are second or third to market and have an uphill battle to gain market share, given veterinarian and pet owner reluctance to change from a product that is working.”

Yet Simmons sounded uniformly upbeat over the prospects of new products, which he described as “six potential blockbusters.” He said the markets for the drugs are in the billions, and veterinarians want options.

So while Ancora is pushing for a major shakeup, Simmons said Elanco’s strategy is delivering for investors—and will continue to do so.

“We’re glad we stayed the course, because it’s working, really,” he said.

At the same, Elanco is trimming its sails and refocusing a bit. Last month, the company said it would cut 420 jobs, or about 4% of its workforce, and shift resources to its pet health business as it prepares to launch several products.

It said the job losses will largely take place in international locations and will have minimal impact in Indiana.

Indiana impact

The company declined several times to say exactly how many people work in Indiana, although it provided IBJ with a figure of about 1,200 as recently as last year.

The company did say it increased the number of people working in Indianapolis by 8% each of the last two years, as it brings more key officials to this region from around the world, including the top executives for market strategy, market development and manufacturing.

A little over three years ago, Elanco pledged to the Indiana Economic Development Corp. that it would retain 1,086 full-time employees in Indiana and would move operations from its Greenfield headquarters to the new headquarters campus downtown.

The new headquarters will be centered by a six-story, glass office building, along with laboratory and support buildings. Simmons said Elanco now expects to occupy more of the buildings and parking spaces than originally planned. Over the past year, the number of days Elanco employees are spending in the office has nearly doubled.

And that’s all in the playbook for Simmons, who wants to turn Indianapolis into the “epicenter for animal health,” in part by attracting hundreds of professionals here, many from outside Elanco’s own workforce.

“This is all about making Indianapolis more strategic,” Simmons said, “and actually increasing the importance and size of key capabilities in Indianapolis.”

That’s as long as the company can win the support of its largest shareholders and keep Ancora at bay.•