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Aspen buys GlaxoSmithKline‎ for R2.1bn: Asief Mohamed – CIO, AEON Investment Management

How does this deal tie up with Aspen’s existing business?

GUGULETHU MFUPHI: South Africa’s Aspen Healthcare share price shot up by 6% today after it bought several over-the-counter brands from GlaxoSmithKline for over R2bn. To get more perspective on the deal we speak we speak to Asief Mohamed, who’s the chief investment officer at AEON Investment Management. Asief, this seems like a big deal, a massive deal for Aspen. What effect might it have on the company?

ASIEF MOHAMED: I think in the longer term it looks like it’s positive, because it overlaps with a  lot of the regions that they operate in. Brazil is one area, but more importantly south Asia, where they’ve acquired Sigma a year or two ago. And so far initial indications are it’s doing very well. The advantage is also that in the future they are going to produce the products that they’ve bought from GSK in their own manufacturing facilities. And if I look at the financial metrics they’ve put out, it doesn’t look that it’s dilutive at this point in time if they bring through synergies which they normally do on these acquisitions, it could be very positive for Aspen in the longer term.

GUGULETHU MFUPHI: Now how might this deal tie up with Aspen’s existing business?

ASIEF MOHAMED: As I’ve mentioned before, it’s the strong overlap in its regions, both in South America and in Asia and to a smaller extent in South Africa and in Africa. So from that perspective it increases their product range, it increases their ability, their distribution, it brings more economies of scale to their distribution and I think it should be good for Aspen as a whole.

GUGULETHU MFUPHI: So it probably should have a roll-over effect to the consumers, to their benefit?

ASIEF MOHAMED: It’s difficult to say whether Aspen will pass on the benefits to them. If you look at the deal from another perspective, Aspen obviously believes that there’s value for them, that they can bring through synergies, that they can add value to shareholders. Glaxo on the other hand is selling these what they call presumably non-core products; they believe that they can’t on their own do it. But the one positive that I also see from the Glaxo perspective is that they have a shareholding in Aspen and…it gets close to 20%, and that also is an extension of how positive they are about Aspen as a whole in the ability to manage and…good products which they themselves can’t do.

GUGULETHU MFUPHI: Any particular idea on the kinds of brands that Aspen will be receiving from GSK?

ASIEF MOHAMED: I’m not too familiar with the brands as such, but Zantac comes to mind, Borstol I think is a very old brand if I recall correctly. But Aspen presumably have done their work on it and it’s mostly OTC drugs in this case, and it should be good for Aspen in terms of getting economies of scale for their distribution network.

GUGULETHU MFUPHI: Taking a further look into Aspen, its share price has run nearly 50% in the past year and it’s currently trading on a forward P/E of 18 times. Does this seem high in the current market?

ASIEF MOHAMED: Aspen has been a very good performer, not just over one year, two years, three years and five years. It’s outperformed the all-share index by a significant margin. I do agree that the share price and the price index multiple at 18 times is very expensive relative to other counters. However, the interesting thing about this specific deal, the R2.1bn acquisition, is that Aspen management has decided it seems at this stage not to issue any shares. They are going to fund it from new debt they’ll issue, and internal resources. So in a sense what they are saying is that the share from their perspective is a bit cheap.
    However, if I look as an investor, it looks a bit pricey to me at this point in time. But Aspen has delivered historically and I hold the share and probably will hold the share for the longer term because of their ability to manage acquisitions in a  manner that’s accretive to shareholders.

GUGULETHU MFUPHI: And looking at the greater pharmaceuticals industry, it’s been one of the best performing sectors over the last three years. What do you foresee for the future?

ASIEF MOHAMED: I think you are probably referring to the South African pharmaceuticals sector – yes, it’s performed very well. I think the international pharmaceutical sector has not performed that well. However, the ratings have come down significantly from where they were historically, because it used to get “darling sector” internationally. I think it’s come to value levels and, if I had the opportunity to select an offshore or local pharmaceutical manufacturer, I’d probably go for offshore because the values there are a lot lower than the local pharmaceutical manufacturers in terms of P/E multiples.

GUGULETHU MFUPHI: Wayne, you mentioned some interesting insights off air about Litha Healthcare as well as Aspen being the main pushers or drivers…

WAYNE McCURRIE: Yes, those have been the drivers. The older pharmaceutical companies – Adcock, Mediclinic, Netcare – actually haven’t done that well. So this big surge in the share prices of this particular sub-index have actually been driven by those two shares. They’ve done extremely well over the last while.
    Look, this isn’t the first deal that Aspen’s done with GSK – there’s another one, it must be a good two, three years ago, maybe even longer, that also turned out to be very successful. It was a very similar deal. They bought drugs, because obviously Aspen’s got the distribution and can move the goods. That’s why GSK is going with them. Look, it’s a big deal, R2bn, quite a big deal, but it’s earnings-enhancing in year one. So, in other words they make a decent return in year one. I must say, it looks good for the share. The share’s not cheap – it’s a 20 P/E. But the price is probably justified at that level.

GUGULETHU MFUPHI: Your stock pick between Aspen and Litha?

WAYNE McCURRIE: Aspen. Unfortunately Litha is too small. We actually can’t choose it, a strange thing to say, but it’s just too small.

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