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Adcock Ingram reports slight growth, sees costs rise

CEO Andy Hall explains issues related to pricing flexibility, wages, import costs, efficiency, being debt-free, and the outlook for unregulated acquisitions.

NOMPU SIZIBA: Drugs manufacturer Adcock Ingram released their interim results today, February 20 2020, for the six months ended December 2019. The company reported revenue up 1% at R3.6 billion. Headline earnings per share came in at 218.5 cents – that’s up 1% on the year before, with operating profit also up by the same margin at R462 million. Shareholders are set to get an interim dividend of 100 cents, which is the same quantum as the year previous.To break down the numbers for us, I’m joined on the line by Andy Hall, the CEO of Adcock Ingram. Thanks very much for joining us, Andy. I suppose your headline numbers are a reflection of what’s happening in the economy right now, and that’s despite you being a more defensive stock where people will always need your offering, whether the economy is booming or not.

ANDY HALL: Nompu, you are absolutely right. I think this is probably the set of results that has shown it more than anything. You mentioned it is defensive sector of the economy, but we’ve also found that when you are subject to price regulations, as we are in the generic and antiretroviral space, that can cause a bit of pressure. So on the branded side it’s been an absolutely good six months for us, but on the generic and ARV side a little more difficult, where we don’t have the pricing flexibility.

NOMPU SIZIBA: Right. You’ve indicated that profit margins are coming under pressure under the current circumstances, so what efforts have you been making on your side to minimise the pain?

ANDY HALL: Yes. Our businesses has done a great job on holding operating expenses low, so they’ve managed to hold those flat year on year, or period on period, which we think is a really good job. We are struggling a little bit in the factories, though, because that’s where we are feeling the real cost push of wages at about 7%, and utilities at about 11%. And then of course the dollar hurts our imported raw materials and products. So that’s the area where we really need to get a little bit smarter. And, you know, we can’t do much about the rand and the dollar – that is what it is. But certainly we need to improve some of the efficiency and throughput in a couple of our factories, particularly the one that makes the oral solid-dosage forms in Wadeville.

NOMPU SIZIBA: Just give us some perspective or context in terms of the drugs that you sell – how many of them are manufactured here in South Africa vis-à-vis what’s produced abroad?

ANDY HALL: We have a strategy at Adcock Ingram – we try and make products in South Africa that are difficult to import or expensive to import. So things like cough mixtures, where we supply about half of the market in South Africa, and things like intravenous drips, which are heavy and difficult and expensive to transport, we do all of those in South Africa. And then we tend to do most of our tablets and capsules at our factory in Bangalore in India, except for the antiretroviral portfolio, which we do in South Africa.

NOMPU SIZIBA: Apart from drug-cost considerations, what are some of the other factors that weigh on your cost curve?

ANDY HALL: Look those are really the only issues that we need to worry about outside of the regulatory environment. So, you know, the regulations in pharmaceuticals are becoming more onerous – I’m sure for good reason. We want to make sure people are protected. And we find that it’s difficult to continually get good pharmacists and good scientists in the market. They do come at a premium, and sometimes we’ve got to pay up to keep them in the business.NOMPU SIZIBA: I see you have some R363 million cash on hand. Are you in conservation mode, or are you on the lookout for any new assets?

ANDY HALL: Nompu, I think we are blessed to have a strong balance sheet in the current economy. So it’s certainly something that our shareholders are happy about – whereas a few years ago, we might have been criticised on that.

But we are on the hunt for acquisitions, and particularly in the unregulated space. So if we can expand our consumer portfolio broader than healthcare and personal care, where we currently are, those are the sorts of acquisitions that we’re looking for, because we’ve got to balance the business better in terms of this price-regulated environment. About 60% of our products are currently single-exit-price regulated, and we’d like to get to more of a 50-50 balance.

NOMPU SIZIBA: When you say “unregulated space”, that sounds interesting. Give us an example of the areas you’d want to get in that would be unregulated, because you’d still be dealing with human health, right?

ANDY HALL: Yes, absolutely. We’d like to get into baby care. We don’t have a baby-care portfolio at all at Adcock Ingram. And then, outside of human health, we think that home care is a potential for Adcock Ingram, because effectively our customer set, where we take our consumer products, is the same, and those products we think we are capable of marketing at Adcock Ingram along with our other consumer products.

NOMPU SIZIBA: So now you’ve got to a nice bit of cash on the side, but what are your debt levels looking like?

ANDY HALL: Fortunately we are completely debt-free, so any debt that our investors see on the balance sheet really is related to IFRS 16, whereby we have to put leases on the balance sheet. But we have no interest-bearing whatsoever in the company.

NOMPU SIZIBA: Wow. You indicate that in July of last year the Bidvest group became a 51% majority shareholder in the Adcock Ingram group. Has that resulted in much of a change in how things have done at Adcock?

ANDY HALL: Nompu, I think what it has given us is a better degree of stability at Adcock Ingram. It’s always nice to have a big anchor shareholder, whom it’s easy to talk to about strategic issues, and where you want to take the business. So, when we decide things now at the boardroom table, effectively we have three Bidvest directors sitting there, who of course are big stakeholders in the business by virtue of the fact that we are a controlled subsidiary. And, you know, I think that really helps us in terms of our flexibility, entrepreneurial ability and ability to move quickly, particularly when we are looking at opportunities.

NOMPU SIZIBA: So, going forward, what’s the outlook for the balance of your financial year?

ANDY HALL: Look, I think it’s still going to remain tough. When we look at the high levels of unemployment, the load shedding that’s unfortunately with us now, and then just the general pressure on the consumer, we think the next six months are going to be pretty much as tough as the first six months. So we’re not particularly optimistic for the short term. But hopefully thereafter we can sort of see the economy start turning again. But we’re not particularly optimistic on the next six months.

NOMPU SIZIBA: Yes, we can all but cross our fingers. Thanks very much Andy, for your time.

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