Maybe it's because people love their pets and lavish money on them come recession or worse, but Stoke-on-Trent-based Dechra Pharmaceuticals, which earns its crust by making and distributing drugs for – mainly domestic – animals, has dealt effectively with serious headwinds in its UK market, as it demonstrated in its first-half results for 2011-12 last month. So should we be wading in with another suggestion to sell Dechra's shares, considering that our previous effort – to sell at 413p in July 2010 – was caught out by the stock market's surging recovery in 2011?
- UK market is resilient
- Financially sound
- Struggle to make headway in US
- Internet competition
- Rise of conglomerates
The paradox at the heart of Dechra is the contrast between its dominance of its stable, if not terribly profitable, markets in the UK with the struggle the company faces in trying to broaden its sales base. Its main focus has been trying to break into the world's biggest drugs market for domestic animals, the US. However, cracking that market is easier said than done.
True, its $64m (£42m) acquisition in 2010 of Florida-based DermaPet, which makes products such as doggy shampoos and conditioners, should help its presence, but pitfalls remain. For instance, on the pharmaceuticals side, generic competition against Vetoryl, which treats Cushing's disease, a glandular illness, in dogs, has prevented one of Dechra's flagship products from making as big an impact on US vets as Dechra had hoped. Nor have Vetoryl's US sales been helped by legal copying of the product by pharmaceuticals dispensaries in several US states. In addition, there are few barriers for larger companies to develop pet pharmaceuticals by simply reformulating drugs intended for humans, which is where Vetoryl came from.
DECHRA PHARMACEUTICALS (DPH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 497p | MARKET VALUE: | £332m | |
| TOUCH: | 497-503p | 12M HIGH: | 580p | LOW: 429p |
| DIVIDEND YIELD: | 2.8% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 145p | NET DEBT: | 48% | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 304 | 11.7 | 14.2 | 8.3 |
| 2009 | 350 | 16.1 | 17.3 | 9.1 |
| 2010 | 369 | 17.7 | 20.0 | 10.5 |
| 2011 | 389 | 18.5 | 21.3 | 12.1 |
| 2012* | 418 | 32.4 | 36.9 | 13.9 |
| % change | +7 | – | – | +15 |
Normal market size: 500 Matched bargain trading Beta: 0.5 *Peel Hunt forecasts (profits & earnings not comparable with historic figures) | ||||
The company also faces two big problems in its perpetually resilient, but low growth, home market. First, it lags behind its competitors in developing a profitable e-commerce business, with companies such as Pets at Home winning favour and market share from internet-savvy consumers. True, internet commerce offers only tight profit margins, but Dechra still needs to beef up in this area.
Second, supplying UK vets could yet come under pricing pressure as veterinary practices consolidate into chains. That's already causing a price squeeze on suppliers and wholesalers and is being exacerbated by the entry of bigger competitors into the UK market. Analysts at broker Peel Hunt cite the arrival of a Fortune 500 US player, Henry Schein, as an example.
Management's answer has been to direct resources towards expansion and to restructure the business by using the best parts to build up an overseas presence. Progress on this is steady, if slow, although a sound balance sheet is a big plus, but the impression remains that Dechra's bosses have yet to solve a set of competing problems, any of which could undermine the business.
