Searching for a boost in China
Aspen’s share price took a knock after the one-off devaluation of its Venezuelan business in 2015. The company is now eyeing the Chinese market for low-cost generics, which potentially offers huge growth opportunities.
aspenPharmacare, the largest maker of generic drugs in Africa, was a darling stock for investors for many years. Previously seen as overvalued, Aspen only lost ground after peaking at 45 000c/share in 2015.
The group has gone through some change, notably ending its collaboration with GlaxoSmithKline (GSK) in its sub-Saharan African operations. GSK, a long-time major shareholder of Aspen, started to divest its holding in 2013, selling off its last shares in Aspen in September last year.
Aspen’s sights are now set on rapid expansion in China to distribute low-cost generic pharmaceuticals. With an ageing and large population, a proliferation of lifestyle diseases, notably diabetes, and rising household income levels, the Chinese healthcare market potentially offers huge opportunities for growth. A 2015 study by Deloitte estimated that annual expenditure on healthcare (including spending on drugs) is projected to grow at an average rate of 11.8% a year from 2014 to 2018, to reach $892bn by 2018.
But despite Aspen’s strong manufacturing capability, successful international acquisitions, secure balance sheet and an excellent global reputation, the share price is struggling to rebound. It said in a trading statement that it expects headline earnings per share (HEPS) for the six months to end December to be between 49% and 57% higher than in the comparative period in 2015. The significant increase is attributable to the one-off negative effect in 2015 arising from the devaluation of Aspen’s Venezuelan business, which cost the group R870m, it said.
Earnings per share (EPS), which excludes one-off items, will be 13% to 17% lower, it warned. This decline is mainly due to the positive effect of significant capital profits realised in the 2015 interim period arising from the disposal of non-core businesses and products, Aspen said. The group’s results were set to be released on 9 March, after this issue of finweek went to print.
Aspen’s share price fell the most in more than two years in September last year, when it said the impact of selling the two pharmaceutical portfolios and a one-time currency-related loss in Venezuela would weigh on earnings. The share price showed indications of a recovery at the beginning of the year – triggering signs of a change in investor sentiment – but encountered resistance at 31 700c/share, forming a lower top, which is a bearish sign. A head-and-shoulders pattern could be in the making, with the final shoulder constructing. Downside through the neckline would extend losses to 18 000c/share. Go short: With the three-week relative strength index (RSI) in oversold territory, a near-term recovery is underway. However, failure to trade beyond 31 700c/ share should sound the alarm bells. The final shoulder would still be forming, and downside to 23 300c/share would be possible. Breaching that level would confirm the bearish pattern and possibly kick-start another bearish leg towards 18 000c/share. Go short if Aspen recovers but struggles to trade above 31 700c/ share – and increase positions below 23 300c/share. Go long: Upside above 31 700c/ share could see Aspen reclaim its losses to either its major resistance trendline or the 35 000c/share level. Aspen would abandon its long-term bear trend above 39 100c/share. Stay long if upside persists through 35 000c/ share. A 100% retracement to the all-time high at 44 870c/ share would be completed upon a positive breakout confirmed above 39 100c/share.