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Bayer Sells Animal Health Division to Elanco: Now What?

Mitchell Moore

On Tuesday, Bayer BAYRY announced the sale of its animal-health division to American competitor Elanco ELAN, for a net price of $7.6 billion. The deal is expected to close in mid-2020 after regulatory approval.

Bayer will receive $5.4 billion in cash and $2.3 billion of stake in Elanco, which it plans to sell off gradually. The combined company will have an estimated market share of about 13%, making it the second largest animal-health firm by revenue, behind only U.S. rival Zoetis ZTS, which was owned by Pfizer PFE until 2013.

Bayer’s Restructuring

Bayer is in the middle of a lengthy corporate restructuring that was initiated as a result of its June 2018 acquisition of Monsanto. The firm now is involved in a class-action lawsuit due to claims that the active ingredient, glyphosate, in its popular weed-killer Roundup causes cancer. There are currently about 18,000 claims in the suit.

Bayer has responded to mounting pressure from investors to prepare for what looks likely to be large fallout from these Roundup lawsuits. Therefore, it has decided to restructure and spin off certain divisions to raise the capital necessary, as it already holds $40 billion in debt. So far, Bayer has spun off its Coppertone and Dr. Scholl’s divisions, raising over $1 billion, with its animal-health division the latest to be let go. Bayer’s goal is to focus on its core agricultural and pharmaceutical businesses going forward.

Bayer’s Financial Outlook

Bayer currently holds a Zacks Rank #3 (Hold), but has a forward P/E ratio much lower than the large cap pharma industry. Our Zacks Consensus Estimates show earnings for this quarter at $0.46 per share, no change over a year ago. Full year estimates call for $1.87 per share, for a 6.86% increase over last year. Next year, the company’s earnings are projected to grow another 13.37% over 2019, showing predicted growth from consolidation plans.

Bayer stock is up 4.6% YTD, despite continued hits from the uncertainty surrounding the Roundup suit. BAYRY has also outperformed broader large-cap pharma market’s 1.5% loss, which consists of firms such as Abbvie ABBV, Merck MRK, and Lilly LLY.

Elanco’s Financial Outlook

Elanco stock is down 5.5% YTD, to lag the large-cap pharma market. It is, however, above the broader medical care market industry’s 7.2% drop. Elanco is also a Zacks Rank #3 (Hold) at the moment, with earnings estimates having been revised marginally downward in the past 60 days.

Earnings estimates show a current quarter shrinkage of 10.34% to $0.26 per share. Next quarter is projected to come in at no change from last year, along with a full year estimate of $1.08 per share, an 8.47% decline. However, fiscal 2020 is predicted to see earnings recover 16.36% to $1.26 for the full year. Elanco has consistently reported earnings beats for the past 4 quarters, with an average surprise of 13.43%. Therefore, earnings could come in higher.

Bottom Line

This deal is a necessity for Bayer, as the company needs cash and wants to focus on its two core areas. It will likely help Elanco significantly by giving new products and increasing market share and power. Interested investors need to look for how revenue and earnings for both companies change if and when the deal is cleared by authorities.

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Pfizer Inc. (PFE) : Free Stock Analysis Report
Bayer Aktiengesellschaft (BAYRY) : Free Stock Analysis Report
Merck & Co., Inc. (MRK) : Free Stock Analysis Report
AbbVie Inc. (ABBV) : Free Stock Analysis Report
Eli Lilly and Company (LLY) : Free Stock Analysis Report
Zoetis Inc. (ZTS) : Free Stock Analysis Report
Elanco Animal Health Incorporated (ELAN) : Free Stock Analysis Report
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