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The Performance Of Dechra In Veterinary Markets Finance Essay

The main aim of this report is to assess the veterinary markets where Dechra exists, and see their present position thus assessing their performance in comparison to Concateno that belongs to an entirely different sector. The objective will be to compare the key ratios of the two companies, and assess their performance based on the market environment forces that are unique to them.

The comparison is done with reference to the consolidated account statement of the two companies, but it should be noted that they have different year end dates. Dechra has a year end of June 2008, while Concateno is based on the financial statements for the year ended December 2007. In this assessment, I will assume they both have a similar year end of June 2008.

1.0 VETERINARY HEALTHCARE AND SERVICE MARKET

GLOBAL VIEW:

The veterinary healthcare industry has a very important role in catering for the health and productivity of the 16 million poultry and 3.3 billion livestock globally. This industry also maintains the well-being and health of the 1 billion companion animals worldwide (Evans & Chapple, 2002). The companion animal market alone was worth £33.7billion globally as at 2006 and the UK market was worth 2.6 billion (7.7% of the global market share).

The animal healthcare market (the main classes that comprise the market is shown in the graph) had a value of $11.050 billion as at 2001, and it was growing at a rate of 0.2% over the previous years. Varying issues has seen the animal health market perform poorly in terms of growth, and it is only one sector that has shown improved performance in terms of growth: companion animals. The market for companion animals has experienced improved annual growth (6.6% per annum). The companion market in this instance encompasses pets like dogs, cats, and horses e.t.c. (Evans & Chapple, 2002)

FIG1: Graph showing growth of the animal healthcare market; there is an improvement in growth for the companion animals, while the food animal sector experiences a decrease in growth rate. Source: (Evans & Chapple, 2002).

The growth of the companion animal market can be attributed to different factors, and they include: continuous growth in the economy of the developed countries during the 1990’s, improved time to market for companion animal products, lower cost, novel technologies, and the growing humanisation of companion animals (Mintel Oxygen, 2007).

The recent recession did not affect this market adversely as compared to other markets; majority of owners place their animals on a high priority level, thus there is a reluctance to reduce expenditure on their pets (dogs, cats and horse e.t.c) (Mintel Oxygen, 2007) hence a key factor for growth is the willingness of the owners to spend more on veterinary products and services for companion animals. Veterinary Products for companion animals currently comprise more than half of the entire veterinary health market (Mintel Oxygen, 2007).

The veterinary healthcare industry has recognized the potential of the companion animal market segment to be a very successful one, as there is the opportunity to provide long term care for ageing pets, there is also continuous research and development of veterinary health care products and services (Evans & Chapple, 2002). In the United States alone, veterinary health product sale in 2008 was $6.7 billion. Various state – run and research based companies provide the biological, chemical and pharmaceutical products that are needed to keep animals in good health. Majority of these products cannot be launched into the market until they have gotten approval from the regulatory agencies (limitation, as this takes a long time) (Dechra Pharmaceuticals PLC, 2010).

1.1 PORTERS FIVE FORCES (INDUSTRY)

FIG 2: Diagram showing the five forces that are currently affecting the veterinary healthcare market.

THREAT OF SUBSTITUTE: The number of alternatives or substitute for products in the veterinary healthcare market is on the increase, thus the threat for substituting available products and services is average (depending on the type of product and service). The tendency for buyers to continuously substitute products is not very high, as some products and services have patent/licensing protection, hence they cannot be substituted. It is only generic products that tend to be substituted if price is less.

NEW ENTRANTS: The barrier for entry is average, but the main threats in this sector lies in the entry of bigger firms that buy up smaller companies. They pose a threat to small or medium sized companies (except those with license or Intellectual property rights). In some countries the number of years for holding patent in the veterinary market has been increased, thus giving small and medium sized companies a chance to survive. The current trend in this industry is the entry of bigger companies through buyout/ acquisition of other companies.

INTENSITY OF COMPETITIVE RIVALRY: The market is a highly competitive one, and competition depends mainly on protection of new technology, patent and other products. Major competitors are large pharmaceutical companies and biopharmaceutical companies.

Pfizer Inc

Merial

Akzo Nobel N.V

AstraZeneca PLC

Axis-shield plc

Johnson’s veterinary group

Isotron PLC

Sanofi – Aventis SA

Shire plc

Tap Pharmaceutical Products

Dechra Pharmaceuticals PLC

Vibrac Corporation

Table1: Some major competitor in the veterinary health care industry. Pfizer and Merial are currently the market leaders Source: (DATAMONITOR, 2009).

CONSUMERS: the rate of competition here is moderate, as consumers will need some specialty products and service for their animals. In cases where generics are out there is a tendency to switch if the price is lesser. Otherwise, in some instances owners are willing to pay a premium for their pets (Mintel Oxygen, 2007). In the case of veterinarians, there is sometimes the use of buying syndicates and wholesalers to get products, thus relationships that could affect the market are protected under contracts and these are reviewed on an ongoing basis (DATAMONITOR, 2006).

COMPANY OVERVIEW

DECHRA PHARMACEUTICAL PLC

Dechra pharmaceutical is an international healthcare company that is into the manufacture of veterinary pharmaceutical products, sale of veterinary equipments, veterinary based laboratory services and related goods and services. Dechra is more into product development than research, as most of the pharmaceutical entities that are used in veterinary products are already used in the human market (Dechra Pharmaceuticals PLC, 2010). Dechra has subsidiaries in the USA, UK and Europe. The parent company is located in the UK. Dechra was founded in 1997 following the management buy-out of Lloyd’s chemists. It comprises of two divisions and six companies that operate under these divisions (DATAMONITOR, 2009).

The Pharmaceutical division of Dechra include Dale, DVP- EU, and DVP-US, while the service division include National veterinary services (NVS), NationWide Laboratories (NWL) and Cambridge Specialist Laboratory Services (CSLS).

Dechra has key employees with strong backgrounds in the veterinary and / or pharmaceuticals industry. Below is a list of some key employees

KEY EMPLOYEES:

Job Title

Board

Name

Group Executive Officer

Executive

Ian Page

Group Finance Director

Executive

Simon Evans

Managing Director, Dechra Veterinary Europe

Executive

Ed Torr

Non Executive Chairman

Non Executive

Michael Redmond

Senior Non Executive Director

Non Executive

Malcolm Diamond

Non Executive Director

Non Executive

Neil Warner

President, US Operations, Dechra Veterinary products

Senior Management

Mike Eldred

Managing Director, National Veterinary Services

Senior Management

Martin Riley

Managing Director, Dales Pharmaceuticals

Senior Management

Mike Annice

Table 2: Majority of them have had several years of experience in the industry, and have made positive impacts to the growth of the company.

PHARMACEUTICALS DIVISION

Dales Pharmaceuticals: this company is the manufacturing subsidiary of Dechra Pharmaceuticals PLC. Dales provides a comprehensive range of pharmaceutical manufacturing and packing service (Dales Pharmaceuticals, 2009). It is here that a majority of Dechra own branded pharmaceutical products that have been licensed are manufactured. Contract manufacturing is also another service offered by Dales, and these contracts are mainly for human pharmaceutical companies; the revenue from this source is the only non-veterinary revenue source of Dechra. There is also the potential merging of the manufacturing arm of the recently acquired Vetxx with Dales; this move will see the improvement in utilisation of manufacturing capacity (Dales Pharmaceuticals, 2009).

DVP-EU is into the marketing and selling of Dechra pharmaceutical own brands, veterinary – exclusive companion animal/pet diets, veterinary pet care products, consumables and instruments within 10 countries in Europe.

There is also the marketing and sales of products for the treatment of varying disease conditions in pets; offers equine medicine and critical care services. Below is a table showing the product portfolio of DVP-EU.

PRODUCT

USES

Vetoryl Capsules

Treats canine hyperadrenocorticism (Cushing’s syndrome)

Felimazole Tablets

Treats feline hyperthyroidism

Equipalazone

Treats equine musculoskeletal disorders

Fucithalmic Vet

Ophthalmic product to fight off infections

Canaural,Malaseb shampoo and

Canaural

Dermatological uses

Table 3: Products that are marketed by DVP-EU.The countries comprises of UK, Ireland and 8 other countries in Europe (Dechra Pharmaceuticals PLC, 2010).

DVP USA: Provides varying approved veterinary products such as animax cream, muricin, cat lax, vetrobiotic, puralube and vetropolycin. These are marketed and sold in order to build the Dechra brand name in USA, as the business was opened in 2005. Some of Dechra own branded products are in process of being licensed or have been licensed. The FDA compliance notification for Vetoryl® was received in 2008 (Dechra Pharmaceuticals PLC, 2008), and it is expected to be launched in 2009, the products that have been licensed or are in the process of been licensed in the USA are listed below.

Product

Uses/Opportunity

Felimazole®

First licensed veterinary product for feline hyperthyroidism treatment

Vetoryl®

New product for treatment of canine Cushing’s syndrome .Sold in the US under FDA waiver scheme, before receipt of the FDA compliance notification.

Table 4: Products that have received approval or in the process of receiving approval for marketing in the USA (Dechra Pharmaceuticals PLC, 2010).

SERVICE DIVISION:

NATIONAL VETERINARY SERVICES: NVS is the subsidiary of Dechra that is into the distribution and supply of veterinary products to approved outlets and veterinary practices in the UK. NVS has over 12,000 products in stock, and these include pet products, accessories, pharmaceuticals and consumables. They also offer a variety of IT solutions to veterinary practices; these services are branded Vetcom®. Vetcom functions mainly to collect orders electronically. NVS has a large customer base, distributing products and services to about 1500 customers daily (Dechra Pharmaceuticals PLC, 2010). NVS improved strongly in performance, through the development of one of the most efficient logistic, trunking and warehousing operation within Europe. NVS is currently the largest veterinary wholesaler in the UK; employs over 460 employees and has the largest market share in excess of 42% (Dechra Pharmaceuticals PLC, 2010).

NATIONWIDE LABORATORIES: NWL is a veterinary laboratory that operates independently, providing clinical pathology and diagnostic services for veterinary surgeons all over Europe. They also offer other veterinary services such as an equine and pet allergy testing programme called Allervet, and a chemotherapy sensitivity testing service for small animal tumours called Petscreen. NWL also offers a number of tests in the range of the clinical pathology disciplines (Dechra Pharmaceuticals PLC, 2010).

CAMBRIDGE SPECIALIST LABORATORY SERVICES: CSLS provides specialist biochemistry assay and hormone service to practicing veterinary surgeons. There is also the collaboration with principal academic experts in the specialist field of veterinary endocrinology (Dechra Pharmaceuticals PLC, 2010).

ACQUISITIONS

There was a recent acquisition of the worldwide patent (intellectual property) for Equidone, an Equine product from Equ-tox, a US company. The patent was valued at $1.75 million.

In early 2008 (January) Dechra acquired Vetxx, a company that is into the production and marketing of veterinary diets, medicines and care products. There is now more room for expansion of Dechra in the European market, as Vetxx’s footprint in Europe is strong. Thus Vextt is providing a large sales and distribution network for the marketing of products and services to a large number of European countries.

Figure 2:

FIG: Pie chart showing Global market share of retail value for pet care products and food. Dechra was only entering the pet food sector for the first time, and they held an impressive 0.4% of the market share (DATAMONITOR, 2009).

SWOT ANALYSIS

The SWOT analysis table highlights the factors that are internal to the company (strength and weakness) and those external (Opportunities and threats). Dechra has more strengths than weaknesses and the veterinary market holds a lot of opportunities for the success of the company. The acquisition of intellectual property of Equinox, licensing of own branded products and acquisition of Vetxx’s will give Dechra an edge in this market.

The threats in the market are not going to be very significant if Dechra is acquired by a large company like GSK, as there will be more distribution channels for products and they will be able to compete on the same level or even higher up than some bigger companies. The delay in FDA approval or denial of licensing is a key issue in this industry, thus the availability of many own branded products will keep the company going while waiting for the licensing of other products.

STRENGTH

Acquisition of Intellectual property of products and companies strengthens Dechra

Focused product development and the licensing of key products in the international market

Larger distribution channels , use of online technology to place order of products

WEAKNESS

If there is a disturbance of the distribution channels, there will be delay in operations.

OPPORTUNITIES

Increasing growth in companion animal market

Encouraging animal healthcare market can help improve prospects of growth

THREATS

FDA approval (delay in licensing, or refusal of approval)

Competition from bigger pharmaceutical companies that are branching out to the veterinary health care industry by the acquisition of smaller companies.

Table 5: SWOT analysis table for Dechra pharmaceutical plc .

OVERVIEW OF FINANCIAL STATEMENT

The financial statement used in this appraisal is the consolidated financial statement that was prepared by KPMG Audit plc.

The accounting policy used in the preparation of the consolidated balance statement for Dechra for the year ending June 2008 is highlighted below.

Accounting Policies: “The consolidated financial statements of Dechra Pharmaceuticals plc have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union” (Dechra Pharmaceuticals PLC, 2008).

Basis of preparation: “The consolidated financial statement was represented in pounds sterling, and rounded to the nearest thousand. It was prepared on a historical cost basis, except for the transactions that were stated at fair value (cash-settled share based transaction)” (Dechra Pharmaceuticals PLC, 2008).

In the year that ended in June 2008 , Dechra generated a revenue of £304 million an improvement of 20% from the previous year ( £253.8 million), the adjusted operating profit increased from £13.9million in 2007 to £19.1 million in 2008 ( an increase of 38.0%). After the deduction of amortisation of acquired intangibles and rationalisation costs, the operating profit was £14.1 million (an increase of £0.3 million from the previous year). Using the same method of deduction from the above, the profit before taxation was £11.7 million (Dechra Pharmaceuticals PLC, 2008).

PERFORMANCE RATIOS

Return on net assets = Profit before interest and tax

Net assets

This shows the percentage return on the funds that have been tied up on a long term basis in the business.

Sales margin = Profit before interest and tax

Sales (turnover)

This is an expression in percentage of the amount of profit in pence made in each £ of sales

Asset turnover = Sales (turnover)

Net assets

An expression of the ability of the company to use it’s assets to generate sales revenue, usually expressed as a multiple (Zane, Kane, & Marcus, 2004).

Dechra

Concateno

2008

2007

Return on net assets

16.63%

1.31%

Sales margin

6.3%

7.6%

Asset Turnover £ 000’s

2.64

0.174

Table 6: Comparison of the performance ratios of Dechra and Concateno, only the asset turnover is expressed as a multiple.

Figure 3: Graph showing performance ratios of Dechra and Concateno.

Sales Margin: Dechra makes a profit of 6.3% for each £, while Concateno makes 7.60%. I cannot tell the trend as I am comparing only one year.

RONA: Dechra shows a high return on net assets, while Concateno has a very low return. The veterinary industry is not a very high risk market, as there is a rapid improvement in that sector, thus there is better profit performance for Dechra unlike Concateno (low profit performance) .

Figure 4: Comparison of asset turnover of Dechra and Concateno. Dechra has a very high asset turnover, which means it sells its products and service with a low profit margin; in comparison Concateno has an asset turnover that is less than one, due to its high profit margin on sale of products and services

Dechra

Concateno

2008

2007

Sales per employee £000’s

342.4

129

Profit per employee £000’s

21.53

9.8

Table 7: Comparisons of sales and profits per employee for the years highlighted above.

Figure 5: Figure showing sales per employee.

Sales per employee: Dechra shows higher productivity of workers, in comparison to Concateno. The same goes for the profit per employee, the returns obtained on the average per employee is relatively high in comparison to that of Concateno.

WORKING CAPITAL RATIOS

Inventory days = Inventory x 365

Cost of sales

Debtors ratio (days) = Debtors x 365

Sales (turnover)

Creditors Ratio = Creditors x 365

Cost of purchases

Figure 6: Graph showing the working capital ratios of the two companies.

The inventory days for Dechra, shows that they have a good inventory day’s ratio, as it is not above the industry standard. Same applies to Concateno, as it all depends on the biotech industry standard.

Debtor’s days: Dechra has relatively low debtor’s days, thus it does not find it difficult getting paid for products and services. In comparison Concateno has difficulty getting paid for its product and services (this might be unique to the industry Concateno operates).

Creditors Days: This shows the amount of time creditors are willing to wait for payments. Concateno has a high number of day’s (this might be unique to the industry), while Dechra has a relatively good number if days as there is the advantage of availability of cash for payments to be made.

LIQUIDITY

Current ratio = Current assets

Current liabilities

Acid test = Current asset less inventory

Current liabilities

SOLVENCY

Interest cover = Profit before interest and tax

Interest paid

Gearing = debt

Shareholder’s fund + debt

DECHRA

CONCATENO

2008

2007

Current Ratio

1.18

1.10

Acid Test (quick ratio)

0.80

0.886

Interest cover

4.4

0.972

Gearing

0.41

0.38

Table 8: Comparison of the liquidity and solvency ratios of the Dechra and Concateno.

Figure 7: Graph showing the varying ratios of liquidity and solvency of the companies.

Current Ratio: Both Dechra and Concateno have enough short term assets to cover their current liabilities as indicated by the current ratios. This is a positive performance measure for Dechra.

Gearing: For the two companies, they have a relatively low gearing ratio, thus they are financed largely by equity.

ACID TEST: This shows that both companies are dependent on inventory to meet their current liabilities.

Interest Cover: Concateno has an interest cover ratio of 0.972; this shows that it is finding it difficult to pay for its interest expenses, while Dechra is 4.4. Dechra is able to generate cash to pay for its interest expenses.

RETURN ON EQUITY

Return on Equity = Profit before interest and tax

Ordinary shares and reserves

For the year ended 2007, Concateno had no return on shareholders funds, while Dechra

EVALUATION: The year end date for the two companies (Dechra and Concateno are June 2008 and December 2007), are not greater than 12 months or less than twelve months apart. Thus I will base the appraisal of Dechra on the comparison using the two sets of consolidated financial statement. The financial policies of both companies were prepared in accordance with the IFRS standards.

Concateno: Concateno is a biotechnology company that is into the manufacturing and distribution of drug and alcohol testing devices and services, it is also provides a range of immunology and pathology products to forensic and clinical laboratories in Europe, USA and the rest of the world.

FINANCIAL OVERVIEW: In the year ending December 2007, Concateno had revenue of £26,064, 000 and an improvement from the £1,360,000 from the previous year, the operating profit was £1, 975,000 in comparison to the £728,000 for the year ending December 2006.

The consolidated financial statements were prepared in accordance with IFRS standards as adopted by the EU

RATIOS

CONCLUSION

Dechra pharmaceutical has great potentials, both now and in the future with the growth in the veterinary healthcare market. The positive trend towards spending on veterinary healthcare is a good indication that investing in veterinary healthcare companies is a wise investment decision. In comparison to Cancateno, Dechra has show improved performance

Given the positive trend toward spending for pet care that will continue over the next decade, we believe that veterinary products companies represent good investment opportunities for investors with a long-term two to five year investment horizon. Over time, if these companies continue to execute well and generate solid sales growth, they should benefit from leveraging off their existing infrastructure and deliver improved earnings growth.

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