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Eli Lilly's Elanco unit blossoming at just the right time

July 30, 2011

Eli Lilly and Co.’s Elanco animal-health business rarely makes headlines, given that it’s such a small slice of the pharmaceutical giant. So you might be surprised to learn that the Greenfield-based unit has 2,400 employees and is expected to rack up sales this year of $1.7 billion.

For years, it was a sleepy business. As recently as 2006, Elanco was little more than a maker of additives for animal feed and garnered just $875 million in sales.

The doubling of sales since is just the start, at least if company brass is able to deliver on ambitious growth plans. Lilly executives crow about the division every chance they get these days, in part to combat investors’ anxiety over the bevy of big-selling human drugs soon to go off patent.

Lilly executives project they will garner more than $4 billion in additional revenue from Elanco and from drug sales in Japan and emerging markets like China from 2010 to 2015, blunting the impact of patent expirations on Zyprexa, Cymbalta and other top-sellers. The animal-health division is a key piece of Lilly’s strategy of preventing overall sales from falling below $20 billion through 2014.

Citigroup Global Markets projects Elanco sales will flirt with $2 billion by 2012 and surpass $3 billion by 2018. A firm that size would be larger than all but five of central Indiana’s public companies today.
 

simmons-jeff-mug Simmons

Elanco CEO Jeff Simmons calls Elanco “a significant diversification play” that today is bearing the fruits of a more aggressive strategy adopted in 2007.

That’s when the company began moving into new businesses, including pet health, dairy, food safety and vaccines.

At an analyst conference in June, Simmons described the company’s mission in lofty terms: “With food, we make it more abundant, more affordable and safe.”

The advancements, he said, have huge implications for a world where one in six people doesn’t get enough to eat and thousands of people die of hunger-related causes.

Then, there are emerging economies like China, where the population increasingly is consuming Western-style diets. For Chinese to consume half as much calcium as Americans consume would require the equivalent of four U.S. dairy industries.

Much of the world’s growing demand for food will be met through increased productivity made possible by companies like Elanco, Simmons said.

“Technology is the No. 1 way to create more food with less. ... That innovation is demanded and is rewarded by our customers, without the threat from generics that bedevil manufacturers of human drugs.

“We have three compounds at Elanco today that are four decades old, and they’re still growing,” Simmons said in underscoring a key difference between the industries.

The dynamics are different in the pet-health business, which is built upon creating innovative products and building strong relationships with veterinarians, but the opportunities are no less promising.

It’s no secret that affluent societies are willing to spend big to make sure their Fidos and Fluffies have long, comfortable lives. U.S. spending on companion pets has nearly tripled over the past 15 years, to $48 billion, according to Bill Buhr, an analyst at the investment research firm Morningstar.

Elanco revenue rose 15 percent in 2010, 28 percent in the first quarter of this year and 20 percent in the second—rates that far outpaced the growth of the overall animal health industry.

The company is No. 5 in that industry now, but aspires to improve its rank. Last month, it completed the purchase of the animal-health business of a Johnson & Johnson subsidiary. And Lilly executives recently have expressed interest in buying some products from Pfizer Inc.’s animal-health unit, though Pfizer says it wants to spin off the business or sell it as a whole.

Some on Wall Street have bandied about the idea of Lilly’s spinning off Elanco. Goldman Sachs analyst Jami Rubin said doing so “would help monetize an undersized but otherwise attractive division.”

Lilly officials, however, don’t seem interested in parting ways with a business that’s enjoying robust growth—especially when their core pharmaceutical business is struggling.

CEO John Lechleiter trumpets Elanco almost every time he speaks with the investment community, saying it will help keep Lilly sturdy while new human drugs wend through the regulatory-approval process.

As he said in a June investor conference, “Some of the key countercyclical growth engines are kicking in nicely at this stage.”•

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