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Lilly to Begin Exchange Offer for Sale of Balance Elanco Stake

Zacks Equity Research

Eli Lilly & Company LLY announced that it will launch an exchange offer for shareholders in order to divest its remaining ownership interest in Elanco Animal Health Incorporated ELAN.

Lilly divested its Elanco animal health unit as an independent publicly traded company - Elanco Animal Health - via an initial public offering (IPO) of a minority stake in 2018. Elanco Animal Health started trading on NYSE from Sep 20, 2018. Lilly retained 80.2% stake in the Elanco Animal Health when it completed the IPO, which it wants to divest this year.

Under the exchange offer, Lilly shareholders can exchange all, some or none of their Lilly shares for shares of Elanco common stock owned by Lilly at 7% discount. Lilly expects the exchange offer to be tax free, except the cash received in lieu of fractional shares.

Lilly had long been exploring strategic alternatives for this business including a sale, merger or creation of a separate company through an IPO. Elanco raised over $4 billion through the IPO and debt offering, the vast majority of which was provided to Lilly as consideration for the businesses Lilly transferred to Elanco in connection with the IPO.

In 2013, Pfizer PFE had spun-off its Animal Health business, which started trading on NYSE from Feb1, 2013 under the name Zoetis, Inc. ZTS. However, Merck still owns the Animal Health segment, which accounts for almost 10% of its total revenues.

In the past year, Lilly’s shares have risen 56.8% compared with the industry’s increase of 7%.



Last week, Lilly announced mixed fourth-quarter results as it beat estimates for sales but missed the same for earnings. It lowered its previously issued earnings and sales guidance for 2019 to account for the costs related to the pending acquisition of Loxo Oncology and the failure of Lartruvo study.

In 2019, Lilly’s revenue growth is expected to be driven by higher demand for its newer drugs including Trulicity, Jardiance, Taltz, Verzenio as well as new migraine drug, Emgality as some older drugs like Cialis lose patent exclusivity. However, competitive pressure on Lilly’s drugs is expected to rise in 2019. Generic competition for several drugs including Cialis, rising pricing pressure, currency headwinds and the impact of the failed Lartruvo study are expected to put pressure on the top line.

Lilly currently carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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