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Eco Animal Health Group: moves into US and China could be transformational

ECO Animal Health Group (AIM: EAH) is a specialized veterinary drug company and a leader in the development, registration, and marketing of pharmaceutical products for global animal health markets. With a careful and responsible application of science, ECO delivers products to promote animal well-being and sustainable productivity. ECO’s proprietary patented drug is Aivlosin®, which is a macrolide antibiotic for the treatment of respiratory and enteric diseases in pigs and poultry. Aivlosin targets a wide range of diseases that span from enzootic pneumonia to swine dysentery. The drug has been approved for use in pigs and poultry in Europe, South Africa, Japan, Asia, and South America. ECO expects to receive approvals this year for use in pigs in the United States.

The Company now holds over 600 marketing authorizations in over 50 countries, and has developed strong relationships with distribution partners globally. With 100 employees located in five offices around the world and £19.3 million in revenues for FY 2009, the Company’s products are recognized as offering security to both distributors and end users.

Investment Thesis

Aivlosin® now accounts for more than half of global sales for ECO. Sales in China during FY 2009 were more than 60% ahead of the previous year, and expectations for FY 2010 indicate similar progress. China is the largest market opportunity for ECO products in which it has a joint venture for sales and marketing (“ECO-BIOK”), and ECO is currently examining other joint in China. The Company is working on launch and distribution plans for the U.S. market, expecting to receive first marketing authorizations for Aivlosin from the Food and Drug Administration (FDA) in 2010.

ECO is forecast by Cenkos Securities to increase its revenues to £22.4m in the FY March 31, 2010 and to £28.5m in 2011.  EBITDA plus share-based payments and exceptional items are estimated at £3.6m and £5.3m respectively, which should translate to earnings per share of 4.7 pence and 7.4 pence. Cenkos expects ECO to produce step increases in earnings as new marketing authorizations are granted and new products are launched. Additionally it expects ECO’s capital expenditure to fall substantially as the product registration program nears completion, resulting in increased cash flow.

ECO’s first half revenue from 4/1/09 to 9/30/09 rose 11% year to £8.9 million, while EBITDA jumped 32% to £1.94 million. The group had net cash of £3.2 at the end of the period. The increase in revenues was largely due to stronger sales of Aivlosin, which rose 10% after further marketing authorizations were secured in Europe. ECO has offered an upbeat outlook for the rest of FY 2010 (FYE is 3/31/10), as they expect business performance to improve further and projecting that Ecomectrin sales would pick up in the second half of the year.

In 2009, EBITDA plus share-based payments and exceptional items increased 66.9% to £3.74 million (2008: £2.24 million). ECO paid a total dividend of 7.15 pence per share in 2008 and 2009, and it generated £3 million in cash from operating activities during 2009.

ECO’s Core Products

Aivlosin® is ECO’s proprietary patented macrolide drug, and it contains the innovative antibiotic Tylvalosin, The inclusion of Tylvalosin allows the drug to rapidly be absorbed and concentrated in target tissues to provide proven control of major respiratory and enteric diseases in both pigs and poultry. It is highly effective against a range of economically substantial diseases in pigs and poultry including:

•    Enzootic Pneumonia
•    Ileitis/PPE
•    Swine Dysentery
•    Mycoplasmosis
•    ORT
•    Necrotic Enteritis

ECO continues to explore other potential uses of Aivlosin in production animals beyond pigs and poultry, such as cattle and horses. In June 2008, ECO was granted a marketing authorization from the European Commission for Aivlosin® granules for oral solution for poultry. It is the rapid absorption of Aivlosin® which results in a swift resolution of the disease and a fast return to productive health that makes it profitable for farmers to use when compared with older generation treatments. This authorization allows Aivlosin® to be marketed in Europe for the treatment and prevention of mycoplasmal respiratory disease in poultry, a segment estimated to be worth over £10 million per annum at the manufacturer level.

In March 2009, ECO announced that it had received a positive opinion from the Committee for Medicinal Products for Veterinary Use of the European Medicines Agency for the use of Aivlosin® granules for oral solution for medicated drinking water for pigs. The Aivlosin® granules dissolve readily in drinking water thus enabling the rapid, accurate and simultaneous treatment of large numbers of pigs that are more likely to drink than to eat. This will allow Aivlosin® to be marketed throughout Europe for the treatment and prevention of ileitis. It is estimated that this market segment is worth £18 million per annum at manufacturer level.

Generic Drugs - ECO is also making progress in its development of a new range of generic medications for pets, adding to its existing Ecoheart dog heartworm tablet and Ecomectin horse paste products. ECO has a number of generic drugs including Ecotraz and Ecomintic (endectocides & other antiparasitics) for the treatment and prevention of parasites in cattle, sheep, pigs, horses, and dogs. For the treatment of bacterial infections in pigs, poultry & cattle, ECO owns and distributes Chlortet and Oxytet. ECO has been granted a marketing authorization in Mexico for Ecoheart Chewable Tablets for dogs. Ecoheart tablets prevent heartworm disease and are also effective in the treatment and control of roundworms and hookworms in dogs. Canine heartworm infection is transmitted by mosquitoes. It is potentially fatal and requires a monthly preventative treatment. Ecoheart Chewable Tablets is the first companion animal product for which ECO has received a marketing authorization in Latin America where the pet sector is an important and growing market. Further marketing authorizations in the key markets of the region are expected.

Research - ECO plans to build on the collaborative research deal it signed in 2006 with the University of Cambridge to investigate new potential indications for Aivlosin. Studies already completed have indicated that Aivlosin appears 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.

Prospects for the Future

In a very difficult economy, ECO has performed very well. Now with markets in China opening and the U.S. expected this year, ECO has the potential to make even more progress. This should be a real launching pad for the Company. While there is a risk for ECO in the amount of revenues coming from one product, it does appear to have a loyal and growing following around the world.

Disclosure: The author holds no positions in the company

Disclosure: no position