Please ensure Javascript is enabled for purposes of website accessibility

After Acquiring Bayer Animal Health, Elanco Is Poised for Earnings Growth in 2021

By Luis Sanchez CFA - Mar 16, 2021 at 7:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Elanco just completed its largest merger ever. Now it turns its attention to ambitious earnings growth goals in 2021.

In the animal health industry, one company in particular acts like a wolf on the prowl. Elanco Animal Health (ELAN 1.67%) is the world's second-largest animal health company and specializes in pharmaceuticals. The company spun off from pharmaceutical giant Eli Lilly in 2018 and has gone through a dramatic transformation since leaving its parent.

One of the most significant changes Elanco announced was its acquisition of Bayer Animal Health in 2019. The acquisition was completed in August 2020 and catapulted Elanco to the forefront of the animal health industry. Now that the merger is complete, what can investors expect the combined company to do in 2021?

a dog getting its heart beat checked by a veterinarian

Image source: Getty Images.

A $7 billion pet healthcare acquisition

The merger with Bayer was transformational but came at a steep price. Elanco paid $5.2 billion in cash and issued 72.9 million in shares to Bayer. This makes it one of the most expensive deals in the animal healthcare industry's history.

Elanco pursued the Bayer merger for two key reasons. The first is that historically, Elanco has been focused on supplying the livestock animal healthcare market, but wanted to expand its reach into the faster-growing pet healthcare market. Bayer Animal Health generated a majority of its revenue from the pet market and brought to Elanco a drug pipeline and notable industry blockbusters including Seresto and Claro.

The deal is also expected to produce significant cost synergies which will enhance the combined company's earnings growth rate. The headline number is $300 million in synergies driven by manufacturing and production efficiencies as well as a more streamlined research and development and salesforce organization.

The combined company has already started its efforts to realize the cost synergies and expand its global presence. 2021 will be the first full year of operation for the new Elanco.

Margin expansion ahead

One of Elanco's main messages to investors is that the company has a clear path forward in regards to its growth and profitability. However, there are still some hurdles along the way. Elanco is still working to fully transition off of Eli Lilly's management systems. Now the company must also deal with achieving the cost synergies from the Bayer acquisition. Despite this, Elanco is confident that moving forward the company's performance will greatly improve.

Over the next few years, Elanco expects to reach 60% gross margin from 51.8% gross margin in 2020. This will be driven by achieving greater scale from increased unit volumes and a restructuring of the company's R&D, salesforce, and manufacturing.

ELAN EBITDA Margin (TTM) Chart
Data by YCharts.

These margin enhancement initiatives are also expected to lift Elanco's EBITDA margin. EBITDA stands for earnings before interest taxes, depreciation, and amortization and is a measure of earnings. The company has a long-term target of 31% and expects EBITDA to grow at a double-digit rate in the coming years. This is a significant improvement over its current level but notably still markedly less than its main competitor, Zoetis.

In 2021, Elanco is targeting an adjusted EBITDA of just over $1 billion leading to a 22% margin. This is almost double the $528 million of adjusted EBITDA that Elanco reported in 2020. If Elanco can achieve these earnings growth targets, shareholders would likely rejoice.

Is Elanco a buy?

Elanco has recently caught the eye of investors and its stock is trading at its highest level in more than one year. Clearly, investors are excited about the prospects of the combined company and the earnings potential.

2021 will be a pivotal year for Elanco as it will be the first full year operating as a combined company with Bayer. The company has put out ambitious earnings targets and investors will be paying attention to whether or not the company can execute on its stated goals.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Elanco Animal Health Incorporated Stock Quote
Elanco Animal Health Incorporated
$23.72 (1.67%) $0.39
Eli Lilly and Company Stock Quote
Eli Lilly and Company
$313.46 (2.10%) $6.45
Zoetis Inc. Stock Quote
Zoetis Inc.
$165.90 (1.76%) $2.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.