- Virbac Group
Although below the 7% announced at the beginning of the year, our organic growth of 4.4% is nonetheless in line with our latest forecasts. Our financial performances were heavily impacted by currency fluctuations that had an adverse effect on our results in a number of major markets, in particular the United Kingdom, Mexico, India and South Africa. At constant exchange rates, the current operating profit before depreciation of assets arising from acquisitions, up by 61%, exceeds the target set at 10% of sales. By the same token, debt reduction of €58 million in 2016 is beyond the announced target of €50 million.
Our expectations were generally met, albeit with varying intensity. The predicted recovery in the United States did indeed take place, but not to the extent that was hoped, primarily due to a slower than expected return of our main products on the market. The lifting by the FDA of the warning letter impacting the St. Louis facility only occurred at the end of the year. In Chile, we had reservations about our outlook for aquaculture due to competitive and health-related pressures on the salmon sector. These difficulties were unfortunately confirmed and magnified by the spread, at the beginning of the year, of an algae bloom that decimated 20% of the Chilean farms. The situation remains quite sound in the other regions that account for three quarters of our business. Growth has been in line with our ambitious expectations in the Latin American and Asia-Pacific regions, with two-digit growth at constant rates in several countries, including Brazil and China. Europe saw growth beyond expectations thanks to excellent developments in most of the countries, mainly driven by our new products.
In the companion animal segment, Virbac growth has increased in all regions, in particular in the United States, with a catch-up effect on the abnormally weak sales volumes in 2015. However, our food producing animal business has been stagnant, with registered growth in the cattle industry unfortunately being masked by the decline in aquaculture.
Our business is expected to see moderate growth in 2017. Our outlook remains rather good in Europe and even very good for the Asia-Pacific and Latin American areas. In the United States, the remaining products still not on the market whose registration dossier does not require any changes will be marketed again in the early months of the year. At the same time, we can finally work on variations to existing registration dossiers and consider submitting new ones. Our sales volume is expected to rival 2016 levels: products sold to distributors at the end of 2016, like Iverhart Max, will have to be cleared before restocking orders pick up. Chile remains plagued by market disruptions. Therefore, we are not yet counting on a clear improvement in our outlook.
We will continue to rely on the two pillars that have historically been the driving force behind Virbac: innovation and business momentum. We have maintained our research and development effort these past few years despite weaker financial results. We remain confident in the potential of the resulting product innovations, especially in the field of parasiticides, for both companion animals and cattle, as well as in dermatology and, in the longer term, the biological market. We are also building on the strong development potential of some of our products or ranges, especially in the reproduction and companion animal petfood segments. Finally, our stepped-up efforts to digitise our approach to sales will boost relations with our customers, whether they be veterinarians or pet owners.
Our research and development effort should remain at 8% of sales before deduction of the research tax credit, as in previous years. We will continue to improve our ratio of operating expenses to sales, which should result in an improved operating profitability rate of around half a point at constant exchange rates. Our focus on investments and the positive change in working capital requirements should support the Group’s efforts in reducing debt by about €30 million to €50 million.
+4.4% at constant exchange rates and scope compared to 2015
In 2015, two significant events profoundly changed the Group’s financial structure. The acquisition of Sentinel products in the United States tripled Virbac’s debt. At the same time, quality problems at the American industrial site in St. Louis impacted our profits, splitting them in half between 2014 and 2015. These events led us to consider improving our financial leverage as a matter of priority. They also helped accelerate Virbac's move towards a cash-optimisation culture at all levels of the organisation.
At the Group level, numerous projects began in this way, such as the introduction of pre-financing programmes and the optimisation of the cash collection from subsidiaries, many of which are included in a cash pooling. In 2016, we indeed successfully launched the Group’s first factoring programmes in Europe and the United States. In the sales subsidiaries, beyond the traditional indicators of sales and operating income, we adopted indicators to monitor the improvement in working capital requirements and initiated numerous local projects in order to optimise cash generation.
These developments will be sustained in 2017 and over the coming years. They will enable us to continue to optimise our cash generation while continuing the recovery of our business and our march forward.
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*Restated to reflect IFRIC 21
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In a growing global veterinary market, major upheavals are taking place: the development of prevention products, the restriction of the use of antibiotics, new parasiticide molecules in companion animals... Backed by life sciences, where scientific progress is particularly rapid, the sector imposes strong regulatory constraints while promoting innovation.
In this context, 2016 was mainly devoted to substantial work relating to the protection, maintenance and compliance of our products and active ingredients. This is all the more crucial since the principle of extraterritoriality of the controls operated by the regulatory agencies is increasingly applicable outside of Europe and the United States.
For innovation we can rely on our strengths. Starting with a strong responsiveness and the international presence of our teams dedicated to development, this allows us to adapt our innovations to the specific needs of each territory. In addition, Virbac is committed to co-mature agreements with public research laboratories, in the field of vaccines and antibiotic substitutes, and is working with biotech companies to develop new markets in other fields.
The big event in 2017 will undoubtedly be the gradual resumption of development at the St. Louis facility. In the rest of the world, significant registration dossiers and development projects should be finalised with several market authorisations targeted for 2018.
EVEN FURTHER ADVANCES IN PETFOOD
With the preventive range of petfood for dogs and cats, Virbac made a notable breakthrough in the market in 2016. These products are distinguished by their composition which is specifically adapted for carnivores. In November 2016, Veterinary HPM Adult Small & Toy was described by the French independent consumer association UFC-Que Choisir as one of the “best choices” among the twenty complete dog foods tested. At the same time, Virbac continued to develop the diet range that will result in 2017 in the launch of 14 references covering the main dog and cat pathologies. To support its scientific approach, Virbac has carried out no fewer than 28 studies in partnership with six European universities.
BREAKTHROUGH INNOVATION IN DERMATOLOGY
One in four dogs has a dermatological problem during their lifetime and a veterinary surgeon treats an average of one dermatological case per day. On the strength of this twofold observation, Virbac made a landmark presentation of Skin Innovative Science (S-I-S) at the 2016 World congress of veterinary dermatology. This new technology unparalleled in the animal health market is present in five dermatological products including several shampoos, stimulates the endogenous antimicrobial peptides and limits the adhesion of microbes to help the skin of cats and dogs to get back to its normal balance.
In a heavily-regulated sector with increasingly frequent controls throughout the product lifetime, our manufacturing activity is under strong pressure to comply.
This is why, in 2016, we temporarily suspended the manufacturing and sale of the LR (leptospirosis/rabies) combination vaccine after a batch of semi-finished products from this sector was found not to be compliant. The resulting biological action plan must ultimately enhance control of our vaccine manufacturing processes. A key topic in an area where we work to reproduce the living, which is variable by nature. 2016 culminated with the lifting of the warning letter that had placed the St. Louis site in the United States under FDA surveillance one year earlier. This is indeed a positive ending to a year devoted to the implementation of the plant’s quality system improvement plan.
Finally, we rolled out our new quality policy across the Group’s subsidiaries. In describing our commitments in this area, it is part of a larger system, the Virbac quality system (VQS), which aims to harmonise the pharmaceutical quality of our products. Another step closer to international standardisation of quality systems.
In 2017, beyond basic compliance in all production units, enhanced operational control of quality processes will be one of our priorities, in conjunction with our overall approach to optimise Virbac’s industrial park.
MEXICO: VIRBAC IS MODERNISING ITS INDUSTRIAL PARK
It’s a major project that culminated with the relocation of the Mexican subsidiary to the new Argo Navis site in 2016. Created in 1992, the subsidiary doubled its sales and production between 2010 and 2016. Hence the need to increase its production capacity while better addressing local quality requirements. The new site brings together under one roof industrial activities, a warehouse, a quality control laboratory and administrative offices. The facility’s production, 80% of which revolves around injectable solutions, is presently taking a significant technological leap forward, going from a manufacturing environment with limited automation to one that includes the most modern sterility equipment.
ST. LOUIS BROUGHT INTO COMPLIANCE
Under a warning letter from the FDA since the end of 2015, the St. Louis site in the US continued its extensive work on aligning its quality system with current Good manufacturing practices (cGMP) in 2016. Stepped-up training, a review of processes and an on-the-spot systematised managerial presence improve the ability of teams to quickly resolve any quality discrepancy. This course of action is part of a quality system improvement plan that has substantial human resources, thanks to 60 recruitments in 2016. At the end of December, the results were there: the St. Louis site saw its cGMP status confirmed, ending a two-year freeze on product launches and variations to registration files.
In 2016, Virbac achieved sales of €872 million, and growth of 4.5% at a constant exchange rate compared to 2015. Almost two-thirds of Virbac's subsidiaries gained in market share and three-quarters of them improved their profitability compared to 2015.
This performance was concealed by the decline in our business in Chile. Apart from that country, down 18% compared to 2015, all Virbac areas grew at a constant exchange rate in 2016 with two-figure growth in ten countries including China and Brazil. Sales in Europe saw strong growth (+4.3%) and so did Asia/Pacific/Africa & Middle East (+6.6%) although that area saw less progress than in previous years due to the severe droughts in India and South Africa. We have also seen a rebound in Latin America where its performance was mainly driven by Brazil (+20.4%) and Colombia (+14.6%). In the United States, profits were below our expectations, essentially due to certain products not returning and the delayed return of the Iverhart range following the temporary suspension of GMP status at the St. Louis facility.
In terms of species, our aquaculture business encountered difficulties in 2016 linked to the algae bloom which has decimated about 20% of the adult salmon population. Meanwhile, the return of a major competitor in 2016 into the antibiotics segment had the consequence of reducing our sales in this important segment of the aquaculture sector. In terms of ruminants, there has been significant growth in injectable antimicrobials (+32.5%), particularly in Europe (chiefly in France), and in Latin America (chiefly Brazil and Mexico). The vaccines segment, where Virbac has seen consistent growth, is also increasing (+10%). Meanwhile, the weaker performance in aquaculture, coupled with differing profit levels in various regions in the other bovine sectors (particularly due to the regulation on critical antibiotics) and in the industrial pig/poultry market, explains the decline in our food producing animal business in 2016.
In the companion animals sector, here we have also seen multiple successes with two-figure growth both for Suprelorin (which is a contraceptive implant) and for the new range of physiological petfood (launched in Europe in 2015) and our product portfolios in dermatology and dental, especially in the United States. Despite the weaker performance of the Iverhart and Sentinel ranges on the American market, internal parasiticides as a whole also performed well in 2016 with two-figure growth.
With the return of a positive trend in 2016, 2017 should be year in which we consolidate our business. Prospects in Chile and the USA are still rather uncertain, but following the recovery of the St. Louis facility's GMP status, we are expecting business to recover in veterinary clinics in the United States particularly with the return of Iverhart Max and our parasiticide range which is now complete. Finally, the growth forecasts are relatively good for all the other regions (Europe, Latin America, Asia, Pacific, Africa and the Middle East). Furthermore, the 2017 performance should also be buoyed by the gradual digitalisation of some of our business such as the 2016 digital initiatives in China and Europe.
DIGITAL REVOLUTION IN CHINA
Virbac is involved in the digitalisation of the Chinese veterinary market. At the end of 2015, buoyed by average annual growth of 30% over the last five years, Virbac China boasted 1,200 customers among the main veterinary clinics in the country. But the products and Virbac brands, which have gained in reputation, are also sold in an unregulated manner on 1,300 sites online. In 2016, the subsidiary began to regulate this market: closure of illegal sites or ones that do not meet its quality charter and signature of partnerships with 60 selected sites. Virbac also plays the web to store card relying on e-commerce platforms to attract pet owners to veterinary practices through a system of e-coupons.
AN ALTERNATIVE TO SURGICAL STERILISATION
Suprelorin is an implant the size of a grain of rice which works on the principle of prolonged and controlled release, creating temporary and reversible sterilisation. Currently available for dogs and male ferrets, it is also renewable during the lifetime of the animal. Available today mainly in Europe, this concentration of technology offers the benefits of painless surgical sterilisation. Yet, each year, 30 million dogs and cats are sterilised in the world. On the back of its success since 2008 and with sales up 11.3% in 2016, Suprelorin could benefit other gender and species of animals in other regions in the future.
DENTAL MARKET: WAR ON TARTAR
Dental plaque results in bad breath and potential periodontal infections. This is the case in 80% of dogs over two years. As a pioneer in the dental market, Virbac offers a large range of products adapted to the needs of owners and their pets for effective management of oral hygiene in dogs and cats in most countries: veggie chews or ones which use enzyme technology, toothpaste/toothbrush kits and a solution to pour into drinking water. In 2016, Virbac is showing double figure performance in its dental range, in the key United States market, due in particular to an expansion of its distribution network.
For 15 years, Virbac has sponsored Jean-Pierre Dick in the world’s biggest offshore racing competitions. A member of the executive board responsible for special projects and chairman of the Fondation d’Entreprise Virbac, this doctor in veterinary medicine promotes the profession on the seven seas. Through his warm personality and his exemplary sporting career, he embodies the spirit of the company with its interwoven values of commitment, determination and self-improvement.
THE VENDÉE GLOBE ON A HIGH-FLYING ARRIVAL
The whole of 2016 is dedicated to the objective of participating in the Vendée Globe, the legendary non-stop solo round the world without assistance race. Jean-Pierre Dick is preparing for it with two transatlantic events: the Bakerly Plymouth/New York transatlantic race and the return New York/Les Sables d’Olonne race. He’s getting his bearings on board a new, particularly physically demanding vessel equipped with foils: an innovative but risky gamble on speed, which weakens the monohull. At the helm of his new Imoca, a high-performance sailing boat that he has hardly had time to tame, Jean-Pierre made a dazzling start on November 6, 2016 in Port Olonna. 80 days of racing followed during which the skipper from Nice (South of France) unflinchingly made up for his mistakes and took bold but worthwhile chances. On January 25, 2017, he crossed the finishing line in 4th position, followed by Yann Eliès 1 hour 23 minutes afterwards - the smallest gap ever recorded in the history of the race. With Armel Le Cléac’h, Jean Le Cam and Mike Golding, Jean-Pierre Dick entered the hall of fame of the skippers who have completed three Vendée Globe races.
VETERINARIANS IN THE FRONT ROW
Over the past 15 years, more than 2,500 veterinarians from 13 different countries have attended a sailing event organised around Jean-Pierre Dick’s racing programme. The key to success: sailing days, boat guided tours, participation in races starts and arrivals on escort boats; all these experiences are emotionally charged and shared in a convivial and caring spirit.
A POWERFUL COMMUNICATION TOOL
Sponsorship of sailing events also contributes to the reputation of the company. As the sponsor of the StMichel-Virbac monohull, the brands enjoy abundant media coverage. Virbac’s commitment to Jean-Pierre Dick’s project thus generates an average of 40 articles per week outside of the period of the races and up to 1,200 weekly articles during the most publicised races such as the Vendée Globe, the Transat Jacques Vabre or the Route du Rhum. In November 2017, Jean-Pierre Dick will start the Transatlantic Jacques Vabre race in partnership with Yann Eliès.
Changing markets, the rise of new technologies, strengthening of regulatory constraints: our organisation must constantly adapt. In particular, with higher levels of demands and investments in production and quality, the capabilities required are evolving.
In the face of these new key issues, it has become essential to offer employees the best chances for success by developing their skills. So 2016 saw the introduction of a development interview, the expansion of our Group’s e-learning platform and the early stages of the Virbac business school (VBS), a corporate university to develop the skills of our marketing and sales employees.
Alongside the recruitment of external talent, we rely on a dynamic internal mobility policy, not only between job roles but also between countries. Since 2016, we now give staff a clearer view of their potential development within the company through the internal release of job offers.
We are going to continue to invest heavily in the development of digital training tools, particularly enhancing the programmes offered in blended learning format which combines individual training online, virtual classes and face-to-face sessions.
DEVELOPMENT: EMPLOYEE AT THE HEART OF THE PROCESS
Developing skills and anticipating how they will evolve are crucial to the company’s performance. In 2016 we introduced a dedicated interview which offers the employees an opportunity to be a key player in their own development. With their manager playing a key support role, they work to build an action plan geared towards their current position. The goal: not only to improve certain skills and know-how but also to consolidate existing strengths. This development dynamic, for which employee’s commitment is an essential prerequisite, should allow everyone to better understand the company’s organisation and culture, and therefore promote the retention of talent within the Group.
UNITED STATES: VALUING EMPLOYEES’ INITIATIVES
Constructive feedback and recognising employees’ commitment are key aspects of Virbac’s HR approach which puts people at the heart of the organisation. With this in mind, Virbac United States launched the Compass Award programme in 2016, which awards gift cards and a classic compass to one or two employees of the subsidiary nominated by their peers, every month. The selection committee is made up of six employees from different departments and all levels of the hierarchy and selects the winners based on the company’s values: it rewards positive contributions to the company’s goals above and beyond what is expected of their position.
The principles on which Virbac bases its governance are those that provide the balance required for the Group’s performance and successful development.
SEPARATION OF POWERS AND COLLEGIALITY
Since 1992, there has been a clear separation between Virbac’s strategic and operational management functions, exercised by the executive board, and supervision of this management function, devolved to the supervisory board. This structure meets the desire to establish a balance of power between the executive and supervisory functions. It involves a regular and effective dialogue between the executive board and the supervisory board, as well as mutual trust.
Collegiality is a key organisational principle in Virbac’s governance. Its two governing bodies, the supervisory board and the executive board, operate on the basis that their respective members seek common positions and take collective decisions, working as real team.
COMMITTED AND EXPERIENCED MANAGEMENT
Virbac’s governance is based on enhanced governing bodies, composed of members with a strong and long-term level of commitment. Their professional experience covers many of the aspects involved in the day-to-day management of a major international group. With the exception of its vice-chairwoman, all of the supervisory board’s members are corporate executives with extensive operational management experience. Virbac’s management, whether members of its supervisory board or members of its executive board, is committed to providing sustained support for the Group’s long-term strategy. Moreover, the involvement of supervisory board members and the non-voting advisor is not limited to their participation in formal board debates. Their involvement also includes regular informal discussions and periodic ad hoc meetings if circumstances so require.
CONTINUAL IMPROVEMENTS TO GOVERNANCE
Virbac follows the recommendations of the current Afep-Medef corporate governance Code. The Group continues to improve its governance practices. In some cases, it surpasses the objectives set by the Afep-Medef Code, particularly with regard to representation between women and men, the board being composed of three women and three men.
The executive board is responsible for the strategic and operational management of the Virbac group. Its five members work closely together and they take collective decisions. This way of working encourages joint reflection and the search for a consensus.
The members of the executive board regularly discuss the company’s long-term vision and operational requirements outside the formal meetings of the executive board. This flexible organisation allows a high level of responsiveness when taking strategic decisions.
The executive board reports on its work to the supervisory board and submits all of the Group’s strategic operations to the supervisory board for its formal approval.
It is supported in its work by a regular dialogue with the members of the strategic committee. In addition to the members of the executive board, the strategic committee also includes the Group’s nine functional directors and five area directors.
It ensures the permanent control of the management of the executive board, and the regular review of the accounts and of all major projects and investments. The supervisory board comprises six members including three independent members:
Two special committees aid the supervisory board in its tasks: the audit committee and the compensation committee. The supervisory board is assisted by a non-voting advisor, Xavier Yon.
The audit committee is responsible for:
It is comprised of Philippe Capron, chairman, Olivier Bohuon and Pierre Madelpuech.
The compensation committee is responsible for:
It is comprised of Marie-Hélène Dick, chairwoman, Olivier Bohuon and Grita Loebsack.
Xavier Yon, permanent representative of the company XYC.
Deloitte & Associés, represented by Hugues Desgranges and Vincent Gros.
Novances-David & Associés, represented by Jean-Pierre Giraud.