North America IPO: Elanco Animal Health's US$1.7bn IPO

IFR Awards 2018
3 min read
Stephen Lacey

If spin-offs are designed to illuminate value, Eli Lilly’s IPO of Elanco Animal Health shone bright for both parent and subsidiary.

By the time the formal roadshow kicked off in mid-September, institutional investors were familiar with Elanco’s plans to wring cost savings out of the business. Elanco management had also conducted extensive pre-deal investor education that gave early momentum from a core 20 accounts.

Goldman Sachs, JP Morgan and Morgan Stanley, the leads among 11 bookrunners, built upon momentum over a 10-day public roadshow with 50 one-on-one meetings and more than 200 institutions overall.

The effort culminated in 62.9m being shares priced at US$24, above the US$21–$23 marketing range, with exercise of the 9.4m greenshoe extending Eli Lilly’s take to US$1.7bn, the largest US-listed healthcare IPO since Pfizer spun-off Zoetis in 2013.

Elanco was not only among the largest IPOs of the year but the most lucrative as well, as its shares closed their debut session 50% above offer at US$36 and in mid-November were still up 38% – stated differently, that is some US$660m in paper profits.

“It was one the best books of demand I’ve ever seen,” said Gabriel Gelman, head of Goldman Sachs’ healthcare origination. “Investors like spin-offs in terms of how they can perform, particularly from companies that are on the other side of a turnaround.

“Most believe there is still room for significant improvement in operating margins.”

Unlike most spin-offs, the former parent and subsidiary are in the same sector, providing overlap not only on research coverage but also on ownership. As a result, many Lilly shareholders put up their hands wanting to buy.

While there are substantial differences between Elanco and Zoetis, the positive experience on the latter meant investors could see a possible path for Elanco. In the past year, Elanco generated adjusted Ebitda of US$517.7m, a 17.5% margin compared with 39.3% at Zoetis, with many investors expecting Elanco to close that 20 percentage point gap.

Elanco management has worked hard to restructure its business by pruning unprofitable business lines, consolidating production and R&D, and reducing headcount. A consequence has been revenue flatlining at around US$3bn over the past three years, but rather than growth for growth alone, the company’s focus has been on enhancing profitability and growing through new products.

The move was lucrative for Eli Lilly, which sold 20% of Elanco through the IPO, with the remaining 80% to be distributed to shareholders tax-free 180 days later. Elanco set its standalone capital structure with US$2bn of debt sold in August, followed by a US$500m term loan. Those funds, plus the IPO proceeds, flowed upstream to Lilly, with a small portion held back to leave Elanco with US$300m in cash.

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