# ECO Animal Health “solid base for sustainable, profitable growth in the years ahead”

- Link: https://www.directorstalkinterviews.com/eco-animal-health-%e2%80%9csolid-base-for-sustainable-profitable-growth-in-the-years-ahead%e2%80%9d/4121080087
- Published: 2022-08-31T07:20:00+01:00
- Author: Giles

**ECO Animal Health Group plc **(LON:EAH) has announced its results for the year
ended 31 March 2022.

**HIGHLIGHTS**

**Financials**

·      Group sales down 22% at £82.2m (2021: £105.6m)

– China and Japan sales declined significantly to £28.4m (2021: £58.9m)

– ROW sales increased by 15% to £53.8m (2021: £46.7m)

·      Gross margin at 43% (2021 restated: 50%)

·      EBITDA decreased to £6.4m (2021 restated: £21.3m) which includes an exchange
rate gain of £1m (2021: loss £2.2m)

·      Administrative expenses excluding foreign exchange and exceptional items 
were constant at £23.4m

·      New product development expenditure 12% higher at £10.2m (2021: £9.1m) reflecting
maturing pipeline

·      Loss per share of 1.01p (2021 restated: profit per share of 10.86p)

·      Net cash at the end of the period £14.3m (2021: £19.5m)

·      New £10m Bank RCF facility agreed after the end of the period, which remains
undrawn

**Operations**

·      Aivlosin® demand remains robust with increasing market share in key markets

o  Strong growth in USA and Canada from stable domestic demand

o  Strong export driven growth in Latin America

o  Strong growth in South and South East Asia, particularly Thailand

·      Two new Aivlosin Regulatory approvals

o  The first zero day drug withdrawal period anti-microbial for poultry in China

o  New swine respiratory disease marketing authorisation in China

·      Two new poultry vaccine projects progressed to full development in the year

o  Addressing a disease which costs the poultry industry over £600m per annum

o  First marketing approvals expected end of 2023

·      New ESG report provides baseline metrics

·      Appointment of new Chief Executive, David Hallas, on 1 April 2022 and new
Non-Executive Director, Tracey James, during the year

> **David Hallas, CEO of ECO Animal Health Group plc, commented**: “I am delighted
> to have joined ECO in April this year and I have seen so many promising signs 
> within the Company since I have arrived. Whilst the well documented China revenue
> performance has disappointed due to the extensively depressed pork prices, the
> underlying growth and continuing gains in other markets is impressive.  We expect
> that China will remain subdued for another quarter or two but the recent improvement
> in pork to feed price ratio provides the foundation for a stronger end to the 
> financial year.  I am particularly excited about our new technologies and the 
> innovative products which will add to our expanding portfolio of products in the
> coming years.  Our approach, our current and future assets and above all our team
> provide the Company with a solid base for sustainable, profitable growth in the
> years ahead.”

**CHAIRMAN’S STATEMENT**

**_FOR THE YEAR ENDED 31 MARCH 2022_**

I am pleased to report that ECO continues to make strong progress on its journey
towards building a broader and long term sustainable business.

Sales of our core Aivlosin business delivered strong growth in North America, South
East Asia and Latin America.  Sales in Europe were slightly down due to supply chain
and post Brexit importation difficulties. China, however, saw a major reduction 
in sales due to a very rapid and steep down cycle in the overall pig market.  Market
cycles are a feature of our market, and looking through these, we believe there 
are opportunities for continued growth of our core Aivlosin business in the coming
years.

The combination of the impact of the China market decline and our continued substantial
investment in R&D has resulted in a significant reduction in bottom line performance
for the year.  The Board believes that the significant investment in R&D is the 
most effective use of our cash flow and expects it to lead to a substantial and 
sustainable increase in shareholder value.

Our substantial investment in R&D has created a broad portfolio of vaccines and 
biologicals projects that offer competitive advantages over existing solutions in
the market.  Some of these projects moved into advanced stages of development during
the year and, based on current plans, the first projects are likely to receive regulatory
approval before the end of calendar year 2023.  We made an initial presentation 
of the portfolio and its potential future value at our Capital Markets Day in January
2022.  The Board is excited about the transformative potential of the portfolio 
to drive a major increase in shareholder value.  Further updates on R&D progress
will be provided at the appropriate time in the coming year.

As we committed last year, we have laid out further information on our approach 
to ESG and will continue to develop and embed our strategy in this important area
in the coming year.

We announced in July 2021 that Marc Loomes, the former Chief Executive (“CEO”) of
ECO, had informed the Board of his wish to retire by the end of 2022.  Marc joined
ECO in 2004 and the contribution his leadership has made to the growth and development
of the business cannot be understated.  We sincerely thank him and wish him every
success and happiness in the next phase of his life.

We announced in January 2022 the appointment, effective 1 April 2022, of David Hallas
as the new CEO of ECO.  David has more than 30 years of experience in the animal
health sector and we are delighted to have been able to attract such a high calibre
individual to lead ECO through the next phase of its development.

We were delighted to welcome Tracey James to the Board; she has now taken over as
Chair of Audit Committee and will build on the foundations put in place by Tony 
Rawlinson who resigned from the Board as a Non-Executive Director.  After nearly
eight years’ service to the Board of ECO, I would like to personally thank him for
his support and wisdom and wish him well for the future.  We will in due course 
seek to add a further Non-Executive Director to the Board.

The Board recognises the value of dividends to shareholders and balancing the need
for prudent management of cash resources as well as funding the exciting pipeline
of new products.  We have however decided that the best use of the Group’s cash 
at the current time is in the new product development initiatives and accordingly
no dividend will be recommended in respect of the year ended 31 March 2022. 

COVID-19 has remained a challenge during the year.  We are very appreciative and
recognise that our people have shown great commitment and flexibility to keep ECO
operating and progressing.

Finally, on behalf of the Board, I sincerely thank all our shareholders and stakeholders
for the continued support you give to ECO, it is much valued and appreciated as 
we build out the next exciting phase for ECO.

**Outlook**

As anticipated, the first three months of the new financial year has seen Chinese
revenue at a subdued level when compared with the record sales of the equivalent
prior year period. This quarter coincided with a policy of extended urban lock-down
within China in an attempt to control the spread of COVID-19.  This reduced pork
consumption, prolonging the period during which major producers were trading at 
a loss and therefore dampened demand for Aivlosin®.  However, gross margins in China
were stronger due to the favourable customer mix and demand for Aivlosin® in this
period was at a similar level to that experienced before the ASF outbreak.

Recently the Chinese pork to feed price ratio has increased to greater than 5; this
is the first occasion in the last year and is a primary indicator of improved profitability
within the ECO customer base and an improved trading environment.  We believe that
customers will remain cautious for the remainder of the calendar year; as winter
disease outbreaks occur and the normal seasonal demand for pork increases, which
is expected to lead to an increase in the demand for Aivlosin® in during fourth 
quarter.

Outside of China, the first quarter of our financial year ending 31 March 2023 saw
strong year-on-year growth.  This growth is particularly strong in our newer markets
of South East Asia supported by the trends in USA and Brazil, which we currently
expect to continue.

Like many businesses we are monitoring costs closely as the impact of increasing
energy costs and general inflationary pressures will be felt by the business throughout
this year.  We remain committed to a focused programme of new product development
and are excited with the progress we are making.  We continue to focus our R&D activities
on initiatives which will provide the greatest shareholder value whilst balancing
the cost, return, risk and time to market.

We look forward to the rest of this financial year with cautious optimism and confidence.

**_Dr Andrew Jones_**

**_Non-Executive Chairman_**

**CHIEF EXECUTIVE’S REPORT**

**_FOR THE YEAR ENDED 31 MARCH 2022_**

This is my first report as Chief Executive, having succeeded Marc Loomes in April
2022. I am grateful to Marc for his leadership and considerable contributions to
the growth and development of ECO.

The Group confronted a series of operational challenges during a year dominated 
by pork price volatility in China, and the global COVID-19 related disruption of
work locations, international travel and supply chains. Despite the significant 
reduction in revenue from China, business in most other major markets advanced and
the Group continued to invest in critical organisation development and strategically
important R&D projects.

**Operational Review**

The difficult trading conditions in China which were primarily caused by low pork
prices and subsequent negative profitability for swine producers, significantly 
impacted the Group’s performance as global revenue declined by 22% to £82.2m. Excluding
China and Japan, revenue advanced by 15% to £53.8m reflecting the value of ECO’s
global footprint (selling in more than seventy countries) and was an excellent and
noteworthy performance.

Sales of Aivlosin®, our patented antimicrobial which is used under veterinary prescription
for the treatment of economically important respiratory and gastrointestinal diseases
in pigs and poultry, reduced by 17% to £72.9m (2021: £87.5m) due to reduced Chinese
sales and accounting for 89% of total revenue.

Sales of the smaller Ecomectin® anti-parasitic range increased by 31% to £5.5m (
2021: £4.2m) and represented 7% of the Group’s revenue.

Sales of all other products were £3.7m (2021: £13.8m) and mainly comprised a range
of supportive antimicrobial products for pigs in China.

Exposure to Russia and Ukraine is minimal with remaining Russian orders being fulfilled
on a payment before collection basis.

**Product Approvals**

Two Aivlosin® marketing authorisations were obtained from the Ministry of Agriculture
and Rural Affairs (“MOA”) of the People’s Republic of China for the use of Aivlosin
® Water Soluble Granules. The first approval allows for the treatment of respiratory
disease caused by Mycoplasma and other sensitive bacteria, in chickens laying eggs
for human consumption and in breeding chickens. Aivlosin® is the first antimicrobial
to be licensed by the Chinese MOA for laying birds with a zero day drug withdrawal
period for eggs. China is the world’s largest producer of table eggs and accounts
for more than a third of the world’s laying birds. The second approval was for swine
respiratory disease (“SRD”) adding three important bacterial respiratory pathogens
of swine, Haemophilus parasuis, Pasteurella multocida, and Streptococcus suis to
the existing Mycoplasma hyopneumoniae registration. Aivlosin® is approved for the
treatment of SRD in other markets; it occurs worldwide and causes major economic
losses to the pig industry due to mortality, reduction in growth rates and decreased
feed efficiency.

**Innovation through Research and Development**

ECO started a programme of significant investment in vaccine R&D and in building
our capability and expertise around four years ago and has seen encouraging progress
within the portfolio of projects.

Two poultry vaccine projects progressed to full development during the year. These
vaccines protect against respiratory disease estimated to cost the poultry industry
over £600m and will enter a vaccine market segment currently worth over £100m. First
approvals are expected towards the end of calendar 2023.

The Company’s early-stage research and proof of concept activities are managed through
collaborations with leading research institutions and universities with later stage
full development work managed by ECO’s experienced project leaders through contract
research organisations. This model mitigates the significant costs associated with
in-house laboratories and Company owned research facilities.

ECO has a formidable team of scientists and is building a significant product portfolio
pipeline with a mix of well-established concepts and novel, highly competitive technologies
and approaches with the emphasis on vaccines and other new products to complement
our existing antimicrobial business. The pipeline is focused on providing solutions
to respiratory and gastrointestinal (gut) diseases of major economic importance 
in pigs and poultry and is constantly refreshed as new opportunities are identified.

New product development expenditure in the year was £10.2m (2021: £9.1m) ensuring
the acceleration of key projects.

A successful Capital Markets Day in early 2022 provided details of the significant
commercial value that exists within ECO’s pipeline of over 12 active projects with
the first two late-stage development vaccines set to achieve approvals by the end
of 2023, and several programmes expected to progress to clinical proof of concept
and early development in 2022 and 2023.

**Sustainable future and our ESG approach**

We have made significant progress over the year on climate goals and on equity, 
diversity and inclusion. We include for the first time an ESG report. We have collected
baseline metrics and will use these to track progress and to develop credible performance
targets as part of a measurable climate transition plan.

By providing medicines and vaccines to pig and poultry producers, we improve the
lives of both animals and the people who rely on them. The healthy animals that 
we help to produce assists the world with its [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
goals of the alleviation of poverty and hunger.

**COVID-19 Impact**

The COVID-19 related restrictions on free movement have limited access to customers,
most notably in China where travel remains severely curtailed, and created considerable
supply chain disruption and uncertainty. Despite these constraints, the Company 
has successfully adopted a hybrid working model and has mitigated most COVID-19 
related challenges through innovative ways of working.

**People**

Our people have demonstrated superb commitment and flexibility during a particularly
challenging period for the business. We remain exceedingly grateful to our colleagues,
customers, and suppliers in showing considerable resilience and engagement during
a time of rapid and considerable change.

**_David Hallas_**

**_Chief Executive_**, **_ECO Animal Health Group_**

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