TABLE OF CONTENTS

PRIMA EKUITI INVESTMENT CHALLENGE:

DECHRA PHARMACEUTICALS PLC (FTSE250)

OCTOBER 4TH 2016

PRIMA EKUITI INVESTMENT CHALLENGE:

DECHRA PHARMACEUTICALS PLC (FTSE 250)

OCTOBER 4TH 2016

COMPANY BACKGROUND.......................................................................................... 3

LEADERSHIP................................................................................................................... 3

INVESTMENT THESIS................................................................................................... 4

MACROECONOMICS DEVELOPMENT AND OUTLOOK........................................4, 5

INDUSTRY ANALYSIS.................................................................................................. 5

1. MARKET DRIVERS AND OPPORTUNITIES...................................................6,7

2. MARKET RESTRAINTS.....................................................................................7, 8

3. COMPARATIVE ADVANTAGE........................................................................ 8

4. PEER-TO-PEER ANALYSIS............................................................................... 9

5. NON-FINANCIAL COMPARISON....................................................................10

FINANCIAL STATEMENT ANALYSIS........................................................................11, 12

VALUATION....................................................................................................................13

KEY RISKS.......................................................................................................................14

FINAL RECOMMENDATION........................................................................................14

COMPANY BACKGROUND 02

Dechra Pharmaceuticals PLC is a global specialist veterinary pharmaceuticals and related products business. Dechra expertise in the development, manufacturing, and sales and marketing of high quality products exclusively for veterinarians worldwide. Formed in 1997, Dechra has since expanded worldwide and is currently operating three major line of business: EU Pharmaceuticals (DVP EU), North America Pharmaceuticals (DVP NA) and Dechra Pharmaceuticals Manufacturing (DPM).

Total revenue in FY 2016 was £247.6 million, with EBITDA of 19.5 million (7.9% margin). The main stream of income is divided across five different product categories: Companion Animal Products (CAP), Equine, Food producing Animal Products (FAP), Diets and Other. The company has grown revenue at 21.7% over 2015, mostly through the strong performance of existing business and new acquisitions made in the year.

Chief Executive Officer: Ian Page Mr. Page has been the Chief Executive Officer and Managing Director of Dechra Pharmaceuticals PLC since November 2001 and 1998 respectively. He also serves as the company’s Executive Director in 1997. Prior to Dechra, Mr. Page joined Dechra principal trading subsidiary National Veterinary Services (NVS) since it commenced operations in 1989. He has played an important role in developing the Group’s growth strategy. Through various positions that he held, Mr. Page has gained extensive knowledge and experience within the pharmaceutical and veterinary sector. In particular he has a wealth of experience in delivering

strategy plans successfully and understands how business develops both in UK and globally. Mr. Page also has a broad experience in M&A. In October 7 2010, Mr. Page has been appointed as Non-Executive Chairman at Sanford DeLand Asset Management.

Chief Financial Officer: Richard CottonFollowing the resignation of company CFO Anne-Francoise Nesmes in July 2016, Richard Cotton will be appointed as the new CFO by the beginning of January 2017. He will leave his position as Group Finance Director at Consort Medical PLC after its interim results in December. In the interim, Septima Maguire, the Group Financial Controller, will be the acting CFO. Mr. Cotton graduated from Kingston University with a BA (Hons) Business Studies degree in 1984 and became a Chartered Management Accountant. He has extensive experience senior financial roles in medical sciences and other sectors. Mr. Cotton was

Group Finance Director of Vitec Group PLC from 2008 to 2011. He was Group Finance Director of Wagon PLC from 2005 to 2008 and from 2001 to 2005 he held Group Finance Director at McLeod Russel PLC. Prior to this he served as Planning Director in Alcoa. Inc.

Dechra continues to deliver a strong performance in financial year 2016 under a solid leadership. Mr. Page has set his personal objectives with acquiring three companies (Genera, Brovel and Putney) as well as successfully launching Zycortal in US and European markets. The company will continue to expand globally in financial year 2017 by making their first acquisition of Apex Laboratories Pty Ltd, a veterinary pharmaceutical company based in Australia. Mr. Cotton will be adding more values to the company with his extensive knowledge and experience when he joins the Board during January 2017. The Board and its Committees are accessed annually to help maintain the effectiveness and ensure they remain fit for purpose.

03INVESTMENT THESIS

LEADERSHIP

We believe that that an investment in this company would yield great returns based on the following catalysts:

Multiple Acquisitions (Brovel, Genera, Putney and Apex)Dechra has made three acquisitions (Genera, Brovel and Putney) throughout financial year 2016, providing critical value in expanding its global footprint. Genera will add four new sales territories including Croatia, Slovenia, Bosnia-Herzegovina and Serbia as well as develop a strong presence in emerging vaccine market. Brovel will be used as a platform to register and market existing Dechra’s product and open up significant penetration into Latin American market. Putney accelerates the North American growth as it provides direct access to high quality product range that complements existing therapeutic areas as well as adding a robust new product pipeline and the expertise to deliver that pipeline.

A deal to acquire Apex, a veterinary pharmaceutical company in Australia has also been ironed out, waiting for its official announcement on 14th of October 2016. The pivotal appeal of this acquisition is to gain access to the established and growing Australian companion animal product market and support expansion in the Australasian and Asian region. The combined acquisitions are set to bring in higher-than-projected growth rates, our analysis implies a valuation of at least 25.5% increase in revenue for the next year.

Launch of New Patented Products (Zycortal and Osphos etc.)Performance with existing North America business remains exceptional with revenue growth of 37.9% at CER. Including Putney and Brovel since acquisition it was 59.5% at CER. This growth has been enhanced by a good performance from Phycox, strong growth and traction with Osphos and the successful launch of Zycortal in March 2016. Several FAP approved, notably Phenocillin and Solamocta (for turkeys and ducks) launched in Q4 2016 in Germany and is due to be launched in 17 other territories. New product sales continue to grow, with 14.4% revenue coming from new products which are either novel, generic or in-licensed.

Significant Low Potential Downside to Company’s Stock ValueGlobal animal healthcare market continues to grow at 5.6% over the last decade. The yearly increase for pet ownership result to a higher demand for veterinary products and supplement. Good progress has been made on the integration of the recent acquisition leading to a £21.7m increase in revenue. Pipeline delivery is also strengthened through both new internally generated ideas and the integration of acquired development programmes. Although a degree of uncertainty following Brexit is anticipated, the business is naturally hedged by its geographical spread and international sourcing.

The global economy is rather bleak with the recent developments around the world from the US interest rate hike to Japan’s decision to control yield curve of their bond. However, we have highlighted three main economic developments which might influence your investment decision in this company:

First, United Kingdom (UK) has 2 options to work on in terms of trade partnership with the EU upon leaving them:

i) To use the Finland model, in which a separate free trade agreement is formed with the EU with special tariff rates, or

ii) To follow tariff rates set by the EU on non-EU countries.

The second option will put UK companies in losing position if it is depending on EU market currently. Higher tariff means lower export from the UK, which in turn lowers the revenue for the companies. This impact will be lower if UK and EU is able to form a new FTA using Finland model.

Second, the upcoming presidential election in the United States of America (US) on 8th November 2016 is seen to be a huge determining point for financial world as both presidential candidates offer contrast approach of economic-flourishing policies as well as trade policies in the US.

Third, the growth for the industry globally is healthy for the past three years and projected to be the same in the future.

Table of Animal Health Market Growth for year 2013 to 2021

04

MACROECONOMICS DEVELOPMENT AND OUTLOOK

2013A 2014A 2015A 2016F 2017F 2018F 2019F 2020F 2021F0

5

10

15

20

25

30

35

40

23.00 23.40

30.00 31.50 32.76 34.07 35.43 36.85 38.32

3.6 4.77.0

5.0 5.0 5.0 5.0 5.0 5.0

Global Animal Health Market

Value ($ Billion) Growth (CER* %)

*CER stands for Constant Exchange Rate.Source: Dechra Annual Report 2014, 2015 and 2016.The forecasted growth of Animal Health Market from year 2016 to 2021 is conservatively projected to be at 5%.

This segment is to justify our approach of using 5% as the forecasted growth rate (at CER).

At a glance:The animal medicines and vaccines sector is estimated to represent a global market of $30 billion according to Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine. The global animal health market is stimulated by not only increasing pet ownership and human-animal bond, but there is an increasing need for higher efficiency livestock production. The worldwide population is growing and emerging markets’ middle classes are becoming more affluent and urbanised. As income rises, so does the consumption and of animal-rich protein such as meat, eggs and milk. Rising prevalence of food-borne disease and their transfer to human beings is also propelling the growth of the market.

On the other hand, a number of restrictions posed by regulatory authorities have negatively impacted the sales of antibiotics within the animal healthcare market, thus inhibiting the market. In addition, soaring costs and rising regulations on animal testing have impeded a number of healthcare companies from manufacturing new drugs for animal welfare, thus restraining the growth of the market. A key challenge for the market is the decreasing population of veterinarians, while the emergence of new diseases provides untapped opportunities for the growth of the market for animal healthcare.

This set of factors has resulted in greater demand for food producing animal products (FAP), anti-infective, biologicals (including vaccines), and pet diets, all of which are products offered by Dechra Pharmaceuticals PLC. Industry sales have grown at a CAGR of 5.6% per year over the last decade, reaching $23.9 billion in 2014. [1] Almost 60% of sales were driven by the production animal (livestock) segment, with the remainder being driven by the companion animal (pets) segment.

05

INDUSTRY ANALYSIS

MARKET DRIVERS AND OPPORTUNITIES

Beyond the underlying demand-drivers, the animal health industry possesses a unique combination of characteristics that determines the value-drivers for participants. Key industry characteristics can be grouped into these value driver categories:

Portfolio Advantage & Commercial Excellence

Increasing demand for farm animals & emergence of new diseasesIn the Production Animal (livestock) segment, animal health product manufacturers’ end-customers include geographically dispersed, but increasingly consolidating, food producers. As human population level rises, animal-based protein is liable to become more valuable. This, coupled with increasing income and changing lifestyle boost demand for meat, poultry and eggs. As farms rush to take advantage of these favourable pricing conditions, however, consumers’ susceptibility to animal epidemics has also been on the rise. In an effort to boost margins, farm animals are often crammed into tight quarters that exacerbate the spread of contagious diseases. These poor conditions create an ideal incubation environment for viral and bacterial mutations. To counter these drawbacks to large-scale commercial livestock farming, farmers have relied heavily on feed additives, pharmaceuticals, and vaccines to keep their farm animals healthy. Companies such as Dechra Pharmaceuticals PLC cater specifically to those needs.

Reliance on mergers and acquisitions (M&A) as business modelAnimal health product manufacturers’ commercial strategies have primarily focused on direct sales (including customer loyalty/branding initiatives), given the traditional key role of vets in purchase decisions and the absence of significant third-party payer influence. M&A strategies have helped animal health product manufacturers achieve the economies of scale and scope needed to support large direct sales forces serving markets that are fragmented by geography and species. Scale economies in commercial are a key value-driver in this industry, spurring M&A activity. Scale economies enable firms to afford the R&D spending and subsequently produce better products and gain higher profits.

Increase in Pet OwnershipCompanion Animals are the primary dispensers of animal health products. Pet owners’ willingness in providing veterinary care, supplements and alternative treatment options resulted in pets living longer and healthier. Over the past few years, pet ownership in the Asia-Pacific region has been increasing with significant rates mainly due to the increase in disposable incomes and changing lifestyles. This has spurred the market for various pet healthcare products and services in this part of the world. In Europe, high emotional values regarding pet animals, resulted in increasing pet ownership. The market therefore is driven by the demand generating from the needs need to keep the pets healthy and happy.

2011 2012 2013 2014 2015 20160

20406080

100120140160180200

Expenditure on Pet Care Products (USD per pet)

Asia Pacific – China Australasia- Australia Europe – United Kingdom Latin America - Brazil

Middle East and Africa – South Africa North America - USA

Source: Euromonitor International

Innovation

Shorter development time and lower investment requirements.06

Innovation for New Chemical Entities is a key growth-driver for the animal health industry. NCE approvals require investment in Research and Development (R&D) to be made. Fortunately, R&D cycle time is, in general, far shorter in the animal health industry than in human health: as little as 3 years for vaccines and 7-10 years for other drugs, versus 10-15 years. According to estimates by PwC research, R&D investments in animal health industry is lower ($100 million) compared to human health industry (an estimated $1.4 billion). Generally, R&D in the animal health industry requires shorter development time and lower investment requirements.

Incentives by governments and International Organisations (IO)Incentives by governments and IOs such as fee reduction for scientific advice and relaxation of legal procedures regarding R&D by European Union members encourage many firms to remain competitive and prominent by undertaking Research and Development.

However, although innovation remains imperative, some leading veterinary pharmaceutical companies’ product portfolios are more than 15 years signalling to strong market presence and effective branding. Dechra Pharmaceuticals PLC continues to enjoy strong market positions in a number of our key therapeutic sectors such as endocrinology, dermatology, anaesthesia and analgesics, and equine medicine.

Competitive Forces

Leading animal health product manufacturers have traditionally experienced few major threats from new entrants, generics focused companies, or non-pharmaceutical companies. There are two key reasons for animal health product manufacturers’ relative insulation:

Large commercial organisations.It is difficult for companies to replicate animal health leaders’ economies of scale, particularly since animal health gross margins tend to be low, especially in the Production Animal segment. This type of challenge may have been one reason that some players have exited the generic animal health product market, e.g., Teva sold its generic business to Bayer in 2013. However, Dechra Pharmaceuticals PLC remains competitive by producing highly soluble and stable products such as Solustab® , making them the specialist and preferred partner through the provision of a wide range of high quality products as well as technical knowledge and professional support.

Increased generic competitionThe combination of regulatory changes that promote generics and distribution channel shifts has resulted in increased competition from generics and over-the-counter (OTC) products. Furthermore, some leading animal health product manufacturers have launched branded generics, further increasing competitive intensity.

Barriers to entryIn the human health industry, generic players are incentivized to participate in the industry because of legislation that gives 180 days of exclusivity to companies who successfully challenge branded drug patents[3]. There are no equivalent financial incentives in the animal health space. Barriers to entry such as these help to explain why generics account for just under 10% of dispensed animal health drugs. This allows companies with large market presence, including Dechra Pharmaceutical PLC to maintain their products portfolio.

Impact of regulation

Use of antibioticsAccording to a September 2014 European Commission memo [4], the new rules ban “the use of medicated feed as a preventative measure or as a growth promoter”, and establish “an E.U. residue limit for veterinary medicines in ordinary feed”. The theme of modifying production animal feeds is echoed in the U.S., where the Food & Drug Administration (FDA) has proposed limits on feed and water antibiotics in production animals. By the end of 2016, it is anticipated that farmers will not be permitted to use medically important antibiotics for growth or performance. Single tier label claims 07

MARKET RESTRAINTS

In July 2015, the U.S. Animal and Plant Health Inspection Service [5] amended guidance on product labels. Previously, labels could claim any of four levels of effectiveness; now, only a single claim may be used. The change could mean that companies who previously relied on claim amendments as part of lifecycle management may need to think of alternative strategies.

Scarcity of arable land and water

Widespread degradation and deepening scarcity of land and water resources have placed a number of key food production systems around the world at risk, hence creating a roadblock in the way of providing resources for animal health. This factor is restraining the growth of the market, especially in the developing countries of Asia because it results in less resources available for animal farming and husbandry. Production of animals in many some developing economies is low, which may limit the market for animal healthcare products and services.

[1] Vetnosis, AH Industry Global Market Review 2015.[2] Mordor Intelligence, Global Veterinary Healthcare Market, June 2016[3]PWC, Animal Health Strategy Playbook, August 2015[4] Source: Federal Register, European Commission Press Release Database[5] Source: Federal Register, European Commission Press Release Database

Dechra Pharmaceuticals Manufacturing (DPM)Dechra has five manufacturing sites that produces majority of their pharmaceuticals product for third parties on a contract basis. The acquisition of Genera has allowed Dechra to gain access into vaccines production facility in a low cost environment in Croatia. This acquisition represents an attractive entry strategy to the fast growing poultry vaccines market, which was valued at $1.3 billion in 2013 and is projected to grow at CAGR of 7.8% until 2020. Although the clear focus of DPM is on Group manufacturing, sites in Skipton, Bladel and Zagreb also utilise their installed capacity and generate income through third party manufacturing.

International FootprintDechra competes in the two largest animal health markets with 72.8% of revenue from Europe, 21.8% in North America and 5.4 % from the rest of the world. Eastern Europe is growing rapidly due to the rise in demand for meat, in particular poultry. Dechra is on track to expand globally by completing two acquisitions in 2016 financial year that granted access across Latin America and Eastern Europe. The acquisition of Apex during October will open up to the established and growing Australian companion animal market which has c.4.2 million dogs and c.3.3million cats. It will also offer a base from which to support and build Dechra’s expansion in the Australasian and Asian regions.

Offers Drugs that cure Endocrine-related diseasesDechra’s niche area includes endocrinology drugs, which many of their competitors have not ventured into. This gives them significant access to this segment of the market. Most of the diseases in this in this tranche are underdiagnosed, which creates ample opportunity for Dechra to dominate this segment. Diseases such as Addison’s disease are not quite complex and niche, which makes it hard for other companies to follow suit. In addition to that, other drugs produced by Dechra have already catered to multiple diseases within this tranche, which places the company at a better position relative to its closest competitors.

Initial Views on BrexitThe decision by UK to leave the European Union has caused volatility and uncertainty to rise in the market. The business is internationally hedged and diversified, which helps in a period of volatility. In case the European economy slow down substantially, Dechra’s international expansion over the last few years could help support the growth. In terms of product manufacturing and registration, Dechra is accustomed to trading with foreign countries with different rules and regulations. The distribution model can adapt to changes in tariffs and duties. A significant downturn in the UK economy may impinge growth rate, however there will not be any material effect on the Group and the material contracts can be renegotiated over time as needed.

COMPARATIVE ADVANTAGE

08

Vetoquinol Virbac S. A. Genus PLC Dechra Pharma PLC

Listed on Paris Stock Exchange Paris Stock Exchange London Stock Exchange

London Stock Exchange

Financial Year Ending 31 December 2015 31 December 2015 30 June 2016 30 June 2016

Debt/ Equity Ratio 0.0975 1.49 0.3303 0.56

ROE (%) 8.69 6.03 14.39 4.52

ROCE (%) 11.77 28.42 14.17 16.1

Operating Margin (%) 10.99 6.59 14.25 5.87

Current Ratio 3.02 1.52 2.22 2.45

EPS 2.04 cents 1.12 cents 56.80 pence 42.95 pence

Dividend Yield (%) 0.93 - 1.28 1.34

P/E ratio 20.65 47.62 25.12 32.01

Justification of Debt/ Equity Ratio (D/E Ratio)This ratio gives us a picture of how highly the company is leveraged. A higher D/E ratio increases the risk of a company as changes in profit will not cause any changes in the debt interest payment. During a period of low profit, higher proportion of the profit will be used for debenture holders’ and loan providers’ interest first, causing dividend pay-out for investors to fall. Dechra Pharmaceutical PLC has leveraged on a huge amount of debt to facilitate its acquisition process in financial year 2016, increasing its D/E ratio from 0.17 in financial year 2015 to 0.56 in financial year 2016. Looking back to its ability to make sure its balance sheet is health, (for instance from 2012 to 2015 where it managed to reduce its D/E ratio from 0.74 to 0.17), we are confident that Dechra will not shortfall to repay its debt obligations. Furthermore, as Dechra is immune to falling profits (as justified in other parts of this research report), the high D/E ratio will not be an issue for investors in terms of dividend pay-out volatility. Payments of debt are scheduled as per annual report.

Justification of Return on Equity (ROE) and Return on Capital Employed (ROCE)A low return on equity and return on capital employed as compared to its peers is seen due to Dechra’s change in business model, in which most of the acquisitions made between 2015 and 2016 have not realised profit fully.

Justification on Operating MarginAs compared to its peers, Dechra has a relatively low operating margin. However, we are confident that this margin will improve significantly based on all the justifications we have made in this research report. Dechra’s acquisitions will improve this margin significantly too. With the increase in sales in specialised products coupled with newly produced drugs such as Zycortal and Osphos, we believe that operating margins will improve in the coming years.

Justification on Current Ratio, Earnings per Share and Dividend YieldDechra’s current ratio, earnings per share and dividend yield are significantly at healthy level as compared to its peers.

Justification on Price/Earnings Ratio (P/E Ratio)While financial market portals provides an industrial comparison of P/E ratio, we believe that this is not a fair ratio to be used for justification of whether a stock price is worth buying as animal health market is a niche market and comparison is usually made between pharmaceutical companies. As for the four companies above, a direct comparison between them is not fair for the following reason:

Vetoquinol and Virbac S. A. are listed on Paris Stock Exchange and hence a different investor behaviour could be exhibited in terms of interpreting the P/E ratios.

Although Genus PLC is the closest company similar to Dechra’s business industry, they are not direct competitors to each other as Dechra specialises in vet medicines while Genus PLC specialises in animal genetics market

PEER-TO-PEER ANALYSIS

09

Company Name Dechra Pharmaceuticals Genus Plc Virbac S.A Vetoquinol

Signature Product(s)

ZycortalTreats Addison’s Disease, an under diagnosed disease with complex and confusing symptoms.

OsphosControl clinical signs associated with bone resorptive processes.

VetorylTreating Cushing’s Disease, which is also highly niche

FelmazoleStabilising hyperthyroidism in cats prior to surgical thyroidectomy.

Genetically superior boars and sows that produce offspring with desirable characteristics, such as feed-efficient growth or leaner meat.

Bull semen, which is delivered through artificial insemination to improve the customers’ herds and their efficiency. Genus PLC also offer genetically superior embryos through their subsidiary IVB.

Focused on R&D, to improve genetic control and product differentiation.

Markets huge spectrum of products, with more emphasis on parasiticide products.

Successful launch of parasiticide products in Europe (Milpro; 3rd place in internal parasiticide Europe market) and in Mediterranean basin (Effitix).

Successfully launched Defensin Technology, which stimulates the body’s own production on anti-microbial peptides. (better dermatology presence)

Reference products (not generic drugs)Anti-infective, pain-inflammation, behaviour.

FlexadinTo support joint health of dogs/cats

ZylkeneTo help dogs/cats cope with unfamiliar situations such as fireworks.

.

Global Footprint*According to revenue

Europe (72.8%)North America (21.8%)Rest of world (5.4%)

North America (46%*)Latin America (15%*)Europe (29%*)Asia (10%*)

Americas (32.7%)Europe (51.8%)Asia Pacific (15.4%)

North America (15.83%*)Latin America (17.82%*)Europe (38.45%*)Asia (14.30%*)Africa & Middle East (3.63%*)Pacific (9.97%*)

Competitive Advantage

Has a significant advantage in endocrine diseases, which is not tapped into by other competitors

Has a huge presence in Balkan countries, which improves demand in FAP products.

Has access to the lucrative poultry vaccine market in which many of

Differentiated animal genetics.

Long-lasting customer relationship.

Has an R&D segment, which will drive growth for this business in the future.

Gene-editing business is seeing major increase with improvements in

Has a large global footprint coupled with major partnerships with companies all around the world particularly in Europe.

Has multiple production sites in countries that Dechra is just starting to penetrate.

Has multiple partnerships with labs

Production sites in 11 countries, providing Virbac S. A. A comprehensive supply chain.

Huge footprint in emerging countries such as India and China.

Has a large market share in FAP products as well particularly in

NON-FINANCIAL COMPARISON

other competitors are not.

R&D. and companies around the world.

ruminant products.

Based on the analysis above, it is clear that Dechra’s global footprint may not be as huge as its competitors. Other competitors such as Vetoquinol, have presence in India and also China, which can be seen as a disadvantage to Dechra in terms of tapping into the wider market. This may be one of the reasons why Dechra’s cost of production is higher as it is not able to fully utilise its economies of scale. Other competitors may also have a significant advantage over Dechra Pharmaceuticals in terms of FAP. Dechra may also lose out in a few market segments such as anti-effective drugs, pain inflammation drugs and also parasiticide. However, this is compensated by Dechra’s recent acquisitions in key areas that are fundamental to drive growth in the company. Its recent geographical expansion in Mexico and also Croatia signifies the companies’ efforts to move into unexplored markets and increase sales in these regions. The move will contribute significantly to Dechra’s supply chain and market share globally.

Dechra’s specialisation in drugs created to cure endocrine diseases and also dermatology related diseases easily compensate its lack of investments in certain drugs said above. This is due to the fact that the drugs that Dechra usually caters to are underdiagnosed, which translates to lower market participation by other companies. This allows the company to garner larger profits from this segment of the market. Drugs such as Zycortal and Osphos has shown significant increase in demand since its release earlier this year and has contributed tremendously to total revenue. Its recent acquisition of Genera and also Brovel will also allow the company to utilise its supply chain to penetrate the FAP market within the respective countries and further improve this area of the business. This is due to the fact that demand for FAPs are relatively higher in these countries. Its recent acquisition of Apex Laboratories in Australia will also allow Dechra to access a wider range of customers particularly to customers whose demand largely consists of CAP products. The acquisition will also bolster its R&D segment and boost sales in the coming year.

Assumptions: Revenue growth follows analyst expectation for year 2017 and 2018. Consecutive years’ growths are set conservatively at

decreasing rates. This is justified given the expected growth of the market and also the organic growth from the business based on past performance.

COGS as a % of sales are capped at 48% and is assumed to be lower in the coming years, to be consistent with our conservative approach of valuation.

Amortisation and Depreciation as a % of sales follows past trends which is at 9%. Tax rate follows 20% consistent with the UK corporate tax rate. No new shares will be issued in the coming years. No new long term debt will be issued in the coming years except for 2017, due to the acquisition of Apex Laboratories in

Australia.

FINANCIAL STATEMENT ANALYSIS

10

11

Assumptions: Risk free rate is taken from the yield of the UK 5-Year Gilt dated 17th November 2016. Risk premium is based on the FTSE All stocks market return in the 5 years. Beta of the company is based on the 1 year Beta produced by the Financial Times. Cost of Equity is arrived through using the formula of Capital Asset Pricing Model. Cost of Debt is based on the current interest rate incurred by the company plus LIBOR rate as of 30th September 2016. Figure is calculated in UK£ thousands

VALUATION 1212

Followed with the newly made acquisitions, the top risk factors include:

Emergence of veterinary buying groups, corporate customers and internet pharmaciesDechra sells and markets their products mainly to veterinary practices and distribute through wholesaler and distributor networks in most markets. To consolidate the purchase, veterinarians are establishing buying groups in mature markets. The rising number of buying groups and corporate customers represents an opportunity to drive up sales volume but this may cost a decreased margin. Relationships and reputation with veterinary practices could be negatively impact. Equitable pricing is created for each customer group to help support veterinarians in retaining customers.

Integration is more challenging than expected (deliver lower returns)Failure to identify suitable acquisition candidates and securing a successful approach could slow down growth and expansion into new markets. Acquired business may deliver lower profit margins due to over-valuation or result in intangible assets impairment. The Board reviews the integration progress regularly and screens acquisition targets.

Unable to meet regulatory requirementsProducts manufacturing are conducted in highly regulated environment and failure to adhere to regulatory standards will impact Dechra’s ability to register or even manufacture their products. Delay in regulatory approvals could also set back product launch time and directly affects sales and margins. Regulatory and legal teams are kept updated to ensure that new acquisitions meet regulatory quality and standards. A response team will be created in cases where changes can impact the power to market and sell any of the products.

Continuous pressure on reducing antibiotic use

KEY RISKS 13

Antibacterial resistance has been identified to transfer from food producing animals to human. Government in some countries has started regulating the use of antibiotic in food producing animals. This directly impact the revenue gained from antimicrobial product range. Comprehensive understanding of regulatory changes is maintained to ensure a good reputation within the market.

We suggest that Prima Ekuiti go long on this investment given to huge potential upside of the company’s share price. The nature of the industry Dechra is operating in is growing at an exceptional rate, with the increasing pet ownership and the growing demand for high quality m eat and sources of protein. Given the specialised state of the industry, it creates an incentive to for companies to continuously innovate and create products that add the most value to consumers. We think that the increasing percentage of Dechra’s focus on the CAP without foregoing its market share in the FAP market, creates a well balanced portfolio for the company and insulates itself from any downside in either the 2 markets. In addition, many competitors are just focusing on the FAP or CAP market, which is in contrast with the business model Dechra is striving for at the moment. This creates more opportunity for Dechra and improve revenues in the future. This coupled with the fact that the industry is relatively immune to financial market shocks due to the fact that the demand for pet well-being would still be there regardless. With the current share price of the company at £13.85 (as of 30th September 2016), we believe that share prices could increase to £17.38 in the coming year, a 25.5% increase in share prices due to recent acquisitions that will add significant value to the company coupled with the release of new products. This invigorates our opinion on this company. Given our very conservative approach in valuing the company’s share price, we believe that Dechra Pharmaceuticals will be an excellent investment.

FINAL RECOMMENDATIONS

14