Elanco outlook revised to positive by S&P Global on reduced leverage

Investing.com -- S&P Global Ratings has revised its outlook for Elanco Animal Health (NYSE:ELAN) Inc. from stable to positive, citing reduced leverage and strong revenue growth potential. The company ended 2024 with net leverage of less than 4.5x, a level S&P Global Ratings views as consistent with a higher rating. This was achieved through the use of proceeds from a divestiture to pay down its debt.

Despite Elanco’s limited history of maintaining lower leverage and a forecast of declining EBITDA in 2025 due to elevated product launch costs, S&P Global Ratings believes there is a one-in-three chance of raising its ratings on the company in the next 12 months if it continues to keep its leverage below 4.5x. This outlook takes into account the risks associated with its new product launches and ongoing macroeconomic uncertainty.

Elanco’s long-term issuer credit rating was affirmed at ’BB-’, while its issue-level rating on its revolver and term loan B was affirmed at ’BB’, and its issue-level rating on its unsecured notes at ’B+’.

After Elanco divested its aqua business, it paid down more than $1 billion of its gross debt, reducing its annual interest expense by about $65 million and ending 2024 with S&P Global Ratings-adjusted leverage of 4.2x. Despite the loss of about $165 million in annual revenue from the divestiture, the company is viewed as strengthening its business.

Elanco has recently launched Bovaer for methane reduction in dairy cattle, Zenrelia for canine dermatology, and Credelio Quattro for canine parasites. These innovative product launches are expected to support increasing revenue and higher margins, enabling the company to further reduce its leverage.

However, the rating on Elanco is currently limited by the execution risk associated with its new products and its limited history of maintaining lower leverage. The company has guided for a decline in its EBITDA in 2025 due to elevated product launch costs, foreign-exchange headwinds, and the divestiture of the aqua business.

Elanco has a global sales and manufacturing footprint, which is expected to help it deal with effects of tariffs and trade protectionism. The company has manufacturing facilities in mainland China, Taiwan, and Mexico, which could mitigate the impact of increased trade protectionism on its costs over an extended timeline.

The rating on Elanco continues to reflect its position as one of the leading companies in the animal health market, with solid long-term growth potential. The company’s revenue is split nearly evenly between its farm animal and companion animal businesses, and further diversified by product and geography. Elanco’s top five products accounted for about 36% of its 2024 revenue.

S&P Global Ratings could revise its outlook on Elanco to stable if it expects the company will sustain leverage of more than 4.5x. Similarly, the outlook could also be revised to stable if Elanco engages in any significant debt-funded mergers or acquisitions. The rating on Elanco could be raised if it is expected to sustain S&P Global Ratings-adjusted debt to EBITDA of less than 4.5x.

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