Dechra shows veterinary medicine has defensive potential

As the cost of living ticks ever upward, there is some evidence that UK households are giving up their family pets. It’s a grim, if perhaps predictable, trend that could also mean businesses in the animal care industry will see a related dip in revenues. 

However, these macroeconomic uncertainties were not reflected in the annual results of specialist veterinary medicine group Dechra Pharmaceuticals (DPH). In fact, the group reported that revenue at its companion animal products (CAP) division – which represents almost three-quarters of total turnover – grew by 16 per cent in its 2022 financial year.  

Dechra’s global footprint in veterinary medicine may yet help it stay resilient in challenging times. While its EU pharmaceutical revenues grew by 8.2 per cent to £407mn, its North American sales grew by 24 per cent to just over £275mn. The latter region is clearly an area of strategic growth for the group, which acquired two US companies – Piedmont Animal Health and Med-Pharmex – this summer.

“Piedmont offers a novel product runway and, if successful, could underpin double-digit growth for some time,” wrote Numis analysts in a 5 September note. “Med-Pharmex is immediately accretive and strengthens US position.”

The underlying gross profit margin for Dechra’s existing business decreased by 50 basis points to 56.4 per cent in the 2022 financial year. According to the group, this reflects “the strong CAP performance offset by the increased generic competition particularly in our [North America] business”. In other words, revenues for pet-focused pharma firms are threatened by competitors in much the same way that human drugmakers are.

Dechra’s management also noted that revenue growth normalised in the second half of the year as the benefit of increased spending on pets seen during the pandemic slowed. But analysts are largely optimistic about its ability to continue growing in the post-Covid economy. 

“Dechra’s markets remain resilient and in growth, its supply chain robust, while recent acquisitions, along with product approvals and a well-stocked pipeline, support and de-risk future growth in our view,” reads the Numis note.

The group’s present valuation, however, may give prospective investors reason to pause. At 20.8 times full-year EV to Ebitda, analysts at Panmure Gordon say Dechra is trading at a significant premium to its reference peer group. Whether veterinary medicine will prove to be a defensive sector in the coming downturn remains to be seen. We think Dechra must justify its premium pricing with a continually strong performance. Hold.

Last IC View: 3,811, 21 Feb 2022