What’s Next For Elanco Stock After Its Recent 20% Drop?

ELAN: Elanco Animal Health logo
ELAN
Elanco Animal Health

The stock price of Elanco (NYSE: ELAN), an animal health products company, saw a 20% fall on Thursday, June 27, after the company announced a delay in expected approval of two drugs. In comparison, Merck stock (NYSE: MRK), which also has an animal health business, was down 1%. Elanco’s Zenrelia – a drug targeting inflammatory conditions in dogs – is now expected to secure the regulatory approval in Q3, and its parasiticide – Ceredelio Quattro – in Q4 of this year. This marks a delay of one quarter for both the drugs. Furthermore, Zenrelia will likely include a safety warning label on its box. Despite these developments, the company’s management stated that they are on track to deliver sales of $600 million to $700 million from their new products by 2025. Also, they raised the 2024 outlook for new products to now garner $400 million to $450 million in sales, compared to its prior guidance of $375 million to $410 million. [1]

Still, the revised outlook couldn’t offset the investor concerns over Zenrelia, as a warning label may result in a slower adoption rate for the drug. After its recent 20% fall, ELAN stock is now down 5% this year. Looking at a slightly longer term, ELAN stock has suffered a sharp decline of 50% from levels of $30 in early January 2021 to around $15 now, vs. an increase of about 45% for the S&P 500 over this period. Notably, ELAN stock has underperformed the broader market in each of the last three years. Returns for the stock were -7% in 2021, -57% in 2022, and 22% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that ELAN underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ELAN face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think ELAN stock is attractive, and it will likely see higher levels over time. At its current levels of $14, ELAN stock trades at 1.6x revenues, versus a 2x average P/S ratio seen over the last three years. This implies that ELAN stock has potential of over 25% gains to levels of $18, if the stock rebounds to its historical valuation multiple.

While ELAN stock appears to have room for growth, it is helpful to see how Elanco’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 ELAN Return -19% -4% -55%
 S&P 500 Return 4% 15% 145%
 Trefis Reinforced Value Portfolio 3% 7% 658%

[1] Returns as of 6/28/2024
[2] Cumulative total returns since the end of 2016

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Notes:
  1. Elanco’s Press Release, June 27, 2024 []