Dechra Pharmaceuticals’s Market Position & Financial Strengths

Analysis Report

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Contents
1 Executive summary.............................................................................................................3
2 Context analysis..................................................................................................................4
2.1 External profile............................................................................................................4
2.2 Dechra’s internal profile..............................................................................................4
3 Overview of financial situation...........................................................................................6
4 Financial ratios....................................................................................................................7
4.1 Performance ratio........................................................................................................7
4.2 Working capital ratio...................................................................................................8
4.3 Investment ratio.........................................................................................................10
5 Overall evaluation.............................................................................................................11
6 Recommendations.............................................................................................................11
7 Reference..........................................................................................................................11

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Executive summary

This report is written to analyze the opportunities of working in Dechra Pharmaceuticals - a

reputable UK animal health company as a director, considering the current situation of the
company and the benefit of a stock option, using the CORE model. The company has a rising
position in the low threat pharmaceutical industry thanks to its good R&D and large
distribution channel. As the company is not yet highly profitable and productive, a manager
who can come up with practical measures to increase staff productivity and sales, leading to
improved profitability would earn performance bonuses. Because the company is
strengthening its positions, finances thanks to successful M&As, its stock price will increase
and the stock options will be a desirable part of the compensation plan. Considering the
intrinsic value of the managerial position, broadened scope of work as the firm grows adds to
the satisfaction and self-esteem of the managers. Regarding all these factors, it is
recommended that managers should move to Dechra Pharmaceuticals.

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Context analysis

1.1 External profile

The biotechnology industry is a rapidly growing field that uses living organisms and their
systems to develop new products and processes for various industries such as food and
beverage, agriculture, healthcare, energy, and environmental sustainability. The industry has
seen significant growth in recent years due to the increasing demand for new and innovative
products and processes, driven by population growth, rising incomes, and changing consumer
preferences. The industry is also influenced by global health and environmental concerns,
such as the need for new treatments for diseases, sustainable food production, and renewable
energy sources (Weintraub, 2016).
Novozymes is a Danish biotechnology company that specializes in developing and producing
enzymes and microorganisms for a wide range of industries. The company was founded in
2000, and it is now a global leader in its field, with operations in over 40 countries and
customers in more than 130 countries.
Now, turning to the Dechra company, they are a global veterinary pharmaceutical company
that specializes in developing and manufacturing veterinary products for companion animals,
horses, and production animals. The company was founded in 1997, and it has since grown to
become a leader in the veterinary pharmaceutical industry (Dechra, 2019).
In analyzing the market for Dechra, it is important to note that the global demand for
veterinary pharmaceuticals is increasing due to the rising trend of pet ownership, the growing
demand for animal-based food products, and an increased focus on animal health and
welfare. The market is highly competitive, with several large players like Zoetis, Merck, and
Boehringer Ingelheim.
The CORE article on Tesco's case provides insights into the competitive environment that
Dechra operates in. The article highlights how Tesco, one of the largest retail chains in the
UK, was able to leverage its market power to negotiate lower prices from Dechra, which had
a significant impact on Dechra's revenue and profitability.
In analyzing this case, Porter's five forces framework can be useful. This framework
considers the five forces that determine the competitive intensity and attractiveness of an
industry. The forces are:
The threat of new entrants: The veterinary pharmaceutical industry has high barriers to
entry, which limits the threat of new entrants.

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The bargaining power of suppliers: Dechra's suppliers, such as Novozymes, have some
bargaining power due to their importance in providing key ingredients for Dechra's products.
The bargaining power of buyers: As demonstrated by Tesco's case, large buyers like
retailers have significant bargaining power over Dechra and other suppliers in the industry.
The threat of substitutes: There are several substitutes for veterinary pharmaceutical
products, including natural remedies and alternative treatments.
The intensity of competitive rivalry: As noted earlier, the industry is highly competitive,
with several large players competing for market share.
Overall, the analysis suggests that while the veterinary pharmaceutical industry has some
barriers to entry and limited threat of substitutes, the bargaining power of large buyers like
retailers can have a significant impact on the industry's competitive dynamics.

1.2 Dechra’s internal profile

Dechra Pharmaceuticals is a global veterinary pharmaceuticals company based in the United
Kingdom. The company was founded in 1997 and is publicly traded on the London Stock
Exchange under the ticker symbol DPH.

Ownership

The ownership of Dechra Pharmaceuticals is spread across various institutional investors and
individual shareholders. The largest shareholder as of 2021 is BlackRock Inc., which owns
approximately 10% of the company's shares.

Figure 1: Dechra Pharmaceuticals global footprint (Dechra Pharmaceuticals, 2023)

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Management

The company is led by a board of directors and an executive management team. The current
CEO is Ian Page, who has been with Dechra since 2008.

Strategy

Dechra's strategy is to focus on key therapeutic areas where it can achieve a leading position,
such as endocrinology, dermatology, and ophthalmology. The company also prioritizes
developing products that address unmet needs in the veterinary market. Dechra invests
heavily in research and development to create new and improved products, as well as in
marketing and sales to promote its products to veterinarians and animal owners.

Business Model

Dechra's business model is based on developing and marketing a range of veterinary

pharmaceutical products, including drugs for companion animals and livestock. The company
also offers services such as diagnostic testing and surgical equipment.

Organization

Dechra is organized into several business units that focus on different aspects of animal
health. These units include Companion Animal Products, Farm Animal Products, and
Diagnostics.

SWOT Analysis

Strengths:

-Strong reputation in the veterinary pharmaceuticals industry

-Strong financial performance and profitability

-Innovative product portfolio

Weaknesses:

-Reliance on a small number of key products

-Limited geographic diversification

-Relatively small size compared to some competitors

Opportunities:

-Growing demand for animal health products in emerging markets

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-Opportunities for expansion through acquisitions and partnerships

-Growing focus on preventative care and wellness in the veterinary industry

Threats:

-Increased competition from other animal health companies

-Government regulation and pricing pressures

-Technological disruption and the emergence of new treatment options

Novozymes, on the other hand, is a Danish biotech company that specializes in developing
and producing enzymes and microorganisms for a range of industries, including agriculture,
food and beverage, and household and personal care. While there may be some overlap in
terms of the use of enzymes in veterinary pharmaceuticals, Novozymes and Dechra operate in
distinct industries with different business models and strategies (Dechra Pharmaceuticals,
2022).

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 Figure 2: The business model of Dechra Pharmaceuticals (Dechra Pharmaceuticals, 2012)

Overview of financial situation

Dechra is a global veterinary pharmaceutical company that focuses on developing,

manufacturing, and marketing a wide range of products for the diagnosis and treatment of
companion animals and livestock.

In 2021, Dechra reported a revenue of £608.0 million, a 5.6% increase compared to the
previous year. The company's operating profit was £162.2 million, a 13.9% increase
compared to the previous year. Earnings per share (EPS) were 51.33p, up from 32.87p in
2020.

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In 2022, Dechra's revenue increased to £681.8 million, a 10.9% increase compared to the
previous year. The company's operating profit was £174.3 million, a 13.6% increase
compared to the previous year. Earnings per share (EPS) were 53.72p, up from 51.33p in
2021.

Figure 3: Financial summary of Dechra Pharmaceuticals (Dechra Pharmaceuticals, 2022)

Dechra's financial performance in both 2021 and 2022 has been strong, with the company
reporting significant growth in revenue, operating profit, and earnings per share. This growth
can be attributed to the company's focus on innovation, investment in research and
development, and strong market presence in the global animal health industry.

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Novozymes is a Danish biotech company that specializes in the development, production, and
sale of industrial enzymes and microorganisms. Here's a financial overview of Novozymes
from 2021 and 2022:

In 2021, Novozymes reported a revenue of DKK 14.951 million , slight increased compared
to the previous year. The company's EBIT (earnings before interest and taxes) was DKK
4007 million, a 6% increase compared to the previous year. The company's net profit was
DKK 3146 million, a 5% decrease compared to the previous year. Earnings per share (EPS)
were DKK 11.23, up from DKK 10.02 in 2020.

Figure 4: Financial summary of Novozymes (Dechra Pharmaceuticals, 2022)

In 2022, Novozymes reported a revenue of DKK 17,533 million, a 6% increase compared to

the previous year which was 14,951. The company's EBIT was DKK 4,561 million, that is
increased compared to the previous year. The company's net profit was DKK 3,686 million, a
15% increase compared to the previous year. Earnings per share (EPS) were DKK 13.19, up
from DKK 11.23 in 2021.

Financial ratios

1.3 Performance ratio

Ratio 2022 2021

Return on net assets of Dechra 0.15 0.15

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 Return on net assets of Novozymes 0.21 0.23

While the RONA ratio of Dechra remained the same at 0.15 in 2021 and 2022, the ratio of
Novozymes reduced from 0.23 to 0.21, indicating that Dechra was not using capital as
efficiently as Novozymes, but the company was more resilient during the Covid-19 period, as
it maintained profitability constant.

Ratio 2022 2021

Asset Turnover of Dechra 0.60 0.57

Asset Turnover of Novozymes 0.84 0.85

Looking at the Asset turnover, the ratio of Novozymes was higher by about 0.25 compared
to that of Dechra in both 2021 and 2022. Consistent with profitability, this ratio improved for
Dechra, showing the company utilized assets more efficiently to generate income in 2022,
while Novozymes saw slightly lower efficiency in the year.

Ratio 2022 2021

Sales margin of Dechra 0.26 0.27

Sales margin of Novozymes 0.26 0.27

When calculating the possible profit from a product or service, the margin of sale of two
companies was the same between 2021 and 2022 which is 0.27 and 0.26 respectively.
Dechra recorded an equal sales margin to Novozymes, while its RONA is lower, showing
lower ability of the company in controlling operational cost compared to its peer.

Ratio 2022 2021

Sales per employee of Dechra 0.33 0.32

Sales per employee of Novozymes 2.40 2.18

Profit per employee of Dechra 0.09 0.08

Profit per employee of Novozymes 0.61 0.58

The number of employees of Dechra in 2022 was around 2000 people and Novozymes had
3.5 times that figure of Dechra. On average, an employee of Novozymes was 6 to 7 times
more productive than a worker of Dechra, showing there is much room among employees for

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exploitation. Both ratios increased among the two companies, implying Dechra is gradually
improving the productivity of their workers.

1.4 Working capital ratio

Ratio 2022 2021

Inventory ratio of Dechra 216.29 208.19

Inventory ratio of Novozymes 177.68 161.62

Inventory ratio of Dechra was higher than that of Novozymes in 2022 and increased by
3.89% from the figure of 2021.

Ratio 2022 2021

Debtor ratio of Dechra 73.24 64.06

Debtor ratio of Novozymes 76.25 71.75

In 2022, while Dechra took an average 73.24 days to collect receivables from their
customers, while Novozymes took 76.25 days. There was an increase in the number of days
to collect receivables in both Dechra and Novozymes, implying lower ability to collect
money from sales among both companies.

Ratio 2022 2021

Creditor ratio of Dechra 168.40 158.06

Creditor ratio of Novozymes 81.87 68.45

In 2022, the number of days that Dechra paid their payables was around double to that of
Novozymes. In addition, the increase in the payback period payables to customers is also a
good thing for both companies because they can capitalize on the capital for a longer period
of time.

Ratio 2022 2021

Current ratio of Dechra 2.80 2.52

Current ratio of Novozymes 1.20 1.44

Acid test ratio of Dechra 1.69 1.56

Acid test ratio of Novozymes 0.71 0.89

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In 2022, both Dechra and Novozymes had this ratio higher than 1, indicating a healthy
position as their current assets can cover all short-term obligations. While this ratio of Dachra
increased from 2.52 to 2.80, the data of Novozymes decreased from 1.33 to 1.38 between
2021 and 2022.

Besides, Acid test ratio for Dechra was 1.69, showing the company does not reliant on its
inventory to cover short-term debts, while Novozymes’s figure showed the company has to
use part of the inventory to cover debt, meaning Novozymes relies on higher short-term debt
compared to liquid assets compared to Dechra.

Ratio 2022 2021

Interest cover ratio of Dechra 19.81 13.86

Interest cover ratio of Novozymes 20.86 165.09

Gearing ratio of Dechra 0.94 0.92

Gearing ratio of Novozymes 1.12 0.98

A firm's interest coverage ratio (ICR) for Dechra maintained a stable interest cover ratio,
while this data of Novozymes was a significant change falling from 165.09 to 20.86, showing
Novozymes increased a large amount of debt in 2022, which could be the source of higher
profitability in this year. As a result, the gearing ratio of Novozymes was much higher than
Dechra in both years, indicating that Novozymes has a higher burden of debt compared to
Dechra. The profitability of Novozymes should also be attributed to the creditors in the form
of paying interest expenses rather than coming back to investors.

1.5 Investment ratio

Ratio 2022 2021

Return on Shareholder’s fund of Dechra 0.26 0.26

Return on Shareholder’s fund of Novozymes 0.33 0.35

While ROE’s Dechra was 0.26 in both 2021 and 2022, this ratio of Novozymes decreased by
0.02 to 0.33 from 2021 to 2022, again, showing the resilience of Novozymes was lower than
Dechra. However, considering that Dechra’s ratio was lower than Novozymes, its efficiency
of using equity is seen to be lower than the peer.

Ratio 2022 2021

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 Earning per share of Dechra 1.21 1.08

Earning per share of Novozymes 1.89 1.79

In 2022, while Dechra EPS increased by 12%, Novozymes EPS grew by 5%, showing that
the speed of the growth in EPS of Dechra was higher than that of Novozymes. Overall,
Novozymes is delivering higher returns per share for investors, however, Dechra has a better
growth potential.

Overall evaluation

Overall, Dechra pharmaceuticals has several strengths regarding its assistance from
experienced, financially sound shareholders, as well as low threats from the veterinarian
industry. The most important factor is that the company has good financial strengths, shown
in its good cash management (long period of repayment to suppliers while can collect
immediately) and low level of leverage, which will gradually increase the investors’ return.
Although profitability is currently lower than the peer - Novozymes, in the future, with the
success of M&A deal, the company can utilize strengths of the two companies such as
advanced technology and highly talented human capital to increase the share price and
profitability substantially. If needed, Dechra can even acquire more borrowing funds easily
thanks to the low leverage, which may not be likely for Novozymes

. Recommendations

After conducting a financial analysis of Dechra and Novozymes, and considering the
potential stock options as part of the reward package at Dechra, it may be beneficial to
consider the following points:

Dechra's financial performance: Based on the financial analysis, it appears that Dechra has
performed well in recent years, with consistent revenue growth, profitability, and a healthy
current ratio. This suggests that Dechra may be a stable and profitable company to work for.

Stock options: The potential for significant stock options as part of the reward package at
Dechra may be an attractive incentive. This can provide the opportunity to benefit financially
from the company's performance and growth, in addition to regular compensation.

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Industry trends: The animal healthcare industry is expected to continue to grow, which could
potentially lead to additional opportunities for career growth and development within Dechra.

Considering these factors, it may be beneficial for the client to pursue a career at Dechra,
particularly if they value stability, profitability, and the potential for significant stock options.
However, the decision ultimately depends on the individual's personal preferences, career
goals, and other relevant factors. It may be helpful for the client to conduct further research
and speak with individuals who have worked at Dechra to gain more insight into the work
environment and growth opportunities.

Reference

Dechra Pharmaceuticals (2012). Dechra Pharmaceuticals - Annual report 2012 - Our

business. [online] Annualreport2012.com. Available at:
http://dechra.annualreport2012.com/media/245632/business-model.jpg [Accessed 13 Feb.
2023].

Dechra Pharmaceuticals (2023). Our Sites. [online] www.dechra.com. Available at:

https://www.dechra.com/about/our-sites [Accessed 13 Feb. 2023].

Dechra. (2019). Dechra adds to its antibiotic portfolio. Veterinary Record, 185(6), 160–160.
https://doi.org/10.1002/j.2042-7670.2019.tb00333.x

Global Market Insights (2023). Animal Healthcare Market Trends | Industry Size Statistics-
2025. [online] Global Market Insights, Inc. Available at:
https://www.gminsights.com/industry-analysis/animal-healthcare-market.

Horsey, R. (2020). Council Post: Pet Care In A Post-Pandemic World. [online] Forbes.
Available at: https://www.forbes.com/sites/forbesbusinesscouncil/2021/12/28/pet-care-in-a-
post-pandemic-world/.

MERCH Animals Care (2023). Research & Development. [online] Merck Animal Health.
Available at: https://www.merck-animal-health.com/research-and-development/.

S&P (2023). Dechra Pharmaceuticals PLC - Corporate profile. [online] Spglobal.com.

Available at: https://www.capitaliq.spglobal.com/web/client?auth=inherit#company/profile?
id=4810891 [Accessed 13 Feb. 2023].

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Weintraub, A. (2016). Dechra charts strong growth with new drug approvals and global
expansion. Fierce Pharma. [online] 22 Feb. Available at:
https://www.fiercepharma.com/financials/dechra-charts-strong-growth-new-drug-approvals-
and-global-expansion [Accessed 13 Feb. 2023].

Zawacki, A. (2014). Learn About The Newest Advances in Veterinary Technology. [online]
Carrington College. Available at: https://carrington.edu/blog/newest-advances-veterinary-
technology/#:~:text=The%20newest%20advances%20in%20veterinary%20technology
%201%20Magnetic [Accessed 18 Feb. 2023].

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