Dechra Pharmaceuticals PLC

Dechra Pharmaceuticals PLC

Annual Report and Accounts for the year ended 30 June 2012

Financial Review

"Operating profit for European Pharmaceuticals grew by 29.6% at constant currency with the operational leverage effect of higher pharmaceutical revenue being clearly demonstrated"

Simon Evans
Group Finance Director

Group Performance

Financial Highlights

Underlying ResultsReported Results
Gross profit99,25988,36112.399,25988,36112.3
% of revenue23.3%22.7%23.3%22.7%
Distribution costs(17,979)(17,659)(1.8)(17,979)(17,659)(1.8)
Selling, general and administrative expenses(38,944)(33,658)(15.7)(54,655)(43,763)(24.9)
Research and development expenses(5,735)(5,221)(9.8)(5,735)(5,221)(9.8)
Operating profit36,60131,82315.020,89021,718(3.8)
% of revenue8.6%8.2%4.9%5.6%
Profit before taxation32,96630,0699.616,82018,514(9.1)
Profit after tax24,30222,74811,74914,134
Earnings per share32.37p*31.53p*2.715.65p*19.59p*(20.1)*
Operating cash flow before interest and tax payments29,12825,37414.829,12825,37414.8
Cash conversion rate91.7%82.8%91.7%82.8%
Free cash flow7,9059,294(14.9)7,9059,294(14.9)
Tax rate26.3%24.3%30.1%23.7%
Total dividend per share12.27p*11.12p*10.312.27p*11.12p*10.3
Net borrowings86,71734,09186,71734,091

* Restated to reflect the impact of the bonus element of the Rights Issue.

Revenue, Underlying Operating Profit and Underlying Profit Before Tax at Constant Currency

Underlying operating profit36,84531,82315.8
Underlying profit before taxation34,10829,07017.3

Analysis of Revenue and Underlying Operating Profit Growth

Operating Profit
Year ended 30 June 2011389,23731,823
Organic growth at constant currency30,6277.94,17013.1
Impact of acquisitions7,1271.88522.7
Impact of foreign currency movements(950)(0.2)(244)(0.8)
Year ended 30 June 2012426,0419.536,60115.0


At Constant Currency
European Pharmaceuticals
Own branded pharmaceuticals64,32248,61432.3
Third party contract manufacturing11,43110,7726.1
Instruments, consumables and equipment1,8942,280(16.9)
Total European Pharmaceuticals105,79089,28718.5
US Pharmaceuticals20,28716,10726.0
Veterinary wholesaling310,184291,1806.5
Total Services315,672296,2586.6
Total revenue at constant currency426,991389,2379.7
Currency impact(950)
Reported revenue426,041389,2379.5


Overall Group revenue increased by 9.5% compared to the 2011 financial year. Of this increase, 7.9% was organic growth, the Eurovet acquisition contributed 1.8% and currency movements had a negative impact of 0.2%.

Within European Pharmaceuticals, own branded pharmaceuticals grew strongly with a constant currency increase of 32.3% compared to the prior year (17.7% excluding Eurovet). This was the first full year that the marketing of Vetoryl came back in-house from our previous marketing partners. Our range of specialist pet diets grew by 1.9%.

Third party contract manufacturing grew by 6.1% compared to the 2011 financial year, returning to growth after a small reduction in revenue last year.

Revenue from US Pharmaceuticals grew by 26.0% compared to the prior year with Vetoryl, Felimazole and the DermaPet range all performing strongly. As with prior reporting periods, continued manufacturing issues with our ophthalmic and otic range had a negative impact of US$1.1 million on revenue.

Within the Services segment, our UK veterinary wholesaler, NVS, recorded growth of 6.5% in the financial year. This was slightly lower than overall market growth in the period due to NVS being underweight in internet pharmacies. Revenue from our Laboratories business showed an increase of 8.1%, reflecting a bounce back from the reduction in revenue seen in the 2011 financial year.

Gross Profit

Gross margin for the Group increased from 22.7% to 23.3%. This was driven by increased revenue from higher margin pharmaceuticals which was partially offset by a reduction in the NVS gross margin caused by increased discounting and an adverse sales mix.

Underlying Distribution Costs

Distribution costs increased by 1.8% compared to 2011, if Eurovet is excluded, the increase was only 1.0%. This below inflation increase was as a result of increased efficiency, particularly in our DVP EU and NVS businesses.

Underlying Selling, General and Administrative ("SG&A") Expenses

SG&A expenses increased by 15.7% (8.1% excluding Eurovet). This increase reflects, in particular, the continued build of sales and marketing infrastructure within our US business and the additional costs of marketing Vetoryl in-house within our DVP EU operation.

Research and Development Expenses

Research and development expenditure increased by 9.8% from £5.2 million to £5.7 million. This increase supports our product development programme which has been enlarged following the acquisition of Eurovet. Further details are given in Product Development and Product Pipeline.

Underlying Operating Profit

At Constant Currency
European Pharmaceuticals29,16622,50629.6
US Pharmaceuticals5,8454,83820.8
Research and development(5,735)(5,221)(9.8)
Central costs(3,487)(3,387)(3.0)
Underlying operating profit at constant currency36,84531,82315.8
Currency impact(244)
Reported underlying operating profit36,60131,82315.0

Operating profit for European Pharmaceuticals grew by 29.6% at constant currency (24.3% excluding Eurovet) with the operational leverage effect of higher pharmaceutical revenue being clearly demonstrated.

US Pharmaceuticals achieved a strong increase of 20.8% in operating profit despite the build-up of sales and marketing infrastructure noted earlier.

The Services segment showed a reduction in operating profit compared to 2011 with the reduction in gross margin noted above only partially mitigated by efficiency savings. Although operating margin for the year fell from 4.4% to 3.5%, the operating margin in the second half of the financial year showed an improvement to 3.6% compared to the 3.4% achieved in the first half.

Underlying Net Finance Expense

The underlying net finance expense in the 2012 financial year was £3.6 million compared to £1.8 million in 2011. However, the 2011 figure was flattered by a £1.0 million gain on foreign exchange whilst there was a loss of £0.9 million in 2012. Excluding foreign exchange gains and losses, the charge for 2012 is broadly equivalent to that for 2011.

Underlying Profit Before Taxation

Underlying profit before taxation increased by 9.6% from £30.1 million to £33.0 million. At constant currency, the increase   was 17.3%.

Non-underlying Items

Non-underlying items in the year comprised amortisation of intangibles acquired as a result of acquisitions together with one off costs relating to acquisitions and subsequent reorganisations, principally Eurovet. Full details are shown in notes 4 and 5 to the financial statements. The Directors believe that highlighting these items separately gives a better understanding of the performance of the Group.


The effective tax rate on underlying earnings was 26.3% compared to 24.3% in 2011. In 2012 there were certain foreign exchange losses for which there was no tax credit. In 2011 the tax rate benefited from non taxable foreign exchange gains.

Earnings Per Share and Dividend

Underlying earnings per share was 32.37 pence compared to 31.53 pence in 2011, up 2.7%. Both of these figures have been adjusted to reflect the bonus element of the Rights Issue. The relatively small increase reflects the additional number of shares issued in respect of the Eurovet acquisition against the small profit contribution from Eurovet recognised in the period from acquisition to the year end. Eurovet is expected to be earnings enhancing in the year ending 30 June 2013.

The Board is proposing a final dividend of 8.50 pence per share which, when added to the interim dividend of 3.77 pence (adjusted for the bonus element of the Rights Issue), gives a total dividend of 12.27 pence. This compares to the Rights Issue adjusted 11.12 pence in 2011. The cash dividend is up by 25.9% from £8.0 million to £10.1 million.

The total dividend is covered 2.4 times by underlying profit after tax (2011: 2.8 times).

Cash Flow

Share-based payments charge1,001830
Changes in working capital(7,111)(9,072)
Cash generated from operations29,12825,374
Net interest(2,426)(2,629)
Taxes paid(7,241)(5,034)
Capital expenditure(3,278)(4,090)
Proceeds of asset sales502
Repayment of borrowings(8,328)(4,329)
Free cash flow7,9059,294
Net new borrowings61,40029,556
Issue of share capital59,288541
Foreign currency effects(994)(129)
Net cash flow1,939(1,006)

The cash conversion rate in 2012 was 91.7% compared to 82.8% in 2011. A strong cash inflow in the second half resulted in an improvement of 14.8% compared to last year.

Free cash flow was slightly below the 2011 level due to higher debt repayments in the year.

Financial Position at the Year End

Non-current assets
Intangible assets225,872125,098
Property, plant and equipment16,7207,721
Working capital49,53132,494
Deferred and contingent
Current tax liability(8,155)(5,391)
Deferred tax liability(29,343)(13,443)
Employee benefit obligations(363)
Net borrowings(86,717)(34,091)
Net assets153,68298,333

The balance sheet at 30 June 2012 is enlarged due to the acquisition of Eurovet on 23 May 2012 together with the consequent Rights Issue.

Net borrowings at the year end represented 1.8 times underlying pro-forma EBITDA compared to 2.3 times at the time of the Eurovet Prospectus. Of the increase in working capital, £11.0 million was as a result of Eurovet with the remainder reflecting increased trading activity.

Bank Facilities

The Group's bank facilities were re-financed and increased during the year in order to partially fund the acquisition of Eurovet. The new facilities have been provided by a syndicate of four banks and comprise:

  • a £55 million term loan repayable in instalments through to October 2016. The first repayment of £5 million is due on
    31 March 2013
  • a £65 million revolving credit facility commenced until October 2016

The main covenants are:

  • cash flow cover no less than 1.25:1
  • interest cover no less than 4:1
  • the ratio of net borrowings to annualised EBITDA no higher than 2.75:1 up until 30 June 2013 and 2.50:1 thereafter
  • consolidated net worth no less than £120 million

There was substantial headroom on all covenants during the year.

The Group also has a £10 million overdraft facility which is currently unutilised.

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