Elanco Announces Exit of Three Manufacturing Sites, Streamlining Footprint

Rhea-AI Summary

Elanco Animal Health (NYSE: ELAN) is optimizing its manufacturing footprint post-acquisition of Bayer Animal Health by selling its Shawnee, Kansas and Speke, UK sites to TriRx Pharmaceuticals. This includes a long-term supply agreement and the transfer of ~600 employees. The sale is expected to incur impairment charges of $245M to $305M in Q2 2021, impacting EPS guidance by $0.43 to $0.54. Elanco anticipates a reduction in annual capital expenditures by $25M to $30M while expecting gross margins to reach 60% by 2023. Additionally, operations in Brazil will be consolidated to enhance efficiency.

Positive

• Expected gross margins to reach 60% by 2023.
• Reduction in annual capital expenditures by $25 million to $30 million.
• Long-term partnership with TriRx to improve site utilization.

Negative

• Impairment charges between $245 million to $305 million expected in Q2 2021.
• Impact on EPS guidance by $0.43 to $0.54.
• Sale of Shawnee facility to reduce revenue by $10 million to $20 million.

Elanco Animal Health Incorporated (NYSE: ELAN) today announced the next step in its journey to build a global, independent animal health leader with actions to optimize its manufacturing footprint. Following the acquisition of Bayer Animal Health, Elanco fully evaluated how to best allocate its manufacturing efforts to ensure efficient, reliable, quality supply for customers. As a result, Elanco has entered into an agreement with Connecticut-based TriRx Pharmaceuticals, a global contract manufacturer, for the sale of the company’s sites in Shawnee, Kan., and Speke, United Kingdom.

The sale of the sites includes the physical assets at both locations along with the transfer of approximately 600 employees, subject to necessary consultation based on local regulations. The companies have also entered into a long-term supply agreement for the facilities to continue to manufacture existing Elanco products.

“Completing this evaluation and taking decisive action to streamline our footprint less than a year after closing our acquisition of Bayer Animal Health was critical to accelerate and strengthen our margin expansion efforts and increase our agility and optionality, while enhancing our value creation opportunity and long-term competitiveness,” said Jeff Simmons, president and CEO at Elanco Animal Health. “It is clear that pursuing avenues for full capacity is best for the future of the Shawnee and Speke plants and the teams based there. TriRx is well positioned to improve site utilization and create opportunity for the employees, while becoming an important long-term manufacturing partner for Elanco.”

“We are excited for the opportunity to enter into a long-term partnership with Elanco and welcome the employees at both Speke and Shawnee into our organization,” said Tim Tyson, chairman and CEO at TriRx. “We have been impressed with the high caliber people and capabilities at both sites and we look forward to partnering to drive increased utilization and long-term success.”

The sale of the Shawnee facility is expected to close in the second half of 2021, while Elanco expects closing on the sale of the Speke facility by early 2022. Financial terms were not disclosed; however, the company anticipates an impairment charge of $245 million to $305 million to be taken in the second quarter of 2021 related to these events, as the assets associated with these facilities will be classified as held for sale at quarter-end. This impairment is expected to drive a reduction of second quarter and full year 2021 GAAP financial guidance for EPS by $0.43 to $0.54, but have no impact on adjusted EPS guidance for those periods. The sale of the Shawnee facility is expected to reduce full year 2021 revenue by $10 million to $20 million as a result of exiting third-party contract manufacturing operations.

At its December 2020 Investor Day, Elanco announced the company expected to achieve gross margin of 60% in the 2023 to 2024 timeframe, as productivity initiatives were anticipated to help enable flat cost of sales, leveraging expected average annual sales growth of approximately 3% to 4%. With this sale to TriRx, Elanco now expects its gross margin efforts to reach 60% by 2023. These changes also reduce annual capital expenditures by $25 million to $30 million, which more than offsets an operating income reduction of approximately $5 million from third-party contract manufacturing activities associated with the sites. Furthermore, Elanco anticipates an improvement in working capital as approximately $75 million to $85 million of inventory on the company’s balance sheet will exit as part of this transaction.

Latin America Manufacturing Consolidation

Additionally, Elanco announced the consolidation of its manufacturing operations in Latin America, ceasing operations at the legacy Bayer Animal Health manufacturing site in Belford Roxo, Brazil, transferring these operations to the company’s site in Santa Clara, Mexico, and a contract manufacturer in Brazil. The Belford Roxo site, which currently supplies six smaller, regional products, is expected to be decommissioned in early 2022. Elanco will work through this transition to support customers’ product supply needs.

“These are always difficult decisions we must make after an acquisition to continue our margin expansion journey, allowing us to streamline operations, reduce complexity, enhance efficiency, and better position us for long-term competitiveness. The moves are expected to improve our cash conversion by decreasing annual capital spend and increasing working capital,” said David Urbanek, executive vice president, Manufacturing and Quality at Elanco. “We are excited to transition these plants to a partner that has the capability to increase plant utilization, creating a stronger and more secure future for the team.”

ABOUT ELANCO

Elanco Animal Health Incorporated (NYSE: ELAN) is a global leader in animal health dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets, creating value for farmers, pet owners, veterinarians, stakeholders, and society as a whole. With nearly 70 years of animal health heritage, we are committed to helping our customers improve the health of animals in their care, while also making a meaningful impact on our local and global communities. At Elanco, we are driven by our vision of Food and Companionship Enriching Life and our Elanco Healthy Purpose™ Sustainability/ESG Pledges –all to advance the health of animals, people, and the planet. Learn more at elanco.com.

ABOUT TRIRx

TriRx is a globally integrated Contract Development and Manufacturing Organization (CDMO) serving the human health and animal health biopharmaceutical markets. TriRx is privately owned and is focused on delivering on commitments to customers and providing medicines to patients that help them feel better and live longer.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including, without limitation, statements concerning our estimated amount of impairment charges related to our sale of sites in Shawnee, Kansas and Speke, United Kingdom and their impact on guidance relating to GAAP EPS and adjusted EPS for the second quarter and full year 2021; our expectations for adjusted gross margin in the 2023 timeframe, including the effects of the sale to TriRx, and for annual capital expenditures, EBIDTA and working capital; and our expectations for consolidation of our Latin America manufacturing facilities and their impact on our operations, margin, cash flow, capital spend, and working capital; and including statements relating to our business, growth strategies, distribution strategies, product development efforts and future expenses.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements.

For additional information about the factors that could cause actual results to differ materially from forward-looking statements, please see the company’s latest Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Although we have attempted to identify important risk factors, there may be other risk factors not presently known to us or that we presently believe are not material that could cause actual results and developments to differ materially from those made in or suggested by the forward-looking statements contained in this press release. If any of these risks materialize, or if any of the above assumptions underlying forward-looking statements prove incorrect, actual results and developments may differ materially from those made in or suggested by the forward-looking statements contained in this press release. We caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this press release. Any forward-looking statement made by us in this press release speaks only as of the date thereof. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or to revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should be viewed as historical data.

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FAQ

What are the details of the Elanco and TriRx agreement?

Elanco is selling its Shawnee and Speke manufacturing sites to TriRx Pharmaceuticals, including a long-term supply agreement.

What financial impact will the Shawnee and Speke site sales have on Elanco?

Elanco expects impairment charges of $245 million to $305 million in Q2 2021 and a reduction of $10 million to $20 million in annual revenue.

When will the sales of the Shawnee and Speke facilities be completed?

The sale of the Shawnee facility is expected to close in the second half of 2021, and the Speke facility by early 2022.

How will the sale affect Elanco's gross margins?

The sale is anticipated to help Elanco reach gross margins of 60% by 2023.

What changes are happening in Elanco's Latin America operations?

Elanco is consolidating its manufacturing in Latin America by ceasing operations at its Belford Roxo site in Brazil.