Elanco will eliminate around 9% of its workforce in the first wave of restructuring following its purchase of Bayer Animal Health.
Around 900 positions will be cut across nearly 40 countries. While the reductions will primarily target sales and marketing, they will also impact R&D, manufacturing, quality, and back office support.
The company told IHS Markit Animal Health it had around 5,800 employees before the Bayer deal. After acquiring the German firm, its employee base rose to approximately 10,000.
Elanco said these actions will reduce duplication, drive efficiency and optimize its footprint across geographies, particularly in Basel, Switzerland. The company gained its Basel operations through its purchase of Novartis Animal Health.
The firm said it has "quickly evaluated the capabilities, structure and staffing of the combined business" to meet its goal of being a fit-for-purpose global leader dedicated solely to animal health. The job cuts are in addition to Elanco's ongoing productivity agenda, which features consolidation of the company's suppliers and contract manufacturers.
The cost of the proposed actions is forecast to be between $190 million and $210 million. Of this total, around $170 million to $190 million will be related to severance fees, while about $20 million will be for asset impairments and other charges.
Elanco said: "As part of the transaction with Bayer, $35 million was reflected in the purchase price attributable to Elanco's restructuring costs. Cash severance payments will be distributed over the next two years. Elanco expects to incur a restructuring charge of $130 million to $145 million in third-quarter 2020, along with $40 million to $45 million in fourth-quarter 2020. The remaining estimated $20 million will be incurred in 2021."
The company expects to realize at least $100m of annual compensation and benefits savings toward its planned synergy goal of $275 million to $300 million by 2025.
Jeff Simmons, president and chief executive of Elanco, remarked, "The team has rapidly applied our historic integration experience to move with speed and decisiveness and capture initial synergies even during the continued challenges created by the COVID-19 pandemic.
"After our early view of the combined business, we have full confidence in delivering $275 million to $300 million in synergies, with the first two-thirds coming in the first 30 months. While decisions that affect our employees are always difficult, we remain committed to treating affected employees with our guiding value of respect and following all local consultation processes.
"We see the deal rationale coming to life as we bring together our longstanding focus on the veterinarian with Bayer's direct-to-consumer expertise to open new opportunities, particularly given pet owners' increased desire to access care and products via online, retail, telemedicine and direct-to-the-doorstep channels.
"Our team is focused on making the tough decisions that drive value quickly while enabling our innovation and growth strategies. Most importantly, moving so fast in our commercial areas means we now have a larger, stronger team in place supporting customers to enhance our overall commercial competitiveness. Today's proposed actions will ultimately better position us to advocate for our customers and to deliver solutions to their greatest unmet needs."
Elanco has started repayment against the loan that funded the Bayer transaction. On 25 September, Elanco repaid $100 million of the $4.275 billion term loan B.
Todd Young, executive vice president and chief financial officer of Elanco, stated, "With the acquisition closed and working capital needs established, we have sufficient liquidity to begin de-leveraging thanks to strong cash flow in second-quarter 2020. We will continue to repay debt from our operating cash flow in 2021 with a focus on our $500-million note, which is due in August 2021."