Ascendis caught in a catch-22
KEY ASSET SALE: RISING DEBT, SLOW REVENUE GROWTH ALSO PROMPT STRATEGY RETHINK
ike that of Aspen, Ascendis Health’s management is placing a lot of store in the sale of a key asset in a bid to bring debt down to manageable levels. However, unlike Aspen, the sale will also force a group strategy rethink.
Ascendis received an unsolicited offer for Remedica, a highEbitda growth generics manufacturer in Cyprus, in January. Negotiations are under way and Ascendis has now thrown the bidding open – presumably to attract a better offer. Other assets on the chopping block include the Biosciences business and Ascendis Direct Selling.
Meanwhile, the company isn’t generating sufficient revenue to reduce debt at the pace it needs to.
Net debt for the six months to December 31 rose to R5.3 billion and the ratio of debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) is now 3.9 (FY June: 3.5). Rand weakness drove the debt up, bearing in mind 70% of Ascendis’ bank debt is denominated in euros.
Debt of R879 million becomes due in 2020’s first quarter; of this R640 million is related to Remedica.
Normalised Ebitda increased 1% to R684 million, however the margin contracted by 20 basis points due to higher operating expenses.
Normalised headline earnings from continuing operations, which excludes R19.6 million capital profits from the Isando manufacturing facility sale in December, declined 6% to R351 million. Normalised headline earnings per share were 10% lower at 72.5 cents
“Top line growth was an arguably acceptable 3%,” says independent analyst Anthony Clark. “But this is meaningless when expenses have grown by 15%.”
Ascendis says these expenses are related to increased investment in sales, marketing, distribution and head office, and the costs of Kyron Laboratories, acquired in March last year.
Of concern is that 44% of operating profit is sucked up by finance charges.
“This is a desperate situation. At this point, Ascendis needs a major asset sale. Without this it will have to face the prospect of a rights issue which, considering the share price is at its lowest point ever, is highly undesirable,” says Clark.
That said, the Remedica sale would be unfortunate, prompting further strategic restructuring. In these results, Remedica earned 56.45% of the profit for the international business. Following Thomas Thomsen’s appointment as CEO last year, Ascendis completed a strategic business review to simplify operations and focus on core business areas Pharma and Consumer Healthcare, complemented by Medical Devices and Animal Health.
Unfortunately, cash constraints are pressing and it no longer has the luxury of restructuring, as originally envisaged.
Thomsen and team are in discussions with existing lenders for short-term support, beyond which lenders have been asked to consider refinancing existing debt facilities.
In addition, an equity capital raise is being considered.
Ascendis is in a catch-22 situation, says Clark. “If you know a company is in trouble, the vultures that are circling will not pay top dollar ... but a capital raise will not be easy either.”