Don't doubt Dechra

Meanwhile, medicines for farm animals are also in growing demand. Emerging nations, in particular, are consuming more meat than ever before and this has led to a rapid increase in demand for food and medicine for livestock. Animal healthcare companies with operations in both of these fields are therefore likely to be well positioned for growth in a market that overall is expected to expand by 4 to 5 per cent a year for the next decade. And in the UK there is no better example of this than Dechra (DPH).

The veterinary pharmaceuticals specialist has established a dominant position in the market through a series of acquisitions. In its 2016 financial year the group bought Putney, Genera, Brovel and Apex, which bulked up its position in the US, Croatia, Mexico and Australia, respectively. Now, with 2017 full-year forecast revenues of £358m, it is believed to have broken into the top 10 global veterinary pharmaceuticals companies by revenue. These giants account for 85 per cent of the total market, with the remaining 15 per cent made up of a large number of very small companies. There are, therefore, many more opportunities for Dechra to continue its global expansion via acquisition. Indeed, at the end of March the group bought a 33 per cent stake in Australian anaesthesia and pain relief specialist Animal Ethics, which could be a target for a full takeover in future.

It's true that, priced at 24 times forecast earnings for the current financial year, Dechra's shares can hardly be described as cheap. But neither are those of its UK peers, and its rating on an enterprise-value-to-cash-profit (EV/Ebitda) basis is significantly below many international peers. Importantly, forecast five-year compound annual earnings growth of over 16 per cent to the end of June 2020 helps illustrate why the shares are worth paying up for.

Moreover, not only do acquisitions have the potential to continue to push earnings forecasts upward, but there is also significant potential for positive surprises from a burgeoning drug development pipeline, which has not yet been accounted for by analyst forecasts. In the first half of the current financial year the group received approval for an unbranded version of widely used antibiotic Amoxi-clav, which was the first major approval from the Putney pipeline. Management anticipates more approvals from this US-based division in 2017. Genera too has added a strong new pipeline platform in the vaccinations market, an area in which Dechra was previously under-represented. The underlying group also has a strong track record of developing new drugs and launching brands into both the companion animal and livestock arenas.

Last year's acquisitions are also performing well, with all of the 2016 acquisitions reported to be delivering ahead of expectations. Further news on how integration is going may be forthcoming from an update that has been scheduled between the time of writing and publication of this article.

Financially, Dechra has proved before that it is adept at sensibly funding its growth. At the half-year stage, the group reported net cash inflows from underlying operating activities of £43.9m, with a cash conversion rate of 124 per cent.