Eli Lilly to Acquire Novartis' Animal Health Biz - Analyst Blog

Eli Lilly and Company LLY announced its intention to acquire Novartis' NVS animal health division for $5.4 billion in an all-cash transaction. The transaction, slated to close by the end of the first quarter of 2015, will boost Eli Lilly's animal health division, Elanco, significantly.

With this acquisition, Eli Lilly will move to the second position in the animal health market in terms of global revenue. We know Zoetis ZTS is one of the largest companies in the global market for animal health. Novartis Animal Health's diverse portfolio targeted towards the prevention and treatment of diseases in pets, farm animals and farmed fish will not only expand Elanco's product portfolio, R&D and manufacturing capabilities, it will also improve its presence in the companion animal and swine markets and equine and vaccines areas. Elanco will also gain an opportunity to enter the aquaculture market.

Eli Lilly expects annual cost savings of approximately $200 million within three years of closing the deal. The acquisition will be accretive to earnings (on a cash basis) from 2016 (excluding integration costs). Through this deal, Eli Lilly expects the combined entity to achieve EBIT (as a % of revenues) in the mid-20% range by 2018.

According to the terms of the agreement, Eli Lilly will acquire nine manufacturing sites, six dedicated R&D facilities, about 600 products, a strong pipeline and an experienced team. Eli Lilly will fund this acquisition with $3.4 billion of cash-on-hand and $2.0 billion in debt to be issued.

Our Take

Currently, Eli Lilly is facing a major challenge in the form of loss of exclusivity for Zyprexa and Cymbalta. The Animal Health business is a growth area for Eli Lilly with revenues coming in at about $2.2 billion in 2013, accounting for 9.3% of total revenues. This included U.S. sales of $1.2 billion. The acquisition of Novartis Animal Health should boost sales significantly. Novartis' Animal Health division posted revenues of $1.1 billion in 2013.

Eli Lilly carries a Zacks Rank #3 (Hold). A better-ranked stock in the health care sector is Questcor Pharmaceuticals, Inc. QCOR, carrying a Zacks Rank #1 (Strong Buy).