Morgan Stanley Upgrades Elanco Animal Health On Valuation

While Elanco Animal Health Inc’s ELAN current valuation reflects the ongoing investor concerns, the focus is now likely to shift to the positives related to the Bayer transaction, prospects of margin expansion and long-term pipeline potential over 20202, according to Morgan Stanley.

The Analyst

Morgan Stanley’s David Risinger upgraded Elanco Animal Health from Equal-Weight to Overweight while reducing the price target from $34 to $32.

The Thesis

Elanco Animal Health’s shares have declined by 15% year to date, significantly underperforming the broader market and key competitor Zoetis Inc ZTS, Risinger said in the note.

Investors currently appear skeptical about the decision to purchase Bayer's Animal Health business for $7.6 billion, the analyst said. He added, however, that investor sentiment may turn positive as the date of deal closing approaches.

Risinger enumerated the reasons for this shift in sentiment as upward pressure on consensus earnings estimates, deal hurdles would have cleared by then and Bayer’s revenue growth prospects would have improved due to “the slowing Advantage franchise declines and potential new product pipeline launches.”

The analyst expects Elanco Animal Health’s shares to outperform the Healthcare sector, given the company’s limited exposure to “potential Washington pricing pressure.”

Price Action

Shares of Elanco Animal Health was trading almost flat at $26.61 at the time of publishing on Thursday.