Eli Lilly & Co. will spin off its animal-health unit Elanco, focusing the company completely on drugs for people after a months-long review of the veterinary and agriculture business.
The drugmaker said in a statement it will file for the initial public offering of the shares in the coming weeks. It expects to finish the spinoff in the second half of 2018.
Elanco sells medication for livestock and pets, and had $3.09 billion in revenue last year. It has grown rapidly through deals, with at least 10 acquisitions since 2007 -- including the $5.4 billion takeover of Novartis AG’s animal-health unit in 2015. In 2016, the unit opened a 48,000-square-foot research center next to its Greenfield, Indiana, headquarters to develop vaccines for pets and livestock animals.
The spinoff is among the biggest strategic decisions by Chief Executive Officer Dave Ricks to realign Lilly. Since he took over at the start of 2017, Ricks has overseen the company’s retreat from a failed Alzheimer’s disease drug and increased its focus in oncology.
“We looked at all the options,” Ricks said during an interview with Bloomberg TV on Tuesday. “This is the best one for all our shareholders.”
The company’s shares rose 3.2 percent to $91.75 before markets opened in New York.
Lilly began reviewing the animal unit’s future in December, and is hoping to repeat the success Pfizer Inc. had spinning out its animal business under the name Zoetis Inc. Since becoming an independent company in 2013, Zoetis shares have more than tripled and have a price-to-earnings ratio almost double that of Pfizer.
“It makes sense to spin off these businesses if you look at where pure-play animal-health trades,” Kevin Kedra, an analyst with Gabelli & Co., said in an interview before the Lilly announcement.
Lilly said adjusted earnings in the second quarter were $1.50 a share, topping the $1.30 average of analyst estimates. The company raised its full-year adjusted earnings forecast to $5.40 to $5.50 a share, from the $5.10 to $5.20 it gave in June.
Following other drugmakers, Lilly said it doesn’t plan to take any price increases on its drugs for the rest of the year.
“We remain focused on driving revenue growth through volume, not price,” Ricks said in a statement announcing the second-quarter results.
Americans are spending more on feeding and caring for animal companions, and rising global living standards are boosting demand for protein-rich diets, fueling the livestock business. The global market for animal medicine is estimated at $33 billion, growing between 4 percent and 6 percent annually, according to research by analysts at Cowen Inc.
That’s made the business appealing to investors. In addition to the Zoetis spinoff and Lilly’s announcement, medical supplier Henry Schein Inc. said in April that it intends to spin out its animal-health business.
Even as it has grown through deals, Elanco has struggled on other fronts. During its quarterly earnings call in January, Lilly cautioned that the year was going to get off to a slow start, with declining sales in the first half before new products launch later this year.
Elanco recorded $792 million in second-quarter sales, up about 1 percent from a year prior.
With two-thirds of its business in livestock drugs, it’s highly dependent on the agriculture market. It has lost share to Zoetis, Merck & Co. and Boehringer Ingelheim GmbH because of a lack of innovation, said Kedra.
Copyright 2018, Bloomberg