Good morning, all. This is the Animalcare Group interim results presentation. Attendees are just filtering through now we've started. The presentation will be with Jenny Winter, the CEO, and Chris Brewster, the CFO. For questions, if you have questions, please hit the Raise Hand icon, and that will show me that you've asked a question. I will then unmute you to be able to ask us. Thank you.
Okay. So, you're very welcome to this morning's presentation. As Helen very kindly said, you've got myself and Chris. I think from looking down the list, most of you are familiar with Animalcare Group, and so hopefully, what we can do this morning is just give you a bit of an update of the first half for us and a bit of a sentiment for where we're going next. So, those of you who follow the animal health market will know that it's a pretty dynamic, growing sector. We see it as quite competitive, but it's got really attractive long-term fundamentals.
Some key points that we see about the market in the first half of this year is we're seeing the market growth returning to what we would call more pre-COVID levels, which is really positive growth, but not quite the growth that we saw, which was really significant just during those COVID years. And so we see it as a real positive. It's a good place to be operating. For us, we definitely recognize that the companion animal part of the market, the dogs and cats, is definitely the main driver of the growth that we're seeing. And despite what you tend to read, particularly in the U.K., more so than in any of our other countries, that, you know, pet ownership is becoming squeezed by inflation, we're not really seeing that.
You can see in some of the other animal health companies that they're seeing, you know, growth of pet ownership and growth in the spend per pet, so we also see that. We're seeing a changing customer base, and here you're seeing different demands. We're seeing a bit more of a switch to OTC and certainly a bit more buying online. If you look at the pharmaceutical, the sort of prescription market, which is about 80% of our business is in this piece of the, in the market, we see that novel, innovative products are driving the growth. These are products that are sustainable for the future, that have, whilst they have competition, they don't have direct competition from generics. So these are the products that are really driving higher margins.
Particularly in the U.K., we see a continued influence of the veterinary corporates. They all seem to be doing something slightly different, but we're seeing a bigger influence, and that, for us, is a positive and a negative. If you win in a corporate, you get the volume growth, but you tend to get a slightly lower margin. So we see the influence of veterinary corporates in the U.K. as something that is a fundamental part of our business moving forward. We see some changes around Europe. There's some legislation changes in France. There is some appetite for growth from the corporates around the other countries where we operate. We're not seeing that in the same way that we see it currently in the U.K.
As I'm sure you're all aware, the CMA is currently looking at the corporates, which we aren't particularly involved in, and that is going on in the UK at the moment. The final point is interesting 'cause this is just a perception of ours at the moment, is that we kind of feel that people are waking up again and really starting to explore M&A of all types. So this might be distribution deals, licensing deals, and full M&A activities. And so I think from our team in the first half of this year, that felt like it was really gaining some momentum. So on the whole, we see it as a really positive place to be doing business, really excited about what the future might look like.
For those of you who are less familiar with us, I think, just as a reminder, you know, what are we? We're a profitable cash-generating business with strong margins, low level of debt. And what this really means is that we have the financial opportunity, and we have huge ambition to invest in both organic and M&A growth. And so that's, that's kind of us in a nutshell, and just wanted to remind people, of the fundamentals of our business. These five things are the things that those of you who've been following us for a while know this is now...
We're five years into this, and while things change along the route, and we're constantly flexing to make sure that we're working with the market dynamics, these five things are still the most important, making sure that our finances are strong, revenue, cash conversion, EPS, et cetera, really fundamentally, so that we can continue to invest in healthy growth for the future. Our portfolio is more is looking more attractive. What we and others see is that always at the bottom of our portfolio, you've got products that come out, either through greater genericization and price pressure, through changes in technology or in vet practices.
Some distribution products go back to their owner, but we are compensating as far as we can, and we'll talk about that later, to move to higher margin, much more sustainable brands and products and services, and so that growth portfolio continues to be important for us. Business development, we'll talk a lot about this. This is really, we see the opportunity for, inorganic growth, as critical for our future success. Our pipeline, at the moment, we have a fairly limited pipeline, and strengthening that is a real focus and will continue to be so, and we are continuing to make sure that we've got the organization, in the right shape to make the most of the opportunities. Just looking at highlights from the first half, we again have seen our margins improve.
We've got 1.5% improvement, and that, for us, is really important to continue that journey. Cash conversion has improved, reducing our net debt to 3.8 as of June 30. Clearly, and you'll hear us talk about this time and time again, the reason why we have the strong financial platform, is we are desperately keen and driven to find the right opportunities for future growth. We launched Plaqtiv in 2022. We've had great response from the market. The reps in all our markets really love selling Plaqtiv. We had Orozyme historically, which is still growing, and so this dental market, for us, is a really important place, and we're looking forward to a good future with that. Identicare, again, we're gonna talk more about this, continues its strong sales and profit momentum.
Daxocox is gaining prescribers in our direct sales markets. This is the once-weekly non-steroidal. We see on the downside, production animals have been affected by some phasing of orders. The production animal orders tend to be sort of big orders in a limited number of times a year. We're seeing a bit of that. We're also seeing some impact of generic competition in the, in the production animal business. In equine, the main, the main benefit we're seeing is we took back one of our distribution products that was previously on distribution. We took it back into the UK. That's Danilon, and that's a really important driver for our UK business. From a business development in the first half, we've been, as always, highly active, but actually, we increased our activity in M&A and partnering opportunities. We've put more resource behind it.
We're actually now that, you know, congresses are normal, and they're actually face-to-face again, we're much more present, and we're seeing that the impact of that coming through sort of post the first half, where, you know, our funnel that we describe of opportunities that we're assessing is just increasing significantly. And for us, we know that if we can increase the number of products we're and opportunities we're looking at, the chance of landing one and being successful and bringing one through is increasing as well. You will have, hopefully, or maybe seen that our joint venture partner, Kane Biotech, who had a 66% share in our STEM joint venture, they are having a strategic review which could or may or may not result in a sale of their share.
We actually have a very strong contract with, as part of that STEM JV, so we are also having a look at what opportunities this might give us, for future growth of the STEM products. So we see that as a really, a really positive thing, depending on where Kane decide to go with it. Either they stay, either they sell their share. Whatever the outcome, we are working closely with them, and we're quite excited about the opportunity. In our pipeline during the first half, nothing very exciting to share in terms of actual detail, but I can tell you that we're really positive about the VHH antibody technology.
This, for those of you who haven't followed our journey, is really a platform technology of some really exciting antibodies that have a number of potential different indications. We have two candidates at the moment, and we're looking at a third. So that's exciting and good to see that long term. It's a long-term opportunity, but it's good to see the number of opportunities coming through there. As I mentioned on the business development slide, you know, we have resourced realigned our resources, and so we've got more people out there talking about opportunities in M&A, and we also have just made sure that we're continuing to drive the organization to be resourced in the right way to achieve future growth.
Pleased with how the first half has gone, and recognizing the changes in the marketplace. I'm gonna hand over to Chris to talk in a bit more detail about the finances.
Thanks, Jenny. Morning, everyone. So hopefully you've had time to read the more detailed press release, but we'll start on a summary of the financials and the highlights on this slide. I think to kind of set the scene, as Jenny said, from our perspective, so pleased with the overall performance, which from a revenue perspective is against a strong 2022 comparator, which was broadly in line with what we called an exceptional 2021, which, you know, lots of the other our competitors saw. We've drawn out, in particular, from a P&L viewpoint around the gross margin evolution. We'll come on to more detail, and importantly, the expectation that we'll return to revenue growth this year.
From a cash and net debt perspective, Jenny's mentioned we've got improvement in our cash generation, which meant that we've ended the period in a very strong financial position, and really, we'll talk a bit more detail about this, but that's really the underpin to be able to execute M&A. Because, you know, the, what we want to do is leverage the balance sheet to execute those. As we progress through the slide deck, we'll cover revenue down to EBITDA in more detail. We've got some more slides on revenue than before, but I'll touch on EPS and the dividend as we don't cover those later on. So on EPS, really, the driver of that is the EBITDA movement that you can see on the slide. And then on the interim dividend, we're declaring GBP the same as prior years.
Really our kind of, I suppose approach to the dividend is we, we've held the interim for the last few years, and any changes we may or may not make to the dividend will be reflected in the final, once we know the year-end results. So this is a kind of summary of the performance down to EBITDA. We can see, at the headline that the revenue's down by 4% to just under GBP 37 million. As I said, we've got a slide on each of the product categories, so we'll deep dive into more of the detail on that and Identicare.
But if I was to summarize that kind of 4% in a nutshell, so if we look at our owned pharma operations, our sales are flat in there, and really, that was a combination of growth from recently launched products, so that Plaqtiv and Daxocox, and as Jenny said, we've taken back Danilon in-house, so we've got the benefit of that being in our own portfolio now, rather than through distribution. And that's really helped to offset some of the moderation in animal health market growth, and also wholesaler destocking, which we've—it's been a theme of, I think some other competitor announcements, and we've seen that in our business, in particular in Southern Europe.
If we pause there and just, I suppose explain a little bit more our view on why we're seeing this destocking, and I suppose volatility in kind of how the wholesaler buying patterns work. Our view is really there's three drivers that underpin this kind of, I suppose, dynamics we're seeing. One is inflation. So what you tend to see is where wholesalers are operating on lower margins, if there's some, you know, relatively significant price inflations, they'll buy ahead of that. Cost of capital, so the debt, the cost of debt's gone up, as you all know, and therefore their focus on cash and working capital is becoming more apparent.
I think the third thing we're seeing, which is a kind of theme from the South, is in particular Spain, is this consolidation of the distributor network. And again, that's meaning that, you know, there's bigger businesses that have perhaps got a bit more focus on cash. So thought it'd be worthwhile just explaining a little bit of the dynamics around that. Excluding Danilon, our international partner business was around GBP 1 million lower than last year. That's really driven by a couple of specific factors, namely order phasing. So as a reminder, the international partners is export. The export customers buy one to three times a year. They're buying batch, you know, pallets of stock. So they, they tend to be kind of quite volatile sometimes in terms of the order patterns.
And then secondly, as we've highlighted, before really in terms of the generic part of the portfolio, we have seen some generic competition, and again, I'll touch on a bit more detail on the production animals slide. And importantly, with again, Identicare has grown by 28%, and again, we'll come onto more detail. On the gross margins, as Jenny noted, we're continuing to see a really nice evolution in the margins over the past few years. Again, drivers, as before, has been sales mix, so that real focus on the higher margin, bigger brands that we've continued to have over the last kind of three years, and you know, the fruits of that are coming through.
You know, Identicare is in there in terms of the accretion in revenue is largely driven by higher margin subscription services, for example. And then those two are coupled with, kind of pricing actions that we've taken from a sales perspective to, to kind of recover or combat inflation, importantly, while maintaining our competitiveness in terms of where we position our pricing in the market. On SG&A, very briefly, broadly, Group overheads are broadly in line with last year. The main feature of the GBP 500,000 increase is people, predominantly around headcount increase, in Identicare in particular, and then salary inflation is broadly the, the balance. Okay, so I've got three slides on our pharma product portfolio.
We've given the historical track record, so you can see underneath each of the charts on the left-hand side, there's some historical track record on the dynamics that would be useful to share, but I will focus on, you know, the H1 2022 versus 2023 in terms of, I suppose, the commentary around performance. To briefly set the scene, so this is kind of summarizing the box around how we see the segment. Companion Animals, as I've been for a long time, is the largest part of our business, around 70% of revenues. In line with the market, this is where we see as the this is the engine of our future growth. To drive this growth, we'll allocate capital to invest in our own operations, so that's sales, marketing, people, innovation through R&D, and also M&A.
If we turn to the specifics on the revenue, so you can see we're at GBP 26 million, so a touch down on prior year. And again, you can actually see, you know, the, the, the peaks in the, in the chart at the bottom. You can see the comparatives in 2022, which, you know, I think on a CER basis, are broadly in line with 2021. So Jenny mentioned the dental range, so that's Plaqtiv and also, importantly, Orozyme, which is one of our top five brands, has done very well. I think we're now market leader in Germany and Belgium, for example, so we're really pleased with how that's growing. Daxocox, what we're seeing there is that in our own operations, that's growing by a mid-single digit at the half year.
That's actually increased a bit post-year-end, as we continue to invest in the sales and marketing excellence around Daxocox to drive uptake. And those two items, in terms of new product growth, they have been offset by wholesaler destocking, we've talked about that, and also some kind of, I suppose, dynamics in the generic portfolio, whether that's more innovative products or in certain areas, there's pricing around some of the generic portfolio. And then Identicare, Identicare is included in there, and we'll touch on that later on. On production animals, again, to briefly set the context of how we see this, so it is an important part of our business. It's about 40% of our Southern European operations.
So it's a kind of legacy, but important part of that business and also international partners. In terms of investment, really, we see this kind of part of our portfolio as maintaining what we've got, so maintaining the revenue. How do we do that? Again, through sales and marketing excellence, having specialized kind of salespeople. But we are looking at, and we continue to look at selective distribution opportunities to kind of maintain that portfolio. So it's here to stay, you know, the objective is to kind of keep that around where we've got today. Driver of that revenue performance is centered around, as I said before, international partners. So the GBP 1 million that international partners' revenue declined by is broadly the same as what the production animal portfolio is.
Again, it's partly down to the sales order phasing, but also some generic price competition against one or two of our products, and we've responded through sales price to combat that kind of potential risk on volume. On equine, very briefly, this is a relatively small, but highly profitable part of the market. I think for us, given our scale, that's really where we can do well, because, you know, potentially some of the bigger companies are in there. Like production animal, investment perspective largely centered around specialist sales and marketing resource. However, in connection with our wider R&D efforts, we are reviewing opportunities for novel and innovative additions to the portfolio.
Jenny mentioned very briefly that, you know, the main driver of growth has been in Danilon back in house, which was affected at the back end of last year. What we have seen is that the distributor got quite a lot of stock in channel at the end of last year, so that's had to unwind in the first half, which is why we're saying that we should expect to see an increase in our selling during the second half of the year as that distributor stock to unwind. Okay. I'm gonna hand back to Jenny just to talk a bit more about Identicare.
Okay. So, we have talked a little bit about Identicare over the years, and we are just becoming increasingly excited and pleased about some of the decisions that we took around Identicare. So just to remind, this is sort of two bits. It's a microchip that goes into dogs. Compulsory microchipping of dogs has been in for a while. Compulsory microchipping of cats is coming in, and also equine. But the majority of the pets who are recorded on our database are dogs. Cats will quickly catch up. So this is predominantly a business where we collect the data when the pet is microchipped, and then that data is where we are now moving towards a really scalable, high margin, recurring revenue subscription platform.
So in order to ensure you get your best possible chance of reunification with your pet, we offer a range of services, which is based on a subscription. And these subscriptions, you know, are growing at high double digit. It's a recurring business, so we're really excited about this. And so in the first half, its sales increased by about 28%, so it's about GBP 1.5 million, which is clearly, you know, a small revenue at the moment, but growing very rapidly, and we reckon that will accelerate in the second half of 2023. Just in the middle section, a lovely picture of Robert Diamond, but really, one of the things that we focused on for this bit of our business was making sure that it had the right leadership.
I think, you know, this is really showing what you can do if you get the right thought process and the right strategy in place. And we brought Robert in. He's a specialist in digital businesses. He, we always sort of have a bit of a chuckle 'cause we try and leave Robert to do what you need to do for a digital business. And it's interesting because there's the question about, is it core, non-core? It's an animal health business. It's absolutely focused on pets, but it's not our prescription business, and bringing Robert in has been, you know, really, really, really helpful. So we have great hopes for this in the future. It's a service business and very exciting.
So, that's a little bit on Identicare, and we'll continue to share a bit more on Identicare now that it's established and repositioned, so.
Okay, so just last couple of slides from me that we got here. So, this is just a summary of the cash side. So cash, cash conversion improved to around 53% in the first half, recognizing that last year obviously was very low, so we expected to see that increase. And that's really driven by, as you can see on the slide, the lower net working capital movement. And the GBP 2 million increase in our cash generated from operations is really the driver of that reduction in debt. And as we said in the announcement, our debt is predominantly now IFRS 16, the lease liabilities, so we're virtually debt-free at the half year. So again, reiterating the kind of strength of the balance sheet.
We mentioned in the statement that we are expecting to see cash conversion improve in the second half. I think the target for the full year is to kind of modestly improve on the 78% that we achieved last year. That is subject to the trading patterns, and by that, we do, we do mean those kind of wholesaler, distributor buying dynamics that we've talked about earlier. Then I think as we went through the last kind, you know, the slides on the business in terms of kind of panning out of production, and then we'll be talked about kind of you know, where we're allocating investment. So this is kind of a summary of that.
I think we gave, we gave something like this two or three years ago, but if we kind of summarize. And again, to set the scene, essentially, the driver post-merger, when we were well over 2x lever, was to get our debt down. And really, that debt was being driven down by having a very strong cash conversion. So we've kind of got that target range of 80%-100%, and essentially creating the leverage to invest in the organic and inorganic opportunities in terms of BD and M&A. So on the left-hand side, as we've talked about, we've got really strong balance sheet that's actually improved again, you know, post year-end, so really pleased with that.
In terms of allocating capital, it's the cash we generate that we're gonna invest in R&D, where Orthros, Jenny will come on to, and, you know, that reserves the debt and equity for M&A and BD opportunities. And again, you know, we clearly have a dividend policy of paying a dividend, but we've always said that we'll, you know, that will be in the context of recognizing the investment needs of the business. So I don't think there's any new news there, but just a reminder of, you know, that kind of overall policy.
Then just moving on naturally from, you know, Chris talked about the fact that we've got, we've got the capability to invest, and so, you know, that's really a, a key part of what we're doing in our activities on a day-to-day basis now. I think I mentioned in the summary, we are seeing an increased openness to explore deal-making, and, and this is at all stages. So bringing in products that are on license, M&A, or as sort of short-term, long-term, we're just seeing that. And it may also be a function of us putting a lot more time and effort and resources behind it in the first six months. And, and hopefully, that continues. We've got a number of very active opportunities at the moment. But we are very disciplined.
It's great that we have that opportunity through our low debt and our leverage, but we still recognize that we are often competing with some of the really large organizations. And so we know that we need to be really ambitious to try and get a great deal, but we also need to be disciplined 'cause we have, you know, a limited amount of money to spend. A reminder of what we're targeting, we're really absolutely focused on things that strengthen our pipeline. So at the moment, we have, we have lifecycle management for dexamethasone, for the Plaqtiv range. We're doing some investment in, you know, new indications, new tablet sizes, new formulations for those products, and we'll continue to do that. And then in the launch, later launch period, we hopefully will have some of the the Orthros candidates coming through.
So really making sure that we build a pipeline of products, both that are short-term and long-term. We're also looking to optimize our geographic footprint. France is clearly a miss for us at the moment, so we're looking at opportunities in France, but also in some of our countries, we're relatively small versus some really very significant and very exciting markets. Germany and Italy, for example, the market's big, we're very small. Can we find bolt-on opportunities in those markets? And we're also looking for bolt-on opportunities 'cause we recognize that, you know, one of our challenges is really about scale. So what can we do? Got a number of conversations going on in there. So really, our focus is generating that sustainable growth in our portfolio, looking for products and organizations and companies.
We recognize that growth in the US is significant, and we keep an eye on the US, but we also recognize that US is a big chunk, and so it's not on our short-term agenda. But certainly strengthening our footprint in Europe, strengthening our pipeline, and making sure that our portfolio is sustainable. I talked briefly in the introduction about Kane. One of the really critical things for us is that when we established the STEM joint venture with Kane, we were very careful about our contract, and so we are very confident that the strength of our own contract means that the opportunities to maximize anything that comes out of Kane's strategic review of their participation. Actually, we see it as it's a win-win.
We are confident that, you know, ultimately, we can do what we want to do and continue to really drive the success of that JV with whatever comes out of the ultimate deal. But it's been a great lesson in, you know, focus on the contract when you first set it up, and we're very confident here that the outcome will be positive. Not much to say on Orthros. We're not sharing any preclinical data, but we're very confident and comfortable and excited about the early research. Clearly, this is a longer-term opportunity, and so we are monitoring very carefully and taking small steps, but those small steps at the moment are very positive.
So the two bits of this deal with Orthros, we have a license agreement for two candidates, and those are progressing through the development program. The research collaboration with Orthros has identified a third candidate that has some really exciting opportunities, and we're looking at how we want to take that through to development. So that's a bit work in progress, but the agreement's going well. We're seeing more and more energy and excitement in this whole space of VHH antibodies and similar technologies, and so this is an important technology platform for us. It could go in several different directions. Early candidates were fairly clear where they would go, but we also see the third and potentially more candidates that will come out. So really important platform for us.
And just in terms of summary and outlook, you know, you're seeing continued gross margin improvement, cash conversion, and, and that's despite what we see as a bit of an easing in demand growth across the markets, post the COVID bump. Strong financial position, more resources now put into, M&A and licensing. Focus on the growth opportunities, including Orthros, STEM, Identicare. So those are, those are all good, positive, sustainable areas for us. And so we, we anticipate that the second half will be an improvement on the first half, so return to revenue growth and EBITDA in line with the market expectations. So that's the sort of end of the formal piece. I think, as Helen said, if you want to ask a question, we can't actually see, but hopefully we'll be able to see in a minute.
If anybody has any questions, more than happy to do our best to answer.
We have one question to start with, which is from Kane at Numis, which he typed up. Question is on the destocking. My understanding is that the wholesalers typically hold four to six weeks of stock. With that in mind, how far into this destocking do you think you are?
Mm-hmm. Yeah, yeah, yeah.
Do you want to start? I don't know.
Yeah, so it does vary. So I think it's probably more four to six weeks in the UK. I think it varies. So how far are we into it? For me, I think the continuation of that stocking, destocking kind of volatility. I think we're gonna continue to see. I think the wholesalers are getting more sophisticated around, and we talked about things like inflation, so where we've got price rises, then they tend, you know, they'll be trying to buy more in advance of that. So you know, when are we gonna see the last of the destocking? Probably into next year, I think, is my... So I still think we'll have a bit of an impact in this year.
I think the interesting thing, so we look at sell-out data. So our sell out data is what actually goes from the wholesaler into the vet, or in some markets, it's what the vet's actually prescribing. So when we look at that data, you can see that there's growth in the sell into sell out, so from the wholesaler to the end prescriber. And in Germany, where we direct distribute, you can see that because we don't have the wholesaler in between. So my thinking on, you know, when do we see the destocking? The fact that we're seeing growth in that sell out from the wholesaler suggests that at some point they're going to have to get back into holding stock.
What I am aware of, from talking, particularly in Spain, where the distributor market has changed absolutely fundamentally in the last probably three years, what you see there is that they're getting much better at using data to say which products they need to hold a different level of stock. So I think what you'll see is a differentiation of products that move really quickly. They might hold, you know, more stock, less stock. So I think that's, that's what's driving it. But certainly, we're seeing sell out growing, where the sell out, sell in has been steady or declining. So I... How long they can last before they get to too short to stock hold, I don't know. But I think you're right, Chris, probably sometime next year you'll see a bit more normalized.
Okay, next, Mike Mitchell. Mike, I'm going to unmute you, and then we'll go to Max after that.
That's great. Hope you can hear me?
Yep, that's good.
Super, that's great. Thanks for taking my questions. Just following on then from the commentary, just on the destocking dynamic, which products in particular are you seeing that? Are there any specific ones that you're seeing that are exposed in that phenomenon that you're seeing right now?
No, so I think so it's more companion animal than production animal, because clearly production animal is a, you know, particularly corporate market anyway, so you essentially, you know, you're selling into. So it's more companion animals. Are there specific products that we're seeing it on? A little bit, probably more in the U.K., where corporates will get the wholesalers to hold safety stock. So there's been a bit of movement around the levels of safety stock they carry, but otherwise, it's kind of across the range, really.
Okay. No, that's great. So yeah, I was just then going to ask, because of course, Dechra's got sort of commentary about destocking earlier in the year. That was more of a U.S. phenomenon, but with a bit of a passing commentary on the U.K. So I know, Chris, earlier on in the presentation, you were sort of focusing more on Southern Europe. So I just wondered whether there was a sort of whether you're still waiting for a destocking dynamic to manifest in the U.K. or whether you're already seeing that. So whether there's anything unexpected yet to come through, but it sounds like you're already sort of getting, getting a, getting a grip or getting an understanding of what's happening in the U.K. market there.
Yes. Yeah. And then obviously, for us, down in London, in stock, so again, you know, it's higher there. So absolutely right. I think from a monetary perspective, I think from what we can see, it's more impact in the Southern European businesses.
Fantastic. Thanks. Then just, one final one for me, just for now. Just on the Identicare subscriptions. You know, just thinking about the sort of, commentary, the narrative that's going on right now about cost of living and how we're all apparently turning off our subscriptions. Not that my son's Xbox Microsoft Gold subscription is getting turned off anytime soon, apparently. But, is there any flexing that you're having to do with regarding subscriptions there, or on pricing or introductory periods at the start of subscriptions? How much navigating this new model are you having to do with Identicare?
Yeah. Do you want to...?
I don't know the answers.
Right. Well, yeah. So, yeah. So today, Mike, I think it's a good question. So I think it's in our mindset for the future. But really, what we're seeing is it's around the value rather than the price point of the subscription. So I think there was a lot of thought gone into the price point, and actually, I think the price point has increased on some of the kind of, you kind of have a bronze, silver, gold type kind of scenario. So the answer is, you know, have we responded yet, because we're seeing subscription growth moderate due to cost of living and et cetera? No.
Well, we may need to kind of flex our subscription, either pricing or offering, as we go forward, then, yes, I suspect that's gonna be the case. But we haven't yet, because I think what we do offer is relatively unique at the moment in the market, and I think that's why Identicare is really well positioned. I think we're doing things that, you know, our competitors are in the U.K.
Got it. That's great. Chris, Jenny, thanks ever so much.
Thanks, Mike. Bye.
Okay, we have Max up now, and I also have two questions from Yan and Tom, which I will give you when Max is done.
Okay.
Hi, guys. Thanks for taking my questions.
Hi.
I've got a few, so I'll go one at a time. So firstly, just on Daxocox. Obviously, you've talked about prescriptions, but not really about the revenues. I guess, is the issue share of voice given Librela's success from Zoetis? Is that really the issue why the growth hasn't necessarily come through as you had expected?
Yeah, I think it's absolutely... You know, we launched into a COVID market where we couldn't talk to anybody, establishing new relations with our customers, and Librela had existed, you know, Zoetis had existing relationships with a product that they were able to move quickly. And our share of voice is much lower. I mean, it's hard to actually look at exactly, you know, what percentage of the Zoetis share of voice we have, but it is much lower. And so what we're doing at the moment is finding ways of increasing that share of voice. You know, what we find is when people start to use it, they really like it. Being once a week is a great opportunity, all of those good things.
But our ability to get to the customers at the pace that we need to get to them and get back to them is really what's limiting us. So yeah, it's absolutely share a voice.
Okay. And then just in terms of the pipeline, obviously the Orthros deal is progressing well. Could you give us an idea of when you might get into, like, a registration-type study, or are we still quite a long way from that stage?
In terms of the lead candidates, it should be sort of end of 2024, beginning of 2025.
For both, for both of them?
Yeah.
Or is there one leading the other?
No, both of them.
Okay. Then just on M&A. Obviously, you've highlighted that, you know, you brought down the debt levels in the business, you know, very successfully over the last few years. Just wondered where you see, in terms of the buyer power for potential M&A. Obviously, you have a large amount of gearing possible in terms of RCFs and stuff, but not sure in this market, how much there would be in terms of sensitivity to going over gear over to higher level gearing. So just kind of interested in how you're viewing the M&A opportunities that you're seeing.
Okay.
And that, and how much firepower you do have, actually?
Okay. So, Max, is that the question centered around how far we're prepared to lever up?
I guess that's part of it, yes. It's sort of what sort of size transactions could you potentially do just with your current borrowing capabilities that you're prepared to take? But you've clearly got more than probably you'd be happy to take.
Yeah. So in terms of leverage, we've had that kind of 1-2 times target. I've kind of wrote on my notes, "Fortune favors the brave." And really, what we're talking about that internally is that, would we... If you ask the question, would we be prepared to go a little bit above that for the right deal that's highly cash generative, is gonna be highly accretive, and what we can see as a pathway to delevering relatively quickly, then, you know, I think our view as a business is, yes, we would. You know, we'd probably go a little bit above that for the right deal. In terms of, I suppose, size of deal, I think we're looking at kind of range from, you know, probably GBP low single millions up to...
If maybe, from a facility perspective, plus equity, you know, maybe in that GBP 50 million range. So, it's really quite a wide range. So, clear off, yeah. So, I think, in terms of that M&A, I think it is it's a leverage and equity play for the biggest size of that range.
Great, thank you. And then last question, just on, in terms of the guidance on EBITDA. Obviously, you're guiding to revenues being a little stronger in the second half, or comparable, but returning to growth, I think is the comment. But the EBITDA, obviously guiding to a little bit weaker EBITDA in the second half than the first half, and I just wondered where the investment, where you see the investment going in that, in the second half?
So yeah, it's really centered around Identicare in the second half, definitely in people. So Chief Marketing Officer, for example, is a key one there. R&D, like I said, in the presentation, that the R&D is difficult to see in our numbers because of the way we allocate things. But R&D in the second half, we think will accelerate to get in relation to the Orthros pipeline. And sales and marketing investment, again, I think, you know, particularly in relation to things like Daxocox. We, the reorganization - well, the kind of internal kind of reshuffling, as Jenny called it, where we're up to, you know, a new COO.
I think absolutely one of the key kind of focus areas is, you know, where are we tightening? You know, where are we too disciplined in terms of our investment in sales and marketing, for example? So definitely sales and marketing.
Great, thank you.
Yeah.
Okay, two questions from Jan Vantomme . First one is, could you give some more details on the financial performance and expected performance of the STEM joint venture? And the second is, what is the expected impact on Identicare of the mandatory chipping of cats next year? What percentage of cats are already chipped? And Jan, I'm going to unmute you if you have any follow-ups.
And if so-
Kick off with STEM.
Shall I, shall I kick off with the easier question first? I'll so in terms of compulsory microchipping for cats, the data suggesting that about 60% of cats are chipped. I think that's based on CMA data, isn't it?
Yeah.
And in terms of what it means for us, the revenue from microchipping. So microchipping effectively is a commodity, so low price, high volume market. So from a chip perspective, and I think a lot of this chipping will go through the charities, or be part funded by the charities. So in terms of. So we'll see, I think, a big increase in volume of chips, but not necessarily coming through into sales. But where the opportunity is with Identicare is what you do with that data and the conversion.
The expectation is, if we look at a kind of run rate conversion on a business as usual basis, logic is that these are people who are effectively being enforced to register their pet, probably have, you know, spend less on their pet than perhaps other people. And therefore, we do expect to get some subscription and service data from that, but probably at lower levels than what we would see from a normal course of business. In terms of timing, I think the legislation is coming in June next year. So, it should—I mean, in theory, the kickoff should be fairly soon in terms of getting all those cats chipped in time. If it's anything like the dog microchipping, then it all kind of happened.
Mm-hmm.
You know, everyone left it to the last minute. So I think it'll be more a feature of the first half next year on chip volume. Second question on STEM. It's a good question, and the kind of answer is, from a financial perspective, I don't know at this stage, and that's partly because STEM as an entity has kind of repositioned itself in terms of what it is. So I can't remember what's in the public domain from Kane's perspective, but essentially, so the STEM business is made up of... So STEM, as an entity, has retail rights everywhere at the moment.
And then it had previously, going into this year, it licensed out the veterinary rights to us for everywhere else, but North and South America, which is, which is Dechra. Essentially, after a kind of strategic review, the positioning of STEM is, yes, there's a retail business there, but probably in Canada on your own, 'cause it's a kind of relatively small market. But getting penetration into the US needs significant investment. You know, you're growing a brand. So what we did is, or what the business did is, start to look for some license partners in the US. So these are people who are a lot bigger than the STEM operation.
And therefore, you know, I think the first license deal, I think Kane announced it was signed, probably in, I think it was in kind of early part of this year. So from a business model perspective, it's, it's becoming a, I suppose, a licensing and partnering business, rather than, I suppose, a standalone retail business with its own operations. As to what that's gonna look like in the future, it's early days at the moment, so I, I don't know the answer.
I think we've always said from an Animalcare perspective, we expect the income from the STEM partnership to be, you know, a pretty significant part, up in the top 10 of our products, probably in the top five. Because there's various different sources of income stream. There's the royalties, there's the, you know, licensing deals, and then there's our own Plaqtiv sales in Europe and the rest of the world, which is what we talked about going really well. So, you know, we see there's a combination of different aspects of income from that deal. But again, it'll be in our top five, I'm sure.
Yeah.
Whether it's number one or two, I don't know.
Yeah.
But-
I think importantly, linking to that, yeah, so I think when we went into STEM, the focus was really around that being an extension to our R&D pipeline, and that's been, you know, we've all said it's been relatively slow, the twos. So I think in terms of that licensing and partnering business model, really what the focus is is trying to increase that kind of the R&D. So and financially, that from a STEM perspective, that means, you know, there'll probably be either more cash or more charge going into the next kind of couple of years.
Does that help, Jan? It's a bit of a... I recognize it's not a very-
Yeah, a straightforward answer.
It's not very quantified, but, that's about.
Yeah, I'm not seeing any other hands up. If anybody has any other questions, please indicate, and I'll unmute you.
Okay. Helen, I think if there's no more questions, I think everybody on the call knows how to find us. If you do suddenly think of something else, I'm more than happy to answer any additional questions you may have in the next few days. In the meantime, thank you very much, and, thanks, Helen, for navigating our way through.
Oh, I'm sorry, I've just seen another one come up from, Jan. "What is the rationale for Kane to exit the JV?
I think it's really that they have, Kane are really focused on their human indications for the technology. So they want to invest a bit more in their human, human bit. So that was their rationale.
Yes, they're releasing funding for the human health part of their business.
Okay.
Anything else, Helen?
Sorry, nothing on the list and no other hands up.
Great.
Great.
Thank you very much.
Okay.
Thank you.
Thank you, everyone.