Description

Punchline

Virbac is a quality acyclical asset, with a net cash balance sheet, at a trough multiple on trough margins.

They are a family-owned animal health company based in France that manufactures medicines for pets and livestock. The business is net cash today, after selling their Sentinel asset (a busted deal from 2015) to Merck in 2020.  This sale took the BS to net cash, and helped return the business to their historical 18% EBITDA margin.  We believe they ‘learned their lesson’, and do not expect any large M&A from here.

Coming into 2023, Virbac announced near-term R&D investments to drive accelerating organic growth. This amounted to a 2pt margin investment in F23, taking headline EBITDA% from 18% to 16%.  This took R&D to 9-10% of sales, above their scaled peers (ZTS and ELAN at 6-7%).  The market has fully capitalized those investments, and then some, with Virbac trading at 9.5x NTM EBITDA.  This is cheap to Virbac’s own history of 12-15x and an avg peer multiple of 17-18x.

We think Virbac presents the opportunity to own a durable, family-owned franchise in a secular growth market, at a trough valuation, on depressed earnings.  We think there are several parties who would want to own Virbac, including recent PE activity in the space at 20+x EBITDA.

Company Overview

Virbac is the 6th largest animal health company in the world. The French company operates in two main segments: Companion Animals (60% of revs) and Food Producing Animals (40% of revs). Virbac offers 30+ products but primary products include Parasiticides (formula to prevent/eliminate parasites), Antibiotics, Vaccines, Diagnostic tests, Specialized Food, Reproduction, Dental Hygiene, and Aquaculture (disease prevention for water animals). Virbac sales skew toward Europe. The family of the founder Richard Dick still owns 50% of the company.

Source: Stifel Nicolaus Research Report: “Waiting for the next acquisition”

Source: Virbac Investor Presentation

Virbac is one of the few pure-plays in Animal Health, with the biggest comp being Zoetis (5-6x larger). Over the last decade+, we’ve seen large pharmaceutical companies spin/sell their Animal Health assets (PFE/ZTS, LLY/Elanco + Bayer, etc.).  Several players still sit within larger pharma businesses (e.g. Merck, BI). The industry has consolidated, with the top 5 mkt now controlling 2/3 of the market.  Animal Health is an attractive market given: 1) less of a generic patent cliff than seen in human health, 2) consumers are mostly self-pay with no reimbursement risk, 3) vets tend to be loyal to incumbent brands/suppliers, and 4) medicine is a relatively small part of the expense base (e.g. LSD% of the cost of raising livestock or maintaining a pet).

Source: Stifel Nicolaus Research Report: “Bright Prospects for the Veterinary Pharma Market”

The animal health market grew at a +4 CAGR from 2010-2019, in excess of overall pet growth as spend/pet grows secularly on increasing “humanization” of pets.  The Animal Health market accelerated in covid (see more below), and is lapping those tough comps in 2023.   Virbac’s organic growth has mirrored the broader animal health market over that period.

Source: Company filings and guidance

Situation Overview

In 2015 Virbac acquired the Sentinel brand of dog Parasiticides from Eli Lilly (required divestiture as part of the Novartis deal). Virbac paid $410M (4.3x sales). The asset immediately struggled as Eli Lilly’s own chewable parasiticide product “Interceptor” was reintroduced to the market. On top of that, the FDA shuttered Sentinel’s US-based manufacturing plant for 12 months in 2016. From peak to trough, EBITDA margins fell from 18% to 10%, almost entirely driven by the Sentinel assets.

In May 2020 Virbac announced the sale of Sentinel to Merck for $400M (7.2x a much lower level of sales). This cured the Balance Sheet, and helped complete Virbac’s return to an 18+% EBITDA margin.

Organic growth for the animal health industry accelerated in 2020-2022 as the population and treatment intensity of pets surged with covid.  This story will be familiar for those who follow IDXX, ZTS, etc.  That bolus of activity is now being lapped in 2023 where Virbac’s revenue growth guide implies a year of +LSD organic, inclusive of +MSD price.  If you strip pricing out of Virbac (and peers’) organic, expected 2023 volumes are now back below the pre-covid trend, and fully unwind the covid over-earning.

2023 margins are guided to ~16% EBITDA, driven by 200bps investment in early stage R&D projects.  That compares to the 18+% they achieved in F22, the 18% peak margin achieved pre-Sentinel, and peers (ZTS, ELAN, DPH LN) at 20-30%+.  Note, this also takes Virbac R&D to 9-10% of sales vs scaled players ZTS/ELAN at 6-7%.

Valuation

On current forecasts that embed the depressed 16% EBITDA margin, Virbac trades at 9.5x NTM EBITDA. This is materially cheaper than its own history of 12-15x as well as other public pure-plays.  Note, EQT agreed to buy peer DPH LN for 21x EBITDA earlier this year.

Today, we get to own Virbac at a 50+% discount to peers, on an EBITDA number that embeds a margin lower than their own history, and significantly lower than the margin they might earn in other hands (a scaled peer or PE).

Source: Factset

Disclaimer:

This presentation is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate. At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security.

Catalyst

Recovery in margins towards historical levels.

Strategic interest in a rare pure-play in a consolidating market.