Dechra Pharmaceuticals plc : Half Yearly Financial Report for the six months ended 31 December 2012

	Half-Year ended  31 December 2012	Half-Year ended  31 December 2011	Reported	At constant currency**
Group revenue	£252.2m	£209.5m	20.4%	23.5%
Underlying operating profit*	£24.3m	£16.2m	50.1%	60.2%
Underlying profit before taxation*	£21.0m	£14.3m	46.9%	54.2%
Operating profit	£15.1m	£11.0m	37.3%
Profit before tax	£11.5m	£8.9m	29.2%
Underlying earnings per share*	18.03p	14.57p†	23.7%
Earnings per share	9.91p	9.27p†	6.9%
Interim dividend per share	4.34p	3.77p†	15.1%
Net borrowings	£102.0m	£46.1m

· Eurovet® integration in line with plan and delivering expected synergies

· Solid growth across all trading segments

· Own branded products delivering strong revenue growth

· Two US product in-licensing deals completed

· Increase in interim dividend of 15.1%

Note:

* Non-underlying items comprise amortisation of acquired intangibles, acquisition expenses, rationalisation costs, loss on extinguishment of debt and the unwinding of discounts on deferred and contingent consideration.

** The Company produces its accounts in Sterling. To give the reader better visibility of the performance of the Group, it also produces certain measures at constant exchange rates. This information is calculated by applying the exchange rates used in the translation of consolidated results in the prior year to retranslate the results for the current year.

† Restated to reflect the bonus element of the Rights Issue.

Results Presentation: Today, Tuesday 26 February, 9.15am at Investec Bank, 2 Gresham Street, London  EC2. Dial in details: 0808 2370030 or [phone]. Pin Number: 28868769#

Enquiries:
Dechra Pharmaceuticals PLC			TooleyStreet Communications Ltd
Ian Page, Chief Executive			Fiona Tooley
Paul Sandland, Group Financial Controller			Graeme Cull
Today: 8am-noon	[phone] (Investec - Room 506)	Today:	[phone] (7.45am-noon)
Mobile:	[phone] (IP) or	Mobile:	[phone] (FMT)
	[phone] (PS)		[phone] (GC)
Thereafter:	[phone]	Office	[phone]
www.dechra.com
[e-mail]

Forward-Looking Statements

This document contains certain forward-looking statements which reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company.

Introduction

The Group has delivered strong growth in the first six months of the financial year. This has been driven by solid revenue growth and prudent cost control across all our trading segments and also from the continuing successful integration of Eurovet Animal Health B.V. ("Eurovet"), acquired in May 2012. Our key strategic segments, European Pharmaceuticals and US Pharmaceuticals, have shown good revenue growth from our own licensed branded veterinary products and specialist pet diets. Contract manufacturing has seen double digit revenue growth and our Services segment has seen robust revenue growth and a modest improvement in operating margin over the corresponding period last year.

Financials

In the six months ended 31 December 2012, Group revenue increased by 20.4% to £252.2 million (2011: £209.5 million). Underlying operating profit rose to £24.3 million (2011: £16.2 million), an increase of 50.1%. Underlying profit before taxation was up 46.9% (an increase of 54.2% at constant currency) to £21.0 million compared to the £14.3 million achieved in 2011. Operating profit was £15.1 million (2011: £11.0 million). Profit before taxation was £11.5 million (2011: £8.9 million).

Underlying basic earnings per share was 18.03 pence (2011: 14.57 pence, adjusted for the bonus element of the Rights Issue). Basic earnings per share was 9.91 pence (2011: 9.27 pence, adjusted for the bonus element of the Rights Issue).

Cash generated from operating activities was £11.6 million compared to the £1.4 million achieved in 2011. In accordance with our normal cash flow cycle, we expect a strong cash inflow in the second half of the financial year. During the period US$16.0 million (£10.1 million) was paid in relation to deferred and contingent consideration under the terms of the DermaPet® acquisition, with a further US$1.5 million (£0.9 million) paid in respect of an in-licence agreement in the US outlined later in this report.

The Group had a working capital outflow in the period of £14.3 million (2011: £17.0 million) which partly reflects the requirement for NVS® to hold additional inventory as a result of supplier shut downs over the Christmas period.

Net borrowings at 31 December 2012 were £102.0 million compared to £86.7 million at 30 June 2012 and £46.1 million at 31 December 2011 (half year before the Eurovet acquisition was completed in May 2012 which was partly funded by £60.0 million of new debt).

Total available bank facilities are currently £130.0 million of which £10.0 million, currently not utilised, is renewable within the next three months.

Interest cover on underlying operating profit was 9.2 times (2011: 12.9 times) excluding gains and losses on foreign exchange movements and derivative contracts.

Dividend

The Board is pleased to declare an interim dividend of 4.34 pence per share (2011: 3.77 pence, restated after being adjusted for the bonus element of the Rights Issue), an increase of 15.1%. The interim dividend is covered 4.1 times by underlying profit after taxation (2011: 3.9 times).

The dividend is payable on 9 April 2013 to Shareholders on the Register of Members at close of business on 15 March 2013. The ordinary shares will become ex dividend on 13 March 2013.

Review

Pharmaceutical Products

The main operational focus within the European Pharmaceuticals segment has been the ongoing integration of Eurovet. The first phase of the integration has progressed in line with our strategy and is delivering the expected cost and revenue synergies. A change to the third party Eurovet distribution agreement in France was implemented in January 2013; the Eurovet brands are now marketed directly through Dechra's French subsidiary. We have also amended our distribution and marketing agreement for Germany and have already begun to realise incremental margin in this territory by selling Dechra products through our new German subsidiary, acquired as part of the Eurovet acquisition. The rationalisation and integration of the duplicate sales offices in the UK, Benelux and Denmark has been successfully completed and the integrated sales and marketing functions are performing well.

This segment grew revenues in the first half by 69.7% (83.1% at constant currency) over the corresponding period last year. Excluding Eurovet, sales increased by 0.8% (an increase of 8.3% at constant currency), reflecting an exceptional increase last year of £1.2 million in the production of Vetoryl® for the US market to ensure continuity of supply whilst we implemented manufacturing changes. This was reversed in the consolidated Group figures. The changes to the distribution arrangements in France and Germany also had an adverse effect on revenue as the previous distributors ran down their inventories, the effect of which will be reversed by incremental sales and margin in the second half of the financial year.

The underlying performance of our key strategic licensed veterinary products was robust. Our own branded pharmaceuticals grew by 10.2%; growth was delivered across all key therapeutic sectors. Farm animal antibiotic usage remains under review in a number of EU markets due to concerns regarding antimicrobial resistance; however, we still saw overall growth in this sector in all markets other than Benelux. Our Specific® pet diets grew by 6.1%; this growth was assisted by the re-launch of a new presentation of our wet diet range and also by the introduction of a new recovery diet for animals in rehabilitation.

ManufacturingFollowing the acquisition of Eurovet, all three manufacturing sites were re-branded as Dechra Manufacturing. After a detailed review of our capabilities we have decided to close the manufacturing facility in Uldum, Denmark. Significant annual cost savings will be made by the transfer of the two licensed pharmaceuticals manufactured at this site into our Skipton facility and by the outsourcing of the unlicensed care products to a third party manufacturer. This rationalisation is expected to be completed by the end of this financial year.

Our external contract manufacturing continues to perform well with revenues at the Skipton site 15.8% ahead of the corresponding period last year; a strong order book has already been secured for the second half.

Following last year's successful US Food and Drug Administration ("FDA") approval of our encapsulation facility, we have now commenced the upgrade of our Skipton injections suite. This will facilitate the global manufacturing of a major product in our development pipeline.

US PharmaceuticalsDechra Veterinary Products US ("DVP US")

DVP US revenues were ahead of the corresponding period last year by 8.7% (9.0% at constant currency). This performance, driven by strong growth of our key product lines, DermaPet, Vetoryl and Felimazole®, was partly offset by ongoing supply problems with our in-licensed dermatological range. These supply problems are expected to be resolved in the second half of the financial year.

In December 2012 we completed an agreement to in-licence three new companion animal products: A- Cyst®, Polyglycan® SA and PolyChews®. Whilst none of these products will make an immediate material impact, they complement our existing range of specialist companion animal products and will make a contribution to the growth of our US business.

The transfer of our veterinary licensed ophthalmic products into a new manufacturer is progressing well and we anticipate a re-launch in 2013. It is unlikely, however, that these products will make a material difference to the current financial year.

ServicesServices revenue increased by 5.2% compared to the corresponding period last year. Although pressure remains on discount allowed, operational efficiencies, gross margin improvement and the additional sales volume resulted in a slight margin improvement over the corresponding period last year.

The new ERP system, implemented in July 2011, is now functioning well and is allowing us to offer new services to veterinary practices. Our product, New Indices, has been rolled out to existing and prospective accounts; this software allows veterinary practices to monitor their purchases and benchmark their performance against their peers. The evening ordering time has been extended to 8pm; this service has been well received by veterinary practices who themselves offer evening surgeries. A number of other new IT and logistics services are at an advanced stage of development and will be launched at the British Small Animal Veterinary Association ("BSAVA") Congress in April 2013.

Dechra Laboratories has delivered 8.2% revenue growth over the corresponding period last year. They have successfully implemented a new laboratory IT system and have also fully integrated their logistics collection service with the NVS fleet, which reduces costs and provides an improved service to their customers.

Product DevelopmentThere has been no material change to the progress of our product development pipeline, which remains on track to deliver our key novel products and differentiated generics. Additionally a wide range of life cycle and international registrations projects are ongoing.

There have been a number of successful registrations in the period:

· Methoxasol, an antimicrobial for swine and poultry in the EU;

· Soludox®, an existing antibiotic, has a new indication for turkeys in the EU;

· Comfortan®, a small animal analgesic has received an extension of its approval for use in cats;

· Libromide®, used in the treatment of canine epilepsy, has had its EU registration extended into  France, Austria, Portugal and Switzerland; and

· Felimazole, for feline hyperthyroidism, has been approved in Australia.

The Regulatory team has also been involved in the integration of Eurovet; Dechra's pharmacovigilance reporting system has been implemented across the Group and the re-branding of Eurovet products into Dechra livery is ongoing.

Acquisition and In-Licence Agreement

We have completed a licensing, supply and distribution agreement for a branded veterinary generic pharmaceutical product for the US market from a US pharmaceutical development company; this will potentially be the first entrant in a significant market segment. Under the terms of the agreement Dechra has paid US$1.5 million upon signing and will pay a further US$3.0 million on approval. There is a potential further contingent payment of US$2.0 million based on achieving US$20.0 million cumulative sales. The product, which is expected to be available to market in 2013, represents a significant growth opportunity for DVP US. Due to commercial sensitivities, further product details will not be released until final marketing approval has been received.

We announced in September 2012 that we had entered into an exclusive licence agreement with SCYNEXIS® Inc. for the development and commercialisation of SCY-641, used for the treatment of canine keratoconjunctivitis sicca ("KCS"). Under the terms of the agreement, Dechra is granted worldwide animal health rights and will be responsible for the remaining clinical development and commercialisation of SCY-641 (SCYNEXIS retains the human health rights to the compound). SCYNEXIS received an upfront fee from Dechra and is eligible to receive further payments based on development milestones and royalties. This worldwide agreement strengthens the Group's novel product development pipeline. The ophthalmic market is a key therapeutic sector for Dechra; the application of SCY-641 in the animal health market offers significantly improved clinical treatment of dry eye in animals and is an excellent commercial opportunity.

People

PLC Board

On 31 January 2013 we announced the appointment of Anne-Francoise Nesmes as Chief Financial Officer. She will join the Group and the Board from GlaxoSmithKline PLC ("GSK") on 22 April 2013. Anne-Francoise is a high calibre finance professional with international pharmaceutical, manufacturing and commercial experience. Her skills, energy and experience are exactly in line with the Group's requirements in this key role to take us to the next strategic level.

Tony Griffin, formerly Chief Executive Officer of the Eurovet Group, was appointed as a Director of Dechra on 1 November 2012. Tony has played a key role in the integration of the Eurovet business into Dechra. In addition to his PLC Board responsibilities Tony's principal responsibility is his role as the Managing Director of Dechra Veterinary Products Europe ("DVP EU").

Two new Independent Non-Executive Directors have been appointed to the Board. Julian Heslop commenced his role on 1 January 2013 and Ishbel Macpherson on 1 February 2013. Julian served as Chief Financial Officer of GSK between 2005 and 2011, having previously held senior roles in both GSK and Grand Metropolitan PLC. Ishbel currently holds a number of Non-Executive roles and has previously had 20 years' experience as an investment banker specialising in mid-market corporate finance.

Senior Management

At a senior management level there have been three subsidiary board appointments: Chris Ashcroft has been appointed as Operations Director of Dechra Manufacturing, Skipton; Chris Hunter has been appointed as Operations Manager of Dechra Laboratories and, following 16 successful years within  NVS, Naomi McCallum has been promoted to the role of Buying Director.

Outlook

Trading within our veterinary products segment continues to be robust; however, we remain cautious regarding the overall economic environment and are also conscious of the pressure on European veterinarians to self-regulate a reduction in antibiotic usage; we continue to monitor closely the situation.

A solid first half performance in our Services segment will be offset by poor sales in January 2013 due to bad weather during which footfall through veterinary practices saw a significant decline. This should not, however, detract from an overall recovery in this segment following a soft performance in the previous financial year.

The Group continues to deliver its strategic objectives; with additional synergies from the Eurovet acquisition, new product introductions, improved efficiency and international expansion we remain well positioned to maintain our strong growth.

Principal Risks and Uncertainties

The Group, like every business, faces risks and uncertainties in both its day-to-day operations and through events relating to the achievement of its long term strategic objectives. The Board has ultimate responsibility for risk management within the Group and ensures that there is an ongoing and embedded process of assessing, monitoring, managing and reporting on significant risks faced by the separate business units and by the Group as a whole.

The principal risks and uncertainties, as identified by the Board, which could impact the remaining six months of the current financial year, are as follows: