This report aims in assessing the performance of DechraPLC by comparing it against Concateno and draws the analysis by interpreting the financial ratios and summarizing the key financial highlights so as to weigh up the evidence after analysing the business lines of both the companies and finally comprehend whether GSK can acquire DechraPLC.Before going into details of assessing the financial performances,a general background about acquisition and strategies are discussed moving onto the brief outlook on global veterinary animal market,a brief overview of pharmaceutical industry and then talks about detailed overview of Dechra Pharmaceuticals PLC and takes into detailed financial performance analysis on a comparative basis and finally concludes by highlighting the Dechra's balanced wholesale business with a robust organic growth in operating profit,its good will with suppliers,its maintenance of staff leading to potential productivity in earnings suggesting GSK to consider in acquiring Dechra to strengthen its performance to high expectations.
As a member of the strategic team at GSK (GlaxoSmithKline), the international drug company I have been assigned to assess the financial performance and prospects of Dechra Pharmaceuticals PLC so as to interpret and assess acquisition options whether GSK can go ahead to acquire Dechra Pharmaceuticals PLC. The financial information has to be interpreted with the following background. Acquisitions have become increasingly popular and hence acquisitive growth strategy has become the subject of study by many financial analysts and economists. Acquisitions are completed to maximise a firm's value. The dominant theory of how value can be created suggests that firms acquire other firms with some form of relatedness thereby creating efficiency through synergy. Synergy usually implies that gains accrue to the acquiring firm through two sources; improved operating efficiencies based on economies of scale - and need to understand the sources of sustained competitive advantage for firms.The following figure suggests that the firms obtain sustained competitive advantages by implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralising external threats and avoiding internal weaknesses.
In this case the GSK will not be faced with the problem of information asymmetry because it has better insights about implementing the strategy considering the resource homogeneity.
Internal Analysis External Analysis
Opportunities
Threats
Strengths
Weaknesses
RESOURCE BASED MODEL ENVIRONMENTAL MODELS OF
COMPETITIVE ADVANTAGE
(sourced from:Jay Barney,Journal of Management,vol.17,No1,1991)
Bounded rationality can thus lead to information asymmetry in the case of information overload or deficit. Asymmetric information refers to a situation in which stakeholders involved in an economic relationship have different information about the nature and outcomes of the transaction or about the intentions of the parties (Akerlof, 1970). Hidden information refers to information about the company, its operations or individual transactions that is not available to one or both contracting parties, but which would be useful to both. Hidden information, bounded rationality and/or an ensuing information asymmetry can also create a possibility for hidden action. In the presence of a possibility for hidden action, i.e. action that can be performed by one party without the other party knowing, incentive asymmetries will produce different (usually negative) outcomes. No doubt both are pharma related but the nature of the clients and the product positioning strategy differs given the competitive position of the market of both these firms face growth curves that are totally unique. Dechra intends to expand its pharmaceutical portfolio of both novel and generic products with most of its product development and not research based. Before going into details of assessing the financial performance and prospects of Dechra PLC, let us go through the global Veterinary pharmaceutical market, Pharmaceutical industry overview and overview of Dechra Pharmaceuticals PLC.
GLOBAL VETERINARY PHARMACEUTICAL MARKET:
The major pharma companies for animal businesses fall under 2 categories, one is for food producing animals and one for companion animals such as dogs and cats. To keep animals healthy veterinarians and food producers use various tools such as animal health products, which consists of veterinary medicines, feed additives, vaccines and other biologicals. The veterinary medicines has a 2.5% growth in sales and contributed US$11,330 million to total global sales. 36.8% share of global sales come from the companion animal sector and the rest comes from treating food producing animals with medication. When compared with human health-care industry, the animal health industry has grown by only 1.9% per annum in real terms.
PHARMACEUTICAL INDUSTRY OVERVIEW:
The pharmaceutical sector plays a vital role in impacting on health, government and household spending, in addition to its effect on the overall economy of a country.
(in USD '000)
2003
2004
2005
2006
2007
2008
Medical and Pharmaceutical exports
130,971
158,452
198,624
210,785
300,131
353,097
Growth(%)
(8.3%)
21.0%
25.4%
6.1%
42.4%
17.6%
Sourced :IMS HEALTH
Global pharmaceutical sales have been growing consistently during the past few years to reach USD 773 billion in 2008. The growth, however, has been at a decelerating rate since 2003, and is expected to decline further to 2.5%-3.5% on a constant dollar basis in 2009. Estimates by IMS Health in its "IMS Global Pharmaceutical and Therapy Forecast" project global sales in excess of USD 750 billion in 2009, sustained primarily by growth in sales in emerging markets, albeit down from the previous forecast of USD 820 billion. The decline in forecasted sales by IMS Health has been attributed both to currency fluctuations and an overall deceleration of pharmaceutical sales. The impact of the global economic slowdown is expected to affect the pharmaceutical industry negatively, although to a lesser extent than other industries due to the defensive nature of the industry. However, the correlation between GDP growth, consumer spending and government expenditure with sales govern the expected outlook for the industry going forward, and while the expected turnaround in the economy in late 2010 is expected to support the pharmaceutical industry, its growth will be restrained by the patent expiries in 2011 and 2012.
The pharmerging markets of China, Brazil, Mexico, South Korea, India, Turkey and Russia will be the drivers of growth in 2009, expected to contribute over 50% of the global market growth in 2009, and some 40% of the growth through 2013. Overall, the growth in these markets is expected to register at 13%-16% through 2013, according to IMS Health, with China growing to become the third largest market by 2011.
Breakdown of the world pharma market,2008 sales
North America(USA,Canada)
40.3%
Africa,Asia
(excluding Japan)
& Australia 11.7%
Latin America 6.0%
Europe 32.0%
Japan 9.9%
DECHRA PHARMACEUTICALSplc :
Overview of Dechra:
Dechra Pharmaceuticals plc is an international specialist in the veterinary and animal healthcare markets. Key to the Group's strategy is the development of its veterinary pharmaceuticals portfolio The Company was incorporated and registered in England and Wales on 13 May 1997 under company number 3369634. The Company re-registered as a public company limited by shares with the name Dechra Pharmaceuticals PLC on 22 August 2000. The principal legislation under which the Company operates is the Companies Act 1985 and the Companies Act 2006. June. Dechra has its sales and marketing operations in the regions of the US, France, the UK, Ireland, Spain, Scandinavia and the Netherlands. Dechra is quoted on the London Stock Exchange (under pharmaceuticals and biotech). Top competitors are:ECO Animal Health Group plc,Goldshield Group plc,Hikma Pharmaceuticals Plc, Sinclair Pharma Plc, William Ransom & Son plc Dechra PLC operates by splitting into two divisions namely Pharmaceuticals division and Services division.
The Pharmaceutical division includes:
Dechra Veterinary Products (DVP): DVP is involved in marketing and development of licensed branded pharmaceuticals to the veterinary profession worldwide.
Dales Pharmaceuticals (Dales): Dales is the licensed manufacturer of veterinary and human pharmaceuticals for DVP and third party customers.
The services division includes:
National Veterinary Services(NVS): NVS is the UK market leader in the supply of pharmaceuticals and added value services to the veterinary profession,including management information systems and consumer internet services.
NationWide Laboratories (NWL):NWL is a multi-disciplined independent commercial veterinary laboratory .
Cambridge Specialist Laboratory Services (CSLS)CSLS is a primary care and secondary referral specialist veterinary immunoassay laboratory.
GROUP PERFORMANCE:
Review of Operating Performance
Divisions
Total
Revenue
Share of total group revenue
Share of Adjusted
Operating Profit
Adjusted operating profit
Adjusted
Operating margin
Pharmaceutical
104%
2008:
£54.3m
2007:
£26.7m
17%
50%
Up 76%
2008:
19.8%
2007:
22.9%
Services
11%
(2008
£259.4m)
(2007:
£234.2m)
83%
50%
Up 12%
2007
4.1%
The major products and services offered by the company:
Services
Products
Brands
Laboratory services
Distribution services
Felimazole,Specific,Vectoryl,
Thyroxyl,Atipam,Irap,
Predinale 25,Vetivex No1
Specific,Canaural,Clean Aural,Equipalazone,
Fuciderm,Fucithalmicvet Malaseb,Vetivex,Neutrale,Domidine,Sedator, Oxyglobi,Ovuplant,
Equidone,Intraepicaine
The following table is a list of company's subsidiary undertakings and associates :
Company
Subsidiary Undertakings
Activity
Percentage of Equity
Held and voting control
Country of incorporation
Dechra Limited
Wholesaler,marketer and manufacturer of pharmaceuticals,
Wholesaler &marketer of Veterinaryproducts,instruments and equipment,Provider of Veterinary laboratory services
100
Great Britain
Dechra Investments Limited
Holding company
100
Great Britain
National Veterinary services Limited
Non-Trading
100
Great Britain
Arnolds Veterinary products Limited
Non-Trading
100
Great Britain
Dales pharmaceuticals Limited
Non-Trading
100
Great Britain
Veneto Limited
Holding company
100
Great Britain
North western Laboratories Limited
Non-Trading
100
Great Britain
Cambridge specialist Laboratory services Limited
Non-Trading
100
Great Britain
Anglian Pharma manufacturing Limited
Non-Trading
100
Great Britain
Anglian Pharma Limited
Holding company
100
Great Britain
Dechra Veterinary Products LLC
Distributor of veterinary products
100
USA
Leeds Veterinary laboratories Limited
Provider of veterinary lab services
100
Great Britain
VetXX Holdings A/S
Holding company
100
Denmark
VetXX A/S
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Denmark
VetXX OY
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Finland
Dechra Veterinary Products SAS
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
France
VetXX DV
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Holland
VetXX AS
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Norway
VetXX Animal Health SLU
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Spain
VetXX AB
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Sweden
VetXX Ltd
Marketer and manufacturer of veterinary pharmaceuticals and pet diets
100
Great Britain
The following table gives the details of substantial shareholdings:
No. of shares
% of shares held
Schroder Investment Management
8,147,749
12.49
Legal & General Investment Management
5,053,820
7.75
Rathbone Unit Trust Management
4,664,601
7.15
BlackRock Investment Management (UK)
3,815,060
5.85
Standard Life Investment Management
3,359,279
5.15
Insight Investment Management
3,244,427
4.97
Invesco Asset Management
2,089,080
3.20
TRADING INFORMATION:
Time/Date
Price
Volume
Trade value
Trade type
Ask
Bid
16:35:25 05-Feb 2010
470.20
20,745
97,542.99
Uncrossing
452.20
505.00
16:29:15 05-Feb-2010
481.00
253
1216.93
Automatic
486.80
481.00
16:29:14 05-Feb-2010
481.00
336
1616.16
Automatic
487.00
481.00
16:28:24 05-Feb-2010
486.20
172
836.26
Automatic
487.00
486.20
16:28:24 05-Feb-2010
486.20
24
116.69
Automatic
487.00
486.20
Number and values of Trade:
SHARE PRICE PERFORMANCE:
Price
(pence)
+/-
% +/-
Bid
Offer
Volume
High
Low
Last close
470.20
+2.60
+0.56%
470.20
471.40
316,729
490.10
460.80
470.20 on 05-Feb-2010
SWOT ANALYSIS:
STRENGTHS:
Massive product development well progressing to schedule
strong position in the British market for distributors to vets of pharmaceutical products
Significant increase in US revenue..
Key pharmaceuticals continue to increase market penetration by new generic launches in UK
Robust organic growth in operating profits.
Economies of scale as a result of vetxx acquisition which has fully integrated and performing in line with expectations.
Gradual progress on quality management systems.
Increased life expectancy of pets and ultimately the consumer's passion for their animals has driven the companion animal market.
International experience and recognition with proven track record of regulatory and license delivery.
Successful design and management of international clinical field trials.
FDA approved manufacturing facilities.
WEAKNESSES:
As Dechra is not research based when compared to the competitors, there is less potentiality towards product innovation.
Limited Geographical coverage.
Not much production orientation in low cost countries.
As the business is limited to developed countries, competition is fierce and so launching of competitor products against key pharmaceutical brands could have impact on revenues.
External shocks such as BSE or general economic conditions could lead to market slow down.
OPPORTUNITIES:
There is lot of opportunity to sell low cost products in BRIC (Brazil, Russia, India, China), thereby, there is scope for increase in sales revenue.
Patent expiry for mega pharma companies providing opportunities for growth in generics.
Integrated group's strong market position recognises the opportunities for specialised and niche pharmaceutical products for the veterinary market.
THREATS:
Failure in maintaining the regulatory standards in compliance with their licenses to operate the business.
High value products prescribed under low category results in loss of revenue
Failure to convince the regulatory authorities could delay or abort the product launches.
Changing regulatory environment causes threat to the existing products as a result of removal of the relevant lincense or imposition of increased regulatory compliance procedures.
.
FINANCIAL PERFORMANCE ANALYSIS:
This report aims to do a comparitive analysis of financial performance of Dechra PLC against Concateno PLC,(a global provider of drug and alcohol testing products and services), by examining various aspects of financial status by calculating liquidity and solvency ratios and financial performance by assessing their Profitability,Efficiency,productivity,Sales,Working capital and Investment ratios and finally come upto weigh up the evidence to evaluate whether GSK can go ahead with acquisition option or not.To deal with year end differences for Dechra and Concateno,I request the GSK team to update the accounts for Concateno as I have 2007 accounts for it.In this context,with the accounts provided,I am going to compare 2006/2007 accounts of Concateno with 2007/2008 accounts of Dechra which is the closest match.The following table shows their year end differences.
YEAR-END
DECHRA
CONCATENO
Financial year ending
June
December
At first, let me draw the differences from their Financial highlights from the following table:
KEY FINANCIAL HIGHLIGHTS OVERVIEW:
DECHRA PLC
CONCATENO PLC
sterling(£)£'000
2007
2008
% increase
2006
2007
Unaudited proforma
Audited
Unaudited proforma
audited
%increase
Revenue
253.8
304.4
20%
37.4
26.1
41.8
1.36
12%
Bar chart showing Dechra's Revenue Growth
The above tabular results show that Concateno had only 12% growth in unaudited proforma revenue over last year whereas Dechra had a significant 20% increase in revenue growth and from the bar chart, it shows that there is significant and steady increase in Revenue growth year over year.
In sterling(000)
DECHRA
CONCATENO
2007
2008
2006
2007
Adjusted Profit Before Taxation
12.6
16.9
4.9
8.0
Profit Before Taxation
12.6
11.7
0.8
0.3
Adjusted Earnings per share(pence)
16.89
20.81
(5.17)
5.29
Earnings per Share(pence)
16.86
14.20
(6.99)
1.05
Dividends per share(pence)
7.50
8.25
No dividends declared
Note:All the above graphs are to represent the financial highlights of DechraPLC
The above tabular results show that Profit before Tax is 0.3 million in 2007 for Concateno whereas Dechra shows 11.7 million which is far higher than Concateno.
.EPS of Dechra has increased consistently year over year from 9.97 pence in 2004 to 16.86 pence in 2007,however slight decrease in EPS to 14.20 pence in 2008 whereas EPS of concateno in 2006 and 2007 shows the loss making position of the company.
Adjusted Earnings Per Share shows 23% increase i.e. from 16.89 pence in 2007 to 20.81 pence and from the graph, we could see a substantial increase from 2004 till 2008,whereas concateno's Adjusted Earnings Per share is very less over the years comparatively.
Though Concateno shows 63%increase in unaudited proforma for adjusted EBITDA compared to Dechra which shows 33%, there is always a key development of Dechra's steady and robust organic growth in operating profit year over year.
Dechra shows 10%increase in Dividend Per Share from 7.50 pence in 2007 to 8.25 pence in 2008.There is consistent increase over the years from 2004 up until 2008.There are no dividends declared during 2006 and 2008 for Concateno.This information helps investors to assess the returns on their investment by analysing the investment ratios.
Name of the Ratio
Formula
Dechra PLC
2007
2008
Dividend Pay out Ratio
Dividend per share/Earnings per share
44.48%
55.08%
The Dividend Pay Out ratio measures the proportion of earnings(profit for the year) that a business pays out to shareholders in the form of dividends.
ANALYSIS OF FINANCIAL RATIOS: The following Financial ratios can help in assessing the financial health of a business and can be used to examine various aspects of financial position and performance for further planning and control purposes.
PERFORMANCE
DECHRA PLC
CONCATENO
2007
2008
2006
2007
Return on Net Assets=operating profit/net assets
32.7%
12.2%
2.19%
1.31%
Gross margin=Gross profit/sales revenue*100
14.5%
17.6%
46.99%
59.27%
Sales margin=operating profit/sales revenue*100
5.45%
4.62%
(53.53%)
7.58%
Asset turn over=sales revenue/net assets
5.99
2.644
0.04099
0.173
Sales per employee=sales/number of employees(£)
339763.05
342374.57
90666.66
129029.703
Profit per employee=operating profit/number of employees(£)
18539.49
15827.89
48533.33
9777.22
RONA or ROCE is called key ratio which compares inputs with outputs and is considered to be a fundamental measure of Business performance and also a primary measure of profitability thereby assessing how well the management has performed with the funds available. The higher the risk, the higher the required return.The tabular results show the performance of Dechra has been high compared to Concateno which has very poor RONA ratio which could be due to a high level of expenses relative to sales revenue.
Gross margin ratio and Sales margin ratios could vary considerably between types of businesses. Businesses operating on low prices have low operating margins.Gross margin for both Dechra and Cocateno has increased which shows that sales revenue is high compared to cost of sales.However from the above table we could see the decline in sales margin which could be due to high level of expenses relative to sales revenue.The increase in staffing may well account for most of the increase in operating profits.Factors such as degree of competition,the type of customer,the economic climate and industry charcteristics such as level of risk will influence the operating margin of the business.
As the Asset turn over ratio is very high for Dechra when compared to Concateno,Dechra proves its effectiveness in using the assets to generate sales revenue.
As sales per Employee ratio is very high for Dechra which implies that they are using their staff efficiently thereby increasing the productivity.
WORKING CAPITAL
DECHRA PLC
CONCATENO
2007
2008
2006
2007
Stock days=Inventory*365/cost of sales
43.289
47.2
43.435
132.5
Debtor days=debtors*365/sales(turnover)
48.93
52.4
369
134
Creditor days=creditors*365/cost of purchases
74.05
73
566.5
137
Inventory period ratio measures the period for which the inventories are held.The tabular results show that there is short inventory period of 47 days for Dechra in 2008 when compared with long inventory period of 132.5 days for concateno .Its not preferable to have long inventory turn over because holding inventories has a cost,for eg,the opportunity cost of the funds tied up.
Debtor ratio predicts that there is shorter average settlement period for Dechra which is most preferable when compared to Concateno which faces a problem if the credit customers take a long time to settle the amounts that they owe to the business.
By looking at the creditor ratio from the above table,Dechra maintains good will with suppliers as there is no increase in their settlement period.In case of Concateno,there is good progress in payables to suppliers from 566.5 days in 2006 to massive reduction upto 137 days in 2007 ,however, when compared to Dechra,it might lose its good will from suppliers which is not appreciable.
LIQUIDITY AND SOLVENCY
DECHRA PLC
CONCATENO
2007
2008
2006
2007
Current ratio=current assets/current liabilities
1.422
1.178
0.874
1.100
Acid test=current assets-inventory/current liabilities
0.959
0.804
0.842
0.885
Interest cover=profit before interest&tax/interest paid
6.090
3.2429
5.275
0.972
Gearing=Total debt/shareholders funds
0.5308=
53.08%
0.685
=68.5%
0.4011
=40.11%
0.38=
38%
Ideal Current ratio is usually 2 times or 2:1 for all businesses. However Dechra when compared to concateno has preferable Current ratio which is nearly 1.5 times as its liquidity is vital to the survival of a business. The higher the ratio, the more liquid the business is considered to be.
Acid Test Ratio: Though Dechra is regarded as having adequate liquidity, however it is not unusual for the acid test ratio to be below 1.0 without causing particular liquidity problems.we can see from the above table that liquid current assets do not quite cover the current liabilities, so the business may be experiencing some liquidity problems. It may be that liquidity might improve when the benefits of expansion come on stream.
Interest Cover Ratio: The Interest cover ratio has declined dramatically where operating profit covered interest 6.09 times in 2007 to one where operating profit covered interest only 3.24 times in 2008 which could be partly caused by the increase in borrowings in 2008 as in case of Dechra, the lower is the risk when compared to Concateno which looks hazardous ,the lower the level of operating profit coverage,the greater the risk to lenders that interest payments will not be met,and greater the risk to the shareholders that the lenders will take action against the business to recover the interest due.
By looking at high gearing ratio,there is clue that Dechra is trading successfully compared to Concateno as concateno has the problem of low profitability compared to Dechra.For a highly geared business,a change in operating profit will lead to a proportionately greater change in ROE ratio as shown below:
SHAREHOLDER'S VIEW
DECHRA PLC
CONCATENO
2007
2008
2006
2007
Return on Equity=profit after tax and interest/ordinary shares and reserves
28.99%
11.58%
3.01%
0.644%
Earnings Per Share(pence)
16.86
14.20
(6.99)
1.05
Dividend cover=profit for the year/dividend announced for the year
2.2 times
2.0times
No dividends declared
No dividends declared
Return on Equity ratio compares the net profit available to owners with owner's average stake.The tabular result analyses that concateno has very poor ROE ratio with an impression that a very safe bank deposit account will yield a better return than this whereas Dechra performed well compared to Concateno,however there is decline in value of ROE in 2008 when compared to 2007
EPS ratio helps to regard as a fundamental measure of share performance. The trend in earnings per share is used to help assess the investment potential of a business shares. Although it is not possible to make total profit rise through ordinary shareholders investing more in the business, this will not necessarily mean that the profitability per share will rise as a result. At this stage of analysis, though its meaningless to compare the EPS of one business with that of another,it can be very useful to monitor the changes that occur in this ratio for a particular business over time.From the table above,when compared to Concateno's poor EPS which shows up the loss making position of the company ,the potentiality for Dechra is high though there is slight fall from 16.86 pence in 2007 to 14.20 pence in 2008.
No dividends were declared for Concateno and for Dechra,the earnings available for dividend cover the actual dividend by just over two times which is prudential.
CONCLUSION:
With the prospective view of Dechra 's VetXX acquisition fully integrated and performing well in line with expectations,DVP EU grew strongly throughout the financial year.Both the existing UK and export businesses and the six months' revenue from VetXX contributed to this performance.So GSK will have advantage of VetXX too.The graph shown below is a kind of rarity.The group revenue increased 20% from £253.8 million to
£304.4 million.
Dechra as a vet supplier,wholesaler and drug manufacturer is building news in the development on prescription and endocrinology drugs for cushings disease and hypothyroidism for cats and dogs owners.Its wholesale business is balanced.It has already attracted the competition commision in 2002.So instead of growing of supplies ,it is investing profits in new drugs and marketing its older ones in new places in US.Amusing blow for animal liberation,Dechra is developing drugs used by and therefore already tested in humans for their animal patients.Now though Dechra's drugs account for just 10% of its sales,they are highly profitable contributing a much higher 40% robust operating profit in 2007 when overall profits rose 16%Analysts continue to expect the profits rising at their rate until 2010.No wonder investors are enthusiastic with the economis slowing down,Dechra's standard growth with its price earn 4 pounds per share which is well over 20 times earnings.
By SWOT analysis and looking into prospects of DechraPLC and by interpreting and analysing the financial ratios in comparison with Concateno, Dechra PLC's performance is high based on its steady operating profitable growth when compared to Concateno and so GSK can go ahead to acquire DechraPLC which adds strength to GSK.
