What happened

Shares of Elanco Animal Health (NYSE:ELAN) tumbled more than 27% in the first six months of the year, according to data provided by S&P Global Market Intelligence. That was significantly worse than the 4% decline of the S&P 500 in that span.

The global animal health leader is getting tripped up by the economic headwinds caused by the coronavirus pandemic. Part of the misery is self-inflicted, as the company's current product mix is biased toward what it calls "food animals," or livestock. Products aimed at companion animals, such as cats and dogs, tend to generate higher margins and are more insulated from commodity fluctuations.

Investors are hopeful that a major acquisition could soon bring relief to the pharma stock, but it might just add to the uncertainty hanging over the business.

A dog with its head tilted sideways.

Image source: Getty Images.

So what

In the first quarter of 2020, Elanco Animal Health reported a 10% decline in revenue compared to the year-ago period. Although livestock products, which comprise two-thirds of revenue, experienced declines due to the coronavirus pandemic, the most significant declines were from the companion animal portfolio. The business was forced to lower sales of the products to inventory channels to account for lower expected demand for the remainder of 2020, which drove sharply lower sales for the segment.

Relief could be on the way soon. Elanco Animal Health is nearing the close of its $7.6 billion acquisition of Bayer Animal Health. The massive transaction is expected to create the second-largest animal health company on the planet by revenue and balance product mix to a nearly 50/50 split between food animals and companion animals. The merger is expected to close in mid-2020. 

Now what

Individual investors should tread carefully with Elanco Animal Health. There are many moving parts right now, both external (the coronavirus pandemic) and internal (the acquisition of Bayer Animal Health), which creates a high level of uncertainty. If the proposed merger doesn't pan out as expected -- which is increasingly likely given the disruption caused by the global health crisis and the fact the acquisition was first announced in August 2019 -- then this could be a disastrous investment. It's best to wait for a clearer path forward to emerge in the coming quarters or years.