Dechra Pharmaceuticals : Half Yearly Financial Report for the Period ended 31 December 2020

Half-Yearly Financial Report 2021 for the six months ended 31 December 2020 (the Period)

Monday, 22 February 2021

"Despite 2020 being one of the most challenging years in Dechra's history, it is pleasing to report that the calendar year ended strongly resulting in an excellent performance in the first half of our financial year."

Ian Page, Chief Executive Officer

Highlights

• • Reported Group revenue for the Period increased by 21.8% at Constant Exchange Rate (CER) (20.6% at Actual Exchange Rate (AER)).

• • European Pharmaceuticals (EU Pharmaceuticals) revenue growth was 21.7% at CER (22.6% at AER).

• • North American Pharmaceuticals (NA Pharmaceuticals) revenue growth was 21.9% at CER (17.2% at AER).

• • Underlying operating profit growth was 32.7% at CER (32.2% at AER) with operating margin improving by 240 bps to 27.0%.

• • Reported operating profit increased by 74.2% at CER (73.0% at AER) driven by the strong trading performance.

• • Strong cash conversion of 105.3%.

• • Osurnia® and Mirataz® product acquisitions performing strongly and ahead of expectations.

• • Good progress continues to be made with the supply chain which adversely affected trading in the comparator period.

• • Underlying diluted EPS growth of 24.7% at CER (24.9% at AER) to 54.28 pence. Interim dividend increased by 8.0% to 11.11 pence.

Financial Summary

Six months	Six months	Growth at	Growth at
ended	ended	actual	constant
31.12.20	31.12.19	exchange	exchange
£m	£m	rate	rate

Revenue	299.8	248.5 20.6% 21.8%
Underlying Operating profit Operating profit % EBITDA Diluted EPS	80.8 27.0% 88.2 54.28p	61.1 32.2% 24.6% 240 bps 32.7% 220 bps 67.9 43.46p 29.9% 30.6% 24.9% 24.7%
Reported Operating profit Cash generated from operating activities before interest and taxation Diluted EPS	40.3 85.1 21.44p	23.3 73.0% 74.2% 60.9 39.7% 12.80p 67.5% 66.7%

The Group presents a number of non-GAAP Alternative Performance Measures (APMs). This allows investors to understand better the underlying performance of the Group, by excluding non-underlying items as set out in note 8. EBITDA is defined as underlying earnings before interest, tax, depreciation and amortisation.

Cash conversion is defined as cash generated from operations before interest and taxation expressed as a percentage of underlying operating profit.

Enquiries

Dechra Pharmaceuticals PLC

Ian Page, Chief Executive Officer Paul Sandland, Chief Financial Officer

TooleyStreet Communications Ltd Fiona Tooley, Director

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(ref: Half Year Results)

FY2021 H1 Average	EUR 1.1060: GBP 1.0	USD 1.3060: GBP 1.0
FY2021 H1 Closing	EUR 1.1123: GBP 1.0	USD 1.3649: GBP 1.0
FY2020 H1 Average	EUR 1.1352: GBP 1.0	USD 1.2593: GBP 1.0
FY2020 H1 Closing	EUR 1.1754: GBP 1.0	USD 1.3204: GBP 1.0
FY2020 Average	EUR 1.1396: GBP 1.0	USD 1.2601: GBP 1.0
FY2020 Closing	EUR 1.0960: GBP 1.0	USD 1.2273: GBP 1.0

Half-Yearly Financial Report 2021 for the six months ended 31 December 2020

Introduction

Despite 2020 being one of the most challenging years in Dechra's history, it is pleasing to report that the calendar year ended strongly resulting in an excellent performance in the first half of our financial year. Revenue growth has been strong, especially within Companion Animal Products (CAP), as pet ownership and welfare has become more important to people as the COVID-19 pandemic has changed peoples' way of living. The Group also benefited from a significantly improved supply chain and a pre-Brexit inventory build. The strong revenue growth, good gross margin and lower than usual underlying Selling, General and Administrative (SGA) costs, due to COVID-19 restricting activity, has resulted in a stronger than expected operating profit performance.

In the commentary which follows all financial references will be at CER unless otherwise stated.

Operational Review

European Pharmaceuticals

In the Period, our total European Pharmaceuticals Segment net revenue increased by 21.7%, including the acquisition of Osurnia® (acquired 27 July 2020) and the benefit of the pre-Brexit inventory build of £7.0 million.

Existing net revenues, excluding third party contract manufacturing (which Dechra is strategically exiting) increased by 18.6%.

All European countries, including the UK, performed strongly with good growth being delivered in all of our product categories; CAP, Food producing Animal Products (FAP), Equine and Nutrition. Our International business, which is reported in this Segment, also performed well through our businesses in Australia, New Zealand and Brazil, and also through our distribution partners.

North American Pharmaceuticals

In the Period, our total North American Segment net revenue increased by 21.9%, including the acquisitions of Ampharmco (acquired 28 August 2019), Mirataz® (acquired 16 April 2020) and Osurnia.

Excluding acquisitions existing net revenues increased by 14.8%.

Growth was almost entirely delivered by CAP performance as we have little presence in Nutrition or the FAP market in North America. The strong sales uplift must be considered against a soft comparator period in the prior year where supply issues detracted from the performance. The majority of our key products are now back in supply; however, the ophthalmic products, which have been out of stock for over a year, are still in the process of being transferred to a new contract manufacturer and are taking longer than expected to return.

Product Category Performance

CAP, which represents the majority of our business at 73.0% of Group turnover, grew at 27.3% over the corresponding period last year. This growth can be attributed to strong market dynamics, excellent virtual customer engagement, an improved supply chain and the continued benefit from the disintermediation of products from the Le Vet acquisition in February 2018.

FAP, 12.3% of Group turnover, reported growth of 10.6%. Our Solustab® range of water soluble powders continues to outperform with exceptional growth in Belgium and Spain.

Equine, 7.6% of Group turnover, delivered 16.8% growth which was ahead of our expectations. This growth can be attributed to an improved flavoured version of our leading brand, Equipalazone®, and the addition of the Le Vet range of equine products strengthening our overall portfolio.

Nutrition, which represents 5.3% of Group turnover, delivered growth of 10.7% in the Period. The growth in our Specific® branded range of pet diets has been driven by a new business unit that has given additional focus to the newly positioned products and also by the launch of a new range of organic diets.

Acquisitions

The product acquisitions of Osurnia and Mirataz are performing ahead of expectations.

We have successfully transferred Osurnia to Dechra following its acquisition from Elanco. We have delivered above expectations in the EU, despite the launch of a competitor product by Elanco and have exceeded sales expectations in Japan and Australia. In the US, we are gaining market share, where we have reduced the price to compete better with the market leading comparable product. Further registrations are being sought in new territories.

We have delivered good growth from Mirataz in the US market, the only territory in which it is currently sold. The product is approved in Europe with a launch targeted for early in the second half of the financial year; this is a slight delay as we were required to alter the external packaging to improve user safety.

Post the Period end, we were pleased to announce on 8 February 2021 the acquisition of the Australian and New Zealand marketing rights for Tri-Solfen® from Animal Ethics Pty Ltd, a related party. Tri-Solfen® has already been successfully introduced to the Australian market for pain relief in lambs since 2008 and was approved and launched for use in cattle in 2019, achieving cumulative annualised sales of AUD9.1 million (£5.1 million). This acquisition allows us to create a meaningful FAP presence in the Australian and New Zealand markets as we build a new sales infrastructure. Additionally, we have acquired a further 1.5% of the issued share capital, taking our holding in Animal Ethics Pty Ltd's parent company, Medical Ethics Pty Ltd, to 49.5%.

Pipeline Delivery

Good progress continues to be made on the pipeline and we expect that the final sections of a dossier for a new canine sedative for the US will be submitted within the next few months. It is also pleasing to report that we are still delivering favourable results on the dog and cat proof of concept studies for the diabetes drugs being developed in partnership with Akston. Following our right to evaluate the cat product we have subsequently signed a licensing and supply agreement on 4 February 2021. A number of minor new products have been approved in major territories and also into international markets, including our poultry vaccine range, Avishield®, in South Africa. Our Regulatory and Development teams have continued to be effective throughout the COVID-19 pandemic and all development laboratories remained operational, with our vaccine development laboratory in Zagreb receiving a Good Laboratory Practice (GLP) certification.

Enablers

People

The level of dedication and commitment from our people throughout the COVID-19 pandemic has remained exceptional and despite increased levels of absence, particularly in our manufacturing sites, we have managed to keep all key functions operational. We have conducted a full review of our global remuneration policies and from 1 January 2021 no individual within Dechra will work below their respective nationally recognised living wage. We have also benchmarked individuals within all levels of the Group, and will be implementing above inflationary salary increases to numerous employees, to continue to provide a competitive and fair level of remuneration throughout the whole organisation, in line with our commitment to the remuneration policies we adopted in 2019.

Manufacturing and Supply Chain

The investment made in the previous financial year into the supply chain infrastructure and management has proved successful with the majority of historic product shortages being resolved. We have implemented stronger, more robust relationships and improved supply agreements with many of our third party suppliers. We have also committed to an increase cost of £1.0 million per annum to cover additional personnel to strengthen the Group's quality systems as global regulatory standards continue to rise. We have recently commenced a €7.0 million capital investment into increasing the scale and capability of our Danish distribution centre, which will provide significant additional space and an underground cold store to enable a sustainable way to warehouse refrigerated stock, such as Osurnia and our vaccine range. The impact of Brexit has been limited and we have successfully managed to ship to and from the UK post-Brexit from all facilities.

Information Technology

The main focus has been to enhance our remote working capabilities and our digital communication with customers. To facilitate this we have improved the security of key servers, upgraded video conferencing systems, accelerated deployment of advanced home working solutions and added additional support to respond to home users' queries. Veterinarians and nurses use of the Dechra Academy has increased significantly during the COVID-19 lockdown, with over 27,000 courses being completed in the last 12 months. We now have over 70,000 registered Academy users worldwide. Communication has also strengthened in Europe with the go live of Salesforce, a CRM system, in eight countries; a system which has been used for several years by our US team. The system will be implemented in the remaining EU markets by the end of this calendar year.

Environmental, Social, Governance (ESG)

Following the launch in the previous financial year of our new strategy we have designated ESG as our fourth strategic enabler reflecting our view that it underpins everything we do. A committee, chaired by Paul Sandland and comprising representatives from across the Group, has focused on gathering data to establish targets which are specific to Dechra. We have formed two sub committees, one covering Health, Safety and Wellbeing and, the other Packaging and Waste. These sub committees will develop strategy, provide direction and monitor performance in these key areas. Carina Kjellberg commences her new role as Group Sustainability Director on 1 March 2021, and will focus on delivery of our strategy including the implementation of actions to enable us to achieve a reduction in our carbon emissions.

Our Donations Policy this year was focused entirely on food banks and mental health charities across the world to support people in communities where we operate who are suffering from the effects of the COVID-19 pandemic.

Stock Code: DPH

Half-Yearly Financial Report 2021 continued

Financial Review

Group revenue in the Period was £299.8 million, a growth of 21.8%.

• • Revenue in EU Pharmaceuticals grew strongly by 21.7% to £195.6 million.

  • • Existing revenue was £188.3 million, an increase of 17.3%. This revenue includes a planned reduction of 21.2% in non-core third party contract manufacturing business; excluding this, revenue increased by 18.6% to £184.2 million.

  • • Acquisition revenue from Osurnia was £7.3 million, which is ahead of our expectations.

• • Our NA Pharmaceuticals Segment revenue increased by 21.9% to £104.2 million.

  • • Existing revenue was £98.2 million, an increase of 14.8%. This performance should be considered against a soft comparator period which was adversely impacted by supply issues as outlined above.

  • • Acquisition revenue consists of £0.4 million from Ampharmco, £2.8 million from Mirataz and £2.8 million from Osurnia.

Revenue

Six months	Six months	Growth at	Growth at
ended	ended	actual	constant
31.12.20	31.12.19	exchange	exchange
£m	£m	rate	rate

EU Pharmaceuticals - Core EU Pharmaceuticals - Third Party Contract Manufacturing	184.2 4.1	154.4 5.2 19.3% (21.2%) 18.6% (21.2%)
EU Pharmaceuticals - Existing NA Pharmaceuticals - Existing1	188.3 98.2	159.6 88.9 18.0% 17.3% 10.5% 14.8%
Group Total - Existing	286.5	248.5 15.3% 16.4%
EU Pharmaceuticals - Acquisitions2 NA Pharmaceuticals - Acquisitions3	7.3 6.0	- - - - - -
Group Total - Acquisitions	13.3	- - -
EU Pharmaceuticals - Total NA Pharmaceuticals - Total	195.6 104.2	159.6 88.9 22.6% 21.7% 17.2% 21.9%
Group Total	299.8	248.5 20.6% 21.8%

• 1. NA Pharmaceuticals - Existing including like-for-like Ampharmco.

• 2. EU Pharmaceuticals - Acquisition comprises Osurnia.

• 3. NA Pharmaceuticals - Acquisition comprises Ampharmco, Mirataz and Osurnia.

The pharmaceutical product categories of CAP, FAP and Equine all posted double digit growth in the Period. Nutrition also posted strong growth following our successful relaunch in the prior year, despite being more susceptible to discretionary spend than the rest of our range.

Other revenue reduced as we continue our planned strategic exit from non-core business, including third party contract manufacturing.

Six months	Six months	Growth at	Growth at
ended	ended	actual	constant
31.12.20	31.12.19	exchange	exchange
Revenue	£m	£m	rate	rate
* 'Other' includes third party contract manufacturing revenue and other non-veterinary business.

CAP FAP Equine	219.0 36.8 22.8	173.7 34.1 19.7 26.1% 27.3% 7.9% 10.6% 15.7% 16.8%
Subtotal Pharmaceuticals	278.6	227.5 22.5% 23.9%
Nutrition Other*	15.9 5.3	14.0 7.0 13.6% (24.3%) 10.7% (22.9%)
Total	299.8	248.5 20.6% 21.8%

Group underlying gross margin percentage in the Period reduced by 100 bps to 56.9% (2020: 57.9%), due to less favourable product sales mix and increased cost of goods. Group underlying Selling, General and Administration (SG&A) expenses increased to £74.8 million in the Period but reduced as a percentage of revenue to 24.9% (2020: 27.8%) due to COVID-19 related cost savings and deferral of the annual pay review from 1 September to 1 January.