This quarter the Fund initiated a position in Dechra Pharmaceuticals PLC (LSE:DPH). Dechra is a U.K.-based company that develops, manufactures, and sells specialty veterinary pharmaceuticals. We are enamored with the global animal health market, and have successfully invested in the space for over a decade. We estimate that the global market for animal health pharmaceuticals is approximately $32 billion. We expect the market to grow at a 5% to 6% annual CAGR, driven by powerful secular trends, including the humanization of pets and persistent increases in demand for animal protein and other animal by-products. We believe that increases in global veterinary R&D, and derivative benefits from human pharmaceutical R&D will also drive market expansion.
The veterinary health care market is structurally superior to the human health care market. Unlike human health care, there are no government payors and few third-party commercial insurers. Pet owners pay for products and services using cash rather than insurance, which helps eliminate reimbursement risk, and enables the industry to pass through modest annual price increases. Additionally, industry regulations tend to be promulgated by the USDA rather than the FDA, and are far less stringent than in the human space.
Dechra is the 10th largest animal pharmaceutical company in the world, but has just 2% global market share. The company targets sectors that are underserved by larger pharmaceutical competitors, and is often the dominant provider in its individual therapeutic niches. Today, the company’s primary areas of focus are endocrinology, dermatology, ophthalmology, analgesics, and equine. Over time, we expect the company to broaden its portfolio, particularly into the food animal market. We estimate that Dechra’s current pipeline of new products includes more than 75 that could add almost 40% to the business on a risk-adjusted basis.
We also expect growth to benefit from geographic expansion. Dechra’s roots are in the U.K., and the company also has a strong and growing presence in the EU. Dechra first entered the U.S. market in 2016, and is growing in that geography in excess of 20% annually. Over time, we expect the company to enter or enhance scale in other emerging markets, particularly those with large production animal populations like Brazil, Argentina, and Australia.
We expect the combination of end-market growth, share gains, R&D, and geographic expansion to generate organic revenue growth around 10% annually. We expect Dechra to supplement this organic growth with acquisitions. The company has successfully completed 13 acquisitions since 2010, which help expand its product set and geographic coverage. Most recently, Dechra acquired AST/LeVet, which strengthened the company’s European product portfolio and should generate significant sales synergies.
Of late, large human health care companies have been spinning off their animal health businesses, creating large pure play entities such as Zoetis and Elanco. We believe that these large, independent players will be better able to deploy capital in pursuit of growth, and will cause the animal health pharmaceutical industry to consolidate. We view Dechra as an attractive target for many of these vendors given its unique portfolio of niche products and minimal overlap with these competitors.
From Ron Baron (Trades, Portfolio)'s fourth-quarter 2018 Baron Growth Fund shareholder letter.
