On April 22, Eli Lilly and Company, the parent company of Elanco, announced an agreement to acquire Novartis Animal Health for approximately $5.4 billion. The transaction, which the company hopes to complete in early 2015, would make Elanco the second-largest animal-health company in global revenue.

During a Web conference with media and investors Tuesday, Elanco President Jeff Simmons said the acquisition will create multiple synergies in terms of product lines, human capitol, research and development and geographic market penetration.

In 2007, Simmons says, Lilly made a decision to invest in its animal health business, and since then has doubled its animal health sales and tripled profits. The company’s strategy involves 60 percent “organic” growth within its existing business and 40 percent “inorganic” growth through acquisitions of other businesses. Organic growth includes a focus on companion-animal products, emerging markets, dedicated manufacturing and a doubling of the company’s research and development (R&D) pipeline.

Plans for inorganic growth includes diversification into areas such as the dairy market, enzymes and vaccines, geographic expansion into Europe and China and market leadership in protein analytics.

The acquisition of Novartis will bring several benefits to the company, Simmons says. Novartis in 2013 earned revenue of $1.1 billion, roughly evenly split between companion- and food-animal business. About two-thirds of the company’s revenue came from outside of North America, while the majority of Elanco’s business is in North America. Novartis has a portfolio of approximately 600 products and a pipeline currently including more than 40 projects. The company operates in 40 countries and has over 3,000 employees.

Novartis brings strong R&D expertise, particularly in vaccines and parasiticides, very strong product brands and customers and an experienced management team, Simmons says.

Elanco also sees growth potential in the global animal-health business overall, with a growing middle class in developing countries driving protein demand and all-time high prices, emergence of new diseases, environmental pressures on animals and pets increasingly becoming part of the family globally.

The acquisition will make Elanco a top-two or top-three player in all major food-animal species. In companion animals the company will move from number five to number three, and the acquisition provides entry into aquaculture and expands its equine business. The company currently is completing its integration of Lohmann Animal Health, a leader in poultry vaccines it acquired last year.

Simmons says the acquisition will bring value in five areas:

  1. Base Business: Continue growth trajectory – and return historical profitability – of existing business.
  2. Cost Synergies: Increase profitability by significantly reducing costs across combined entity.
  3. Pipeline: Enhance both revenue growth and profitability by launching robust Novartis Animal Health pipeline.
  4. Sales Synergies: Maximize product sales with larger global commercial scale.
  5. Tax Benefits: Receive tax benefit from step up in basis of some acquired assets.

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