Elanco HQ 320

Elanco Animal Health photo

Elanco, based in Greenfield, Indiana, will become the world's second-largest animal health business if its purchase of Bayer's veterinary division closes this summer.

Elanco Animal Health is closer to becoming the world's second-largest provider of veterinary medicines, now that European antitrust regulators have conditionally cleared its $7.6 billion acquisition of Bayer's animal health business.

In terms of size, Elanco currently ranks fourth in the animal health market by revenue; Bayer is fifth, according to company filings. If all goes as planned, Elanco's sales will surpass those of the veterinary businesses of Boehringer Ingelheim and Merck. Pfizer spinoff Zoetis International will remain the world's largest player in the animal health arena, trailed by Elanco, which was spun out of Eli Lilly last year.

But there's a catch: For the deal to go through, Elanco had to agree to offload some assets, per conditions set by the European Commission. Elanco pledged to sell the European and United Kingdom rights of Bayer's Drontal and Profender de-wormer products for cats and dogs to France's Vetoquinol for $145 million. 

In addition, Elanco will sell the worldwide rights for Osurnia, a treatment for otitis externa, an infection of the ear canal, for $135 million to the U.K.'s Dechra Pharmaceuticals. It has also agreed to sell the worldwide rights for Vecoxan, an oral antiparasitic treatment for calves and lambs, to Merck for $55 million.

The U.S. Federal Trade Commission must approve the deal, too. In December, the American antitrust agency asked Elanco for more information on the Bayer transaction, suggesting that it, also, had identified possible competition concerns.

"We continue to collaborate with the FTC, but the process in the U.S. doesn’t have a specific decision date like the EU’s does," Elanco spokesperson Colleen Parr Decker told the VIN News Service by email. She added that Elanco is on track for a mid-year closing of Aug. 3.

In its bid to gain FTC approval, Elanco agreed in January to divest the U.S. rights to its Capstar over-the-counter flea treatment for cats and dogs to PetIQ. The $95 million cash deal also is contingent upon the FTC's approval of the Elanco-Bayer acquisition.

In Australia, meanwhile, Elanco has pledged to sell assets including the Drontal, Profender and Droncit de-worming brands, plus the Avenge+Fly sheep lousicide brand, in an attempt to satisfy regulators Down Under.

Antitrust regulators often demand that companies divest certain products or divisions to get big mergers over the line. But they still can reject them, as seen in 2011, when the Antitrust Division of the U.S. Department of Justice blocked AT&T's attempted takeover of T-Mobile. AT&T's bid subsequently was abandoned.

The Elanco-Bayer deal first was announced last August, when Greenfield, Indiana-based Elanco offered $5.3 billion in cash and $2.3 billion in shares to Bayer, a German pharmaceuticals and agricultural chemicals giant that had been shedding assets to pay debts and legal costs associated with its purchase of the seed group Monsanto.

At the time, Bayer said the sum offered by Elanco was equivalent to 18.8 times the business's core annual earnings, implying that Elanco sees plenty of growth potential in the veterinary medicine sphere. Rosy long-term sales projections by industry analysts in the sector are underpinned by expectations of increased demand for meat and dairy products in emerging economies and a propensity for people to spend more on their pets.

Elanco's current products portfolio is comprised heavily of drugs for production animals. If approved, the deal with Bayer will bring its pet business up to about 50% of its sales, while adding e-commerce and retail offerings. 

Elanco is pressing forward with the deal despite the COVID-19 crisis suddenly reducing demand for veterinary medicine, reflecting government-imposed lockdowns that have slowed the economy. On May 7, Elanco recorded a $49.1 million first-quarter loss, swinging from a profit of $31.5 million for the same period a year earlier, amid a 10% drop in sales to $657.7 million.

Chief executive Jeff Simmons asserts, however, that the pandemic has bolstered the longer-term merits of the Bayer deal.

"The recent months have only underscored the critical work our farmers do in delivering meat, milk, fish and eggs, and the importance of providing pet owners and veterinarians with a variety of solutions in multiple channels from telemedicine and e-commerce to direct home delivery," he said in a statement.

Update: Elanco Animal Health Incorporated received approval July 15 from the U.S. Federal Trade Commission (FTC) for its acquisition of Bayer Animal Health. FTC approval, which is conditional on a series of divestitures, represents the final antitrust clearance needed to complete the transaction, which Elanco said is on track for closing at the beginning of August.