1. PRIMA EKUITI INVESTMENT CHALLENGE:
DECHRA PHARMACEUTICALS PLC
(FTSE250)
OCTOBER 4TH 2016
PRIMA EKUITI INVESTMENT CHALLENGE:
DECHRA PHARMACEUTICALS PLC
(FTSE 250)
OCTOBER 4TH
2016
2. TABLE OF CONTENTS
COMPANY BACKGROUND ......................................................................................... 3
LEADERSHIP .................................................................................................................. 3
INVESTMENT THESIS .................................................................................................. 4
MACROECONOMICS DEVELOPMENT AND OUTLOOK........................................ 4, 5
INDUSTRY ANALYSIS.................................................................................................. 5
1. MARKET DRIVERS AND OPPORTUNITIES .................................................. 6,7
2. MARKET RESTRAINTS .................................................................................... 7, 8
3. COMPARATIVE ADVANTAGE........................................................................ 8
4. PEER-TO-PEER ANALYSIS .............................................................................. 9
5. NON-FINANCIAL COMPARISON.................................................................... 10
FINANCIAL STATEMENT ANALYSIS ....................................................................... 11, 12
VALUATION ................................................................................................................... 13
KEY RISKS...................................................................................................................... 14
FINAL RECOMMENDATION ....................................................................................... 14
02
3. Dechra Pharmaceuticals PLC is a global specialistveterinary pharmaceuticalsand related products business.Dechra expertisei n the
development, manufacturing,and sales and marketingof high quality products exclusively for veterinariansworl dwide.Formed in
1997,Dechra has sinceexpanded worldwideand is currently operatingthree major lineof business:EU Pharmaceuticals(DVP EU),
North America Pharmaceuticals (DVP NA) and Dechra PharmaceuticalsManufacturing(DPM).
Total revenue in FY 2016 was £247.6 million,with EBITDA of 19.5 million (7.9%margin).The main stream of income is divided across
five different product categories: Companion Animal Products (CAP), Equine, Food producingAnimal Products (FAP), Diets and
Other. The company has grown revenue at 21.7% over 2015, mostly through the strongperformance of existingbusiness and new
acquisitionsmadein the year.
Chief Executive Officer: Ian Page
Mr. Page has been the Chief Executive Officer and ManagingDirector of Dechra
PharmaceuticalsPLC sinceNovember 2001 and 1998 respectively. He also serves as the
company’s Executive Director in 1997.Prior to Dechra, Mr. Page joined Dechra principal
tradingsubsidiary National Veterinary Services (NVS) sinceitcommenced operations in 1989.
He has played an important rolein developing the Group’s growth strategy. Through various
positions thathe held, Mr. Page has gained extensive knowledge and experience within the
pharmaceutical and veterinary sector.In particular hehas a wealth of experience in delivering
strategy plans successfully and understands howbusiness develops both in UK and globally.Mr.Page also has a broad experien cein
M&A. In October 7 2010,Mr. Page has been appointed as Non-Executive Chairman atSanford DeLand Asset Management.
Chief Financial Officer: Richard Cotton
Followingthe resignation of company CFO Anne-FrancoiseNesmes in July 2016,Richard
Cotton will be appointed as the new CFO by the beginning of January 2017.He will leavehis
position as Group FinanceDirector at ConsortMedical PLC after its interim results in
December. In the interim, Septima Maguire, the Group Financial Controller,will bethe
actingCFO. Mr. Cotton graduated from Kingston University with a BA (Hons) Business
Studies degree in 1984 and became a Chartered Management Accountant. He has extensive
experience senior financial roles in medical sciences and other sectors.Mr. Cotton was
Group FinanceDirector of Vitec Group PLC from 2008 to 2011.He was Group FinanceDirector of Wagon PLC from 2005 to 2008 and
from 2001 to 2005 he held Group FinanceDirector at McLeod Russel PLC. Prior to this he served as PlanningDirector in Alcoa. Inc.
Dechra continues to deliver a strongperformance in financial year 2016 under a solid leadership.Mr.Page has set his personal
objectives with acquiringthree companies (Genera, Brovel and Putney) as well as successfully launching Zycortal in US and European
markets. The company will continueto expand globally in financial year 2017 by makingtheir firstacquisition of Apex Laborato ries
Pty Ltd, a veterinary pharmaceutical company based in Australia.Mr.Cotton will beaddingmore values to the company with hi s
extensive knowledge and experience when he joins theBoard during January 2017.The Board and its Committees areaccessed
annually to help maintain the effectiveness and ensure they remain fit for purpose.
03
COMPANY BACKGROUND
LEADERSHIP
4. We believe that that an investment in this company would yield great returns based on the followingcatalysts:
Multiple Acquisitions (Brovel, Genera, Putney and Apex)
Dechra has made three acquisitions (Genera,Brovel and Putney) throughout financial year 2016,providingcritical valuein
expandingits global footprint.Genera will add four new sales territories includingCroatia,Slovenia,Bosnia-Herzegovina and Serbia
as well as develop a strong presence in emerging vaccinemarket. Brovel will be used as a platform to register and market existing
Dechra’s product and open up significantpenetration into Latin American market. Putney accelerates the North American growth as
it provides directaccess to high quality productrange that complements existingtherapeutic areas as well as addinga robustnew
product pipelineand the expertise to deliver that pipeline.
A deal to acquireApex, a veterinary pharmaceutical company in Australiahas also been ironed out, waitingfor its official
announcement on 14th of October 2016.The pivotal appeal of this acquisition isto gain access to the established and growing
Australian companion animal productmarket and supportexpansion in the Australasian and Asian region.The combined
acquisitionsaresetto bringin higher-than-projected growth rates, our analysis implies a valuation of atleast25.5% increasein
revenue for the next year.
Launch of New Patented Products (Zycortal and Osphos etc.)
Performance with existingNorth America business remains exceptional with revenue growth of 37.9% at CER. IncludingPutney an d
Brovel sinceacquisition itwas 59.5%at CER. This growth has been enhanced by a good performance from Phycox, strong growth and
traction with Osphos and the successful launch of Zycortal in March 2016.Several FAP approved, notably Phenocillin and Solamocta
(for turkeys and ducks) launched in Q4 2016 in Germany and is due to be launched in 17 other territories.New product sales
continue to grow, with 14.4% revenue coming from new products which are either novel, generic or in-licensed.
Significant Low Potential Downsideto Company’s Stock Value
Global animal healthcaremarketcontinues to grow at 5.6% over the lastdecade. The yearly increasefor pet ownership resultto a
higher demand for veterinary products and supplement. Good progress has been made on the integration of the recent acquisitio n
leadingto a £21.7m increasein revenue. Pipelinedelivery is also strengthened through both new internally generated ideas and the
integration of acquired development programmes. Although a degree of uncertainty followingBrexitis anticipated,the busines s is
naturally hedged by its geographical spread and international sourcing.
The global economy is rather bleak with the recent developments around the world from the US interest rate hike to Japan’s
decision to control yield curve of their bond. However, we have highlighted three main economic developments which might
influenceyour investment decision in this company:
First, United Kingdom (UK) has 2 options to work on in terms of trade partnership with the EU upon leavingthem:
i) To usethe Finland model,in which a separatefree trade agreement is formed with the EU with special tariff rates,or
ii) To followtariff rates set by the EU on non-EU countries.
The second option will put UK companies in losingposition if itis dependingon EU market currently. Higher tariff means lower
export from the UK, which in turn lowers the revenue for the companies.This impactwill be lower if UK and EU is ableto form a new
FTA usingFinland model.
Second,the upcoming presidential election in the United States of America (US) on 8th November 2016 is seen to be a huge
determining point for financial world as both presidential candidates offer contrastapproach of economic-flourishing policies as
well as trade policies in the US.
04
INVESTMENT THESIS
MACROECONOMICS DEVELOPMENT AND OUTLOOK
5. Third, the growth for the industry globally is healthy for the pastthree years and projected to be the same in the future.
Table of Animal Health Market Growth for year 2013 to 2021
*CER stands for ConstantExchange Rate.
Source: Dechra Annual Report 2014,2015 and 2016.
The forecasted growth of Animal Health Market from year 2016 to 2021 is conservatively projected to be at 5%.
This segment is to justify our approach of using5%as the forecasted growth rate (at CER).
At a glance:
The animal medicines and vaccines sector is estimated to represent a global market of $30 billion accordingto Vetnosis,a research
and consultingfirmspecializingin global animal health and veterinary medicine. The global animal health market is stimulated by
not only increasingpet ownership and human-animal bond, but there is an increasingneed for higher efficiency livestock
production.The worldwide population is growingand emerging markets’ middle classes arebecomingmore affluent and urba nised.
As income rises,so does the consumption and of animal-rich protein such as meat, eggs and milk.Risingprevalenceof food-borne
diseaseand their transfer to human beings is also propellingthegrowth of the market.
On the other hand, a number of restrictions posed by regulatory authorities have negatively impacted the sales of antibioticswithin
the animal healthcaremarket, thus inhibitingthe market. In addition,soaringcosts and risingregulations on animal testing have
impeded a number of healthcarecompanies from manufacturingnew drugs for animal welfare,thus restrainingthe growth of the
market. A key challengefor the market is the decreasingpopulation of veterinarians,whiletheemergence of new diseases provides
untapped opportunities for the growth of the market for animal healthcare.
This set of factors has resulted in greater demand for food producing animal products (FAP), anti -infective, biologicals (including
vaccines), and pet diets, all of which are products offered by Dechra Pharmaceuticals PLC. Industry sales have grown at a CAGR of
5.6% per year over the last decade, reaching $23.9 billion in 2014. [1] Almost 60% of sales were driven by the production animal
(livestock) segment, with the remainder being driven by the companion animal (pets) segment.
23.00 23.40
30.00 31.50 32.76 34.07
35.43
36.85 38.32
3.6 4.7
7.0
5.0 5.0 5.0 5.0 5.0 5.0
0
5
10
15
20
25
30
35
40
2013A 2014A 2015A 2016F 2017F 2018F 2019F 2020F 2021F
Global Animal HealthMarket
Value ($ Billion) Growth (CER* %)
05
INDUSTRYANALYSIS
6. Beyond the underlyingdemand-drivers,the animal health industry possessesa uniquecombination of characteristicsthat
determines the value-drivers for participants.Key industry characteristicscan begrouped into these valuedriver categories:
Portfolio Advantage& Commercial Excellence
Increasing demand for farm animals & emergence of new diseases
In the Production Animal (livestock) segment, animal health productmanufacturers’end-customers includegeographically
dispersed,but increasingly consolidating,food producers.As human population level rises,animal -based protein is liableto
become more valuable.This,coupled with increasingincomeand changinglifestyleboostdemand for meat, poultry and eggs.
As farms rush to take advantage of these favourablepricingconditions,however, consumers’ susceptibility to animal epidemics
has also been on the rise.In an effort to boost margins,farmanimals areoften crammed into tight quarters that exacerbate the
spread of contagious diseases.Thesepoor conditions createan ideal incubation environmentfor viral and bacterial mutations .
To counter these drawbacks to large-scalecommercial livestock farming,farmers haverelied heavily on feed additives,
pharmaceuticals,and vaccines to keep their farm animals healthy. Companies such as Dechra Pharmaceuticals PLC cater
specifically to those needs.
Reliance on mergers and acquisitions (M&A) as business model
Animal health productmanufacturers’commercial strategies have primarily focused on directsales (includingcustomer
loyalty/brandinginitiatives),given the traditional key roleof vets in purchase decisions and theabsence of significantthird-party
payer influence.M&A strategies have helped animal health productmanufacturers achievethe economies of scaleand scope
needed to support largedirectsales forces servingmarkets that arefragmented by geography and species.Scaleeconomies in
commercial area key value-driver in this industry,spurringM&Aactivity.Scaleeconomies enablefirms to afford the R&D
spendingand subsequently produce better products and gain higher profits.
Increase in Pet Ownership
Companion Animals arethe primary dispensers of animal health products.Pet owners’ willingness in providingveterinary care,
supplements and alternativetreatment options resulted in pets livinglonger and healthier.Over the pastfew years,pet
ownership in the Asia-Pacific region has been increasingwith significantrates mainly dueto the increasein disposableincomes
and changinglifestyles.This has spurred the market for various pet healthcareproducts and services in this partof the wor ld. In
Europe, high emotional values regardingpet animals,resulted in increasingpetownership. The market therefore is driven by
the demand generating from the needs need to keep the pets healthy and happy.
Source: Euromonitor International
0
50
100
150
200
2011 2012 2013 2014 2015 2016
Expenditure onPet Care Products (USD per pet)
Asia Pacific –China Australasia- Australia
Europe – United Kingdom Latin America - Brazil
MiddleEast and Africa – South Africa North America - USA
06
MARKET DRIVERS AND OPPORTUNITIES
7. Innovation
Shorter development time and lower investment requirements.
Innovation for New Chemical Entities is a key growth-driver for the animal health industry.NCE approvals requireinvestmentin
Research and Development (R&D) to be made. Fortunately, R&D cycletime is,in general, far shorter in the animal health
industry than in human health: as littleas 3 years for vaccines and 7-10 years for other drugs, versus 10-15 years.Accordingto
estimates by PwC research, R&D investments in animal health industry is lower ($100 million) compared to human health
industry (an estimated $1.4 billion).Generally,R&D in the animal health industry requires shorter development time and lower
investment requirements.
Incentives by governments and International Organisations (IO)
Incentives by governments and IOs such as fee reduction for scientific adviceand relaxation of legal procedures regardingR&D
by European Union members encourage many firms to remain competitive and prominent by undertaking Research and
Development.
However, although innovation remains imperative,some leadingveterinary pharmaceutical companies’productportfolios aremor e
than 15 years signalling to strongmarket presence and effective branding.Dechra Pharmaceuticals PLC continues to enjoy strong
market positions in a number of our key therapeutic sectors such as endocrinology,dermatology, anaesthesia and analgesics,a nd
equine medicine.
Competitive Forces
Leading animal health productmanufacturers have traditionally experienced few major threats from new entrants, generics focused
companies,or non-pharmaceutical companies.Thereare two key reasons for animal health productmanufacturers’relative
insulation:
Large commercial organisations.
It is difficultfor companies to replicateanimal health leaders’economies of scale,particularly sinceanimal health gross margins
tend to be low, especially in theProduction Animal segment. This type of challengemay have been one reason that some
players haveexited the generic animal health productmarket, e.g., Teva sold its generic business to Bayer in 2013. However,
Dechra Pharmaceuticals PLC remains competitive by producinghighly solubleand stableproducts such as Solustab® , making
them the specialistand preferred partner through the provision of a widerange of high quality products as well as technical
knowledge and professional support.
Increased generic competition
The combination of regulatory changes that promote generics and distribution channel shiftshas resulted in increased
competition from generics and over-the-counter (OTC) products.Furthermore, some leadinganimal health product
manufacturers have launched branded generics, further increasingcompetitiveintensity.
Barriers to entry
In the human health industry,generic players areincentivized to participatein the industry becauseof legislation thatgives 180
days of exclusivity to companies who successfully challengebranded drug patents[3]. There are no equivalentfinancial
incentives in the animal health space.Barriers to entry such as these help to explain why generics accountfor justunder 10% of
dispensed animal health drugs.This allows companies with largemarket presence, including DechraPharmaceutical PLC to
maintain their products portfolio.
Impact of regulation
Use of antibiotics
Accordingto a September 2014 European Commission memo [4], the new rules ban “the useof medicated feed as a
preventative measure or as a growth promoter”, and establish “an E.U. residue limitfor veterinary medicines in ordinary feed”.
The theme of modifyingproduction animal feeds is echoed in the U.S., where the Food & Drug Administration (FDA) has
proposed limits on feed and water antibioticsin production animals.By the end of 2016,it is anticipated thatfarmers will notbe
permitted to use medically importantantibioticsfor growth or performance.
07
MARKET RESTRAINTS
8. Single tier label claims
In July 2015,the U.S. Animal and PlantHealth Inspection Service[5] amended guidanceon product labels.Previously,labels
could claimany of four levels of effectiveness; now, only a singleclaimmay be used. The change could mean that companies
who previously relied on claimamendments as partof lifecyclemanagement may need to think of alternativestrategies.
Scarcity of arable land and water
Widespread degradation and deepening scarcity of land and water resources have placed a number of key food production systems
around the world atrisk,hence creatinga roadblock in the way of providingresources for animal health.This factor is restrainingthe
growth of the market, especially in thedeveloping countries of Asia becauseit results in less resources availablefor anima l farming
and husbandry.Production of animals in many some developingeconomies is low, which may limitthe market for animal healthca re
products and services.
[1] Vetnosis, AH Industry Global MarketReview 2015.
[2] Mordor Intelligence,Global Veterinary HealthcareMarket, June 2016
[3]PWC, Animal Health Strategy Playbook,August 2015
[4] Source: Federal Register, European Commission Press ReleaseDatabase
[5] Source: Federal Register, European Commission Press ReleaseDatabase
DechraPharmaceuticals Manufacturing (DPM)
Dechra has fivemanufacturingsites that produces majority of their pharmaceuticals productfor third parties on a contract b asis.
The acquisition of Genera has allowed Dechra to gain access into vaccines production facility in a lowcostenvironment in Croatia.
This acquisition represents an attractiveentry strategy to the fastgrowing poultry vaccines market,which was valued at $1.3 billion
in 2013 and is projected to grow at CAGR of 7.8% until 2020.Although the clear focus of DPM is on Group manufacturing,sites in
Skipton, Bladel and Zagreb also utilisetheir installed capacity and generate income through third party manufacturing.
InternationalFootprint
Dechra competes in the two largestanimal health markets with 72.8% of revenue from Europe, 21.8% in North America and 5.4 %
from the rest of the world.Eastern Europe is growingrapidly dueto the risein demand for meat, in particular poultry.Dechra is on
track to expand globally by completingtwo acquisitions in 2016 financial year thatgranted access acrossLatin America and Eastern
Europe. The acquisition of Apex duringOctober will open up to the established and growingAustralian companion animal market
which has c.4.2 million dogs and c.3.3million cats.Itwill also offer a basefrom which to support and build Dechra’s expansion in the
Australasian and Asian regions.
Offers Drugs that cure Endocrine-related diseases
Dechra’s nichearea includes endocrinology drugs,which many of their competitors have not ventured into.This gives them
significantaccessto this segment of the market. Most of the diseases in this in this trancheareunderdiagnosed,which crea tes
ample opportunity for Dechra to dominate this segment. Diseases such as Addison’sdiseasearenot quite complex and niche, which
makes it hard for other companies to followsuit.In addition to that, other drugs produced by Dechra have already catered to
multiplediseases within this tranche,which places the company at a better position relativeto its closestcompetitors.
Initial Views on Brexit
The decision by UK to leave the European Union has caused volatility and uncertainty to risein the market. The business is
internationally hedged and diversified,which helps in a period of volatility.In casethe European economy slowdown substan tially,
Dechra’s international expansion over the lastfew years could help supportthe growth. In terms of product manufacturingand
registration,Dechra is accustomed to tradingwith foreign countries with different rules and regulations.The distribution model can
adaptto changes in tariffs and duties.A significantdownturn in the UK economy may impinge growth rate, however there will not
be any material effect on the Group and the material contracts can berenegotiated over time as needed.
COMPARATIVE ADVANTAGE
08
9. Vetoquinol Virbac S. A. Genus PLC Dechra Pharma PLC
Listed on Paris Stock Exchange Paris Stock Exchange London Stock Exchange London Stock Exchange
Financial Year Ending 31 December 2015 31 December 2015 30 June 2016 30 June 2016
Debt/ Equity Ratio 0.0975 1.49 0.3303 0.56
ROE (%) 8.69 6.03 14.39 4.52
ROCE (%) 11.77 28.42 14.17 16.1
OperatingMargin (%) 10.99 6.59 14.25 5.87
Current Ratio 3.02 1.52 2.22 2.45
EPS 2.04 cents 1.12 cents 56.80 pence 42.95 pence
Dividend Yield (%) 0.93 - 1.28 1.34
P/E ratio 20.65 47.62 25.12 32.01
Justification of Debt/ Equity Ratio (D/E Ratio)
This ratio gives us a picture of how highly the company is leveraged. A higher D/E ratio increases therisk of a company as c hanges in
profitwill not causeany changes in the debt interest payment. Duringa period of low profit, higher proportion of the profitwill be
used for debenture holders’and loan providers’interestfirst,causingdividend pay-outfor investors to fall.Dechra Pharmaceutical
PLC has leveraged on a huge amount of debt to facilitateits acquisition process in financial year 2016,increasingits D/Eratio from
0.17 in financial year 2015 to 0.56 in financial year 2016.Lookingback to its ability to make sure its balancesheet is hea lth,(for
instancefrom 2012 to 2015 where it managed to reduce its D/E ratio from 0.74 to 0.17), we are confident that Dechra will not
shortfall to repay its debt obligations.Furthermore, as Dechra is immune to fallingprofits (asjustified in other parts of this research
report), the high D/E ratio will notbe an issuefor investors in terms of dividend pay-out volatility.Payments of debt are scheduled
as per annual report.
Justification of Return on Equity (ROE) and Return on Capital Employed (ROCE)
A lowreturn on equity and return on capital employed as compared to its peers is seen due to Dechra’s change in business mod el,in
which most of the acquisitionsmadebetween 2015 and 2016 have not realised profitfully.
Justification on Operating Margin
As compared to its peers, Dechra has a relatively lowoperating margin.However, we are confident that this margin will improve
significantly based on all thejustificationswehave made in this research report. Dechra’s acquisitionswill improvethis margin
significantly too.With the increasein sales in specialised products coupled with newly produced drugs such as Zycortal and Osphos,
we believe that operatingmargins will improvein the coming years.
Justification on Current Ratio, Earnings per Shareand Dividend Yield
Dechra’s current ratio,earnings per shareand dividend yield aresignificantly athealthy level as compared to its peers.
Justification on Price/Earnings Ratio (P/E Ratio)
Whilefinancial marketportals provides an industrial comparison of P/E ratio,we believe that this is not a fair ratio to be used for
justification of whether a stock priceis worth buyingas animal health market is a nichemarket and comparison is usually ma de
between pharmaceutical companies.As for the four companies above, a direct comparison between them is not fair for the
followingreason:
Vetoquinol and Virbac S. A. are listed on Paris Stock Exchangeand hence a different investor behaviour could be exhibited
in terms of interpreting the P/E ratios.
Although Genus PLC is the closestcompany similar to Dechra’s business industry,they are not direct competitors to each
other as Dechra specialises in vetmedicines while Genus PLC specialises in animal genetics market
PEER-TO-PEER ANALYSIS
09
10.
Company Name Dechra Pharmaceuticals Genus Plc Virbac S.A Vetoquinol
Signature
Product(s)
Zycortal
Treats Addison’s Disease,
an under diagnosed
diseasewith complex and
confusingsymptoms.
Osphos
Control clinical signs
associated with bone
resorptiveprocesses.
Vetoryl
Treating Cushing’s Disease,
which is also highly niche
Felmazole
Stabilisinghyperthyroidism
in cats prior to surgical
thyroidectomy.
Genetically superior
boars and sows that
produce offspringwith
desirable
characteristics,such as
feed-efficient growth or
leaner meat.
Bull semen, which is
delivered through
artificial insemination to
improve the customers’
herds and their
efficiency.Genus PLC
also offer genetically
superior embryos
through their subsidiary
IVB.
Focused on R&D, to
improve genetic control
and product
differentiation.
Markets huge spectrum
of products, with more
emphasis on parasiticide
products.
Successful launch of
parasiticideproducts in
Europe (Milpro; 3rd place
in internal parasiticide
Europe market) and in
Mediterranean basin
(Effitix).
Successfully launched
Defensin Technology,
which stimulates the
body’s own production
on anti-microbial
peptides. (better
dermatology presence)
Reference products
(not generic drugs)
Anti-infective, pain-
inflammation,
behaviour.
Flexadin
To supportjointhealth
of dogs/cats
Zylkene
To help dogs/cats cope
with unfamiliar
situations such as
fireworks.
.
Global Footprint
*According to
revenue
Europe (72.8%)
North America (21.8%)
Rest of world (5.4%)
North America (46%*)
Latin America (15%*)
Europe (29%*)
Asia (10%*)
Americas (32.7%)
Europe (51.8%)
Asia Pacific(15.4%)
North America
(15.83%*)
Latin America
(17.82%*)
Europe (38.45%*)
Asia (14.30%*)
Africa & MiddleEast
(3.63%*)
Pacific (9.97%*)
Competitive
Advantage
Has a significantadvantage
in endocrine diseases,
which is not tapped into by
other competitors
Has a huge presence in
Balkan countries,which
improves demand in FAP
products.
Has access to the lucrative
poultry vaccinemarket in
which many of other
competitors are not.
Differentiated animal
genetics.
Long-lastingcustomer
relationship.
Has an R&D segment,
which will drivegrowth
for this business in the
future.
Gene-editing business is
seeing major increase
with improvements in
R&D.
Has a largeglobal
footprint coupled with
major partnerships with
companies all around the
world particularly in
Europe.
Has multipleproduction
sites in countries that
Dechra is juststartingto
penetrate.
Has multiple
partnerships with labs
and companies around
the world.
Production sites in 11
countries,providing
Virbac S. A. A
comprehensive supply
chain.
Huge footprint in
emerging countries
such as India and China.
Has a largemarket
sharein FAP products
as well particularly in
ruminantproducts.
NON-FINANCIAL COMPARISON
10
11. Based on the analysisabove,itis clear thatDechra’s global footprintmay not be as huge as its competitors.Other competitors such
as Vetoquinol, have presence in India and also China,which can beseen as a disadvantageto Dechra in terms of tappinginto the
wider market. This may be one of the reasons why Dechra’s costof production is higher as itis not ableto fully utiliseits economies
of scale.Other competitors may also havea significantadvantageover Dechra Pharmaceuticalsin terms of FAP. Dechra may also
loseout in a few market segments such as anti-effective drugs, pain inflammation drugs and also parasiticide. However, this is
compensated by Dechra’s recent acquisitionsin key areas that arefundamental to drivegrowth in the company. Its recent
geographical expansion in Mexico and also Croatia signifies thecompanies ’efforts to move into unexplored markets and increase
sales in these regions.The move will contributesignificantly to Dechra’s supply chain and market shareglobally.
Dechra’s specialisation in drugs created to cure endocrinediseases and also dermatology rel ated diseases easily compensate its lack
of investments in certain drugs said above.This is due to the fact that the drugs that Dechra usually caters to areunderdia gnosed,
which translates to lower market participation by other companies.This allows the company to garner larger profi ts fromthis
segment of the market. Drugs such as Zycortal and Osphos has shown significantincreasein demand sinceits releaseearlier this
year and has contributed tremendously to total revenue. Its recent acquisition of Genera and also Brovel will also allowthe company
to utiliseits supply chain to penetrate the FAP market within the respective countries and further improve this area of the business.
This is due to the fact that demand for FAPs are relatively higher in these countries.Its recent acquisition of Apex Laboratories in
Australia will also allowDechra to access a wider range of customers particularly to customers whose demand largely consists of CAP
products.The acquisition will also bolster its R&D segment and boost sales in thecoming year.
Assumptions:
Revenue growth follows analystexpectation for year 2017 and 2018.Consecutive years’ growths areset conservatively at
decreasingrates.This is justified given the expected growth of the market and also the organic growth from the business
based on pastperformance.
COGS as a % of sales arecapped at 48% and is assumed to be lower in the coming years,to be consistentwith our
conservativeapproach of valuation.
Amortisation and Depreciation as a % of sales followspasttrends which is at9%.
Tax rate follows 20%consistentwith the UK corporate tax rate.
No new shares will beissued in the comingyears.
No new longterm debt will beissued in the comingyears except for 2017, due to the acquisiti on of Apex Laboratories in
Australia.
FINANCIAL STATEMENT ANALYSIS
11
13. Assumptions:
Risk free rate is taken from the yield of the UK 5-Year Giltdated 17th November 2016.
Risk premium is based on the FTSE All stocks market return in the 5 years.
Beta of the company is based on the 1 year Beta produced by the Financial Times.
Cost of Equity is arrived through usingthe formula of Capital AssetPricingModel.
Cost of Debt is based on the current interest rate incurred by the company plus LIBOR rate as of 30th September 2016.
Figure is calculated in UK£ thousands
VALUATION
13
14. Followed with the newly made acquisitions,thetop risk factors include:
Emergence of veterinary buying groups, corporatecustomers and internet pharmacies
Dechra sells and markets their products mainly to veterinary practices and distributethrough wholesaler and distributor networks in
most markets. To consolidatethe purchase,veterinarians areestablishingbuyinggroups in mature markets. The risingnumber of
buyinggroups and corporate customers represents an opportunity to driveup sales volumebut this may costa decreased margin .
Relationshipsand reputation with veterinary practices could benegatively impact. Equitablepricingis created for each customer
group to help support veterinarians in retainingcustomers.
Integration is more challenging than expected (deliver lower returns)
Failureto identify suitableacquisition candidates and securinga successful approach could slowdown growth and expansion into
new markets. Acquired business may deliver lower profitmargins due to over-valuation or resultin intangibleassets impairment.
The Board reviews the integration progress regularly and screens acquisition targets.
Unable to meet regulatory requirements
Products manufacturingareconducted in highly regulated environment and failureto adhere to regulatory standards will impact
Dechra’s ability to register or even manufacture their products. Delay in regulatory approvals could also setback product launch
time and directly affects sales and margins.Regulatory and legal teams are kept updated to ensure that new acquisitionsmeet
regulatory quality and standards.Aresponse team will becreated in cases where changes can impactthe power to market and sell
any of the products.
Continuous pressureon reducing antibiotic use
Antibacterial resistancehas been identified to transfer from food producinganimalsto human. Government in some countries has
started regulatingthe use of antibiotic in food producinganimals.This directly impactthe revenue gained from antimicrobia l
product range. Comprehensive understandingof regulatory changes is maintained to ensure a good reputation within the market.
We suggest that Prima Ekuiti go long on this investment given to huge potential upsideof the company’s shareprice.The nature of
the industry Dechra is operatingin is growingat an exceptional rate, with the increasingpetownership and the growing demand for
high quality m eat and sources of protein. Given the specialised stateof the industry,itcreates an incentive to for companies to
continuously innovateand create products that add the most value to consumers. We think that the increasingpercentage of
Dechra’s focus on the CAP without foregoing its market sharein the FAP market, creates a well balanced portfolio for the company
and insulates itself fromany downsidein either the 2 markets. In addition,many competitors are justfocusingon the FAP or CAP
market, which is in contrastwith the business model Dechra is strivingfor atthe moment. This creates more opportunity for Dechra
and improve revenues in the future. This coupled with the fact that the industry is relatively immuneto financial marketshocks due
to the factthat the demand for pet well-being would still bethere regardless.With the current sharepriceof the company at £13.85
(as of 30th September 2016),we believe that shareprices could increaseto £17.38 in the coming year, a 25.5% increasein sh are
prices due to recent acquisitions thatwill add significantvalueto the company coupled with the releaseof new products. This
invigorates our opinion on this company. Given our very conservativeapproach in valuingthecompany’s shareprice, we believ e that
Dechra Pharmaceuticals will bean excellent investment.
KEY RISKS
FINAL RECOMMENDATIONS
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