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,” said Simmons.
“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.”