ADCOCK INGRAM Surviving aches and pains
Pharmaceutical group Adcock Ingram has come under pressure from fierce competition in the over-the-counter (OTC) drugs market and from subdued consumer spending.
These challenges filtered through to the bottom line; a fall in diluted headline EPS to 422c was reported for the year to September. Turnover growth was a negligible 3% at R4,5bn. The results were also diluted by rising utility costs, aboveinflation wage increases and supply-chain disruptions due to factory upgrades.
Unlike its competitors Aspen Pharmacare and Cipla Medpro, Adcock has considerable exposure to the OTC market, which is under pressure from cheap imports. Its brands include headache tablets Panado and Compral. OTC turnover, however, grew by 11,4% due to the acquisition of NutriLida.
The prescription drugs segment reported a 6,9% decrease in revenue as the 2,14% increase in the single exit price (SEP) granted by government in March was implemented on products only where market conditions allowed. Hospital revenue grew 6,4% as full production resumed following the completion of the Aeroton factory upgrade.
Group CEO Jonathan Louw says price controls mean Adcock is unable to pass cost increases on to customers. He doesn’t foresee the situation improving in the current year. “The one difference is that hopefully a lot of our supply challenges will be alleviated — so we’ll be able to supply a lot better than we have,” he says. The group has spent nearly R2bn in recent years upgrading and constructing infrastructure.
Not much is expected from its 14% slice (an R825m contract over the next two years) of the new antiretroviral (ARV) supply tender either. It had to aggressively lower its prices to improve on the 4% share it was allocated in 2010.
Ron Klipin, an analyst at SA Stockbrokers, says margins are low in the ARV supply business but it will boost the group’s top line and factory utilisation.
Besides getting only a small portion of the ARV tender, the group experienced several other misfortunes in 2010. It was forced to withdraw from the market its Synap Forte, Lentogesic and Doxyfene products after the US Food & Drug Administration withdrew the medical compound dextropropoxyphene from its market. The Medicines Control Council in SA doesn’t have the capacity to test every drug on the market, and regularly follows foreign recommendations.
Though Adcock has faced many challenges it has managed to diversify its portfolio. It has become a bigger player in branded prescription products, thanks to its collaboration with multinationals such as MSD. It has also become less dependent on SEP, having grown its nonprescription product offering such as vitamins and supplements. The company is also trying to increase its presence in Africa. “Now close to 6% of revenue comes from outside SA,” says Louw. “We’ve established ourselves in Ghana and Kenya, and are exporting to surrounding territories.”
In July, the group spread its wings even further by entering the Indian market. It acquired pharmaceutical firm Cosme Farma for R708m and the deal will be finalised in January. Louw says the acquisition will increase the contribution to turnover from offshore markets to 10%.
The group also plans to launch new generic products in the cardiovascular category early in the coming year, and add to its complementary alternative medicines portfolio.
Though management will remain focused on increasing efficiencies in the supply chain and expanding in emerging markets, it expects the economic climate to remain uncertain and depress consumer spending. Input cost pressures and currency fluctuations, which are linked to active ingredient prices, are also expected to affect margins. But Adcock has a strong track record of good operating margins (2012: 19,7%), return on equity (23,5%) and cash generation. And the pharmaceuticals industry is defensive, with high barriers to entry.
Investors should, however, be mindful of increasing competition. Adcock is already lagging behind Aspen and Cipla. “It seems to have fallen behind the curve,” says Klipin.
Continued regulation changes could also affect returns in the longer term. These include international benchmarking and the capping of logistics fees.