Vetoquinol SA – It’s a family affair

Vetoquinol is A French company specialized in “Animal health”, i.e. pharmaceuticals for animals. I came across the company more or less by random. The company went public in 2006 but the majority (~62%) is owned by the founding family, the current CEO is the 3rd generation of the founders. Some key figures:

Market Cap 450 mn EUR
P/B 1,6
P/E 16
EV/EBITDA 8
EV/EBIT 11
Operating Margin (11 year avg) 11,0%
ROCE (11 year avg): 10,8%
EPS CAGR 8 year +4,0%
Debt: ~ 3 EUR net cash per share

Stock Price:

Despite a relatively low Beta, in the long run Vetoquinol is very much in line with the CAC mid/small cap index as we can see in the chart:

At first sight, there was a lot to like at Vetoquinol when I read 2-3 of their annual reports(available in English):

+ family owned/run business (CEO 400 k salary, 46 years old), looks like good alignment of interest
+ only 3 analysts are following the company
+ slow grower
+ Good cash flow conversion (Op. CF > NI)
+ low beta stock (0,7)
+ generally attractive market (animal health)
+ super solid balance sheet (net cash, no pensions etc.)
+ reinvestment potential

However there were also some items which were missing for a “perfect” stock:

– not super cheap
– below average ROE/ROCE etc.
– no ROE/ROIC targets
– relatively frequent (but small) M&A

Let’s take a quick look at the business itself

I am clearly not an expert in the pharmaceutical area. However, reading through Vetquinol’s annual reports one can identify some differences to the “normal” pharmaceutical business:

+ longer product cycles than “normal” pharma (25 years), less threat from generics
+ distribution via vets is predominant
+ mostly directly paid by the customer, no health insurers etc.
+ long-term growth potential
+ 2 main market segments: Pets and “farm animals”.
+ already a quite concentrated market, however many big players are subsidiaries of larger groups

There are 2 other listed “pure play” animal health companies, Zoetis (Pfizer Spin-off) and French competitor Virbac. If we look at some metrics, both companies are valued much much higher then Vetoquionol:

Name Ticker Mkt Cap (EUR) P/B P/E EV/Next Yr Est EBIT
VETOQUINOL SA VETO FP 456.86M 1,61 16.36 10,9
VIRBAC SA VIRP FP 1.40B 1,57 43.83 16.81
ZOETIS INC ZTS US 19.80B 18.78 27.79 17.34

I think especially in Zoetis case this has to do with the general current hype in health care. However there are also clearly risks in the business model

– change of distribution model (direct/internet) could be a challenge
– Generics
– Vetoquinol could turn out to be too small ? They claim to be the number 9 globally, but the distance to the large players is big
– they do have exposure to EM markets, actually they just acquired some EM based companies (Brazil, India)

Vetoquinol itself claims to have the following competitive advantages:

+ focused player
+ long-term oriented management = shareholder
+ family owned –> acquisition of Brazilian family business only possible because they are family owned
+ very good corporate culture

Valuation/Summary

Even if we take into account net cash, Vetoquinol is not cheap on an absolute basis with a P/E around 15 times and EV/EBIT of 11. I would be prepared to pay such a multiple only for a very good company and I am not sure if Vetoquinol is a very good company. Yes, they are cheap compared to other comparable companies but I guess that those companies are already much too expensive.

So in order for them to become more interesiting to me, either profits need to go up or the price needs to go down. As they do have quite some EM exposure there is currently not much short term upside for earnings, so the only way to buy this would be a lower price.

At what price would I be interested ? Instead of a very detailed CF model, I rather try to go for a “common sense” approach here:

On average, Vetoquinol traded at ~14 xP/E since IPO, within a range of 8-17. I would want to buy them at a disocunt to average, so maybe 12-13. So with current earnings of 2,25 per share and 3 EUR net cash, I would be a buyer in the 30-32 EUR per share range. I think at that entry price, Vetoquiol could be a good 15% p.a. long term “Boring” compounder. However at the current 38 EUR per share this would mean that the stock price has to fall -20 to -30 percent to get me interested.

So again, a stock for my watchlist, next to Svenska Handelsbanken.

PS: Some research links:

http://www.fool.com/investing/general/2015/06/10/stocks-to-watch-in-animal-health-zoetis-and-woof-a.aspx
http://investor.zoetis.com/sites/zoetis.investorhq.businesswire.com/files/event/additional/Zoetis_at_William_Blaire_Conference_6.10.15.pdf

http://www.virbac.com/files/live/sites/corp-public/files/contributed/05-investors/05-regulated-information/01-financial-reports/2015/03-quarterly-financial-reports/Quarterly_Financial_Information%20March_2015.pdf

http://www.virbac.com/files/live/sites/corp-public/files/contributed/05-investors/05-regulated-information/07-analysts-presentations/2014/en/2014_Financials_and_Strategic_Update_March_2015.pdf

http://pharmaceuticalcommerce.com/brand_communications?articleid=26854

http://www.theglobeandmail.com/report-on-business/bioniche-puts-focus-on-human-health/article17950965/

3 comments

  • Thank you for another interesting analysis, I really like your blog and youre investment style. I have been an investor in animal health for more than 10 years now, acquiring positions in both Virbac and Vetoquinol in 2005, at a time when these companies were trading at 7x Ebitda. I sold Veto 2 years later and Virbac in 2015.

    I have 2 main concerns for Veto, namely 1) the quality of Veto’s portfolio and 2) the management of the company by the family. Overall, I agree with you it deserves a significant discount to Virbac.

    On 1), I think veto is sub critical mass in an environment where one needs a worldwide reach to leverage drugs development costs. In commercial animals, the investment thesis has been increased meat consumption by emerging markets, so it is critical to have access to Brazil, India, China, etc. In companion animals, incredible margins can be made in developed markets: pet owners can spend several thousand euros for the health of their companion, and brands / access to distribution is providing good barriers to entry in this market. On both, Veto is significantly weaker than its main French competitors (Virbac and private CEVA).
    The family have not been a great long term value creator: just plot Veto vs Virbac for the last 10 years. I happen to know a fait bit about CEVA’s financials: it was about the same size as Veto in the early 2000’s, it is now much bigger and much more profitable (4 LBOs in a row!). The Frechin family is controlling the board: Etienne (77 years old), his wife (wtf!), his two brothers and his son (46, the current CEO, 3rd generation), along with 3 independants (do the math on the average age…). Last time I checked, there are also relatives at various management positions at Veto. So it is a family business, run by the family. Their interest is theoretically aligned with shareholders, but they have careers they would not have otherwise, and value creation also takes skills.
    The VanDick (Virbac) also control the business but have hired professional managers (Marée is an McKinsey alumni and has a serious track record of value creation), while the son is racing sail boat bearing the name of the company (Virbac) which does not destroy significant value. In the end, I am not a big fan of low ROCE business that underperform their peers.
    So Veto is also on my watch list, but for another reason: many one day the family will see light and agree to a take private or will hire a pro manager. This could be a catalyst to significant value creation!

  • Da hierzu das Interesse ohnehin nicht allzu hoch zu sein scheint, schreibe ich mal in Deutsch:

    Schaut man auf ROA und ROE ähnelt Animal Health eher Generic als Proprietary Pharma. Trotz vorhandener Patente, wie bei Vétoquinol für Forcyl, erreichen die Renditen kein Humanmedizin-Niveau.
    Unter den dutzenden Wettbewerbern sind aber immerhin Sparten von ABT, BAY, Boehringer Ingelheim, LLY, MRK und NVS, was für eine gewisse Lukrativität spricht. Der Pfizer-Spin-off blieb bislang eine Ausnahme.

    “Mostly directly paid by the customer, no health insurers etc.” ist wohl der wichtigste Vorteil. Staatliche Eingriffe sind weniger wahrscheinlich und man denke nur an den Hillary-Tweet vor zehn Tagen. Humanpharma ist stärken regulatorischen Eingriffen ausgesetzt, wenn auch vermutlich nicht solchen wie Versorger oder Telekoms.

    Ohne in Details geschaut zu haben, also durchaus watchlist-tauglich.

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