Pharmaceutical company Aspen weathered a stormy start to 2018, its 20th year as a listed company on the JSE, with speculation rife that it was to be the next target of a Viceroy report. This caused the share price to fall to R243, its lowest price in two years. While the share price has largely recovered, investors remain skittish.
“International investors have simply taken the decision that they don’t want to be exposed to SA’s international corporates,” says Aspen deputy CEO Gus Attridge. “We are seen to be in the same investment class as Steinhoff – both emerging market multinationals and both reasonably acquisitive.”
The KPMG debacle has also raised international concerns about SA audit firms, he says. “Are they as good as they are reputed to be? For now some investors are staying away.”
On Thursday Aspen released interim results for the six months to December, which investors will no doubt be scrutinising. Revenue generated by the Group grew 11% to R21.9 billion, operating profit grew 13% to R5.1 billion and profit after tax grew by 30% to R3.7 billion, helped along by investment income, lower finance costs and a lower tax rate.
Normalised earnings before interest, taxes, depreciation, and amortisation (Ebitda) improved 15% to R6.3 billion and normalised headline earnings per share increased by 26% to 872 cents – for the 19th year in a row.
Of this revenue, commercial pharmaceuticals contributed 80%, with 7% of the 15% growth derived from organic growth, Attridge says. The balance, he says, was supported by “a continued positive momentum in performance from the South African pharmaceutical business and a strong result from the thrombosis brands”.
The period also saw the inclusion for the full period, of the AstraZeneca anaesthetic portfolio, which the group acquired from September 1, 2016. The profitability of this was further enhanced by the acquisition, with effect from October 1, 2017, of the residual rights (for the intellectual property and manufacturing know how related to the AstraZeneca anaesthetics portfolio ) that Aspen did not acquire first time around. This is expected to enhance performance in the second half as well.
|Anaesthetic brands||R9.9 bn||59%|
|Thrombosis brands||R3.3 bn||17%|
|(28% EM & 10% DM)|
|High potency & cytotoxic||R2.2 bn||-8%|
|Other pharmaceuticals||R10.4 bn||2%|
|Regional brands||R7.2 bn||4%|
Source: Aspen sens statement 8th March, 2018
Aspen has been on its big growth path since 2013, doubling revenue and profit on the back of three large acquisitions and in the process creating what is South Africa’s most geographically diverse company. More recently, in the past 12 to 18 months, the management team has concentrated on aligning all the group’s disparate parts and sorting out problem children. This has paid off.
“The South African business has been working well, and Venezuela is long behind us,” says Attridge. “Disparate legacy systems have been replaced and the company is now fully integrated. Our access to immediate, online information has been revolutionised.”
Growing big, fast meant that management wasn’t always as on top of things as it would have liked and Aspen is now facing challenges on multiple fronts relating to its drug-pricing policies. Last June an Italian court dismissed the firm’s appeal of the Italian Competition Authority verdict that found Aspen guilty of over-inflating its prices.
As a result the European Commission is now investigating excessive pricing of five cancer drugs across the EU. And in the UK, the Competition and Markets Authority has opened an investigation into alleged anti-competitive conduct against Aspen in relation to the supply of two of its drugs.
“These investigations (in particular the EU) require a considerable deployment of resources, but we need to answer all the question if we are to convince the Commission that our pricing has been reasonable,” says Attridge.
While the past period saw little acquisitive activity, the group remains on the lookout for potential opportunities. “We are conscious of the need to transact at a reasonable value. To overpay means destroying shareholder value.”
Borrowings, net of cash, increased by R6.0 billion to R43.1 billion in the six-month period. While this is within lenders’ covenants and Aspen’s comfort range, debt to equity is now close to 100%.
Cash generated from operations of R3.0 billion, 7% down from 1H2016 and was offset by R9.4 billion of payments relating to acquisitions, other capital expenditure and dividends to shareholders.
“To a casual observer the numbers are good,” says Reuben Beelders, portfolio manager at Gryphon Asset Management. “But a closer look gives rise to some concerns. The growth in profit of 30% was not driven by operational growth – this is not sustainable. And ROE remains poor at around 16%. Thus at current prices you are paying 2.7x book value for a 16% RoE. This is not good.”
While management has guided for a good performance in the second half, Attridge notes that the stronger rand could have an impact. “About 80% of our revenue is generated in foreign currency, which will soften results when translated back into rands,” he notes. This will be mitigated to some extent by the fact that pharmaceutical input costs are dollar-based.