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ECO Animal Health: growing fast while awaiting US launch

The livestock therapeutic specialist is continuing organic growth in China, Latin America and India.  In the shorter term, investors will want to look out for news of US regulatory approval for its flagship product Aivlosin this year as well as full-year results that are expected to show a substantial increase in both turnover and profits. Longer term, a trade sale may be on the cards,...
ECO Animal Health: growing fast while awaiting US launch

Vegetarians say feeding the world would become a lot easier if man gave up on meat. Their argument is that the amount of water, land and crops used to feed livestock would be better employed growing more crops, and it is an argument that has its merits.

The problem is that humans retain carnivore features, such as our front teeth, and meat just tastes too good to too many people. So the meat industry has plenty of life left in it, in spite of the increased interest in vegetarianism during the past few decades.

In fact, meat consumption is due to increase significantly as the world’s population is expected to expand from 6.5 billion to nine billion people over the next 40 years. A recent report by the UK’s Government Office for Science highlights the problems that this increased consumption of meat will bring about during this century.

The report – Foresight: The Future of Food and Farming (2011) – says that different studies predict increases in per capita consumption of meat from 32 kilograms per annum currently to 52kg per annum by the middle of the century. “Whether consumption of meat in major economies such as Brazil and China will stabilise at levels similar to countries such as the UK, or whether they will rise further to reach levels more similar to the USA is highly uncertain,” say the authors of the report. “However, major increases in the consumption of meat, particularly grain-fed meat, would have serious implications for the competition for land, water and other inputs, and will also affect the sustainability of food production.”

These concerns are good news for firms that are involved in the efficient farming of livestock, such as those that operate in the animal health industry – a market that was valued at $18.7bn in 2009 (source: Vetnosis) and is currently growing at more than 5% per year. Alternative Investment Market-quoted ECO Animal Health (LON:EAH) is one such firm.

ECO Animal Health’s shares have been traded on AIM since London’s junior market was founded in 1995 (when the firm was known as Lawrence plc).

The group’s flagship product is Aivlosin – a brand that has been trademarked by ECO Animal Health. Accounting for almost 60% of ECO Animal Health’s sales, Aivlosin is a drug containing the animal antibiotic tylvalosin. It is rapidly absorbed by animals and concentrates in target tissues to provide control of major respiratory and enteric diseases in both pigs and poultry. So far, it is licensed only for respiratory and enteric bacterial diseases in pigs and poultry, but the drug has potential to be used for other purposes.

In pigs, Aivlosin is currently used to help control diseases like: enzootic pneumonia, a chronic respiratory disease found in swine worldwide; Ileitis, a common intestinal disease found in growing pigs; and swine dysentery, which is highly contagious. In poultry, Aivlosin is aimed at tackling mycoplasmosis and ORT, which both cause respiratory disease, as well as necrotic enteritis, a fatal intestinal disease.

According to Peter Lawrence, ECO Animal Health’s executive chairman, livestock farmers and regulators want a new-generation antibiotic “that gets into the bloodstream very quickly, goes straight to the point of infection, kills the infection and then gets out of the animal’s body quickly too”. And Lawrence says that Aivlosin is the “fastest-acting product on the market”.

Already the firm has seen strong sales of Aivlosin in Asian and Latin American markets, while its sales into Europe have been growing steadily. “Our organic growth will continue to come from markets such as China, Latin America and India,” says Lawrence.

Lawrence also expects ECO Animal Health to get its first licences for Aivlosin from the US Food and Drug Adminstration later this year, although timelines have been extended due to the FDA’s excessive workload.

Meanwhile, there is also the possibility that Aivlosin could be used for applications in human health. ECO Animal Health and Cambridge University have been working together since 2006 to investigate Aivlosin’s potential as an inhibitor of influenza viruses and in 2009 the university was awarded a £500,000 grant by the Medical Research Council in connection with this research.

ECO Animal Health’s range also includes Ecomectin, which is its second-biggest selling product. This endectocide is used for a broad range of parasite control, including the treatment and control of gastro-intestinal roundworms, lungworms, grubs, horn flies, sucking and biting lice as well as mites.

In the first half of the current financial year (which ends on 31 March 2011), sales of Aivlosin were 55% ahead of H1 2010, while sales of Ecomectin were ahead by 21%. The boost in sales of Ecomectin was a reflection of increased demand in Japan, where the active ingredient in the product was discovered, and the well-received launch of Ecomectin in Mexico.

Other drugs owned by ECO Animal Health include therapeutics, such as Chlortet (aimed at controlling E.coli infections), and medicated feed additives, such as Flaveco (which is designed to enhance digestion in pigs, poultry, calves and growing cattle).

Recent interim results show that the firm’s turnover for the six months to 30 September increased by some 38% to £12.3m, while its pre-tax profit came in at £500,000 (H1 2010: £385,000) or 0.5p per share.

Traditionally the second half of the year is stronger for Eco Animal Health, which produced a pre-tax profit of £1.6m and adjusted earnings per share (excluding amortisation) of 7.2p for the whole of last year.

Ultimately, Lawrence sees a trade sale as the most likely exit for investors since he believes a large international business would place more value on ECO Animal Health than the stockmarket. “If we could sell the business to a multinational animal health company we would not have to give away 50% of our margin to distributors, so the profit would be three times as big to a purchaser,” he says.

But in the shorter term investors will want to look out for news of US regulatory approval for Aivlosin this year as well as full-year results that are expected to show a substantial increase in both turnover and profits. House broker Cenkos Securities estimates a 30% increase in revenues to £28.3m for the full year to 31 March 2011, along with an adjusted pre-tax profit of £3.1m (2010: £2.2m). Adjusted earnings per share are expected to come in at 7.9p (2010: 7.2p).

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