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What Are the Major Risks Affecting Elanco Animal Health?

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Underperforming businesses

In its fourth-quarter earnings conference call, Elanco Animal Health (ELAN) reported a 4% YoY drop in sales driven by a 9% decline in sales volumes but partly offset by a 5% rise in prices for its Companion Animal Therapeutics segment in the fourth quarter. This has been mainly attributable to the demand for Galliprant outstripping supply, thereby leading to a delay in orders.

In its fourth-quarter earnings conference call, Elanco Animal Health reported a 6% YoY revenue decline driven by a 5% fall in sales volumes and a 1% drop in price in its Ruminants & Swine segment in the fourth quarter. The company suffered due to the unavailability of Micotil as a result of a halt of production at a contract manufacturer’s facility due to quality issues. Additionally, the company also reported a decline in revenues from the sale of swine antibiotics in Asia.

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Supply constraints

According to Elanco Animal Health’s fourth-quarter earnings conference call, the company has already expanded its production capacity for active pharmaceutical ingredients and formulations of Galliprant. The company is currently working on expanding capacity at Galliprant’s packaging sites. Although the company expects to expand production by the first quarter or second quarter of fiscal 2019, failure to meet these timelines may further escalate the ongoing supply problems and negatively affect the revenue performance of Elanco Animal Health’s Companion Animal Therapeutics business in fiscal 2019.

Antibiotics

According to the Elanco Animal Health’s fourth-quarter earnings conference call, the company is focused on reducing unnecessary use of antibiotics and shifting customers towards alternatives such as enzymes, probiotics, and vaccines. The company plans to build a pipeline comprising of 25 investigational alternatives to antibiotics by 2020. Beyond this, Elanco Animal Health is focusing on keeping animals healthy as well as using, developing, and recommending animal-only antibiotics. To further decrease usage of shared-class antibiotics, Elanco Animal Health has changed labels for around 100 of its antibiotic products to exclude growth promotion. If the reduced usage of the company’s antibiotic products is not offset by the shift to the company’s alternative products, it may negatively affect the revenue performance of the Ruminants & Swine segment in fiscal 2019.

Competitive pressure

Since fiscal 2018 was the first full year of operation for Elanco Animal Health, the company will be facing intense competition from Zoetis (ZTS), which is far more established in the animal health space.

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