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Steinhoff’s accounting scandal has inflicted a fair amount of collateral damage on Aspen Pharmacare, the Durban-based company that’s built a global empire in the two decades since listing.
Still 16%-held by CEO Stephen Saad and his deputy, Gus Attridge, Aspen makes its portfolio of mostly speciality products on six continents.
But its aggressive offshore acquisition strategy and “very subjective” accounting treatment of intangible assets have brought unwanted attention from short sellers in recent months — keeping its shares on a losing streak.
The share is yet to recover from a fear-driven sell-off sparked by speculation that Aspen was the next target — after Steinhoff — of Viceroy Research. It was trading at R258.90 at the time of writing — well below the highs of nearly R440 reached in 2015. But most analysts still rate it a “buy”, Bloomberg data shows.
Naturally, Aspen’s management team is bullish. Head of strategic trade Stavros Nicolaou says the drugmaker “is probably SA’s most globalised company”, with sales to 150 countries.
Nicolaou says Aspen has safeguarded its future by shifting from generic drugs to specialised therapies, which shield it from low-cost rivals as they are difficult to make.
“There’s significant focus in growing these niche areas in offshore markets, such as China,” he says.
The group is also not dependent on patent protection: it buys post-patent products and extracts value through supply chain efficiencies and by taking them to new markets.
The group is looking to focus mainly on emerging markets that have “positive demo- graphics and low per-capita usage and spend”.
Quinton Ivan, Coronation’s head of SA equity research, is among the optimists. He says the share’s decline belies Aspen’s strong fundamentals and “fantastic track record”.
But the “indiscriminate” selldown means Aspen is attractively priced. At the time of writing, its forward p:e was 15.2.
Ivan says new opportunities, including the infant nutrition business in China, are not reflected in the share price. He also says Aspen’s acquisitions have been “strategically sound”.
However, André Bekker, an equity analyst at Arqaam Capital, is sceptical. He says most of Aspen’s revenues have been bought — it’s made 52 acquisitions and 16 disposals since listing — which means economic profit erosion has offset any organic growth.
In the four years to June 2017, Aspen’s revenues and earnings roughly doubled, but operating margins and return on capital declined, Bloomberg data shows.
Arqaam estimates that about R5bn in synergies have been extracted since listing, but this came at a cost of R24.9bn in capital expenditure, as Aspen has had to invest in additional product rights and manufacturing facilities.
Arqaam is unhappy with management’s accounting policies, particularly its treatment of normalised headline EPS numbers, which exclude charges that are “integral to its business model”, such as transaction and restructuring costs.
Its treatment of intangibles is also “very subjective”.
“Pharmaceuticals remain vulnerable to competition, generics and obsolescence. Aspen’s accounting treatment inflates earnings … and fails to match the group’s revenue to its cost base.”
That could be behind Aspen’s “higher than justified” share rating, Bekker says.