Will earnings lift Dechra Pharmaceuticals shares after Med-Pharmex deal?

The Dechra Pharmaceuticals share price has fallen year-to-date, despite a recent US acquisition. Will its full-year results announcement on Monday 5 September be a catalyst for a spike in growth in the veterinary pharmaceuticals company?

The Dechra Pharmaceuticals [DPH.L] share price slumped 32.9% in the first nine months of 2022 amid rising recession fears in the global economy. The company is preparing to release preliminary results for the year ended 30 June on 5 September, shortly after news of a considerable acquisition lifted its share price slightly.

The group operates within the veterinary pharmaceuticals business and develops, manufactures and markets products for the industry with a broad range of anaesthetics and other specialised drugs. The FTSE 100 company distributes to 68 different countries and has registered close to 6,000 products.

Dechra isn’t the only stock seeing underperformance within the veterinary pharmaceutical industry. Shares in US competitor IDEXX Laboratories [IDXX] have fallen 46.9% over the same period. Zoetis [ZTS] and Elanco Animal Health [ELAN], which both have a considerable position in the area, have also fallen 34.3% and 45.8%, respectively, in the year to 1 September, putting Dechra Pharmaceuticals slightly ahead of its rivals.

The industry responded strongly after Covid-19 restrictions came into force in 2020.

A surge in the number of people getting a pet while stuck at home led to increased spending in the pet care industry and Dechra saw its share price double between March 2020 and September 2021. Higher inflation and increased recession fears have since reversed these gains, but the shares are still trading above pre-pandemic levels.

Strong half-year results give optimistic outlook

In February, the group released strong half-year results for the six months ending 31 December. Group revenue grew 10.9% year-over-year from £299.8m to £332.4m, and the operating profit margin rose 120 basis points to 28.2%. The growth was led by a strong six months of trading in North America, with revenue for the region growing by 21.2% year-over-year.

In a trading update released in the middle of July, the group noted that it has continued to record strong revenue growth for the financial year ending 30 June. Total group revenue for the period increased by approximately 12%, once again being led by strong growth from its North American business, with revenue in the region up 25% year-over-year.

The company’s European business only reported revenue growth of approximately 5% for the period. However, the expansion in the North American market more than made up for this. Growth within the region was supported by six minor product acquisitions. The company also received worldwide rights to its canine lymphoma drug Laverdia.

Analysts optimistic after Med-Pharmex acquisition news

On 30 August, the group announced it had made a £221.5m acquisition of US-based veterinary pharmaceutical manufacturer Med-Pharmex. The deal will expand the group already growing US operations and add to its current portfolio of products in the country.

Med-Pharmex mainly produces white-label products that are sold through existing distributors. Dechra aims to take some of these products towards its own in-house brand and sell them through the company’s existing sales and marketing channels.

The acquisition was funded from existing debt resources, and with Med-Pharmex reporting adjusted EBITDA of $15.3m for the year ending December 2021, the deal should help boost Dechra’s future earnings.

The Dechra share price closed 2.7% higher on 30 August after the news was announced. However, the shares have since fallen back down as global markets have been hurt by growing recession concerns.

Nevertheless, analysts are optimistic for the shares after the acquisition news and ahead of its preliminary results. Out of 10 analysts polled by the Financial Times, one gave the shares a ‘buy’ rating, five believed the shares would ‘outperform’ with the remaining four analysts giving ‘hold’ ratings. There were no ‘sell’ or ‘underperform’ ratings given to the shares.

The 10 analysts also offered 12-month price targets for the shares. The median was 4,400p, representing a 29.5% upside on the 1 September closing price.