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Eli Lilly's animal health unit Elanco rated by S&P, Fitch ahead of IPO


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Eli Lilly's animal health unit Elanco rated by S&P, Fitch ahead of IPO

Eli Lilly and Co.'s unit Elanco Animal Health Inc., which recently filed an IPO with the SEC, received its first ratings from S&P Global Ratings and Fitch Ratings.

S&P Global Ratings assigned its BB+ issuer credit rating to Elanco, while the outlook on the rating is positive. Fitch Ratings assigned a BB+ issuer default rating to Elanco, while the outlook on the rating is positive.

The rating agencies' actions follow Lilly's decision to spin off the animal health unit in order to focus on its pharmaceutical business, which includes medicines for diabetes and cancer. Lilly plans to sell less than 20% of its stake in the IPO, but Cowen & Co. analyst Steve Scala believes the company will look to divest its remaining ownership in 2019.

Elanco plans to raise about $2.5 billion in debt and distribute $2.2 billion of the proceeds to Lilly. The remaining $300 million would be used by Elanco for general corporate purposes.

The agency said the rating on Elanco reflects the company's solid market position as one of the largest animal pharmaceutical companies and its diverse product portfolio, among other things.

S&P said it could raise the rating to BBB- over the next year if Elanco could decrease leverage below 3x by 2020.

The agency said an upgrade could also happen if during 2019 the EBITDA margin and cash flow generation steadily improve and leverage, or if the investment strategy of using borrowed money declines as the company successfully launches new products, implements initiatives to reduce costs and makes progress on separating from Lilly without meaningful setbacks.

S&P added that it would revise the outlook to stable if Elanco cannot reduce leverage below 3x over the next two years and fails to achieve the projected profitability improvement in 2019 or faces significant setbacks with new product launches or the separation process.

Fitch Ratings

Fitch said the positive outlook reflects the agency's view that the company will be able to reduce leverage within a reasonable period if it executes on its revenue growth and margin expansion initiatives.

Elanco's rating could be upgraded if the product portfolio becomes less reliant on antibiotics and if the leverage remains below 3x, among other things, according to Fitch.

The agency said there could be a negative ratings action if leverage remains above 3.5x and if there is continued erosion in antibiotic demand without sufficient offsets.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.