Hello, and welcome to the Animalcare Analyst Presentation. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. Alternatively, you may also submit your questions at any time via the Q&A box on the presentation platform. If you require assistance at any time, please press star zero and you will be connected to an operator. I will now hand you over to your host, Jennifer Winter, to begin today's conference. Thank you.
Okay. Thanks, Courtney. Hi. I think many of you on the call will recognize my voice and know that I'm the CEO, and I've got Chris with me as well online. I think we've been chatting quite a lot to most of you over the last couple of years. Hopefully nothing you see or hear today will be too much of a surprise. Obviously with the recent announcements, we thought it would be a good opportunity as well to talk a little bit about post income close activities. Hopefully you've all got a copy of the deck. I'll try and remember to move on slides as we go. The plan is that I'll give a little bit of an intro and then hand over to Chris to talk through the specifics on the financials.
Then I'll come back and talk a little bit more about the deal and wrap up. It should take 30 minutes or so, which leaves us lots of time for questions. Courtney is going to facilitate the questions either that you want to ask on the phone or on the webcast where there's a facility, and Chris and I will do our best to answer them. Kicking off, I think you can see through the announcements and you'll hear from Chris and myself that really the theme of where Animalcare is about resilience that we've shown through the pandemic and the disruption, and confidence around our ability to land deals, but also looking at future growth. I think we all know that there remains uncertainty and we won't spend our time telling you what all the uncertainty is.
Chris is going to refer a little bit to that in his presentation about how we see the market and how we see things returning to normal and where we see the potential for future disruption. From where we are, what we've seen is that the different countries have responded differently to the pandemic. There's a context of uncertainty and volatility, but overall we have been able to act quickly, be agile about how we respond to the changing situation, and we anticipate continuing to do that. We've been trying to be very flexible and getting on with things. What I was going to do is just remind everybody, if you move on to slide two, clearly the disclaimer, and then move on to slide three, which is titled Continued Execution of Growth Strategy.
What I was going to do here is just talk through some of those that we're not going to spend much time on today. Just to reinforce that regardless of the disruption, we've continued to focus on these five things. Chris is going to talk about the strong finances in a minute. You saw our year-end, those of you, we talked to you about the work that we did in 2019. Chris is going to talk a little bit more about how that panned out during the first half of 2020. Key leadership has always been, since we initiated and put in place this strategy, kind of really important for our implementation. Really interestingly, the putting in place strong leaders in each of the countries, but also putting in place the group functions, really lightweight group functions.
I don't mean lightweight as individuals, I mean light as in not lots of people, has really helped us with that agility through disruption. Also putting in place a really clear structure with good capabilities in our business development team has meant that through the first half of this year and continuing up until now, we've really been able to focus on our BD activities. It's made a big difference putting that very professional structure in place. You can see from the announcements we made yesterday that that's a material change in the sort of deals that we're able to do. The growth portfolio, we talk about this as sort of the existing portfolio. We recognize that moving forwards we need to continue to maintain that existing portfolio.
It is going to generate the cash that will enable us to do more and more investment in future pipeline and exciting deals. We have continued to tidy up that portfolio. I think we have talked many times about it was a very fragmented portfolio, and the work continues. We took out about 100 brands last year. We have taken out some more tail brands this year, and we are really making sure that we focus our activities on those brands that have the opportunity to grow and are a bit more sustainable and resilient. We are also seeing the positive impact. Chris, you can see it in the numbers. We will talk a bit more about where we have launched the branded generics that were in our development pipeline. They have been launched successfully. Most of them launched in 2019.
We've had a couple launching this year, which has been more difficult, and we'll talk a bit more about that. We've really now almost launched all of those branded generics that we had in the portfolio originally, which were actually from Animalcare UK days. We've got some really strong brands that anybody would describe them as mature in terms of age. They're continuing to perform really well. Things like Danilon, which is a painkiller for equine. Dinalgen, which is another painkiller for production animals. Those are two products that are continuing to perform really well across the whole business. Things like Orozyme, which is our own dental product, is continuing to perform well. We have some good products in our existing portfolio. We're tidying up. We've seen the benefits of some of the actions.
Spain has done really well with some of the products where we've put more focus behind them. We're really moving forwards on that whole growth portfolio. The other two pillars, business development and innovative pipeline. The plan is I'll come back and talk a little bit more about those once Chris has talked through the finances. We'll do a little bit more on those at the end. From my perspective, it's all really exciting stuff that's going on, and we're very positive and confident about moving forward. Just moving on to slide four. We just pulled together some highlights, some things that we think really reinforce the fact that we're moving forward with our strategy. Strong finances. You'll have seen in the announcements that they were at a higher end of the range of pandemic scenario modeling.
I think when we did the scenario modeling back in March, it was just really difficult to predict. We're very pleased that the business has been resilient. We'll talk a bit more about where it's been more resilient than others. Overall, we're pleased that we're at the upper end of that pandemic scenario modeling. Business development. The agreement with Kane Biotech that we announced yesterday, whilst that was post-period end, obviously, that's been a work in progress. The really exciting thing about that deal is that it gives us access to products today and influence over new treatments for the future. It's a kind of two-part deal, and that for us, is a really good model for the sorts of deals that we are working on.
In particular, this one's very exciting because what it is that Kane Biotech have a focus on producing products for human pharmaceuticals, and our new spin-out that we are building, STEM Animal Health, is going to be the sort of animal health arm of a human biotech company. I think moving forward, that's a really exciting place to be because a lot of the innovation is coming out of human pharmaceutical. Kane is really our first step on that ladder. That's why we're particularly excited about it. Pipeline progress, I will talk a bit more about, but really for us, our COX-2 inhibitor, which is differentiated from the competition for osteoarthritis in dogs, is continuing to progress as planned. Those of you who've experienced the ups and downs of the regulatory process know that that's actually a really good sign.
We're very happy that that's on track, and obviously launching next year, subject to approval. The improved capability part of what we've been doing. We recognize that Animalcare and Ecuphar historically were very much in the generics and branded generics space. We recognize that launching new novel products such as the Kane dental products and future products, but more specifically launching Daxocox, which is our own intellectual property. We've got launching a differentiated product, so it really needs a different approach to sales and marketing. One of the things that we have delivered effectively when our normal sales model has been disrupted, is a lot of training and upskilling of our teams on sales and marketing capability and sales excellence. That's been very exciting, and the organization is really responding well to that.
The other thing that has been accelerated really through the pandemic has been the way that pet owners and vets and the market has looked to more digital offerings, whether that's us talking to our customers digitally or it's pet owners trying to buy online. We had already started to do more on a digital perspective, but we've really ramped that up. Our ability to work digitally, I think we said right at the start of the pandemic that our organization switched to working from home as required pretty seamlessly. We've also switched to working with customers online pretty seamlessly as well. That's been probably easier for us to do a bit because of our size and agility and the fact that we've got people who are really up to change and doing things in different ways.
Those are just some highlights that you'll hear coming out in the rest of the presentation. Okay, I'm going to hand over to Chris at that point, and he'll talk through a bit more detail on the finances.
Good morning, everyone. I'm going to start on slide six. Just before I do, it's a little bit of a recap to what Jenny said. It's really referring to the communications we made back in May. As we said, we entered 2020 in a strong financial position, that was following the significant debt reduction we achieved in 2019. The business saw a strong first quarter in this year before the pandemic hit in quarter two. During that time, as we said, we modeled a range of trading scenarios, primarily for audit purposes, that estimated a potential revenue downturn of something between 13% and 22% on a rolling 12-month basis. As you can see from the numbers, we're pleased to report that the group's traded resiliently in the first half and up to the end of August above that pandemic scenario modeling.
Importantly, we've maintained the strong balance sheet. Five things I just wanted to touch on on this slide. Revenue is down 4.4% versus prior period. We'll come on to more detail on the next slide, but we've seen varying impact by product category, with cats seeing a greater impact of COVID versus the farm animals, and also across the countries. On EBITDA, that's modestly down versus 2019 to GBP 6.6 million. Two main reasons for this, which is reflected in the improved EBITDA margin. The first is the full-year cost efficiencies we brought forward from 2019. Most of that relates to the restructuring of the tech and reg function. As we said during May, we took decisive action in quarter two to reduce or defer spend relative to the lower demand. Together, those resulted in SGA savings around GBP 1 million versus prior period.
What I will say is a proportion of that will be reinvested in the second half to support future growth. SGA costs a % of sales, we should see get back to similar levels to what we had in 2019. On cash conversion, you'll see following the exceptional full-year cash performance last year, that our cash conversion has dropped to below 60%. Main driver for this is an increase in stocks, which were on a cash basis, GBP 2.3 million higher than the beginning of the period. About half of that relates to strategic stock build to protect sales during manufacturing transfers, so that's in line with our expectations. The balance broadly relates to the demand disruption that we saw in quarter two.
On debt, as I said, we maintained a strong balance sheet both at the half year and post period to the end of August, which we've given an indication on. The half-year net debt and leverage were at similar levels to the end of 2019. At the end of August, the position was slightly stronger than at the half year. Finally, I'll side just on the dividend. We said back in March, trading statement, and again at the finals, that we would review the decision to defer the final dividend until we have more clarity as to the impact of COVID. We did say at that time that one option that we had was to retain the cash to invest in future growth opportunities, and that's exactly what we've done in respect of the Kane deal.
Secondly, reflecting the resilient first half performance, we have declared an interim dividend at the same level as 2019. If we turn to slide seven, as I said, I'll give you a bit more color on revenues. What we can see here is that the diversity of the portfolio across both the companion animal and production animal sectors, as well as by country, has supported a resilient first half performance. On companion animals, this part of the business saw around 11% decline in revenues, the main driver being the significant downturn in Q2, where in general, lockdown and social distancing measures led to restricted opening hours and reduced consultations in vet practices, and that in turn led to a marked decline in the number of clients visiting small animal vet practices.
This did also affect our ability to promote and launch new products, which are, as you know, a key driver of our growth. The interaction with many vet practices was much reduced. If we associate this backdrop to country performance, we can see the most significant decline is in the U.K., where the portfolio is almost entirely companion animal. This performance does correspond to the more prevalent impact of COVID in the customer base, which was subject to large-scale closures of vet practices, as well as the wider restrictions I've already noted. Just to give you an indication, these measures in quarter two resulted in Q2 volumes being at around 60% of normalized sales levels. To contrast this to Germany, where we said before, around three quarters of vet practices continue to operate as normal.
As you can see, that's reflected in the performance of the German business, which is slightly up on last year. Italy continuing to perform extremely well, growing by 30% in the first half, and that follows 20% growth in the last financial year. Growth in this period is largely driven by the Companion Animals portfolio, in particular, annualized sales of new products that we launched in 2019. That growth has also been supported by a strong performance in the production animal part of that business. Just to finalize on those countries. We noted previously that both Germany and Italy are small players in large animal health markets and strategically, and the resilient performance in both of these companies strengthen this. Our objective remains to utilize the really strong base we've got in each of those countries on which to build more significant scale.
One of the objectives is to do that over the next three years. If we come onto Production Animals, as I said, in contrast to the Companion Animals, this grew strongly and appears to be less affected by COVID due to the more industrial nature of the market. Production Animals now in the half year accounts for around 30% of the sales. It's been operating around 25% previously. If we look to where the growth has come from. Our Spain Production Animal business unit, which is about half of the Spanish business, performed particularly well. That was up 21% versus last year. That's clearly benefiting from the operational restructuring that we did at the end of last year and during the first half of this year. Also, as we mentioned before, the partial reversal of the distributed destocking that we did see at the end of 2019.
Moving on to slide eight. I've kind of already noted that the debt was broadly in line with the start of the year, but three items I want to touch on here. Non-underlying cash costs, as expected, were much lower than the prior period at GBP 7.7 million. These primarily relate to the restructuring of the production animals business unit in Spain, which I've already noted, and also manufacturing transfer costs as we work towards both de-risking and simplifying the supply chain. CapEx was GBP 1 million. That predominantly relates to additional clinical studies for the E-6087 development, which as Jenny's noted, was submitted for approval in January, and that's proceeding as planned through the regulated pathway. Just finally, all of our facilities, as a reminder, are euro-denominated. What we have seen is a significant movement in our debt due to the strengthening of the euro.
We started the year around 118, the half year was around 111. What the result is that we've had a GBP 1.7 million impact of adverse exchange losses. I'd expect that probably be broadly in the same region by the end of the year, but that's obviously subject to Brexit. Slide nine. We said at the finals that we weren't able to provide specific and meaningful financial guidance at that time, what we would do is continue to update you on what we're hearing and seeing across our business and the wider animal health market in respect of COVID. This slide will just reiterate some of the things that we've talked about for the half year, also give you some observations for the quarter that's just about to end, also going into the end of this year and start of next year.
Again, as a quick reminder, Q1 performance was strong, in line with internal expectations. That was partly supported by customer stockpiling in certain countries, which at the time we said we expected to unwind in Q2, and that's exactly what we experienced, in particular in the U.K. As we entered Q2, as I've said, while the veterinary market remained open for business, it was subject to some various restrictions which saw a marked downturn in demand. That did vary from country to country, as you've already seen on the revenue analysis. In contrast, as we said, production animals was and continues to be less affected. The other key factor in Q2 was our ability to promote and launch new products, as vets were largely focused on servicing the pet owners, and they did actually significantly limit interaction with the sales team.
Importantly, vets were not showing a lack of interest in new products. It was more a lack of bandwidth to interact. We expect to see an improved take-up of new products in the second half, in particular, for example, in relation to Companion Animals. As we moved into Q3, we started to see signs of recovery with vets returning to normal working patterns. As I've said, trading to the end of August from a revenue perspective was broadly in line with the prior year. Where we can, our sales teams are back in the field visiting customers. Otherwise, they are interacting remotely via virtual meetings, for example, but importantly utilizing the learnings from Q2 in terms of how our customers want to be served. Again, this dynamic does again vary from country to country and also by business unit.
If we look forward into Q4 and beyond, it's clear we're seeing evidence of potential further impact and uncertainty due to COVID. While this will inevitably affect market recovery and bring further challenges, we've seen that the veterinary sector is learning to live with the virus, and our business across Europe as a whole has proved to be resilient and agile. This, for us, gives us confidence together with the strong financial position and the continuing attractive long-term fundamentals in the market we operate in to continue to deliver on our growth strategy. I'll pass over to Jenny to talk more about that now.
Thanks so much, Chris. If we pop along to slide 11, I thought we'd take the opportunity to talk a little bit more about the deal that we announced yesterday, and importantly about why that deal is kind of the way we want to move forward. It was interesting because I think for some people, they have expressed that during the period of disruption, it's been much harder to do M&A and deal activity. I think probably for organizations that have a sort of set way of doing it and have been doing it for a long time, that being unable to go face to face to do due diligence, et cetera, probably has slowed them down a bit. Actually, we took a decision to push on with as much enthusiasm and actually a little bit more resource to try and move our deal agenda forward.
It really is the important part of our future growth strategy. We got around it. We did some really thorough due diligence. We looked at Kane and were able to build some really good relationships with the senior leaders at Kane virtually, and we put a bit more effort into that. I think that's a good model for us moving forward, because we've got a number of other things on the go. Actually, we're learning how to do M&A without face-to-face. Kane is a Canadian company. As I said earlier, it probably helps that our BD head carries a Canadian passport, so language is no problem. Actually getting used to the Canadian system and the way that the biotech industry works there was pretty quick. Kane have been focused on finding solutions that attack the biofilm.
Just in simplistic terms, and it was in the release yesterday, the biofilm is produced, and it prevents the bacteria from being attacked. It kind of holds together all the bacteria. If you can stop the biofilm, then the bacteria die. Kane's technology is all about preventing biofilm. What was exciting about the deal for us is that biofilm isn't just causing dental infection. Biofilm causes wound infection, ear infections, all of those things. It's just that the first products available from the Kane deal are dental products. Really for us, the exciting thing is that it's this two-pronged approach. That it gives us portfolio today and products for our reps to be out there selling and that makes us money pretty quickly, rapidly accretive.
It also gives us an opportunity through the equity investment in the spin-out, STEM Animal Health, to work with people who are experts in dealing with biofilm to create new products as we move forward. There's a number of new products that are already being looked at, and we are influencing what that might be. What we were able to bring to this debate and to that new spin-out is the understanding of the animal health business. The guys who started Kane and who are focused in Kane are predominantly human pharmaceuticals. It's a really nice opportunity for us, both for products today and products in the future.
That's really, interestingly, the Kane deal fits with our overall strategy because we've said all along that what we need to do is to find some products that we can launch in the next year, and then build the pipeline behind that. This is sort of, for us, it's a tick in the box that we've found something that we can launch next year. Our continued effort is to find those things that we can launch in future years. As I say, we're talking to lots of people about those. The other thing that I mentioned was, this opened the door for a model where we're talking to other human pharmaceuticals and biotech companies to be their animal health partner.
Having got the Kane deal successfully landed, now as we move forward to implement it, that will give us all confidence for the future, but also will give potential partners confidence for the future to be the partner of choice for human biotech and human pharmaceuticals to run their animal health arm. Just to reinforce what we're doing in terms of business development, using STEM Animal Health as an example, we recognize that we need to reinforce our existing base. Looking for products that are really what we call plug-and-play, rapidly accretive. They're probably on the lower risk reward. Having said that, when we talk about lower risk and lower reward, we are very actively setting the barrier of whatever we bring in has to be as big as our biggest products.
We're really talking about products that are more than GBP 4 million at peak year sales in two to three years. We're not bringing in more tail products. This is focused on bringing in bigger products. Products like the STEM Animal Health products that are real, and they're here, and they carry very little development risk at this point. The other thing that we've said is that it must be a neat fit with what we currently do. We don't want to fragment. We don't want to be running all over the place. We're too small to do that. The exciting thing about the STEM Animal Health products is that we already have Orozyme, which is a GBP 3 million product, and it's still a growth product. We've got experience.
We're used to talking to vets about dental. It's something that we have the capabilities to launch successfully, quickly. The second group of products that we are looking for and where the longer-term investment, the equity investment in STEM starts to deliver, is looking at products with more sustainable, higher margin growth. Not to say that the dental products aren't in that they've got nice margin. Really, if Animalcare is going to be game-changing, then we will be looking for products that are operating in big markets, that have big growth opportunities. We recognize that those are sort of higher risk and reward profile. The benefits of this spin-out STEM for biofilm products is that, we've got some expertise in biofilm. That reduces the risk a bit. We've got a partner in there. That reduces the risk a bit.
We've also got the human biotech piece of Kane, where you're feeding off the expertise. Just balancing that risk. There are other conversations that we're having that are really exciting, but we recognize they're higher risk, but they have a much higher reward profile. That's really where we're going with our business development. As I say, STEM is a good example of the way that we want to move forward. Just moving on to the specifics of the deal. We gave quite a lot of detail in the RNS yesterday, but just to try and visually represent the way that this new business is going to work on slide 12, we've been very focused on getting that sort of risk balance. You can see in the center, you've got STEM Animal Health, and that is about commercializing globally.
Dechra has the license for the dental products in the Americas, North and South America. Animalcare has the license for the dental products outside those territories, so everywhere else in the world. This development of novel biofilm-based treatments. Kane put in all the revenues from the animal health spin-out into STEM, Animalcare, GBP 3 million over four years, and that gives us a one-third stake in STEM. We have got an option for a period of six years to acquire an additional one-sixth stake in STEM, which takes us to 51, and we've already set that option price. We pay some distribution fees effectively, and royalties for commercial rights to both the existing products and the DispersinB product ranges outside the Americas. That's the sort of distribution deal part of it.
The equity part of it buys us into the new STEM Animal Health company, which will continue to produce new products in this area. The development of those new products is really funded by the equity and by the money that Kane Biotech has put in. Just to summarize the deal, it complements our existing portfolio, already strong in dental. The dental market is one of those really good growth markets. It's about GBP 1.8 billion in 2019. Annual growth rate of about 6%. It's a healthy growing market. It fits in that part of the market where pet owners want that cosmetic, good clean teeth, et cetera. More importantly, if you talk to the vets, periodontal disease is the most common infectious disease of adult dogs. For vets, it's really important, for pet owners, it's really important.
A really nice sweet spot to kick off this first experience of biofilm. Earnings enhancing in 2022, and it will be paid from existing cash resources. Okay. That's the sort of BD piece. Happy to answer questions on that, and if there's any more clarity needed. Just moving on to slide 13, further growth opportunities. The COX-2 inhibitor project is maturing. We're still investing a bit because we are doing some more clinical studies to produce more data so that that helps the launch. It's a long-acting COX inhibitor. It's the first new chemical entity for us. It's IP protected, globally owned. We can launch everywhere. Just to remind you, we submitted it in January 2020. Normal sort of regulatory process, we would allow a year. Things are on track. We expect once we launch it, that it will become a top 10 product three years post-launch.
Pretty quick uptake to be one of our top products. We know that because it is novel and it's launching, it is a bit different, so it'll take a bit longer to get to peak year. We know that it will be big and important for us within three years. We're pretty well advanced with our 2021 launch plan, obviously subject to approval. We've been doing a lot of work, and as Chris mentioned, investing money that we've been able to save to accelerate this launch a little bit, working with key opinion leaders, training the sales marketing team, making sure that we have an aligned brand. This will be one brand name everywhere in the world. It'll look the same, feel the same.
We will be competing with the big pharmaceutical companies on this one. We need to be absolutely on our best game. We are making sure that we're ready to get out there and launch this successfully, assuming the regulatory process continues as it has been. Just in terms of what we're investing in, there's pipeline development costs. We're still investing in this product. We're investing in making sure that we launch this competitively and that we really do roll up our sleeves and get out there and show what we can do from a commercial perspective. We're looking for more deals. We're already working on lots of things with lots of partners. We want to develop a risk-based pipeline so that we have some fantastic game-changers coming through, but also some products that we know will be positive in the next couple of years.
Deals like Kane. The place we've got to is we are confident that we know what we're looking for. We're confident about what we can bring into the pipeline and the portfolio. Also the group is confident that when we find a deal that we can access a full range of appropriate funding options to deliver the growth opportunities. That's been a really good discussion with the board and with the rest of the group. We're ready to go when we come forward with the right deals. That's the bit about what comes next after Kane. Obviously, we'll keep people updated when we have any news, but that's where we are. At that point, I'll just summarize and open up the conversation to answer any questions. We're continuing to deliver on our growth strategy.
Yes, the pandemic has made us need to move a bit more quickly on some things, slow down on other things. Overall, continuing the growth strategy, Kane is a good first step on the sort of business development deals that we are going to be doing. Performance was okay in half one. It was resilient. It was helped by production animals. Also, I was very impressed at the way that the team turned around and managed to change the way that they worked and actually worked through this to create the performance that you've seen today. Financial position remains strong. Really, we've still been able to invest and create cash to invest. Also, took the decision to pay the interim dividend for 2020, recognizing our shareholders and the commitment and also the strength of our business.
As Chris said, there's evidence of a return to more normal trading. We're watching that on a daily basis. Spain is our biggest market. You've seen in the news that Spain's really struggling. We're working through that, but we recognize that we need to do things differently and we need to be really agile. Finally, our development pipeline is progressing with plans in place for 2021 launch of our long-acting COX inhibitor, and we're awaiting the final stages of the regulatory process. All in all, I think, we've had resilient existing business. We've been able to land a deal that fits perfectly with the strategy that we'd set out. The team are in good shape, and we're really excited about how we're going to move forward in 2021, in particular. Some good stuff happening. That's a quick run-through.
Courtney, we're ready for questions if anyone has any questions.
That's great. Just as a reminder that if you would like to ask a question on today's call, please press star one on your telephone keypad. Please ensure your line is unmuted locally, and you will be advised when to ask your question. Alternatively, you may also submit your questions via the Q&A box on the online presentation platform. We do have some questions coming through. The first question comes in from the line of Mike Mitchell calling from Panmure Gordon. Mike, please go ahead.
Thanks. Morning, Jenny. Morning, Chris.
Morning.
Some questions on the announcement from yesterday, actually, and a little bit more detail on Kane, if that's okay. Jenny, you alluded to the enhanced capacity, I think, on the BD side and in terms of key leadership and being able to sort of parallelize business development. I'm just wondering, what are the indication areas of interest sort of are coming to the top of the list. You've quite clearly sort of highlighted the dental space and the sort of wound opportunities. I'm just wondering where perhaps the focus lies in terms of particular therapeutic spaces in terms of animal health. Just a second question also on if we look at STEM as an entity. I'm just wondering in terms of the assets within there that you now, of course, have a sort of equity exposure to.
I'm just wondering if it's possible to quantify the total investment to date in the platform and in the vehicle that's been made so far, in addition or externally to the investment that you'll be putting in over the next 48 months?
The second question, Mike, is a very difficult one. I'm just trying to think how we could even speculate on that, because it's really Kane Biotech who've been investing in this area for years.
Absolutely. Yeah.
Beyond our equity investment and the value of the cash that Kane are putting in, which is the sales. Effectively, they're transferring all the sales from North America. We don't anticipate any more development costs going in there. We think that the revenue from the Americas, plus what Kane have already done and our equity stake should be all that is required for the development of the next ones. We haven't, at this point, planned to divert any of our own cash to other developments, and that would be on a case-by-case basis if it was something just really amazing that needed a bit more investment. At the moment, the products that we think will come out of the Kane deal will be funded by existing equity, North American revenues, and our own revenues going in, obviously.
Got it. That's great. Thank you.
All right. On your first question. Yeah, one of the things that I think we talked about when we launched the strategy at the end of 2018, beginning of 2019, was recognizing that we can't go chasing every therapy area. What we have done is tried to be really specific about areas that we're interested in. We're quite interested in things like reinforcing the full pain area. We've got a couple of good pain products already. We're launching the COX inhibitor in pain.
Yeah.
We're also looking at the dental, ears, and eyes part of the business, because that, again, we've got good anchor products in those areas, so it makes sense to us. The other area that we've got a bit of experience and we'd like to reinforce is we've been looking at the whole allergy area and monoclonal antibodies and how biologics are moving into animals. Pretty broad, but making sure that we don't get caught up running all over the place. Things like dermatitis, allergies, all of those sorts of things we're interested in.
Okay.
One of the things we are very interested in is looking at what's coming out of human pharmaceuticals, which is the comment I made, because I think there's a very rich vein to be exploited there, and I guess it's a bit easier for me, because that's where I came from. We're digging around in there a bit.
Absolutely.
Trying not to fragment, because I think fragmentation is not the right thing, and we're really focused on getting 80% of our business from our top 20 products. Bringing in small bits and pieces isn't going to get us there.
Got it. Thank you.
All right. Thanks, Mike.
Thank you. Our next question comes in from the line of Chris Glasper, calling from N+1 Singer. Chris, please go ahead.
Morning. Morning, guys. Hope you are well. Just a bit more color, please, if you can give it on the Kane deal. Just on the products covered, the sales that they're currently generating in the Americas at the moment, how quickly it's taken them to get to that level, regulatory status of the products in Europe, et cetera. I've got a second question, which I can come on to after.
Okay. I'll have a stab at the first one. As you know, Dechra have the products in the Americas. We don't have their data. I can tell you that they're successful, but I can't actually give you the numbers or the forecasts for those. That's Dechra's commercial numbers. All of the products that Kane are developing are options for us. At the moment, there's a broad dental portfolio of gels, water additives, et cetera, et cetera, chews, toothpastes for us that we'll be launching ex the Americas. The comment about regulatory is that we are going to tech transfer them. Currently, they're manufactured in Canada. We're going to tech transfer them to Europe. From a regulatory perspective, because they are non-prescription, the regulatory pathway is pretty straightforward.
Got it. Okay.
Chris, do you want to add anything to that?
Yeah, I was just going to say, Chris, as Jenny said, we've not got all the information on Dechra. What we can say is that I think they started launching these products in, I think 2018 and a little bit of 2019 into the Americas. It's kind of starting from a nil base. It is relatively small, but likely though, expecting to grow over the next three to five years.
Great. Just the phasing of your investments. The $3 million into the vehicle and then the $2 million for the distribution. Obviously, both look like they're going to be phased over a period of time.
Yeah.
what the phasing is on those?
On the equity, there's $1 million that went yesterday. The $2 million is over the next 4 years. The license payments are effectively phased equally over a period of milestones. There's one next year that's just the anniversary of the deal, the other three are based on either a product milestone or two commercial milestones. I think if you look at the deal as a whole, what we've been able to do really well with Kane is kind of phase this investment over quite a long period of time. Importantly, all the equity injection is going into the company to help fund future development. As we said, we don't envisage that from a development perspective, this is going to be a huge cash strain on either business, Kane or us.
STEM, with the revenues it’s got, but also the revenues in future from our licensing deal, should be cash flow positive and probably in a similar year to what we’ve said in terms of the licensing deal.
Yeah. Okay. Is the development side, is that just reformulation into different presentations, effectively, as Jenny said, the gels, the chews, et cetera? Or is there new novel?
Mainly-
coming in there.
Yeah, it's new formulations for different indications. They're looking at all sorts of things, ointments for ears and all those sorts of things. It's using the technology in different ways.
Yeah.
Yeah. Great.
There'll be new clinical data required on them. A bit of the development will be making sure it works. I think the point for us is it's not basic R&D, because I think that's where the high risk comes in. It's using the sort of proven formulations and the proven technologies in different indications where biofilms exist.
Yeah. Understood. Great. That's really helpful. Thanks. Then just a question for Chris. Obviously, there was a bit of a working capital build in the first half, some of which was planned, some of which was activity-led. Just wondering what pace of unwind we should expect to see on that, and how much is going to be dependent on a recovery in the market?
Yeah. Good question. I think we indicated as we went into this year that on the back of the 120% cash conversion in 2019, that we would operate around the 80% mark on the basis of having 100% average over those two years. Absolutely, to your point, subject to Q4 demand, we are expecting to see some kind of unwind of working capital in Q4, so I'm expecting to be in the 70%-80% kind of conversion rate.
Yeah. Great.
Great. That's it. Thank you.
Thanks, Chris.
Okay. Our next question comes in from the line of Max Herrmann, calling from Stifel. Max, please go ahead.
Great. Thanks for taking my question. Just be interested if you can give us some kind of idea quarterly, so first quarter and second quarter on the progression. You had a stronger first quarter with a bit of stocking and then the unwinding. What you're seeing, you've obviously given a little bit of detail. Any more color you can give on the third quarter? I think you mentioned Spain, obviously, as your major market, and with the sort of second wave of COVID and what you're actually seeing there on the ground in terms of progression in the business there, and maybe the U.K. as well, because that was probably the most impacted in the first half of the year. Just on a bit more detail there.
Secondly, just again on the coactiv+ and the DispersinB, do you see one particularly opportunity bigger than the other? Is it the coactiv+ is more broad-based and has more product opportunities, or how do you see the two products?
Okay. Chris, do you want to answer this part? Yeah.
Yeah. I'll get my face in. Yeah. I think we've covered this, Max, in some detail already. To give you again, just to reiterate, quarter one was strong, and there was a little bit of growth versus the previous year, and as you said, some of that was related to some stockpiling, which unwound in quarter two. As we saw, and as I talked about in terms of Q2, if you look at the kind of half year figures, on the basis that the business was broadly equal at the end of the first quarter, the movements we saw in Q2 volumes are largely reflected in where each of those countries or markets are at the half year. As I said, on the U.K., what we saw was sales at roughly about 60% of normalized levels.
As you said, into Q3, we've seen a recovery. Year to date, August was in line with prior year on a revenue basis. Again, that's a group position. The dynamics by market broadly in line with where we are in the half year. For quarter four, I think the only thing I can say at this stage is that based on what we can see now, we'd expect to continue to be trading above those kind of pandemic scenario modeling that we talked about for the year.
Thank you.
Yeah.
Our next question comes in from the line of Lars Knudsen, calling from SEB.
Oh, sorry.
Asset Management.
Sorry, there was a second question.
Yeah, there was a second question.
Over to Lars Knudsen. Go ahead.
Sorry.
Is there a mute button?
Sorry.
It was just really on the coactiv+.
coactiv+™
Dispersin.
Yeah.
Where you see the bigger potential of the two?
Yeah
any more detail and color you can give on the product.
Yeah. There's probably not much to choose between them. They're relatively high margin, good products. Both of them should be pretty profitable. I think it's more about which one is most effective in the indication. One of the pieces of work we need to get on with very quickly is prioritizing all the different uses you could have, and then looking at which is the most effective in those uses, if you see what I mean. I think it will be indication-led rather than Dispersin or coactiv+. I know that came from a human perspective of doing a lot around wounds. We're very interested in things like otitis media, ear infection, et cetera. There's not much to choose between which one from a profitability perspective, it will be which one gives the best efficacy.
I don't think one will beat the other until we get a bit closer to it. At the moment, the wound healing piece is Dispersin, and it looks good in there. That should be a good indicator for what it's like in animals as well. Yeah, I think we've got all that prioritization to come, but not much to choose between them if we can get the efficacy.
Does that help?
Okay. Yeah. A bit more color. That's very helpful. Thanks very much.
I think one of the things we will do is once we've got that priority sorted, and we're much clearer on what that pipeline will look like, we'll come back and share that with you.
Thank you.
Sorry, Courtney, I interrupted you there.
No problem at all. Our next question comes in from the line of Lars Knudsen calling from SEB Asset Management. Lars, please go ahead with your question.
Yeah. Hey. I have two questions. I think probably the one is you've already kind of answered, you write in your statement, trading statement that trading until end of August is roughly flat versus last year. Is that referring to year-to-date August, or is that Q3 to date August? That's the first question. The second question is, when do you expect reported EBITDA to be in line with underlying EBITDA?
First question, it is year to date August that we were talking about in terms of trading in line with last year.
Yeah. That means H1.
For the first eight months of the year. First eight months of the year. Yeah.
So now-
Cumulative first eight months of the year. That's it. Yeah.
Cumulative first eight months. That means that you in July, August have experienced.
Some recovery. Yeah, some recovery to compensate for the decline that we saw in the first half of the year. Yeah.
Okay.
In terms of reported EBITDA to underlying EBITDA, the key difference there is the non-underlying costs in there, which as you can see in the first half of the year, most relate to restructuring costs. I think they're about GBP 0.7 million at half-year. We gave an indication this year, as I said before, that we expected to be significantly down on last year. To give you a rough number, about GBP 1 million, maybe a little bit more, but that'll be the difference between underlying and non-underlying.
Yeah. When do you expect not to be much reporting extraordinary cost?
Yes
a normal business operation or is? Yeah.
It's a deal cost. It's still in there though, aren't they?
Yeah. You're right. In terms of restructuring, which includes and also manufacturing transfer costs, they should be largely done this year, early part of next year. Absolutely to Jenny's point is that most of the items that you see in there going forward will be deal related.
Okay.
Okay.
Okay. Thank you.
Thanks, Lars.
Apologies. Go ahead, Jenny. I was just going to say if we've got any more questions. We do have some questions coming through on the online portal, if you're still happy to go ahead and take those.
I'm okay. Yeah.
Lovely. The first questions that we received read, "Please can you describe the typical route and expected development timeline for the biofilms products, and can you provide any further detail on potential commercial synergies of the deal?"
Okay. The development timelines will be quicker than a prescription product because it will be a clinical trial program to prove that it works and prove that it's safe. Making sure that all the ingredients are regulatory approved, but not in terms of a pharmaceutical regulatory process. We would be expecting to launch new products out of that deal in two years' time, in 2022.
Launch the dental products next year and then start launching new products after the deal in 2022 onwards. Most of the biofilm opportunities, and I talked before about the different indications. Most of the biofilm opportunities are areas that we have some expertise in. We would be able to launch pretty rapidly once we've got proven efficacy and safety and a manufacturing formulation, which we will start working on for the new product. We anticipate synergies to be completely aligned to our existing business. We have topical products, we have ear products, we have wound products, and so we would put them into our portfolio. I think what the new products will do is sort of rejuvenate our rather mature portfolio in that area and really bring in some new technology.
Just to add to that. If the question's around the commercial return, as Jenny noted. If we look at our dental portfolio, which is normally a key brand, that's around the pre-COVID GBP 3 million-GBP 3.5 million mark. What we've said is for all the things that we're bringing into the business, that they need to be at least that size or above. As Jenny said, the expectation is that we should at least double that dental product range in terms of revenue, kind of probably in the next kind of three years, something like that.
Okay. Thank you. We do have just two final questions coming through once again. The final two read, "Will Kane put these products through its own speciality network?" "Can you talk about geographic spread and future potential for growth across the branded portfolio?
Any products that Kane have that are for animal health will come into the STEM organization. Animalcare will have the option to launch any products that come out of the Kane portfolio for animal health. I don't know if that quite answers the question, and I'll just check with Chris whether he's got anything to add to that. In terms of geography, I think we've said previously that we have been focused very much on Europe. We are interested in increasing our footprint, but we'll drive an increase in footprint based on our products. We're not looking to buy additional footprint, but what we are doing is looking at where we don't currently have a footprint and we have new products coming through, and uncertain is a really good example of how we can strengthen, and the COX inhibitor, we can strengthen our presence in other markets.
We're looking at that. At the moment, we're focused on the markets where we have direct sales presence, and working with distribution partners and other partners in those countries where we don't have existing presence. The deal gives us access to all countries outside the Americas. We will be commercializing the products out of the STEM Animal Health portfolio everywhere but the Americas ourselves. Don't know if that answers the question. Courtney, you said there was one more.
That was the final question.
Okay.
I'll hand across to yourself, Jenny, for any closing remarks.
I think we've gone four minutes over time. I'll keep my closing remarks very short just to say thank you very much. We're pleased with where we got to through what has been a very difficult period. We're very pleased to be on our journey on our growth strategy by landing this deal. I'm conscious that we haven't shared an enormous amount of future commercials for the deal. As we get further into the newer products, I'm sure we'll come back and give a little bit more flavor on those. Thanks, everybody. I'm sure, as always, Chris and I can pick up other questions outside this meeting. Thanks very much for your attendance.
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