After Acquisition of Bayer Animal Health, Elanco Set to See Profit Growth in 2021


In the animal health industry, one company in particular is acting like a wolf on the prowl. Elanco Animal Health (NYSE: ELAN) is the second largest animal health company in the world and specializes in pharmaceuticals. The company has separated from the pharmaceutical giant Eli lilly in 2018 and has undergone a dramatic transformation since leaving its parent company.

One of the most important changes Elanco announced its acquisition of Bayer Animal Health in 2019. The acquisition was finalized in August 2020 and catapulted Elanco to the forefront of the animal health industry. Now that the merger is complete, what can investors expect from the combined company in 2021?

Image source: Getty Images.

$ 7 billion acquisition in pet health care

The merger with Bayer was transformational but came at a high price. Elanco paid $ 5.2 billion in cash and issued 72.9 million shares to Bayer. This makes it one of the most expensive offerings in the history of the animal health industry.

Elanco pursued the Bayer merger for two main reasons. The first is that historically Elanco has focused on supplying the farmed animal health market, but wanted to expand its reach into the rapidly growing companion animal health market. Bayer Animal Health generated the majority of its revenue in the companion animal market and brought Elanco a drug pipeline and notable industry blockbusters including Seresto and Claro.

The deal is also expected to produce significant cost synergies that will improve the profit growth rate of the combined company. The overall figure is $ 300 million in synergies from efficient manufacturing and production as well as a more streamlined research and development and sales force organization.

The combined company has already started its efforts to realize cost synergies and expand its global presence. 2021 will be the first full year of operation for the new Elanco.

Margin expansion to come

One of Elanco’s main messages to investors is that the company has a clear path ahead when it comes to growth and profitability. However, there are still a few hurdles along the way. Elanco is still working on the complete transition of Eli Lilly’s management systems. Now, the company must also deal with the realization of the cost synergies resulting from the acquisition of Bayer. Despite this, Elanco is confident that in the future the performance of the company will improve significantly.

Over the next few years, Elanco plans to reach 60% Gross margin of 51.8% gross margin in 2020. This will be due to a larger scale thanks to increased unit volumes and a restructuring of the R&D, sales force and manufacturing of the company.

ELAN EBITDA Margin (TTM) chart
Data by YCharts.

These margin improvement initiatives are also expected to increase Elanco’s EBITDA margin. EBITDA represents profit before taxes on interest, depreciation and amortization and is a measure of earnings. The company has a long-term target of 31% and expects EBITDA to grow at a double-digit rate in the coming years. This is a significant improvement compared to its current level but above all still significantly lower than its main competitor, Zoetis.

In 2021, Elanco is targeting adjusted EBITDA of just over $ 1 billion, or a margin of 22%. That’s almost double the $ 528 million in adjusted EBITDA that Elanco reported in 2020. If Elanco can meet those earnings growth targets, shareholders would likely rejoice.

Is Elanco a buy?

Elanco has recently gained the attention of investors and its the share is trading at its highest level for over a year. Clearly, investors are excited about the prospects for the combined company and the potential for profits.

2021 will be a pivotal year for Elanco as it will be the first full year of operation as a combined company with Bayer. The company has set ambitious profit targets and investors will be attentive to whether or not the company can meet its stated targets.

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Luis Sanchez CFA owns shares of Zoetis. The Motley Fool owns shares of Zoetis. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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