UK Dividends – Pharmaceuticals & Biotechnology (Part 2)

Here’s the second part of my whirlwind tour of the Pharmaceuticals and Biotechnology sector in the UK exchanges based on dividend paying stocks in the UK Dividend Champions List. This post follows on from Part 1 and covers companies that have shorter dividend growth histories (up to 9 years) as well as a couple that aren’t on the list just for completeness.

UK Pharmaceutical stocks

Pharmaceutical companies have the potential for amazing growth; had you bought $1,000 worth of shares in Mylan Inc (MYL) back in 1976, your investment at the end of the year 2000 would be worth $1.5 million; half as much again as the $1 million you would have obtained from a similar investment in Berkshire Hathaway (BRK) through that same period.

However it’s also fraught with expensive research, testing and regulation that can end in failure in the quest for a cure. In addition, once a drug is patented, it is protected for only 20 years after which competitors can make their own generic versions and typically the actual protected duration is nearer 10 to 12 years when time for clinical testing is included.

Animal Healthcare

Some of the companies listed below provide products and services for animal health care, which has some differences from human healthcare. The majority of people care deeply for the welfare of their pets and spending on animal health in the US at least has increased even during recessionary periods. It’s also less expensive to develop and release animal healthcare products because the regulatory and testing requirements are lower than for people.

The sector also tends to have less demand for generic drugs than in human healthcare, and the industry typically has many smaller drugs with higher brand loyalty with fewer large companies competing for their share. Pet owners tend to be more loyal to branded medicines and are not encouraged to try generics because the insurance industry has less reach into animal care.

Finally, there is global demand to improve animal health in terms of increasing livestock production and efficiency as well as addressing animal to human diseases (bird-flu etc).

Dividend Challengers (5-9 years of dividend growth)

Animalcare Group plc (6 years)

The Company

Formed in 1988, Animalcare Group plc (ANCR) consists of three product groups: Licensed Veterinary Medicines, Companion Animal Identification and Animal Welfare products that are sold mainly through veterinary practices. It operates primarily in the UK (90% of revenue) but is expanding into Western Europe (10% of revenue).

The Veterinary Medicines group (61% of total revenue in FY14) launched three new drugs last year to treat epilepsy in dogs, hyperthyroidism in cats and an antibiotic for cats and dogs. The Animal Identification group (19% revenue) is benefitting from a law passed in the UK requiring all dogs in the UK to have an ID chip implant by 2016, although free programs to encourage the chipping of dogs has caused some pressure on prices. The Animal Welfare group (20% revenue) continues to improve profit margin and most of its revenue is from infusion and intravenous fluid products.

Dividend History

ANCR has increased its dividend for 6 years since 2008. It first started paying dividends in 2006 but froze the dividend in 2008.

Dividend Growth

The 5-year annual dividend growth is 17% and last year’s increase was 3.8%. The current dividend gives a yield of 3.19%. ANCR’s Payout Ratio of 52% is in line with its typical range over the last 5 years. Dividend Cover is 1.87x and Net Gearing is -3%.

Management

Nothing about management in the 2014 Annual report particularly stands out to me. The company risks are quite general and there are several references to increasing and maintaining the strength of senior management. The CEO, Iain Menneer, has worked for the company for 11 years in sales, marketing and business development.

Valuation

The current P/E ratio is 16.9, down from a high of 19 in 2012. Estimated EPS growth is -5%.

Outlook

Animal Care grew 6% in FY2014 (end of June 2014). The company is debt-free, has positive cash flow and has a dividend paying policy. They plan to launch two new medicines in the second half of FY2015.


Alliance Pharma plc (6 years)

The Company

Alliance Pharma plc (APH) is an AIM-listed specialty pharmaceutical company with a £46M revenue in FY13. It does not perform any R&D of its own (having stopped development activities in 2009) but instead it acquires and licenses established drugs in niche areas. Labor costs and capital expenses such as warehousing are outsourced where possible to reduce overhead and increase flexibility. The company has been expanding its consumer product range to improve organic growth, which has required some additional expenses in marketing.

It operates in Dermatology (Hydromol), Secondary Care (Immunotherapy), Community and Consumer Products (baby powder, ulcer treatments, acne treatments and Lypsyl lip salve), Established Products and International.

Dividend History

APH first started paying dividends in 2009 and has increased them for 6 years on a Calendar year basis (5 years with FY).

Dividend Growth

Dividend payments increased by 10% in 2014 and currently provide a yield of 2.2%. Annualized growth over the last 5 years has been 68%, a high number that results from a low initial payment. The Payout Ratio is 28% and has been low since dividends commenced. Dividend Cover is 4.4x and Net Gearing is 35%.

Management

The CEO, John Dawson, founded Alliance in 1996. Alliance’s Chairman retired in 2014 and was replaced by Andrew Smith, a 10-year company non-executive director who has held a number of senior pharmaceutical positions in the US and the UK. Management promote a progressive dividend policy.

Valuation

The current P/E of 11.5 is consistent with historical values over the last 6 years. Future EPS growth is estimated to be low at 0.92%.

Outlook

Alliance have 60 products in their portfolio, the largest being 10% of sales which helps in reducing risk. The Lypsyl brand was acquired in December 2013 and the company believes they can turn sales around with marketing investments. Interim results for FY14 in September showed a 9.3% year-on-year revenue growth and half-year pre-tax profit of £5.4M compared to £6.8M in 2013.


Anpario plc (6 years)

The Company

Anpario plc (ANP) produces animal feed additives to improve health, hygiene and nutrition. It is listed on the AIM exchange with a £59M market cap. It reports in two operating segments based on geographic regions: UK / Eire (24% FY13 revenue) and International (76%). International growth was primarily in Brazil, China and Asia Pacific.

Dividend History

Dividend yield is 1.18%. The company first started paying dividends in 2009 and has increased them each year for 6 years.

Dividend Growth

The most recent increase was 16.7% in CY2014. Annualized dividend growth over 5 years is 30%. The Payout Ratio is 23% (FY13), a slight increase from the previous year’s 21%. Dividend Cover is 4x and Net Gearing is 4%.

Management

ANP’s CEO is David Bullen who joined the company in 2009 with a sales and marketing background. One of the Non-Executive directors on the Board is Peter Lawrence who also founded ECO Animal Health plc discussed further below. One of Management’s goals is to pay an increasing dividend. Risks identified in the Annual Report are very generic: competitors, raw material costs, exchange rates and Intellectual Property risks may all affect future performance.

Valuation

ANP’s P/E is 22, about average for the last 2 years when it doubled its previous average level in 2013. The share price doubled through 2013 and again through 2014. Estimated EPS Growth is 12.6%.

Outlook

Anpario is growing its operations in the US which is banning antibiotics used to promote animal growth. It believes that its natural feed additives are well positioned to take advantage of this ruling which takes is fully phased-in by 2017. Brazil has similar restrictions because it is the largest supplier of poultry to Europe, which also requires natural feed additives.


Stocks not on the list (0-4 years of dividend growth)

ECO Animal Health Group plc (4 years)

The Company

ECO Animal Health Group plc (EAH) develops, manufactures and markets pharmaceuticals for animal health. It has registered over 600 products, primarily for the treatment of pigs and poultry and has a market value of £138M. It’s an AIM-listed company that was founded in 1972 as Lawrence plc, named after its founder.

It reports in geographic segments – the UK (2% of FY14 revenue), Europe (14%), Asia (43%), Latin America (21%), North America (12%) and Rest of the World (8%).

Dividend History

ECO’s dividend yield is 1.9%. The company has a long dividend history with dividends paid yearly since 1999 but with inconsistent growth. It froze dividends in 2008 and cut them in 2010 leaving it with a 4-year dividend growth.

Dividend Growth

Dividend growth in CY14 over the previous year was 5%. The Payout Ratio in FY14 was high at 93% and currently stands at 70% TTM. Net Gearing is -14% and Dividend Cover is 0.73x.

Management

ECO’s chairman, Peter Lawrence, is also on the board of Anpario plc and the company also offered management services to Anpario in 2014. The Annual Report does not offer a lot of details about future strategy.

Valuation

ECO’s P/E remains high at 37, maintaining a similar level for the last two years and down from a previous average level of about 70 from 2009 through 2012. Estimated EPS growth is 23%.

Outlook

The largest contributor to the value of ECO’s drug licenses is the antibiotic Aivlosin at around 86% of total value. The remaining amortization period is 9 to 20 years and demand for this product in the US and Latin America remains strong.


Hikma Pharmaceuticals plc (3 years)

The Company

Hikma Pharmaceuticals plc (HIK) was formed in Jordan in 1978 and listed on the UK stock market in 2005. A £4.4B company, it develops, manufactures and markets a broad range of branded and non-branded generic products across the Middle-East & North Africa, US and Europe. The company is structured in three reporting segments – Branded (41% of FY13 revenue), Injectables (39%) and Generics (20%).

Dividend History

With a yield of 0.6%, HIK have increased dividends for three years since 2012 and paid dividends yearly since it was first listed in 2005. Hikma pays dividends in US$, so the dividend income is susceptible to currency rate changes – dividends in FY11 were frozen in US dollar terms but showed as a cut in UK pounds. It has also paid special dividends in 2013 and 2014 which are excluded in my dividend growth and history calculations.

Dividend Growth

Dividend growth in 2014 was 8% and over the last 5 years was an annualized 16.7%.
Payout Ratio is 12.9% and has been on the decline since reaching a high of 33% in 2011. Dividend Cover is 8.3x and Net Gearing is 37%.

Management

The non-executive Chairman, Samih Darwazah, is the founder of the company, which has delivered total shareholder return of 364% since 2005, beating both the FTSE-250 index (153%) and the FTSE Pharmaceutical index (87%).

Valuation

Hikma’s P/E of 19.9 is above its average from the last 10 years which has ranged from highs of 25 to lows of 17. Estimated EPS growth is expected to be -5%.

Outlook

Interim FY14 results were better than FY13 and the company’s approach to manufacture generic drugs eliminates some of the risks associated with developing drugs from scratch. It also plans to continue growth through acquisitions which adds risk. While it’s in a relatively safe position to continue dividend growth, the yield is very low and likely not worth the risk.


AstraZeneca plc (0 years)

The Company

AstraZeneca plc (AZN:LSE) is a £59B sized company spanning the entire chain of a medicine from discovery and development through to manufacturing and distribution. Their primary focus is on three areas of healthcare: Cardiovascular and Metabolic disease (CVMD); Oncology; and Respiratory, Inflammation and Autoimmunity (RIA). They are also active in the Infection, Neuroscience and Gastrointestinal (ING) disease areas.

The company is also listed as an ADR on the NYSE with the same symbol AZN.

Dividend History

The dividend yield is currently 3.8% and AstraZeneca have paid dividends at least since 1994. However, their CY14 payments were lower than 2013 and ended a 10-year growth streak that started in 2004. It was a similar story in 2002 with lower payments ending a 9-year streak.
Their interim payment of £53.1 in FY14 is lower than their previous interim payment of £59.20 so chances are they will not be starting a new dividend growth streak this year.

Dividend Growth

Their dividend payment in CY14 was a 5% decline from 2013, although the decrease is less on a FY basis. Over the last 5 years, the annualized growth was 4% and over 10 years it was 14%.
The Payout Ratio is 134 in 2013 and currently showing as 346 on a TTM period. Dividend Cover is 1.16 and Net Gearing is 41%.

Management

The former CEO retired in 2012 after a poor first quarter report. The current CEO, Pascal Sorio, joined in October 2012 from Roche AG where he headed the pharmaceuticals division. He is a doctor of veterinary medicine. Their annual report lists a whole slew of risks (a good thing) and the company has “return to growth” as one of their strategic initiatives. Management are trying to offset loss of income with growth from acquisitions as well as significant cost-reduction activities.

Valuation

AZN’s P/E is 87, while this is a high number; the value is more a result of low earnings around £0.82, than high share price. It is still over-valued though and the share price is likely to decline to compensate for lower income. Future revenue growth over the next few years is expected to be fairly low (single digits) until newer products come to market and EPS growth for the next 5 years is estimated at -6.5%.

Outlook

AstraZeneca will be losing patent protection on its top two drugs in the next two years – Nexium (2015) and Crestor (2016/17). These two drugs also have strong margins which causes an additional impact on earnings. The company has some products in their pipeline which may be very successful – Forxiga (diabetes treatment) and a cardiovascular drug, Brilinta which was recently launched.


Research Notes

  1. Dividend Cover and Net Gearing values are from Investorease. The Investorease values are significantly different from those at Morningstar.co.uk so please check your own sources for more accurate details.
  2. Estimated EPS Growth values from Morningstar.co.uk (Financials & Ratios > Ratios tab)
  3. P/E Values from Morningstar.com (Valuation tab)
  4. Investorease.com is possibly the best site I’ve come across for UK dividend history records, but it’s not always correct either. Likewise with Yahoo Finance. The majority of other sites only keep a 5-year record, if that.
  5. Dividend History data is compiled from Annual Reports / Company website as the golden source when available. Yahoo Finance data is cross-checked with Investorease data and errors corrected if possible (typically arising from stock-splits, special dividends and currency rates).

Disclosure: I don’t own any of the stocks or companies listed in this article and have no intention to buy any shares in them.

 

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