Time to buy Dechra

The group's progress in selling its veterinary products in North America - 17 per cent of sales - and particularly the US, is extremely encouraging. Last year sales there increased by 60 per cent thanks to the well-timed acquisition of PSPC - owner of a patented joint-health drug called Phycox - and strong sales growth across the endocrine and dermatology categories. Even the ophthalmic products, which were relaunched since falling victim to supply issues across the Atlantic, achieved the expected sales targets. And excluding acquired and newly launched products, sales of Dechra's 'core' products still rose nearly 22 per cent in the US last year at constant currency.

To support this rapid growth across the pond, Dechra is busy adding to its sales teams and just opened a new subsidiary in Canada, which has already achieved sales targets for Cushing-syndrome drug Vetoryl and thyroid medication Felimazole, as well as several dermatology products. But Dechra isn't just building its own sales teams in North America. In Europe, chief executive Ian Page has been busy evaluating in which territories Dechra can take over from third-party distributors. But Mr Page says new offices will only open where the value of the extra profits to be made by taking the salesforce in-house exceeds the infrastructure costs. In the past year Dechra has done this in Poland and plans to move on to Austria next.

Europe has been a tougher market for Dechra, but it's performing well against the difficult market backdrop. The weak euro has been an issue for most companies doing business in Europe lately and Dechra, which generates 83 per cent of sales there, is no exception. But at constant currency, sales grew by a solid 3.9 per cent last year thanks to a strong performance from the companion animal products division, which offset a decline across the food-producing animal products (FAP) portfolio. European vets are growing increasingly concerned about antibiotic resistance, prompting a decline in FAP sales, but Mr Page says the trend has stabilised in the Netherlands and Denmark, although competitive pressures in Germany prevail.

Dechra has also moved to a net cash position of late, despite remaining hot on the acquisition trail. Its latest deal - an offer to buy Croatian business Genera for €51m (£38m) - won't receive the regulatory green light before November. But the tie-up should take Dechra straight into the lucrative poultry vaccines market and support flagging sales in the FAP segment by adding a selection of products to that part of Dechra's future product pipeline. The existing pipeline looks pretty strong in its own right, with about 26 products currently making their way through development.

City analysts haven't updated their numbers for the earnings impact of the Genera deal, but they have tweaked down expectations for current-year EPS. That's only because Dechra is investing more than expected in expanding salesforces and management teams in the US to cope with demand. But while that's eating away at margins in the near term, it presents a larger growth opportunity further out.

The analyst downgrades also help explain the recent share price weakness. But we'd see this as an opportunity - the share price is only down 5 per cent in the past month which doesn't suggest inherent weakness in the underlying business or a significant loss of sentiment for the stock. What's more, Dechra's shares have traded on high earnings multiples over the past couple of years, and the current next-12-months forward PE ratio of 21 is actually close to the lowest the rating has been over the past six months and compares with a peak of about 25 times.