Margins under pressure at Dechra

published 11 January 2012

Veterinary pharmaceutical firm Dechra Pharmaceuticals has reported that group revenue for the six months ended 31 December was around 9.1% ahead of the equivalent period last year.

In European Pharmaceuticals the group achieved revenue growth of around 10.5% (7.8% at constant currency) compared to the same period last year. Branded pharmaceutical revenue increased by 13.8% at constant currency compared to the equivalent period last year. Specialist pet diets revenue was flat at constant currency due to a reduction in export sales, which was offset by an increase in sales in core markets.

Revenue from US Pharmaceuticals was ahead of the corresponding period last year by 40.9% (44.6% at constant currency), with strong growth from DermaPet and increased sales of Vetoryl and Felimazole, the firmn said. However, previously reported supply issues with ophthalmic and otic products have continued.

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Revenue from the services sector for the six months was 7.4% up on the equivalent period in the prior year. Gross margin remains under pressure and was reduced in the period due to product mix and increased discounting in an increasingly competitive market.

Panmure Gordon noted that the UK business benefited from a low base, as a result of low footfall during the snow-bound month of December in 2010, but noted "growth overall was strong across all segments of the business and, particularly pleasing, was the 41% growth in US Pharmaceuticals as well as 10.5% growth in European Pharmaceuticals, despite Diets remaining flat."

In a statement the firm said: "Trading within our veterinary products segments, the main area of our strategic focus, continues to perform robustly. Revenues in our services segment remain resilient; however, our revenue increase in this area has been offset by a decrease in margin. Overall the group has performed to management's expectation within the period."

Panmure Gordon responded to the warning on margins by downgrading its fiscal 2012 (FY2012) margin assumption by four-tenths of a percentage point, or 40 basis points (bp).

"Overall, we believe the operating leverage afforded by strong growth in pharmaceuticals should more than compensate any margin pressure in Services so, overall, we expect the group to expand gross margin in FY2012 by 130bp to 24.0% (albeit a downgrade from our previous assumption of 24.4%)," Panmure analyst Savvas Neophytou said.

"With the company being in an investment cycle for growth in the US, we believe the share price upside is capped for the time being until investors get better visibility of the how fast the company is achieving growth in the US. We reiterate our Hold recommendation and 525p price target," Panmure Gordon said.

Finncap, meanwhile, said that Dechra's trading update points to group revenues of over £209m.

"We are retaining our top-of-the-range forecasts at this time. However, unless Dechra experiences zero growth in the second half, other analysts will have to raise their revenue forecasts for the full year," suggests finnCap analyst Keith Redpath.

"We continue to believe that Dechra is a quality business which is riding out

recessionary pressures and continuing to deliver profitable growth. Our Buy

recommendation and 620p price target remain unchanged," Redpath concluded.

The share price fell 1.25% to 513.5p by 13:11.