Elanco’s first challenge as separate firm will be stopping red ink

Eli Lilly and Co.’s Elanco Animal Health unit lost more than a half-billion dollars over the past three years, a huge amount of red ink that will challenge the new management team when the unit gets spun off as a separate company this fall.

Elanco posted losses of $310.7 million in 2017, $47.9 million in 2016 and $210.8 million in 2015, according to a recent government filing. That adds up to $569.4 million over those three years.

Much of the red ink was connected to restructuring and other special charges. Elanco made a series of expensive acquisitions in recent years, most notably a $5.4 billion purchase of Novartis’ animal health division in 2015.

But in its IPO registration statement, Elanco cautions that the losses could continue, pointing out that it might do additional restructuring and take further special charges as it strikes out as an independent company.

“We could continue to incur asset impairment, restructuring and other special charges and could report losses in the future,” the filing says. “We also expect to continue to incur substantial expenditures to develop, manufacture and market our products and implement our business strategies."

Then in standard corporate boilerplate, it added: “We may encounter unforeseen expenses, difficulties, complications, delays, adverse events and other unknown factors that may materially adversely affect our business.”

Translation: We’ve been counting on Lilly for decades to handle our corporate functions. Now we have to do it ourselves and that could be expensive at first. The red ink might continue. Don’t say we didn’t warn you.

Elanco has been an integral part of Lilly since the Indianapolis-based drugmaker set it up in 1954—originally to make livestock antibiotics, and then over the years, a wide array of vaccines, feed additives and other animal health products.

Sales for Elanco ballooned over the years, helping to partially offset Lilly’s occasional declines as patents expired on human medicines.

But, in recent years, Elanco’s growth has stalled. Revenue last year was $2.89 billion, down about 1 percent.

That has happened as competitors, including Bayer’s animal health unit, Merck’s animal health unit and Pfizer’s animal health spinoff, Zoetis Inc., saw sales climb, taking market share from Lilly.

Last month, Lilly CEO David Ricks announced that the two companies would part ways to unlock more value for shareholders. The move, he said, would allow each company to focus on its core competency: Lilly on human medicines and Elanco on animal health products.

The new Elanco will be led by familiar faces. Many of the top officers have worked at the company for years. Jeffrey N. Simmons, Elanco’s leader since 2008, will be president CEO and director of the new company. The outside chairman will be R. David Hoover, retired chairman and CEO of Ball Corp.