The broader health sector got a new player last week when pharmaceutical giant Eli Lilly (NYSE:LLY) spun off its animal health unit as Elanco (NYSE:ELAN), and at least one MarketFoolery listener is curious about how the Fools view it.
In this segment, host Chris Hill and senior analyst Jason Moser weigh in on the new company, shares of which soared by more than 40% on their first trading day, even after management boosted its offering price. What does Elanco do, what are its prospects, and should you invest in it?
A full transcript follows the video.
This video was recorded on Sept. 20, 2018.
Chris Hill: Question from Evan Machete, who writes, "What do you know about Elanco Animal Health and this week's public offering? The company is seemingly a dynamite fit for Jason Moser's healthcare and wealthcare space. I don't usually invest in IPOs, but is this company worth watching over the next few months?"
They certainly had a great IPO. Elanco Animal Health was spun out of Eli Lilly. Kudos to them, because the range of the stock going into the IPO, they bumped it up $24 a share, and it took off like a rocket.
Jason Moser: Yeah. You can be forgiven if you thought Elanco was perhaps yet another venture of the Elon Musk's that was just taking him into another direction altogether.
Hill: [laughs] If you like SpaceX and you like flamethrowers, wait until you check out our animal health line!
Moser: Yeah. First and foremost, I'm pretty consistent with my general feelings when it comes to IPOs. I think you need to wait and watch. I think you need to give it a couple of quarters so you can assess what you're dealing with, in regard to the business, in regard to management. Given everything I've learned about Elanco, I'm going to stick with my guns on that one there.
That said, I do think it is a very interesting company, given what it does. What do they do? They are in the business of animal animal vaccinations, animal health, whether its companion animals or farm food animals. They are producing a lot of the vaccinations and nutritional supplements and whatnot for that space. And it is a very big market opportunity. You look at it altogether, it's somewhere in the neighborhood of $35 billion. It's not insignificant. It's an attractive market in that it's very resilient, high barriers to entry. I think they stand a chance to do very well, given their background as a part of Eli Lilly for so long.
Now, with that said, there is tremendous competition out there. If we look at Elanco today, 2017 revenues came in around $2.9 billion. Zoetis, which is another company out there in the same market, they're bringing in basically about double the top line that Elanco is, and it's a much, much bigger company. They have, of course, more resources. Now, that's not to say that Elanco can't be successful. I think they can. It reminds me a lot of a company I covered a while back called MWI Veterinary Supply. That was a business that was in very much sort of a similar line of work. They were acquired by AmerisourceBergen not all that long ago at a premium. I think a lot of that was because of the market dynamics. It's just a very attractive market.
One thing to keep an eye on with this company is going to be how much they continue to devote to research and development. That's really how these businesses remain relevant. I look at a company like Idexx Laboratories, for example, which is a stock I own, I recently purchased it. They are in the business of the testing equipment and diagnostics supplies for veterinarians and the companion animal group. Not a competitor, really, with Elanco, but you could see with Idexx, they consistently devote a significant percentage of the revenue every year to research and development, to continue to advance and bring new products to the field. I think as long as Elanco does that, if we can look at that R&D line and see that they are investing in the business, they stand to do well, well.
But, it is a brand new IPO. You have to recognize Eli Lilly is still going to hold a lot of control of this business, at least in the initial stages of its existence as a publicly traded company. But, yeah, there's definitely something there. I could see why this company would do well. It's a very attractive market.