Animal magic: Stephen Wildridge of Animalcare talks to Stockopedia

The British tend to think of themselves as a nation of dog lovers – and with industry statisticians putting the number of dog owning households at 5.2m, it is hard to argue. By comparison, the country has an even closer affection for cats – or at least 6.1m households do. Then there are the 4.1m fish owners, 1.96m who chose to live with rodents and 1.39m households who prefer birds. It’s a market catered for by nearly 24,000 UK registered vets – and one that is prized by some of the largest pharmaceuticals groups in the world. For Stephen Wildridge, the chief executive of Animalcare Group (LON:ANCR) , the opportunities presented by the companion animal market were enough to trigger a major strategy change at the AIM listed company earlier this year.

Animalcare started life on AIM in January 2008 after livestock specialist Ritchey upgraded from the PLUS market and snapped up Animalcare Ltd in a £14m deal. Since then the group has pursued a two-pronged strategy, with Animalcare working on the vet medicines, supplies and animal identification markets while the Ritchey and Fearing International businesses focused on the agricultural livestock sector. However, for Wildridge and his management team, the disparity between the profits and performance of the two divisions reached a head earlier this year. In the company’s latest results for the 12 months to June 30, the companion animal division delivered 56% of group’s overall £19.2m revenues and 84% of its £3.14m operating profit. Meanwhile, the agricultural division produced 44% of revenues but only 16% of operating profits. It was a situation that led the company to sell off the agricultural business in September for a handsome £3.25m. Left with an impressive pipeline of new products, a focused strategy of picking niche segments and a keen eye for possible acquisitions, Stephen Wildridge spoke to Stockopedia about his ambitions for the group.

Stephen, what is you assessment of Animalcare’s performance during the last year and what triggered the decision to refocus the group’s strategy?

I am highly delighted with the results. The numbers from the companion animal business were excellent and we managed to get the agricultural businesses to a point at the year-end where the results were acceptable. We were aware of issues with the agricultural businesses for some time. In March we were working on a project to bring all the businesses together on to one site but even then we were looking at the agricultural businesses, thinking ‘is this a good idea?’ So in April we kicked off a strategic review covering all the businesses and as a result of that decided that the agricultural businesses were not a good idea for us as part of the future. They were going to require quite a lot of work over two years to get them to a point where, I felt, they would be performing at a level they should be and we had other things that we could have been doing in that time, which was concentrating on the companion animal business.

At that point, we looked around for a good buyer for the businesses and came up with a company called Tru-Test Ltd in New Zealand. Tru-Test were a supplier of the Ritchey and Fearing International businesses for the previous 15 years and they were looking for an opportunity to develop their services in Europe and it gave them an ideal option to do that. We were able to come up with a deal which was one of those rare ones because is was a win for the buyer, because he got a business and a base which he wanted in Europe, and it was a win for ourselves because we got a rather good price for the business and it was a win for the people in the business because there was no loss of jobs. So it was a real win-win-win.

Can you give me an idea of the dynamics in your core companion animal care market?

It is growing fast and that is as a result of a strategy that we put in place in 2003 and it is one that has been maturing and developing all the while in the background. It is just clearer and much more exposed now. It is taking advantage of harmonisation of veterinary regulations in Europe, which means that we can now build a registration dossier for the UK. That registration dossier is almost equally applicable throughout the rest of Europe and the European markets so we don’t have to reinvent the wheel each time we want to go and register somewhere else. So the expertise we build up in the UK is applicable across markets. It is also down to the availability of active pharmaceutical ingredients – APIs – that are more available to us now than they were because of the increasing human generics (medicines) that are out there. We can take those on and formulate them into products and then attack a large market for investment. The key to doing it is by working in partnership with other businesses like Animalcare in the key markets in Europe. We have partners in Germany, France, the Iberian Peninsular, Belgium and Holland. What we do is develop products ourselves but also co-develop and share the risks of development and the costs of development as well. Whereas Animalcare is a relatively small business and capable of developing perhaps three projects at any one time, we have access to between nine and 12 at any one time from our partners. So we are punching far above our weight in terms of a development pipeline. We also have the opportunity to reduce risk by co-sharing – if one out of three projects goes down, that hurts. If one out of 12 projects goes down, it still hurts but nowhere near as much.

All this has been going on in the background all the time but what we are doing is now clearer, much more upfront and much more evident. Revenues from new products in the Animalcare business were up by 69% last year. Equally we had increases from our companion animal identification sector by a good 15% and our others, which is things like orthopaedic equipment, surgical instruments and surgical equipment, which were up a good strong 7% as well. So as we are introducing new products it is helping to pull through some of the other ranges that we have.

We invested in sales people last year – field based staff and tele-sales – and the overheads went up accordingly. But they are in place now, doing the job and bringing the sales through. Even with that investment and the extra overhead, we still had Ebitda going up by 26%, which is not such a bad thing.

What types of new products you have brought to the market?

In the veterinary medicines segment we have Benazecare, Cephacare and Buprecare which are the new products that we have launched over the last 24 months. We did a formulation upgrade on Buprecare during the year and it is now a flavoured product, which increases the acceptability to the dogs and cats that it is prescribed to. Overall, that segment grew by 21%. The latest information that is available from NOAH [National Office of Animal Health – the industry association], for calendar year 2009 the companion animal market segment for vet medicines in the UK grew by just over 8%. So we are growing at something like two and a half time the market rate.

What factors have driven those changes in the group?

There are two things. The new products we are bringing in are being sold well and have new innovations to them. It is also that as we are going and talking to vets about our new products they are asking about what else Animalcare does. At which point we are able to cross-sell other parts of our range.

Do you face a lot of competition in the market?

Absolutely. We are playing in a vet market which is almost analogous to the human market. You have in the vet market the likes of £PFZ , Novartis (NYSE:NVS), Bayer (FWB:BAYN), Merial, which is a joint venture between Sanofi-aventis (NYSE:SNY) and Schering-Plough/Intervet – all those big multi-nationals that you would expect to see in human health, they are all there in animal health as well. Then you also have smaller players, people like Vétoquino, Virbac and CEVA from France and also some nationals like Dechra Pharmaceuticals (LON:DPH) . So it is fairly competitive but what we do is try and find niches where we can offer something special or where we can have a good competitive edge. For instance, if we can get into a niche after the originator and it is sufficiently large to be of interest but sufficiently small to not attract attention from other players as well. We have done that quite successfully.

We launched two new products in June, which had little impact on the financial year itself, but will start to play for this year. That was a inject-able antibiotic called Enrocare where the interest for us is that one of the formulations has a particular application for small and exotic animals. That’s a good strong one for us. We also launched a product called Phenoleptil, which is a product to treat epilepsy in dogs. Like in human pharmaceuticals, chronic disease of old age is a good cash generator. Things like chronic heart failure, which our Benazecare treats, or renal insufficiency, which, again, Benazecare treats – once the animal is on that treatment it will be on that treatment for the rest of its life. Likewise, once the animal is on Phenoleptil it will be on that treatment for the rest of its life.

With the new strategy now in place, what are you near-term expectations for the group?

In terms of the prospects for the rest of 2010 and into 2011 I can tell you now that the first quarter of this financial year has been very good, very strong. It is considerably ahead of last year and meeting budget quite nicely – that’s both the vet medicines and companion animal identification divisions doing well.

We have also just launched two new products. One is our first vaccine, called Anivac, which fits into that niche description I mentioned earlier – it is a small market in its own right, only about £0.5m, but if we are in there we think we can take a good share from the originators because we have a product that has a unique selling point. That is down to the formulation. The original products are oily vaccines which can give irritation at the site of injection. Our formulation doesn’t irritate and is also physiological pH so we think we are going to take a good market share there. We also launched Florgane, which comes from our Belgian partner, and that is a patented formulation of an antibiotic to treat bovine pneumonia. Its advantage is, again, that it is not an oily formulation, which in this case means that it is easier to get into the syringe and easier to inject. Why is that important? Well if you are a vet in a yard and you have got 40, 50, 60, 100 kilo calves to vaccinate, if you can do it in a fifth or a third of the time in cold weather, so much the better. We think we have got some really good opportunities with that.

We have at least two more products to launch in January 2011 and one maybe two more products to launch before the year-end on top of that. So we have in total, eight new products in a 12 month period. I don’t know any other company that has got a pipeline like that so you can see why we wanted to concentrate on the animal care business.

Do you foresee your future growth being underpinned by these new product launches or is there scope for further acquisitions?

I can see in my own mind that an upstream acquisition of manufacturing and formulation development capability would be useful and advantageous. I can also see that a downstream acquisition of distribution either in the UK or in France perhaps would be advantageous. Equally, the acquisition of technology, the acquisition of some of these formulation innovations. We could quite usefully use any available funds we have for that sort of thing. We need to do a much more in depth review of what our options are to decide exactly what we are going to do in the near future. But I can tell you now that for the next 12-24 months we have got more than enough to keep us occupied.

Thank you for talking to Stockopedia.

Thank you.