April 22, 2014 / 3:04 PM / 5 years ago

Lilly eyes emerging markets in Novartis animal-health deal

PARIS/NEW YORK (Reuters) - The purchase of Novartis’ animal-health business will strengthen Eli Lilly’s hand in emerging markets, tapping into growing demand there for protein-rich diets and household treatments for pets, top executives of the U.S. company said.

A Novartis logo is pictured on its headquarters building in Mumbai February 6, 2014. REUTERS/Danish Siddiqui

As part of a multibillion-dollar revamp announced earlier on Tuesday, Swiss drugmaker Novartis said it would sell its animal-health arm to Indianapolis-based Lilly for about $5.4 billion, while also swapping assets with GlaxoSmithKline.

Lilly said the deal would turn its Elanco unit from the world’s No. 4 animal-health group by revenue to the global No. 2 in a sector that supplies medicines, vaccines and feed additives for farm and domestic animals. The sector’s biggest operator is Zoetis, spun off by Pfizer last year.

The Lilly unit posted sales of $2.15 billion in 2013, up 6 percent on the year, compared with about $1.1 billion for Novartis’ animal-health activities. Eli Lilly’s total sales were $23.1 billion.

“Elanco has doubled its sales and tripled its profits between 2007 and today, and this acquisition really brings it into the top tier of companies,” Lilly Chief Executive John Lechtleiter said in an interview. Other top players include U.S. drugmaker Merck & Co and France’s Sanofi.

Thanks to vaccines and anti-parasite medicines from the Novartis deal, Lechleiter said Elanco will now be able to provide products for aquaculture, or fish farms, which he called “a different type of animal protein that we’ve wanted to get into.”

Elanco is also expanding its presence in eggs, through its planned acquisition of Germany’s Lohmann Animal Health.

“This (Novartis) deal really allows us to get a significant increase in our footprint in emerging markets and in our protein business on the food animal side this will be very important for us,” Jeff Simmons, Eli Lilly’s senior vice president and president of Elanco, told Reuters.

Elanco’s products include its Elector PSP to kill flies and beetles in cattle sheds, and the Rumensin feed supplement to boost productivity of dairy and beef cows. Novartis’ products range from its Atopica treatment for dermatitis in dogs and cats and its Denagard antibiotic for pigs and poultry.

Lilly sees the dairy, fish and egg sectors as products emerging market consumers turn to for protein before shifting towards meat, Simmons said.

“I believe these emerging markets and these emerging diets - eggs, fish, dairy - are key.”

Elanco has been seeing “high single-digit” growth rates in emerging markets and the Novartis deal would make it the No. 3 player in these countries versus No. 5 currently, he added.

The deal could also ease Elanco’s economic reliance on the livestock commodities markets such as cattle and hogs - which have roiled in recent years amid volatile grain prices, extreme weather patterns and shrinking herd sizes in the U.S.

“It takes us away from the meat cycles, where every four to five years, we ride the same (economic) rollercoaster that the meat producers do,” Simmons said.

The Novartis deal crowns a period of fast expansion for Elanco, whose operating profit margins rose to 26 percent last year - which Lechleiter said were comparable to margins of human prescription drugs.

Emerging market demand in animal health also reflected a growing trend for keeping pets, Simmons said, noting this had helped make its flea and heartworm brands big growth drivers at Elanco.

“Cities like Sao Paulo and Hong Kong are becoming more of a pet opportunity and that will continue to grow and expand,” Simmons said.

Pets represent about 40 percent of the global animal-health market, versus around 60 percent for farm animals, and Elanco would become the No. 3 player in the pet health segment following the Novartis acquisition, he said.

Additional reporting by Natalie Huet; in Paris and PJ Huffstutter in Chicago. Editing by Andrew Callus, Mark Potter and Chizu Nomiyama

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