With high shareholder discontent and poor performance relative to peers, $8.4 billion market cap company Elanco Animal Health is vulnerable to shareholder activism.

Elanco was spun off from pharmaceutical giant Eli Lilly in August 2018. Since then, the stock has lost 37%. Its former parent gained 43% during the same time, while closest peer Zoetis surged by 53%.

Elanco started trading down after the initial public offering and accelerated when the firm announced a $7.6 billion deal to purchase Bayer’s animal health unit last August. The mid-March coronavirus selloff worsened things substantially, with a muted recovery. The cash and stock transaction, expected to be completed in mid-2020, will make Bayer a significant shareholder in the combined company and be financed through the issuance of new debt and equity.

The expected dilution and leverage increase has likely made investors wary of holding Elanco stock. As a result, shares appear undervalued on certain ratios. Elanco trades at a price-to-sales ratio of 8.2 compared with Zoetis’ 32, according to Activist Insight Vulnerability. This is due to Elanco’s extremely poor profitability and weak free cash flow generation. Elanco has gross margins of 50%, compared with 70% for Zoetis. Meanwhile, Zoetis generates more than $1 billion in free cash annually, while Elanco produces just below $100 million, despite Zoetis having only twice as much revenue.

In part, this underperformance is due to the product mix. Elanco currently makes around two-thirds of revenues from food animal health products and the rest from companion animal (pet) products. With the Bayer acquisition, Elanco wants to balance the two, with pets offering higher growth prospects.

Yet investor confidence appears weak. Food animal ruminants & swine, the largest revenue driver of the company’s four units, has experienced two consecutive years of falling income, and could continue to drag the overall growth rate down.

An activist investor could see multiple avenues for value creation. It can push management to come up with an aggressive plan to improve margins by cutting costs and through the sale of non-performing assets. In light of the Bayer acquisition, Elanco might be better off getting rid of the ruminants and swine unit to pay down debt, and become a company focused more on pet products. If the firm reaches the same margins as Zoetis, its stock price could triple. At the same time, given the disruption in global markets, Elanco could renegotiate the acquisition price with Bayer.

Corporate governance hooks for an activist are plentiful. It is extremely rare for large companies to have such a high rate of discontent among its shareholders. At the May 21 annual meeting, the three directors up for re-election received around 40% of votes cast against their re-election. In 2019, Chairman David Hoover got 46% opposition. He remains at the helm of the board.

The company also has a staggered board, no majority standard in uncontested elections, and requires a supermajority vote to amend charters. An activist investor willing to mount a challenge to the board will have to wait until next year, as the firm does not provide the right to call special meetings. The nomination deadline closes on February 20, 2021.