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Dechra Pharmaceuticals: dogged by its own success

Health updates

Down, Fido. Shares in UK-based Dechra Pharmaceuticals, whose medications cater to the world’s growing band of pets and other animals, lost nearly 7 per cent in Monday morning trading. For a company that had just reported revenues up by a fifth to £608m in the year to end-June and even stronger underlying profitability, that seems unduly mean-spirited.

For sure, several quibbles, ranging from valuation to sustainability, are on point. Its 100-times price earnings multiple is double that of industry leader, New York listed Zoetis. True, the duo trade on a much lower forward multiple of 44 times but even so those are streets ahead of the peer group. 

But it is no surprise that the share price, up 70 per cent in the past year to a peak in late August, has run so far ahead of earnings. All things pet-related proved lockdown beneficiaries; pet care was one of food group Nestlé’s fastest-growing product lines at the halfway stage. The runaway share price proved a virtuous cycle when Dechra was mooted as a possible addition to the UK benchmark FTSE 100 on August 24.

With workers returning to offices, pets and their health could slip down the agenda. Dechra spooked analysts by mentioning that — anecdotally — vet visits are slipping in the US. This is a market where 70 per cent of homes, or 90.5m, are thought to have a pet. Still, Dechra reckons that, based on puppy prices, Brits are still acquiring dogs.

Dechra’s ability to sustain its upward march depends not just on the number of pets and assorted livestock it services, but also pricing power — something undermined by private equity’s consolidation of veterinary clinics — and competitors joining forces.

Yet Dechra itself has been no slouch in acquiring bolt-on companies. That has helped revenues rise 70 per cent over the past five years and operating margins increase by 4 percentage points. Moreover, its niche specialisms give it an edge over bigger rivals. Monday’s fall represents a buying opportunity.

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