Eco Animal Health: helping the meat industry to stay in good shape

One of the consequences of the world’s ever-growing population is an increasing demand on resources. Currently there is much speculation about commodities super cycles, fuelled by the fact that the populations of India and China are not only getting larger but are also aspiring to a way of life that we in the West have taken for granted for decades.

Take food, for example. Although, according to the UN World Food Programme, food prices have stabilised recently after seeing huge inflation last year they are not expected to fall back to pre-2008 levels.

One of the consequences of the speedy development of India and China is that those countries are seeing their respective middle class populations grow very quickly.

Naturally, these middle classes expect to eat well and this is set to put pressure on the prices of traditionally expensive food stuffs like meat.

All of this, of course, is good news for companies that aim to help meat producers. One such firm is Eco Animal Health Group, which is traded  on London’s Alternative Investment Market.

Eco is a pharmaceuticals business that has been traded on AIM since the junior market was founded in 1995, although it used to be called Lawrence plc. The name change came about in October 2007 in order to better reflect the nature of the business.

The group’s flagship product is Aivlosin. Accounting for more than half of Eco’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.

Eco’s product range also includes Ecomectin. This endectocide addresses a market currently worth about £8m in Eutope alone and 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. Last year, sales of Ecomectin improved by 10% during the 12 months to 31 March 2009 compared to sales generated by the drug during the group’s 2008 financial year.

Other drugs owned by Eco include therapeutics, such as Chlortet (aimed at controlling E.coli infections), and performance promoters, such as Flaveco (which is designed to improve efficiency and growth in pigs, poultry, calves and growing cattle).

But for the moment, and in the near future, it is clear that Aivlosin is Eco’s main focus. With Aivlosin already approved for use in pigs and poultry in Europe, South Africa,Japan, Asia and South America, the group is confident that the drug will begin receiving approvals for use in pigs in the US during 2010.

However, Europe still offers plenty of growth for the drug. In June 2008, Eco was granted authorisation from the European Commission to market Aivlosin granules as a treatment for mycoplasmal respiratory disease in poultry – a market segment that is estimated to be worth more than £10m per year. Meanwhile, in March this year Eco said that a European veterinary agency had given it a “positive opinion” regarding the use of Aivlosin granules in medicated drinking water for pigs. Full approval has now been granted, which allows the drug to be marketed throughout Europe as a treatment for ileitis (an important intestinal disease) – a segment valued at £18m annually.

Eco is targeting a significant share of the pig and poultry markets worldwide for its Aivlosin drug, and within the EU it has decided to sell directly into two major  markets: France and the UK. It has also selected several national distributors as partners to sell Aivlosin in other EU territories.

Longer term, Eco plans to build on the collaborative research deal it agreed in 2006 with Cambridge University to investigate new potential indications for Aivlosin. Studies already completed have indicated that Aivlosin appeared to prevent the replication of certain common viruses, including influenza, in laboratory test systems, without damaging cell cultures. Researchers at the Virology Division of the university’s Department of Pathology have been awarded a £500,000 grant by the UK Medical Research Council to extend their work investigating inhibition of influenza viruses, and Eco’s management believes that this work could have far reaching and exciting commercial applications for the firm.

At the end of July, Eco reported that turnover during the year to 31 March 2009 increased 17.4% to £19.3m while pre-tax profits came in at £504,000 (2008: £1m loss). Cash flowing into the business from operations during the year amounted to £3m as opposed to £591,000 of cash outflow in 2008.

The company reported that the current financial year had started strongly, although Eco’s management stated that it remained cautiously optimistic regarding trading given the generally difficult global economic environment.

Eco is forecast to increase its revenues to £22.4m in the year to 31 March 2010, and to £28.5m in 2011. Pre-tax profits are estimated at £3.6m and £5.3m respectively, which should translate to earnings per share of 4.7 pence and 7.4 pence.

This means that, at 206 pence each, Eco’s shares are trading on a hefty price-to-earnings ratio. However, these earnings also appear set to grow quickly.

As well as the fast-growing earnings, Eco also pays a dividend. After July’s results the board recommended a final dividend of 5.45 pence per share, which will be payable to anyone holding shares at the close of trading on 29 September. Including the interim dividend (already paid) Eco’s total dividend for the year will be 7.15 pence, which makes for a respectable yield of approximately 3.5% at the current share price.

As ever, the proof will be in the pudding. So investors may want to check the interim results for the six months to the end of September for signs that Eco is on track to make 2010’s forecast figures.