Good morning, everyone, and welcome to this webcast and conference call regarding our announcement earlier today that Orion is acquiring Belgian Innovet's Animal Health business. I'm today here in this Helsinki studio with our CEO, Timo Lappalainen, and then we also have remotely online Orion's CFO, Jari Karlson, who is also representing our Animal Health business in the Orion Executive Management Board. Bonjour, Jari.
Bonjour.
Yes. Great. We have Jari online. We will shortly have a short presentation by Timo regarding the announcement and acquisition, after which then we will open the lines for questions. We will first take questions from the teleconference lines, and after that, we will then take all the questions we receive through the webcast chat box. I kindly ask everybody to state their name and organization you are representing before asking your question. Just before I let Timo to step in, just a kind reminder about the disclaimer regarding forward-looking statements. Now, Timo, it's your turn, so please, the stage is yours.
Thank you, Tuukka. Today we've announced a transaction, and to put this firstly into the perspective why we are holding this is that, of course, we've told over the past couple of years that the M&A is one tool in our toolbox, and having the history that we haven't made transactions in our recent history, we wanted to, you know, discuss a little bit more on this than we traditionally probably would have done given the size of the transaction and its impact in the overall group balance sheet or in P&L. Give you a little bit on the meat and the bone. There were, of course, number of legal entities that are part of the Innovet group, and here they are listed.
The seller is a family-owned Belgian private company who have built the company over past decades to a very successful business, and buyer is Orion Corporation, as we traditionally have, so the legal entity is the mother company. The transaction consideration is roughly EUR 130 million on a debt-free basis. Transaction will be funded from our cash reserves, and as there will be assumption of debt, and there will be also some deferred payments, so the immediate cash impact is roughly EUR 90 million. The transaction was both signed and closed today, so we are now all systems go in that regard. As we have outlined over the past few years, we are looking for growth opportunities in all of our businesses.
In this specific case, of course, the Animal Health business will expand its portfolio, get a foothold also in food-producing animals market, and also then create a opportunity and a foothold for commercial presence in Western Europe and many important growth markets, especially in food-producing animal markets. Furthermore, there is a new production unit that is being constructed and is specialized in manufacturing of animal health products. This is something that we currently do not have, but we are producing both human and animal health pharmaceuticals at the same facility. Of course, this is part of our growth strategy story. What is actually the acquired operation in totality?
It is a unit that has more than 200 products, roughly, a little bit less than 180 employees because there's manufacturing. There are numerous marketing authorizations around the globe, and the products are sold pretty much globally. An important asset for the company is that most of the products that are sold, those are also manufactured within the premises. When we look at the footprint that was acquired, is the headquarters, the logistics packaging unit that resides in Belgium. Then we have in northern France, we have a facility that produces and also holds some other activities.
There also the new facility is being constructed, and one would expect that the construction work will be finalized sometime next year. Furthermore, of course, there will be validations and various regulatory filings that need to take place. Also we have access to the sales offices in Budapest and also in the growth market in Vietnam. Here you can see that the split of the business, so roughly last year, EUR 60 million, and by far the majority is in livestock animals and the rest in smaller species or in companion animals. The Orion's existing Animal Health business and the acquired Innovet business, those complement very nicely each other. When we look at the geographies, there's no overlapping.
Orion traditionally has had its commercial footprint in Scandinavia and certain Eastern European countries. Whereas the footprint by Innovet is focused in France and the Benelux countries. Now, furthermore, there is no overlap in the products. When we look at the products first, Orion's Animal Health business today is very much focused on companion animals, although we have still substantial livestock business and have had that even more so. VMD or the Innovet is much more on the livestock business. When we put that operations together from the production business or product perspective, it's a very balanced portfolio in these two categories within Animal Health business.
Of course, the geography that is now we have jointly and will be developing, you know, is a great opportunity to develop that further. When we look at the overlapping, so as I mentioned, there are no overlapping. We think that this creates a great new organization, new unit that will have a lot of mileage for further geographical expansion. New operation will be also an attractive distribution partner for in-licensing new products. Of course, we will be looking for cross-selling opportunities, and needless to say, of course, access to new markets. Also, the opportunities for R&D and especially in production, as said, we do not have dedicated animal health production unit within the group, but we will have that now. That's something new for us.
Of course, that creates new growth opportunities, both in inorganic way and of course, also further in licensing, and we will continue to look at that to bolster this business further. With these introductory remarks, I'll open the floor for questions and invite also our CFO, Jari Karlson, to join the call. Jari is now in France. He took the announcement in France. For our new colleagues, Jari is also responsible in the management team for Animal Health, and he will be taking an extra duty over the next couple of months to also lead the new Animal Health operation. With these words, I open the lines, and as Tuukka said, we will first take the live questions. Please.
Thank you. If you have a question from the phone lines, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Harry Sephton at Credit Suisse. Please go ahead, your line is open.
Brilliant. Thank you very much for taking my questions. I had four, please. The first one was on the price of the deal. It's around 2.1x sales, which I would say is relatively cheap in the grand scheme of the Animal Health industry. Can you maybe comment on the competitiveness of the bidding process? My second question is on where you see the value add from Orion. You've mentioned that you're not within the predominant part of the industry, which is livestock. Would you say that this is more of a platform acquisition for Orion, signaling your desire to grow within livestock? Or would you say that there's any synergies that you expect that you can deliver from this acquisition? My third question is on the main products of the portfolio.
You mentioned the 93% in livestock. Can you maybe give a split as to the approximate mix of what those products are, the mix of vaccines, anti-infectives, any detail there would be particularly helpful. My fourth question is on the growth from the portfolio. Can you give us an idea of whether there is any pipeline associated with this deal and what you've seen in terms of the growth from the underlying portfolio ex-any pipeline? Thank you very much.
Okay. Thank you. Let me maybe we'll do that. I'll start with the consideration. Of course, this is a friendly acquisition. We've known the seller here for already a couple of decades. I guess one could maybe say that this was a meeting of minds, that the both organizations recognize that there is value in creating a larger group, and especially in the sense that this would provide an opportunity to complement each other's portfolios. There are no any major overlapping scenarios in either product side or in geographies. In that sense, we feel that this valuation that was here created that was pretty much fully valued the opportunity that is there.
That maybe that's for that. The seller is a private entity, and as such wants to keep its things to itself. In terms of the value adding to Orion, maybe I'll take that and then Jari can take the product split and the growth of the portfolio. Certainly this will create us a platform in livestock in terms of the production, in terms of also in the markets where we currently are not, where there's a customer intimacy also from that perspective, so there's a direct access to customers. Now the synergistic effects, those will be more in the cross-selling opportunities.
However, one has to remember that the target groups for livestock and companion animals in many countries are very different. Because in livestock business, you sell to large organizations, farmers or through buying organizations, so it's more relating to business to business. There are, of course, something in some countries where the business runs through the vets as well. Whereas in companion animals, you still do quite a lot of business through veterinary clinics, but there we are also seeing the consolidation of purchasing power. This is clearly we would value this as a platform of creating entrée to new product market in large sense and also new geographical markets. The third question was on the product split. I don't know if, Jari. Do you want to take this?
Yeah, I can say a few words. Basically the core product lines are various injectable livestock products. Innovet has not had any vaccine production in their product line. Antibiotics definitely are a big share of the total portfolio, but not all of it. Also the injectables are the core focus in the future, which is of course reflected by also the fact that they are now here in France finalizing the new investment to a completely new injectable plant site or plant within the existing site where they have been operating for decades already so far. The portfolio as such is pretty broad, like typically generic portfolios are, so no kind of a key main product which are dominant in the portfolio.
Like I said earlier, they don't have vaccine production, so that is not in the scope. The business has been steadily growing over the last year, both here in their domestic markets in France and Benelux, and then in the export markets in many places, especially outside of Europe, in Asia and also in Africa.
I wonder if that addressed also the fourth question, which was the growth of portfolio. At this stage, as we are, of course, a little bit shy on the exact numbers 'cause the deal closed only today, but maybe that'll give you a flavor. It has been a growth business over the years. As we know, livestock has been especially outside Europe.
That's brilliant. Thank you very much.
Thank you. Our next question comes from the line of Sami Sarkamies of Danske Bank. Please go ahead, your line is open.
Okay. Hi. Most of my questions have already been asked, but maybe a couple of follow-ups on historical growth and margin profile. I mean, could you be a bit more exact on whether it's been like a single-digit growth or double-digit growth in the past this company has been able to achieve?
Okay. Maybe we could describe that it has varied, but high single digit might be a good proxy. Of course, there are years when it has been even higher, but you know, there are maybe specific reasons for that.
Okay. When it comes to future growth potential, how material is this new production facility? I mean, will that sort of double the production capacity or, I mean, can you share any sort of data on that?
Well, it will be. Well, Jari, maybe I'll 'cause you're at the facility or in the vicinity of the facility, so maybe you are the right person to answer that.
It may be difficult to give exact, but it will be a major growth in the capacity and so far one of the limiting factors for further growth has been identified to be that the capacity of the older, smaller unit has started to be at the peak. This should allow clearly continuous growth also for many years to come. Of course, in addition to the additional capacity, this is now a new modern facility, while the old one was relatively old already. Also from that perspective, the change was needed. Not only because of the new capacity, but also to the upgrade of the facility in all respects.
Okay. Finally, anything you can share regarding the margin profile relative to your own animal health business? It seems that the profitability of VMD is currently burdened by these growth investments materially. Do you expect this to be margin dilutive also in the long term?
Well, I think that is a fact that as you mentioned, so the existing investment program, which is ongoing, of course, that has been a major and material investment for the unit. However, when we look at the overall scheme of things, the materiality of the bottom line in the next couple of years, we do not think that materiality threshold will be exceeded. As we do not break down the margins for our various businesses, including animal health, I think it'd be better to refer that to further discussions if we make a change in our policy. At this time, I think the only thing I can say that it is not material in the group numbers.
Okay, thanks. Then, on guidance, you chose not to update that even though this acquisition adds to, you know, revenues, you know, around 3% on annual level for this year. Why was it the case that you didn't upgrade guidance?
Well, we feel comfortable with our existing guidance given the geopolitical uncertainties that everybody are facing today, not only as a sector or the company, but the entire global economy. We took a little bit of a cautious look and want to see how the entire business and the year will evolve for the next couple of months. We'll revisit when we have more clarity also for the remaining part of the year.
Okay, thanks. I don't have any further questions.
Thank you. Currently, we have one further person in the queue. That's James Vane-Tempest at Jefferies. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. I just have two remaining, please. Firstly, you talk about it being a friendly transaction. Just wondering if you can give a little bit more color on the process, whether it was competitive, and if so, you know, was it more sort of private equity interest, or was this just something which you were able to conclude yourselves? Then second question is, given this is the, I guess, the larger deal you've completed for many years, just curious, how this may impact your returns policy in terms of dividend. I know it's being funded out of existing cash reserves, but that would be helpful as well. Thank you.
Okay. If I'll take the transaction part, and then, Jari Karlson, you may want to address the capital allocation part. The process was a transaction whereby, of course, we have a private seller, you know, he has various options, including not selling or just continuing the business or selling to somebody else. We are not aware what might have been his other plans or plan Bs should this transaction with Orion not have materialized. This deal we did directly. We negotiated this directly with the seller. Had there been other parties or other opportunities for him, of course, I said the zero option is always there to continue the business. We are not private to that information.
Jari, do you want to address the capital allocation and the return of capital to the shareholders?
Yes. This is not, I mean, as of course, you all know that Orion has been a company with no net debt. This size of a transaction to date does not really have any material impact on our capabilities to do dividend distribution. This alone will not have any, as far as I can see, any material impact on our capabilities. It's of course a different thing what the board each year decides that what is a practical and right way to do the capital allocation. That decision is likely not really being impacted by this deal because this was not that large transaction.
Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypad now. We have a further question from Jamie Clark at Millennium. Please go ahead. Your line is open.
Hi. Good morning, guys. Well done on what looks to be a good strategic acquisition for your business. I just wondered if you can comment on how you're thinking about M&A going forward. Are you still looking to do deals? If you were to do deals, would you be looking at more animal health than pharma? Thank you.
We have said over the past years that we are looking for expansion in all of our businesses, both in generic space in proprietary side. It is likely to be more on the in-licensing front as we have now concluded the deal this year and last year as well. Also in animal health side, as now this deal got closed. This does not change our view how we will move forward. The opportunities, how those present themselves, how is the fit to our strategy, and of course always we are disciplined with evaluation. That is more the driving force. Having made this will not exclude or put weight on some other businesses from the capital allocation perspective, more or less.
We will continue to monitor the market and continue our discussions and evaluations of opportunities.
Maybe Jari could add about the firepower we still have left for M&A so that Jamie gets answer also to that.
Good point. Jari?
We actually presented in our last capital markets day a calculation where we were elaborating different capabilities to fund further growth profile acquisitions. There were basically two different configurations. One, our capability to raise more debt and still keep our financial target of equity ratio of 50%, and then also including the fact that the AGM has now given the board right to issue up to EUR 14 million new Orion shares. If we include both of those capabilities, we are talking about roughly EUR 1 billion-type of transaction power without sacrificing the financial target of 50% equity ratio. If we only use the debt, even after with the current situation, we still have several hundred million of capability to raise more debt and still keep the financial target.
I think there is still plenty of room to do more transaction and at the same time, maintain the financial targets we have set years back.
Okay. Brilliant. Thank you. It sounds like from your comments, you're in lots of discussions in various aspects of the market over potential transactions.
I'm sorry, could you please repeat? The line broke down a little bit.
Sorry. It sounds from your comments that you're still in discussions with various parties over other transactions. You don't lack firepower and you are talking to lots of companies, so other deals remain possible.
Yes. As I said, we are evaluating opportunities in all of our businesses.
It's good. Thank you very much.
Thank you. There are currently no further questions from the sidelines at this time.
Okay. Thank you, operator. We can turn to the webcast chat, and I have here a couple of ones from Iiris Theman from Carnegie. Thank you, Iiris, for the questions. The first one would be, can you comment how Innovet's profitability compares to overall Animal Health sector?
Well, in the overall Animal Health sector, I think we have to differentiate the publicly traded companies, which there is a significant variation also within that. I mean, it is a very broad spectrum. As one of the questions here highlighted, the profitability has been under stress due to the, or one of the reasons have been, the recent consolidation. I think from that perspective, in the recent year, it has been a little bit on the lower end. Also, of course, as a privately held company, there may also be a little bit different way of running and reporting numbers than maybe a public company does.
Maybe to add that the portfolio is almost fully generic.
True. Very good point. Thank you.
Okay. Thank you, Timo. Then the follow-up from Iris was that, do you see Innovet's margins to improve next year, or is these investments that are going on at the Innovet side, to burden profitability also next year?
Well, as we said, as Jari said, the facility is under construction. While the technical construction would be completed sometime next year, there's still work to be done before the transition of the existing products from the old facility will take or will have completed to the new facility. Typically that is a process that takes a couple of years. I think there is that will not change the picture dramatically next year, but it will be more on, of course, on the demand side and how well we will be then able to satisfy the demand with the old facility, given that there's the capacity, there's very little capacity left in that facility.
As we mentioned, this is a growth platform that we expect to utilize in the longer term, and this will create opportunities in the longer term. Overall, I think when we look at the incremental profitability, you know, next year compared to this year and including the Innovet, that would not be material from the group perspective.
Thank you, Timo. We have exhausted for now all the questions from the webcast. All the webcast viewers, you have the chance still to type in questions, if you have any. While we wait for a few seconds, I still once more turn to the operator and ask whether there has been any new follow-ups on the conference call lines.
Currently no further ones. Once again, if you do wish to ask a question on your phones, please dial zero one on your telephone keypads now.
In the absence of we've.
No action.
Okay. Seems like we've exhausted all the questions. Thank you, everybody, and welcome to our half year's report on July the 15th. Thank you, everybody.