CFA RESEARCH CHALLENGE

BUTLER UNIVERSITY
ELAN.NYSE
S TOCK ANAL YS I S
ELAN.NYSE Stock Price
SELL
$8.05 / SHARE
42% DOWNSIDE
 Headquartered in
Indianapolis, Indiana

Pet and Farm Animal

Health and Technology

Notable Brands :
Seresto, Advantix,
Rumensin

ELAN Annual Report

ELANCO ANIMAL HEALTH, INC.

 2018 2019 2019 2019 2021
Bayer Animal Kindred
Spin-Off From Prevtec Aratana Biosciences
Health
Eli Lilly Acquisition Acquisition Acquisition
Acquisition

ELAN Annual Report

ELAN KEY EVENTS

 Targets Sustainability

19th in Fortune's "Change

the World" List 2019

East Africa Growth

Accelerator (EAGA)
Program

ENVIRONMENTAL, SOCIAL, GOVERNANCE

Most Common Skills and Experiences
Business Leadership and Operations
Public Company Board Experience
Finance and Accounting

Least Common Skills and Experiences

Research and Development/Innovation
Legal, Public Policy, and Regulatory
Digital, Technology, and Cybersecurity

CORPORATE GOVERNANCE
2021 Segment Revenue 2019 Geographic Revenue

ELAN Annual Report

ELANCO ANIMAL HEALTH

 Animal Health Biotechnology
US Pet Ownership
Statista

2021 Segmented
Revenue Select Consumer
IBIS World
Spending
Statista

INDUSTRY OVERVIEW
 27.28% Market Share 7.26% of Market Share
IBISWorld IBISWorld

29.38% Profit Margin (as 13.47% Profit Margin (as

of 2021) of 2021)
IBISWorld IBISWorld

INDUSTRY COMPETITORS
 WHY SELL?
1 OPERATIONAL FAILURES AT PEAK PET
OWNERSHIP RESULT IN NET LOSSES

2
HEAVILY LEVERAGED IN A HARSH
INTEREST RATE ENVIRONMENT

RESEARCH & DEVELOPMENT PIPELINE

3
IS NOT CAPABLE OF DRIVING GROWTH
1: OPERATIONAL FAILURES
 ELAN Fails to Generate Income in Strong
Consumer Market

Net Income Generated Twice US Pet Ownership at Record High

Team Analysis Statista

1: Operational Failures
No Forecasted Net Income (2022-2026)

No reasons to expect net

loss trend to change

Has established product

line and multi-decade life

Inaccurate to value as a
startup

Team Analysis

1: Operational Failures
2: HEAVILY LEVERAGED
 Increasing Interest Rates & Floating Rate
Debt Spell Disaster

Team Analysis Interest Coverage Ratio (avg. 0.63x 2022E-2026E)

2: Heavily Leveraged
 Total Debt Overview

ELAN Debt Schedule

Significantly more levered
than industry average

Majority is floating rate

Most Significant : $4.275B

Expensive interest payments

divert cash flow from income-
Bloomberg
generating opportunities

2: 2:
Heavily Leveraged
Heavily Leveraged
3: UNINSPIRING PIPELINE
 Not Enough Blockbuster Drugs for Optimism
U.S. Regulatory Exploratory Product Initial
Asset Agency Species Research Development Development Submission Approval

Zorbium
FDA (Rx)
Pain
Advantage XD EPA (OTC) Advantage XD Cat
OTC Flea Advantage XD Dog H2 2023
Bexacat FDA (Rx)
SGLT-2 Diabetes Q4 2022

KIND-030 USDA (Rx)

By Q1 2023
Parvovirus
Broad-Spectrum FDA (Rx)
H1 2024
Parasiticide
JAK Inhibitor FDA (Rx) H1 2024
Q4 2022

USDA (Rx) H1 2024

IL-31 SA H1 2023 8

ELAN Annual Report

KIND-030 and Broad Spectrum Parasiticide are significant growth opportunities but not enough

3: Uninspiring Pipleline
Pipeline
 New Target Optimistic New Target Pessimistic New Target
Neutral Case
Price Case Price Case Price

Bexacat - Peak
50% $8.20 90% $8.38 25% $8.10
R&D Breakdown
Sales Captured

Zorbium - Peak
50% $8.27 90% $8.54 25% $8.12
One drug won't fix the
Sales Captured

Advantage XD -
problem
Peak Sales 50% $8.20 90% $8.38 25% $8.10
Captured
Needs multiple major
drug wins to justify
KIND-030 - Peak
50% $8.36 90% $8.73 25% $8.15
Sales Captured

Broad Spectrum stock's current level

Parasiticide -
50% $8.51 90% $9.06 25% $8.20
Peak Sales
Captured Pipeline is unable to
JAK Inhibitor -
Peak Sales 50% $8.51 90% $9.06 25% $8.20
provide required short-
Captured
term relief
IL-31 SA Antibody 50% $8.51 90% $9.06 25% $8.20

Team Analysis

3: Uninspiring Pipleline
Pipeline
VALUATION & INVESTMENT RISKS
 Weighted Average Cost of Capital (WACC)
Assumption Rate Methodology
WACC 8.73%
Risk Free Rate 5.50% 10 Year US Treasury

Equity Risk Premium 5.78% Risk Free Rate(5.5%) * Beta*(1.05)

Tax Rate 8.00% ELAN FY22 Effective Tax Rate
Cost of Debt 7.20% BB Rated Bond Yield
Cost of Equity 11.28% Risk Free Rate + Equity Risk Premium
Covariance of Weekly ELAN & SPY Returns
Beta 1.05x
/ Variance of SPY Returns
Market Cap($4.5B) / Market Cap + Long-
Weight of Equity 45.24%
Term Debt($9.95B)
Long-Term Debt($5.448B) / Market Cap +
Weight of Debt 54.75%
Long-Term Debt($9.95B)
Team Analysis

3: Uninspiring
Valuation
Pipeline
 DCF model estimates a target price of $8.05,
a 42% downside to the closing price of $13.87

Team Analysis

3: Uninspiring
Valuation
Pipeline
 Primary Investment
Risks
Slowdown in Global
Consumption (MR1)

Worsening of Company
Indebtedness (FR1)

Team Analysis

3: Uninspiring
Investment Pipeline
Risks
These Factors Could Contribute to a Significant
Slowdown in Consumer Spending
Real GDP Growth (%) Slowing
Federal Reserve Bank of St. Louis

Real GDP Growth (%)

High Inflation affects

Consumer Spending Power
Federal Reserve Bank of Cleveland

Consumer Price Index (YoY %Change)

Investment
Investment 3:
Risks:
Risk:Uninspiring
Slowdown
Slowdown Pipeline
in in Consumption
Consumer Spending
 Little Reason for Optimism Regarding the
Company's Cash Flow Situation
BB Corporate Bond Yield

Difficult Interest Rate Environment for

Limited FCF for debt Fundraising
Federal Reserve of St. Louis
servicing and investing
Team Analysis
Investment
3: Risks:
Investment Uninspiring
Company
Pipeline
Risk: Company Indebtedness
Indebtedness
 Recommendation
Operational Failures
SELL
Heavily Leveraged & Harsh Interest
Rate Environment Target Price

$8.05
Uninspiring R&D Pipeline
42% Downside

RECOMMENDATION SUMMARY
 Q4 2022 Earnings
Net Loss: $54 million
Team projection: $20 million
Share price has fallen 32% since
publication of team analysis on February
3, 2023
Company's results and stock price
movement to date align with team's
recommendation

MARKET UPDATE
 THANK YOU!

BUTLER UNIVERSITY
ELAN.NYSE
S TOCK ANAL YS I S