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Edited Transcript of DPH.L earnings conference call or presentation 2-Sep-19 9:30am GMT

Full Year 2019 Dechra Pharmaceuticals PLC Earnings Call

London Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Dechra Pharmaceuticals PLC earnings conference call or presentation Monday, September 2, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ian D. Page

Dechra Pharmaceuticals PLC - CEO, MD & Executive Director

* Paul Sandland

Dechra Pharmaceuticals PLC - Acting CFO

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Conference Call Participants

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* Anand Dhananjay Date

HSBC, Research Division - UK MidCap Equity Analyst

* Andrew Mark Whitney

Investec Bank plc, Research Division - Analyst

* Brian Templeton White

Cantor Fitzgerald Europe, Research Division - Research Analyst

* James Alexander Stewart Vane-Tempest

Jefferies LLC, Research Division - Senior Equity Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* James Francis Thomas Mainwaring

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Zoe Karamanoli

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [1]

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Well, good morning, everybody. First thing I'd like to do is to introduce Paul, Paul Sandland's acting CFO. One or two of you may recognize him because he's actually been acting CFO 5 or 6 years ago before Anne-Francoise joined the Board when he was Financial Controller. Since that time, Paul has been running the finance function for our European segment. So very experienced, well knowledgeable of Dechra.

Looking at the highlights for the year. Pleased to say that we continue to outperform the market substantially. Acquisitions are also performing well, and we've further extended our pipeline capabilities.

From a financial perspective, I won't dwell on this page too much, but obviously a 24% increase in dividend shows our confidence in the business now and in the future.

On that point, I'll pass you on to Paul, who'll cover the financials in detail.

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Paul Sandland, Dechra Pharmaceuticals PLC - Acting CFO [2]

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Thanks, Ian. Good morning, everyone. Pleased to have delivered another strong set of financial results, achieving double-digit growth at all lines of the income statement.

Revenue was up by 17.5% to GBP 481.8 million. That delivered a 21.5% increase in gross profit. This leveraged strongly to a 27.3% increase in operating profit of GBP 127.4 million with a 200 basis points uplift in operating margin to 26.4%. That translates strongly to a 16.6% increase in underlying EPS. This reflects the full year impact of the increased debt and number of shares from the AST/Le Vet deal and a confident increase of 23.9% in the dividend to 31.6p.

In terms of our revenue by segment, segmental performance has been strong in both the existing and from our acquired businesses. Our existing EU includes DVP EU, International and the like-for-like for RxVet, AST, Le Vet and noncore third-party manufacturing. Whilst in acquisitions, we have the 2 we've made in the year, which is Caledonian, it's a New Zealand acquisition acquired in October; and Venco, which was acquired in December in Brazil. We also have the balance of AST, Le Vet and RxVet, which we've now owned for nearly 18 months. North American revenue is all-existing.

Moving on to EU Pharma in a bit more detail. Delivered strong revenue growth, up 18.7%. The existing business was up by 5.2%, which increases to 7.8% if you strip out the third-party manufacturing, which we've flagged previously we're strategically exiting from.

The acquisition added GBP 34.2 million with AST, Le Vet performing in line with expectations and the recent acquisitions of Caledonian and Venco performing ahead of expectations.

Underlying EBIT was up 31.7% to GBP 100.3 million. This includes a nonrecurring credit of GBP 3.5 million due to the curtailment of our Dutch pension scheme, which we previously flagged at the half year.

Existing business was up by 10.6%, 6.1% if you exclude the impact of the pension credit. And the acquisitions contributed GBP 15.8 million.

Underlying EBIT margin increased strongly by 320 basis points as we were able to generate good operating leverage driven by the AST/Le Vet synergies, whilst these do get diluted slightly as a result of the inclusion of Venco, which is a lower-margin FAP business. If we strip out the impact of the nonrecurring pension credit, our EBIT margins still increased by 210 basis points.

Moving on to North America. Delivered another strong set of revenue -- set of results, with revenue growth of 15.4% in the year. This represents a strong outperformance of the market. The U.S. is the main driver of the growth, but our Canadian business has also performed well in the year. This growth has been achieved through a combination of portfolio focus and the full-year benefit of the investment we made in the commercial team. Growth did slow in the second half of the year, as we previously flagged, as the Zycortal competitor returned to the market. Our operating profit increased 17.8% to GBP 59.2 million, and our operating leverage was up 70 basis points to 33.3%.

Moving on to research and development. We've signaled previously that we would continue to increase our R&D spend and we've done that. We've spent 36.6% to GBP 25.1 million. This increased spend reflects the previously stated strategic intention to expand the pipeline and increase investment in more novel opportunities to drive future growth. This has been further enhanced post year-end through the major agreement we signed with Akston, and Ian will cover it in more detail later in the presentation. Notwithstanding the increased R&D investments, we've still been able to deliver a significant increase in operating margin, which I covered in the previous slide.

Moving on to gross margin. Margin increased to 57.7% due to strong performance of our higher-margin CAP business and through the realization of revenue synergies at parts of the AST and Le Vet deal.

Underlying SG&A expenses were up 14.3%, reflecting the additional investments in R&D and full year impact of the investments made in our commercial teams. SG&A also includes the GBP 3.5 million pension curtailment credit. If we strip that out, our spend as a percentage of revenue is broadly flat.

Moving on to currency. While surprisingly currency has been less impactful, on the average rate than in recent years, despite large volatility within the year, with the average euro rate weakening slightly by 0.5% against sterling and the average dollar rate strengthening by 3.9% against sterling. We've included the sensitivities on this slide and sterling has weakened recently, and have these rates applied for the financial year, EPS would have been about 5.6% higher. The Australian dollar, Croatian kuna and Brazilian real are starting to influence our currency mix as these businesses become more relevant to the business as a whole.

On cash flow, our underlying EBITDA percentage increased from 26.2% to 28.5% in the year. We made a couple of planned investments in working capital, firstly, to support the growth of the business; and secondly, to mitigate any potential delays at ports arising as a result of Brexit. We'll sit on this additional inventory until we gain more certainty over what will happen in October, at which point this will then unwind. These investments resulted in our cash conversion being 85%, which improved on last year, but I would anticipate further improvement as the Brexit inventory unwinds.

ROCE improved slightly year-on-year as we continued to benefit from consolidation of our acquisitions by further leveraging our asset base.

In terms of net debt, improved to various moving parts. We started the year with a net debt-to-EBITDA leverage ratio of 1.75x, which increased at half year to 1.82x as a result of the Venco acquisition. At year-end came, it down to 1.64x on the back of strong cash generation from the business.

On tax, our underlying effective tax rate increased slightly to 21.2% due to full year impact of the AST, Le Vet mix, partially offset by the U.S. Tax Cuts and Job Act benefits. We expect a similar effective tax rate in 2020. But although we will see the benefit from The Netherlands corporate tax reduction, this is likely to be offset by increasing profits in our other overseas markets where the tax rate is higher.

The reported ETR credit of 11.2% includes a one-off tax credit of GBP 8 million from the revaluation of deferred tax liabilities due to the reduction in The Netherlands tax rate, which we've taken through nonunderlying. We continue to monitor risks, particularly around North American tax policy; EU challenges; CFCs, from which we benefit; and expiry of patents, which will reduce the benefits we currently obtain from those regimes.

And then just a wrap-up on the numbers. Our nonunderlying items mostly relate to acquisition-related items and as set out on the slide as well as ongoing costs related to the rationalization of our manufacturing organization. Since the inception of this program, we've incurred GBP 4.9 million of nonunderlying costs. Total planned income statement spend on this project is expected to be GBP 7.6 million by the time it's due to be completed in FY '21.

The full year dividend is up 23.9% to 31.6p, with dividend cover reducing to 2.8x, reflecting our confidence in the future prospects of the business.

On banking, we have significant headroom available on our existing facilities, which would enable us to consider further relevant acquisitions and investment opportunities as and when they arise.

Ian will now provide you some more detail on the strategic and operational highlights.

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [3]

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Thanks, Paul.

Looking at the existing business, first of all, in terms of the EU, we estimate the market to be growing at about 2.5%, so our real growth at just shy of 8% is an excellent performance. The noncore business, as Paul outlined, are things like agrochemicals and decline in contract manufacturing, which is why the real figure is nearer to 8%.

We continue to outperform in almost all the markets. We can't say that conclusively because not every market's growth is actually measured, but we believe we outperformed in every market in which we operate within Europe.

Special mention to Germany, we put a new country manager in there in the previous financial year. He's put a new strategy in place that involves recruiting an increased sales team, and the performance has been excellent on the back of that.

North America continues to perform extremely well. All organic growth. We continue to increase market share, particularly of a range of generic products that we have there, so we've actually outperformed our own expectations. Clearly, you can't keep increasing market share forever because our market shares are now very high, but we do expect to continue go to double-digit growth -- low double-digit growth in future years.

Probably worth mentioning, we talked about the sales team a lot over the last few years because we've been building the scale of the sales team, and we're now slightly -- we're more or less where we'd like to be, we're commensurate with the scale of the business. So we will continue to hire people but only in line with the growth that we deliver.

Breaking out performance by product type. Companion Animal Products continue to be the main driver of growth. Excellent delivery across all our therapeutic sectors.

FAP, very pleasing. Although it's a relatively low number, you have to bear in mind that within Europe, where most of our FAP business is, there is still an ongoing pressure to reduce the use of antibiotics due to concerns of microbial resistance. Our FAP range is positioned in the right sector now, and they're all therapeutic treatments. So they're only used for the treatment of sick animals. So there will always be a business, the type of antibiotics that we sell in that sector, which currently represents about 2/3 of our FAP sales. Obviously, with the acquisition of Venco, that balance will change a little in the future because that's moving us more into the vaccines, which is the biggest-growing sector of the veterinary market.

Looking at Equine products, horse products. A slightly disappointing performance. What we saw was in America, there've been an unusual number of broken legs on a couple of race horses and a few people decided that they were going to speculate on this. It was all young horses. And somebody suggested that bisphosphonates, that had been recently introduced into the market, of which Osphos is a bisphosphonate, may be responsible for this. There was absolutely no evidence for it whatsoever. But the other point that was missed from the supposed expert that wrote this report was that Osphos is actually contraindicated for young horses. So it can never have actually been the reason for it. So it took us a long time to deliver that message back into the community. The equine community is a quite small community, so bad news gets around quickly, but good news is also delivered fairly quickly. So we've managed to correct the market on that misperception and we're now getting growth back in this sector.

Nutrition, slight better performance in the second half on the relaunch of the CAP Diet. People ask me a lot, "Is this business core?" Yes, we still consider it core. It still makes a contribution to our leverage in a number of European countries, namely France, Sweden, Denmark, where we have a decent market share. The therapeutic diets are high-quality diets, and they do actually complement a lot of our pharmaceuticals in a lot of therapeutic areas, so the vet would recommend the diet to go with the pharmaceuticals. So we still see this business as core. One of the reasons for its underperformance is because vets have lost a lot of the segment by Internet pharmacies and by retail stores that also now sell therapeutic diets.

Our geographical expansion continues. Probably the key point to bring out in the year is the excellent performance of Australia and New Zealand and also the Brazilian business, Venco, since we've owned it. What this really demonstrates is that the performance of selling products through our own sales and marketing subsidiaries is better than when we sell it through third-party distributors. And this really sort of cements our acquisition strategy, trying to develop sales in international markets.

In terms of the pipeline, there's been an extensive range of products launched within the period and registered within the period into multiple international markets. There's a more detailed list of the key products on Page 30, if anybody is interested in specifics in that area.

Over recent years we've made numerous acquisitions that you're aware of. A lot of them have been generic or generic plus orientated. So what we've seen is the historic balance in the business has slightly swung in that direction. So we've put a huge amount of emphasis and a lot of resource into finding new development opportunities. And I'm pleased to say that over the last couple of years we signed an awful lot of technology agreements which have strengthened the pipeline very considerably, the most significant of which is the recent signing event in the press release of the deal with Akston to license the technology that they originally started to develop for human diabetes, that they saw an animal application. This was a very competitive tender, including a number of big pharma looking to acquire this. So we're delighted that we've convinced them that we're the best party to take this product forward, particularly with endocrinology being a very strong point of ours.

Can you imagine giving a dog or a cat daily injection? It's quite easy to see that giving a weekly injection is going to be a massive marketing benefit. So it's a benefit to the vet, it's a benefit to the dog owner, and obviously, it's a benefit to the dog and cat as well not having to be injected every day. So really significant product, will deliver excellent long-term value. But as Paul said earlier, it will add additional probably development spend due to the clinical trials but also due to the milestone payments over the next few years.

In terms of acquisition, although AST and Le Vet seem quite a long time ago now, they still are making an excellent contribution to the growth and we're now seeing the true like-for-like we will show next year. AST was a Dutch business completely merged now commercially with our own Dutch organization. The biggest benefits of this -- the acquisition where they were made simultaneously was Le Vet. We've now disintermediated 2/3 of the distribution agreements with Le Vet held with our competitors. And in the second half of the financial year, you saw the big benefits of those products being sold in Dechra livery through our existing subsidiary. So the acquisition has been a fantastic success for us.

Acquisitions we've made in the year. We have spotted Caledonia, a very small bolt-on, but it's now given us a market-leading position in equine products in Australia and New Zealand.

Venco, a major step forward for us into the Brazilian market, a massive market, the third-biggest now outside of Western Europe and North America, so hugely significant market for us, and it is in the right sector with vaccines. The other really pleasing thing about this is we've managed to put a strong management team in place, partly they've got new recruits, but also through an existing team, we believe are capable to really deliver our sales in South America going forward.

We announced on Thursday last week another small acquisition, slightly unusual for Dechra because the predominant reason for buying this was that it's a manufacturing site, a fully FDA-approved manufacturing site that has multiple dose formats. Why do we want another manufacturing site? Well, relying on third-party contract manufacturing, which is about 1/2 our turnover is becoming very, very difficult. The increasing exacting standards in quality means that production of veterinary products, and most of our products are actually made in human pharmaceutical laboratories, we're such small batch rooms that we become less relevant to them. So to take control of more of our own manufacturing has been very important, particularly in such a key market as the United States. The business was also appealing because it has 2 veterinary licenses that they originally started as a contract manufacturer, but they started then to put money into registration. And one of the products we already market, GentaCalm, you can see on the slide. But also they've got 2 other products that are relatively near term in development that we'll be able to sell through our existing U.S. sales team as and when they're approved.

Just a few words on Animal Ethics. This is a business that we've had a share in for some time where we've also got -- with the exception of Australia and New Zealand, we've also got global marketing rights. This product vastly improves animal welfare in tail docking, in castration, in disbudding for cattle. And we have the opportunity to increase our market share to 48%, which we've duly done. Progress is being made in all major global farm animal markets around the world. We see this as being significant in a number of ways, not least because it's a novel product for us to sell, but animal welfare is becoming more and more important across the world.

One fringe benefit was somebody from Sydney University thought that it might have an application in foot-and-mouth. And foot-and-mouth, while it's been eradicated from a lot of countries like the U.K., it's still endemic across big parts of the world. And to the small-holding farmer, it can be absolutely catastrophic. The cattle can't eat, and eventually they'll die. What they found was that if you spray this on the mouth ulceration, that the cattle will start to eat. And by a complete fluke, the pH also kills the virus in the mouth of the cow. So it's been found to be hugely successful. We've already got it marketed in Laos. And we expect that we'll get very quick marketing authorizations in a lot of countries where this is a real major problem.

One other thing that people may not realize is that Animal Ethics is actually owned by Medical Ethics. So it is Medical Ethics that we own the 48% share in. They're also -- they've got several applications that they see for their product to be applied in human medicine. And they've got ongoing trials in venous leg ulcers, which so far it looks like it's going to be a major success in that area as well.

Looking at IT, people and manufacturing. There's not a lot as for the people changes that we didn't mention at the half year. Oracle, we implemented 2 years ago now. It's embedded very, very well, and we're looking now at the next phase of implementing ERP across other countries in which we operate where it's not yet in.

In terms of manufacturing, I think it will be fair to mention that towards the back-end of last year, we had a number of supply issues, not least from contract manufacturers, but also internally. This is not a major problem within the business. It was just a number of delays. The standards of quality are increasing remarkably across the globe. You've also now got for the first time consultation between the MHRA and the FDA. So they basically confer notes when they've done an inspection which has almost put them in competition to see who can drive the quality standards to the highest. This isn't an issue to us. It creates a big barrier to entry and our quality standards are very good. But what we have recognized was that the previous 5-year plan was slightly flawed that it didn't put enough investment into people and systems to deal with the improvement in quality, which is now being done, and we have overcome the majority of the temporary supply issues that we'd encountered.

Finally, looking at the outlook. Hopefully, we've demonstrated through the presentation that our strategy is delivering well. All aspects of it are performing well. The portfolio is still delivering growth from existing products. We're expanding into new territories. And the acquisitions are all performing well. And we're still screening other potential companies that we see would be suitable to bolt on to the group.

On that note, we're happy to take questions.

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Questions and Answers

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [1]

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(Operator Instructions)

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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James Gordon from JPMorgan. Yes, I've got couple of questions, please. One is about margin. Can you talk about the puts and the takes for margin expansion this year, the top and underlying operating margin (inaudible). I think you probably have an FX tailwind, how much did that help? And then it seems like you have a bit of a headwind on R&D, because that's going up. You're not going to have a one-off in SG&A as well. So first question would be around margin expansion.

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Paul Sandland, Dechra Pharmaceuticals PLC - Acting CFO [3]

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Yes. So I think the model is -- what we always have, which is now that the team is mature, increased sales, more products through the top line, which will give us leverage at the bottom line. I think in terms of FX, you're absolutely right. We'll manage and do the business based on constant currency and you see that we invest (inaudible) to gain exposure to the markets in which we operate.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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The second question was just on supply chain issues and investments. I think you said that it wasn't material in '19, but where did you see any impact, if there was some? Where could you see a bit more impact in 2020 if there is an impact from the supply chain issues?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [5]

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They were encountered at the back end of last year, but we have enough stock in the supply chain for not to have a material effect on the back end of last year. We've seen in the first months of the new financial year, it was a little bit below our expectations. But the major products that were out of stock came back in stock in August, so we're now seeing a reversal of that position.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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(inaudible) which products they were?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [7]

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I prefer not to for commercial reasons.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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And then a final question, just M&A. You got quite a lot more room in terms of the leverage ratio, where you could go to. So is that a reason one to expect you might do something that uses quite a lot of leverage this year? Or you're more betting in deal you've already done this year?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [9]

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I'd like to think that buying business is an exact science where I can say I'm going to buy one next February. Unfortunately, it doesn't work like that. So it's very difficult to give you the specific answer to that question. We have numerous targets, but some of them took 5 years in gestation. Some of them took a lot more quickly than that. So I'd like to think that we will par again this year, but we can never make that promise.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [10]

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It's Andrew Whitney from Investec. Just 2 questions from me on the U.S. business actually. U.S. growth rate is very strong relative to U.S. market. Is a little bit of that the maturation of the Putney pipeline that you bought historically? And how much longer can that run on for? I know you talked about taking -- continue to take share. But are we sort of -- has that Putney pipeline piece played out pretty much?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [11]

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No, no, there's still products in the pipeline. Of course you're right, in terms of the products that have already been launched after that pipeline have made a big contribution to that growth, particularly things like the Amoxi-Clav product that we have, that's performed extremely well, and we've got pretty high market shares. But we're also getting growth out of the existing registered products, things like Zycortal and Osphos -- not Osphos in this period, but Vetoryl is still performing well. So it's a combination of things. But you're quite right, Putney has made a big contribution to that, but the pipeline has still got a few years to run before everything that was originally from the Putney product line that comes to market.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [12]

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That's very helpful. And then I think it was this time last year you were seeing some generics in the supply chain, and I just wondered if there was any movement on that theme or thereabout?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [13]

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No, I think the issue last year that we tried to raise, there was one major generic that have been launched through the distributors as a white label product. We've seen nothing else coming to the market. This directly competed with us. And I think you've probably actually seen that the distributors have made a slight change of direction there when they tried to change the model rather than try and compete with their own bread-and-butter core suppliers.

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Zoe Karamanoli, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Zoe Karamanoli from RBC. The first question on margin. You seemed harped on reducing other revenue on margin, is that now flattened out? Or should we expect to see more of that?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [15]

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No, we expect a bit over to decline. It's third-party contract manufacturing. We've got 1 or 2 reasonable contracts at a long term, so it take a while for them to wash out, but the majority of that will disappear. We also have some agrochemical business. And we're not deliberately moving out of that, we're just -- because it makes a small contribution. So we'll just let that run, but it's not strategically important. But it will probably decline due to its lack of focus over a number of years.

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Zoe Karamanoli, RBC Capital Markets, LLC, Research Division - Analyst [16]

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Okay. And then the second, any upcoming pricing renewals with major distributors or wholesalers and customers that we should be aware of?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [17]

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The distributors and wholesalers don't determine price in the market. We set a veterinary price and we give the distributors a fixed margin off that price. They don't play any influence at all within the pricing model within our market. What does determine the price a little bit more is the consolidation of veterinary practices. And we've always said that as these customers get bigger, we have to improve the discounts a little year-on-year. But as you can see, despite that headwind, we still managed to grow margins every year.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [18]

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James Alexander from Jefferies. For some of the deals which have been done already, are there synergies yet that should be realized?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [19]

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Sure. The Le Vet particularly, as we said, was about 2/3 of the products that now we're selling through our own subsidiaries. And that was -- they were only launched mainly in the second half of the last financial year. So in this new financial year, you should see the full effect of that. The reason we've only done 2/3 is because 2/3 of it have change of ownership contracts. The other 1/3 of the opportunities have the finite terms of the contract, which has still got some room out, but eventually, we'll bring all those products or the majority of them back in us. There's 1 or 2 that's strategic, we're not involved with the current distributors, but we'll continue to see synergies from that. And of course, we still got the full year effect from Venco. Venco, there's a couple of years of really the investment that we need to make to bring part of the facility quality standards a little bit higher, and then we'll look to expand that into other South American countries. So it's a while before that I'd say that's the focus, our intent. And the recent acquisition that we talked about, Ampharmco, there's no real return on that until about 3 years' time once we've done all the tech transfer of new products into that facility.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [20]

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My second question is on (inaudible) opportunities?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [21]

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The main -- there seems to be very little overlap. So I doubt whether there'll be a tailwind that's sold out that's of much significance, but you never know. I think from a competitive landscape, we don't really compete head on with either of them. And that's 1 less player in the marketplace. And presumably, they'll all still look at the big products and leave our niche specialist sort of sectors less attention.

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Zoe Karamanoli, RBC Capital Markets, LLC, Research Division - Analyst [22]

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(inaudible) given some (inaudible) information on the pipeline (inaudible), updates on that (inaudible) on products, et cetera?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [23]

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We tend -- because the pipeline doesn't move that quickly over a period of time, we tend to just cover that in more detail at the half year. If you look at actually the (inaudible), in fact by the time it comes to market, the addressable market is about $200 billion, if you look at the dogs with diabetes -- $200 million, if you look at the number of dogs and cats with diabetes in the world, and the current market's in excess of $100 million. So I mean that's the thing with a product with such a massive application benefit, we would take a huge share of that. And then some of the other technologies, we're looking at with several million each. So the pipeline has increased in value significantly. But we'll try and give you a bit more transparency when we get to the half year. It's a very difficult thing to do because we discount considerably on the market value. By the time it takes to get to market, the likelihood of getting to market, it's such a risk-adjusted number that I'm not so sure what meaning it really has. But the pipeline is stronger than it's ever been, and we're recognizing more opportunities than we've ever seen.

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Zoe Karamanoli, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Then just on Tri-Solfen in Europe (inaudible) going now, any update (inaudible)

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [25]

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One of the ingredients is lignocaine, which has been injected into thousands of mouths for 30 years in human dentistry. Well, for some reason, the regulators decided that you need to set prove that it's safe to spray on to a wound, which is an absolute nonsense but it's a box-ticking exercise. So it's actually delayed the registration of the first target market, which was Germany while we had to work almost for the maximum residue in it. So I mean it's a ludicrous regulation because, clearly, you're going to get [harm more] put in your mouth than anything that might -- it actually becomes systemic in an animal (inaudible) 6 weeks later. It's a very frustrating situation. So on the one hand, you've got the government saying, "We need to find better [family] for animals," and then they're not talking to the regulators and saying, "Let's show some pragmatism and some common sense on getting this product accelerated." The box tickings of the world, unfortunately, are winning on this one. So I think you're probably looking at another 1.5 years, 2 years before we actually get a registration within Europe. But what we are finding is that then I think you'll get multiple markets to start coming online at a similar sort of time. We've got it in registration in Brazil and in Mexico and several of the countries that have a slightly quicker process.

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Zoe Karamanoli, RBC Capital Markets, LLC, Research Division - Analyst [26]

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And then finally, you talked about pricing and the consolidation of debt in both Europe and the U.S. And what about the opportunities with your sales channel? Is there any more (inaudible) direct (inaudible)?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [27]

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The distributors don't provide good value. They work on fairly thin margins, they offer excellent services to the veterinary practices. So I don't think there's a need to miss out the distributors. There was a concern couple of years ago when they started to introduce their own white label product ranges that, that was the direction that they were going to take, and I think then we would have to consider going direct. But that hasn't proliferated, so I don't see it being a point at the moment in disrupting the market. It looks well and serves us well.

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Unidentified Analyst, [28]

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(inaudible) from Stifel. Couple of questions. You talked about the performance of acquisition, Venco acquisition doing better than you'd expected. Just wanted to get a bit more color on what specifically was affecting that or causing that?

And secondly, just again on Le Vet acquisition. Just interested in, you've obviously taken 2/3 of the products now from other distributors, so quite a large number that you distributed yourself already. Have you noticed a change in the performance of those products or disruptions to those products as you transferred them? Is that something you expect to impact potentially positively the business going forward as you get those products under your belt?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [29]

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Well, there's a bit of disruption because, obviously, the previous owners of those products want to try and maximize sales. In one or two occasions, they flooded the market which just mean it's taken us actually longer to get into the market than we'd actually hoped. As I said, with international, we are better at selling our products than any third-party that we sell them through. So I would like to think that once they're all embedded within our existing sales and marketing organizations that we can deliver better sales than the previous partners that used to sell them.

In terms of Venco, normally, you've got to be very careful and diligent when you buy a business that they haven't tried to sell more in the sort of 6 months beforehand and to try and inflate sales so they can maximize the value. We're very good at trying to spot this because we know the market so well. I think in Venco, we might have actually done something slightly different because I think they all wanted to keep jobs with us once we bought it. So if anything, they perhaps undercut what they could actually deliver, so -- and I think also with vaccines being a big growth area. And also, the Dechra brand is becoming well-recognized now, and I think having the strength and the support that we can offer them as a larger company, I think, is serving them well.

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [30]

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It's James Mainwaring from Stifel as well. Just sort of going back to your focus more on the generic and generic plus products, just a kind of thought about how long it takes to perhaps get some of the AST kind of generic plus products and put them into the U.S., whether that's into market, and if it's quicker than sort of doing your (inaudible) origination?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [31]

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First of all, generics and generic plus isn't our focus. We've got there by acquisition rather than by design. There are very few companies that have generic products around the world to acquire. So most of what we've acquired has been in that sector. So which is why we talk now about trying to make sure that the historic balance is returned. Sorry, what was the...

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [32]

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It's just about kind of being able to get approved in a different market.

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [33]

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There's only, really, 2 of the products where we felt the dossiers were robust enough to transact in the U.S. market. You've got to bear in mind that the generic can't easily be transferred from one country to the other. And as we mentioned with the U.S. market many, many times, the barrier to registration in the U.S. is a lot higher than it is within Europe. So there's not a lot of products that would actually merit, with the information that we have, actually taking into other countries. So the Le Vet acquisition was predominantly about Europe.

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [34]

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Okay. And then one final one, looking at through R&D. You happened to sort of look a bit earlier in the pipeline, the product. I was wondering if you have to sort of kind of think about your team makeup within the R&D department used to be very focused [to work on] just on the dossier stage and getting it approved in countries where you (inaudible) things get more people here or kind of experience in that earlier stage clinical development as well?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [35]

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We've been building the team in terms of the -- I mean the major expenses require, I would say, is the clinical trial aspects of it. So we have been strengthening that team, which is part of the incremental plus over the last couple of years. But we have the skills and resources to run the program that we got currently. If anything, we've got more opportunities than we have money to spend in this area at the moment. So we have been fairly selective in what we've taken in. But you are right, a lot of it, by accident, is early stage and things that we've looked up before. But the end market size is worthwhile taking that risk.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [36]

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It's Anand from HSBC. I've got a couple of questions. Just following on from that. Could you comment a little bit on the market for acquiring active ingredients? Do you think it's becoming more competitive? Are you seeing any sweetheart deals that these guys are spending of their animal health businesses by giving them special terms for the vet [AIs] or anything like that?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [37]

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No, there are very few human pharma are actually involved in veterinary medicine now. So there's no easy spinoff deals. The first part of your question, some things, we've got into an exclusive period very early on because we've identified and approached the company. So those deals, they're a lot more straightforward than something like Akston. There's not many things that have been put into a competitive tender situation as Akston was. And that wasn't all about price. It was -- a lot of it was to doing with determining with the best partner. And you've got to look also at the marketplace at the moment. People that have got specialist products were dominated by 5 big pharmaceutical companies that are quite hard to get decisions thereof very quickly. There's tiers of management. They're slow in making decisions. There are very few companies in Dechra's sweet spot that have got a novel portfolio that's proven that were able to deliver specialist products successfully into the marketplace. So we do actually get brought a lot of products and have us chance to look at something.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [38]

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The second part of my question was Akston, you said it was a very competitive tender with big groups. So you're saying it's not just price. It's we can promise we can bring it to market quicker and...

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [39]

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Yes. And yes, I mean, there's a lot of benefits in trading with Dechra that you can say that I'm bound to say but we're easy to deal with, we're very pragmatic, we make decisions very, very quickly and we've got proven success. We're outperforming everybody else in the marketplace.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [40]

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I forgot the lady's last name, but I think there's a lady called Septima who's heading up your acquisition integration.

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [41]

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Process.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [42]

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Have you -- is there any risk around that? Is there a new person that's been appointed internally to sort of run that?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [43]

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Not yet. Septima decide -- just to clarify this question. Septima is going to become CFO of Benchmark, a smaller company within our industry. So she'll leave us in the beginning of November. We're looking at opportunities. She'd only been in the role for about 1 year anyway, by the way. So she's -- she was previously the Financial Controller. Yes, she'll be missed. She's a terrific lady, very hardworking, very knowledgeable, very capable. But you will have people to move on in life, don't you? And we applaud her for the role that she's taken, and we'll find a way to deal with it.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [44]

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And my last one was, I was just looking at Covetrus' last transcript. Should we just almost discount everything they say because they've got their own profit and loss...?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [45]

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Sorry.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [46]

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Covetrus, so they're basically saying, footfall for vet practice is down and blah, blah, blah. Can we just discount that because of the position they're in?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [47]

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I don't really want to comment too much. I did -- somebody asked me a question, I think, when they first created Covetrus about 18 months ago, and I said the jury is out. I got a lot flack for it within the industry, but I think the jury is out.

Okay. Any questions from anybody that's on the telephone line?

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Operator [48]

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(Operator Instructions) The first question comes from the line of Brian White calling from Cantor Fitzgerald.

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Brian Templeton White, Cantor Fitzgerald Europe, Research Division - Research Analyst [49]

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A couple of questions on the diabetes for dogs product. And I was just trying to think here about the certainty of a return on quite a sizable investment for you. It is -- have you disclosed the technology itself based on -- is that an animal version of an already approved long-acting human insulin version?

And then just secondly, you mentioned cats. And I wondered if -- is it a different registration package for cats versus dogs? And if so, you do it sequentially or is it in parallel? And does that come also with additional costs?

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [50]

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We have first (inaudible) for the cats (inaudible) play great terms. The product isn't licensed in human medicine yet, but it was originally developed for human medicine. The product using the same technology is actually a different molecule for dogs and cats and for people, so it does involve starting -- from standing start on each occasion. Where we've got confidence in this product, the last time that, looked at the data a few days ago, the clinical trial that started in a university in America, and 13 over 14 dogs have been successfully stabilized on a weekly treatment. I mean that isn't big enough to be clinically proven yet, but it's a hugely strong indication that this product is going to work. There will -- can we run the things consecutively? I think we'll get some way into the development process before we actually sign the agreement on the cat products, but there will be some overlap at running both programs simultaneously.

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Paul Sandland, Dechra Pharmaceuticals PLC - Acting CFO [51]

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I think, Brian, just to add to that, along the way there are a number milestones, that if those milestones aren't achieved, then the milestones don't get paid.

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Operator [52]

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(Operator Instructions)

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [53]

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Okay. Yes. No?

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Operator [54]

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We have no further questions coming through on the phone lines. Please go ahead.

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Ian D. Page, Dechra Pharmaceuticals PLC - CEO, MD & Executive Director [55]

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Okay. Thank you very much, everybody. Thank you, you did so.