Lilly shares slide on news of possible sale, spinoff of Elanco

Shares of Eli Lilly and Co. tumbled about 3 percent Tuesday morning after the Indianapolis drugmaker said it might sell or spin off its struggling Elanco Animal Health division.

Elanco—which makes a broad array of vaccines, antibiotics, feed additives and other health products for livestock and pets—is facing growing competition and has been losing market share to large competitors, including Zoetis and Bayer.

Lilly said Elanco’s sales have fallen 1 percent in the first nine months of 2017, to $2.29 billion, although sales for the third quarter edged up 5 percent, to $740.6 million. Its full-year 2016 sales were $3.16 billion, down from $3.18 billion in 2015.

Meanwhile, competitors watched their sales climb in 2016, including Bayer’s animal health unit (up 4.8 percent), Merck’s animal health unit (up 4.4 percent), and Pfizer animal health spinoff Zoetis Inc. (up 2.5 percent).

“We’ve had some challenges in the business this year,” Lilly CEO David Ricks told analysts Tuesday on a conference call. That includes loss of sales or market share for such products as parasite medicines for dogs and health products for beef and dairy cows.

Despite the challenges, Ricks said, the timing is right to explore options for Elanco, a move that Lilly announced Tuesday morning. Elanco employs 6,500 people, including about 800 at its Greenfield headquarters.

“It’s a top-tier animal health business, among the top five five globally, and we participate in all the relevant segments of animal health,” Ricks told analysts.

In recent months, Lilly has been working to integrate two major acquisitions into Elanco: the $5.4 billion purchase of Novartis’ animal health division in 2015, and last year’s $885 million purchase of Boehringer Ingelheim’s pet vaccine business.

“And so now is a good time, having completed those acquisitions and scaled the business, to reflect on the best posture for Elanco Animal Health,” Ricks said.

Separately, Lilly also said it was exploring options, including a sale, of Posilac, a supplement to boost dairy cow productivity, which has seen falling sales. In the third quarter, Lilly took a special charges of $406.5 million, partly due to expected lower sales of Posilac.

Ricks did not say how much Lilly might reap from an Elanco sale or spinoff, or what the company would do with the proceeds.

Investors seemed skeptical that Lilly’s move would mean a big return. In mid-morning trading on Tuesday, shares of Lilly fell 3.1 percent to $85.50.

But Lilly executives tried to sound upbeat, saying Elanco remains strong, despite recent challenges.

“I think we’re not evaluating this business through the lens of 2017 performance,” said Jeff Simmons, president of Elanco. “We’re looking at the past 10 years, and we’ve built a globally competitive animal health company with a nice pipeline, with good opportunities to improve margins and grow at pace and in some segments above industry pace.”

Ricks pointed out that cutting the operation loose wouldn’t hurt the overall business of Eli Lilly and Co., because animal health has little connection with human drug development, aside from some back-office functions.

“We have a large [animal] vaccine portfolio that doesn’t synergize with pharma R&D,” Ricks said. “We have feed additive assets that have really no synergy connecting to Lilly.”