No need to take a Myprodol
After winning its battle with the branded painkiller, the pharma company has its sights set on infant formula in China
If Aspen’s Myprodol moment is anything to go by, thinking big is worth it.
Talking analysts through the company’s year-end numbers last week, CEO
Stephen Saad, with no small degree of relish, produced a chart showing how, in April,
Aspen’s generic brands
Mybulen and Mybucod overtook the big daddy of SA painkillers for the first time.
“Never in my wildest dreams did I think we’d be bigger than Myprodol,” he said.
“Plugging away” has clearly paid off for Aspen, which has almost doubled the size of its commercial pharma business in the past four years, to R31.7bn in sales for the year ended June.
The division is now its biggest revenue spinner, with overall sales of R41.2bn for the period — a gain of 16% in real currencies, and in no small way helped by its acquisitions of the anaesthetics portfolios formerly owned by the mighty Glaxosmithkline (GSK) and Astrazeneca.
The irony of its Mybulen victory, however, is that generics now account for just 10% of Aspen’s turnover.
And it was clear from the presentation that specialty pharma products — like “high-potency” and “cytotoxic” steriles — are where Aspen intends carving its niche in the global pharmaceutical market.
Saad said steriles constitute “the most complex area to manufacture”, but Aspen, which doesn’t produce original blockbuster drugs like Pfizer or GSK do, “has got to find its competitive advantage. Where have we found that? In niche technologies and difficult-to-access products.”
Within Aspen’s manufacturing business, which contributed R6.55bn to total sales, the steriles division is clearly where the group has placed its bets.
But the division is merely one illustration of how the company has evolved since 2000, when it produced only tablets and only in SA. Since 2013, Aspen’s manufacturing capacity has risen fivefold, and it now spans three continents — Africa, India and Europe, with recently added manufacturing facilities in France and the Netherlands.
It hasn’t been easy, however. Aspen says its facilities in France and the Netherlands have “absorbed a disproportionate amount of senior management time” to get them right.
The company “put fixing this ahead of any commercial objectives”, said Saad.
The market, however, is backing the transition to manufacturing.
Says 36One analyst Shmuel Simpson: “While a large portion of the business is still in distribution it is the manufacturing of specific . . . products . . . that can give them margin, provided that they deliver the synergies and actually develop some expertise in those areas. It’s a transition which I do think is positive for the company.”
After months of hesitancy, investors appear to have been won over. A turnaround in the second half of the year, in which normalised headline earnings soared 27%, helped lift earnings 16% for the period as a whole.
Aspen’s shares jumped almost 10% in the two days after the release of its results, hoisting the stock above R300/share for the first time since February.
“Some of the price movement is warranted,” Simpson says.
Investec’s Marcelle Jankelow, who had a “buy” call on Aspen ahead of the results and a 12-month target of R335/share, says: “Nobody was going to touch the stock until they were
happy that management would deliver [what it promised in the first half]. We were frustrated by that . . . but everything I was concerned about has been addressed.”
According to Jankelow, key issues for the market — besides Aspen’s well-documented bust-up with European regulators over accusations of price gouging — were the company’s disclosure, the promises it had made on synergy targets, a turnaround in SA, and the performance of its anticoagulant drugs.
Aspen had promised synergies of between R800m and R1bn, but in the end produced R1.2bn in cost savings for the year.
Jankelow says disclosure was excellent, and “you can see what the top-line growth is for the important therapeutic classes, and the growth that the market was expecting is there”.
As for SA, Saad said at the presentation that management has managed an “unbelievable achievement”, producing a 29% increase in second-half sales for private sector products after the first half’s 7% drop.
Sales of over-the-counter drugs were 24% up for the year as a whole.
Not everyone is convinced, however.
Of the analysts surveyed by Bloomberg, sev- en have “buy” calls on Aspen, four recommend a “hold” and three — Renaissance Capital, Noah Capital Markets and Morgan Stanley — have it as a “sell”. Already, Aspen’s share price jump has taken it close to the 12-month consensus target of R311.70.
As for disclosure, not everyone believes that the company is putting out all the numbers needed to analyse the business properly. Says Simpson: “In the past Ebitda [earnings before interest, tax, depreciation and amortisation] numbers were provided for each region – now they only give you the consolidated numbers, making it a bit more complicated [to analyse]. So while some of the disclosures were certainly enhanced other elements were removed.
“It’s a different disclosure — I wouldn’t necessarily say it’s better.”
One number that sticks out is the huge growth in Aspen’s anaesthetics division, thanks to a series of deals that now make it the world’s largest outside the US. The unit “shot the lights out”, says Jankelow, posting sales growth of more than 100%, to R7.06bn.
The largest contributors were developed Europe, with R1.7bn of sales, China on R1.5bn and Japan at R1.3bn.
“It’s a fantastic portfolio for Aspen. [There are] lots of challenges in the supply chain, but it fits in with our existing infrastructure,” says Saad.
Still, the company has had to build up considerably in China, opening offices in Beijing, Shanghai and Guangzhou. It now employs 610 people in the country — the largest regional sales force in the company.
While it’s “early days”, Aspen says the growth rates are “encouraging”.
You’d think that with anaesthetics now such a big focus, Aspen’s latest deal — the US$555M acquisition of the remaining rights to Astrazeneca’s anaesthetics portfolio — would have been made with more fanfare.
Instead, it was slipped in with last week’s number as something of a footnote. But if included in this year’s results, the acquisition would have added an extra $90m to operating profit. And under the terms, Aspen may be in hock for a further $211m payment based on sales and gross profit up to November 30 2019.
Jankelow says: “It’s clear now that [the company is] integrating the anaesthetics business, so I think that was a bonus.
“We certainly got the distinct impression from foreign shareholders that they were concerned Aspen [had] lost its mojo, [and was] not doing any deals. So well done that it put it out there with the results.”
At Tuesday’s exchange rate, the latest Astrazeneca deal could end up costing Aspen more than R10bn.
Its debt levels are already high, at R37.1bn, though net debt to Ebitda as a ratio has narrowed slightly, from 3.3 times to 3.2 in the year under review.
Aspen deputy CEO Gus Attridge says this ratio gives the company a “fair margin” of headroom, as does the fact that it is spitting out cash: the company’s operating profit to cash conversion ratio is now 109%.
Further acquisitions are still on the cards, according to Saad, who is keen on the market in women’s health, particularly epidurals in China, where a baby boom is likely after the country abandoned its one-child policy last year.
Strip out anaesthetics, however, and Aspen’s growth rates are a lot lower: thrombosis product sales fell 12%, nutritionals shrank 8% and manufacturing sales dipped 1%.
This is deeply problematic for some. Last week, Gryphon Asset Management portfolio manager Casparus Treurnicht told Business Day that, without its acquisitions, “Aspen seems like a business that is struggling to keep its head above water.
“I am concerned when a business shrinks its revenue by 5.3% over two years and investors pay in excess of a 20 p:e ratio for it.”
Aspen’s prowess in different geographies is also an issue. Within the commercial pharma business — which includes anaesthetics, thrombosis, high potency and “other” products — 54% of its sales come from emerging markets. “I don’t know another multinational that has that split,” said Saad.
But within its thrombosis portfolio, most of its sales are still from developed Europe — and that area is struggling.
Not only has Aspen had a considerable runin with regulators in Spain and Italy on accusations of price gouging, but sales are going down — fast.
Revenue from thrombosis products in developed Europe were R605m lower this year. Aspen blames mandatory price cuts and an adjustment in its distribution model, but also says there is “no excuse” for the performance. However, developing Europe – Poland, Russia and Belarus — is growing revenue.
Perhaps the most enticing prospect for would-be Aspen investors is its interest in the infant milk formula business, particularly in China. Aspen has teamed up with a Hong Kong-
based partner and plans to launch its Alula brand next month. Importantly, no unregistered products will be allowed in China after December, but Aspen has submitted its paperwork and expects its registration to be approved by March.
Saad said there’s likely to be a “mad scramble” by competitors to get products registered and says oversupply could be a problem for the next while, as manufacturers that haven’t got their registrations sewn up in time dump stock on the market. Still, after this “washout” China represents a “significant growth opportunity” for the company.
Simpson agrees: “I think that . . . [the Chinese venture] could potentially be quite big if [Aspen] executes it properly. The China market is huge; they have the largest per capita spend on infant formula.”
So if, at one point, overtaking Myprodol seemed an impossibility, could Aspen one day be the next Nestlé in the infant formula business? Simpson says: “I don’t think [Aspen is] going to win the China market — I don’t think it even has the aspirations.
“But if it can get a small share . . . Effectively what the government is doing is cutting down the number of brands that are going to be allowed to operate in China and it’s somewhat of an opportunity for someone to come in and take some market share from those guys that are going to be falling out of the market. But this is not something that’s going to happen overnight — it’s going to take some time.”
Simpson’s overriding concern with Aspen goes back to price regulation, however.
“In most of the markets in which they operate you’re dealing with governments and regulators who are negotiating hard.
“My concern is really top-line, organic growth, which I think is going to be challenging, and the only way they’re going to make that up is with margin. That is where they need to deliver” he says.