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People love their pets. And investors love companies that keep these animals healthy. At present, a merger of two of the five largest players in the animal health sector could result in additional gains for shareholders.
Elanco Animal Health
(symbol: ELAN) discusses possible merger with Bayer's animal health business under a $ 4.5 billion contract, reports said. This combination would give Elanco a more balanced product portfolio and greater reach to spread research and development costs.
A representative of Bayer stated Barron the company is still on the path of its plan to leave the animal health sector. "After a strategic review of exit options, the main focus is the sale. However, Bayer also continues to consider all options to maximize value, "said the company.
Elanco declined to comment.
Elanco's shares surpassed the $ 35 one at the news of the potential deal, but returned to $ 33.86 on Tuesday. Shares were still 1.5% higher, better than the 0.3% loss of
Dow Jones Industrial Average.
Pharmaceutical and agricultural input manufacturer parts
Bayer
(BAYN.Germany) rose 1.2% Tuesday in international trade.
Read more: The pet economy is booming and she has legs
"Bayer has a much higher contribution of companion products", writes Evercore ISI analyst Umer Raffat in a research report on Tuesday. Raffat adds that Bayer's sales in the animal health sector are concentrated and that its four main products represent more than 60% of the turnover.
If the transaction is completed, 45% of the combined company's sales would come from pet health products, a proportion similar to that of the leader.
zoetis
(ZTS).
Elanco and Zoetis are the two leading animal health franchises that sell patented medicines to treat livestock and pets.
Merck
(MRK) and Bayer are the other publicly traded companies that operate in the animal health sector.
Investors would probably love to see Elanco and Bayer reach an agreement, animal health being a good investment in recent years. Zoetis shares have averaged 29% per annum over the past 5 years, well above the 8% annual gain recorded by pharmaceutical companies in the United States.
S & P 500
during this period. Elanco went public in 2018 at $ 24 per share.
These high market returns correspond to strong demand for all animal health franchises. Sales of animal health products in publicly traded companies have increased by more than 5% per year over the last 5 years, which is higher than the average annual growth of 3% of pharmaceutical companies in the S & P 500.
Elanco trades 26 times the estimated profits for 2020, while Zoetis exchanges against 29 times the estimated profits. If Elanco traded like Zoetis, its shares could jump 10%, given the prospects for better margins from transaction synergies.
Write to Al Root at [email protected]
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