R10bn deal could give Aspen rivals a headache
Saad in smart move to control ingredients’ supply chain process
IT TOOK Aspen CEO Stephen Saad three years to put together a massive R10-billion deal that will see it buy a pharmaceutical ingredient business in Holland and the right to buy 11 drug brands from American multinational Merck.
It’s a game changer for South Africa’s fastest-growing drugs firm, which has left rivals like Adcock Ingram in the dust, and reflects Saad’s belief in building “trust” with overseas partners, like Merck and British multinational GlaxoSmithKline (GSK).
With this new deal, Aspen’s drug-manufacturing business will stretch into Europe and the US, giving it greater control of the ingredients that go into making the drugs it sells.
Saad told Business Times that this was part of its strategy to corner the market in emerging markets.
“The group is focused on developing products we can put into emerging markets,” said Saad.
“It is increasingly important to control the supply chain and remove the middleman, especially when it comes to biological tenders, which are increasingly competitive.”
The Merck deal will bring it more than R6-billion in annual sales, and the 11 branded drugs it will get the right to buy include hormone replacement therapy, oral contraceptives and fertility treatments.
This seems a smart bet, especially because there is little generic competition for these drugs
Though the deal is international in scope, Saad said this will actually be a boost for South African manufacturing, as the plan is to make these complex biochemical end-products in this country, using active ingredients from the Dutch company.
While Adcock has largely focused on South Africa, Aspen is looking for growth in Latin America, Asia Pacific, Eastern Europe and Russia — and has developed relationships of “trust” with firms in those countries.
As a result, Aspen continues to defy the expectations of investors, who believe that on a price-to-earnings ratio of 29, the drug company’s stock is already pricey.
Sasha Naryshkine, a director at Vestact, said that if Aspen could continue growing the way it had, the stock remained a buy.
“It’s always had a higher valuation than its peers. Relative to some other manufacturers, they’re fair. There are not many companies in as high a growth mode as they are.
“There always lies a risk because one or two earnings stumble and you get multiple contraction in the same way you get multiple expansion. For the time being, it’s still a buy.”
This appears to support market sentiment. As the deal was announced, Aspen’s share price soared 6% from R192. The trajectory continued on Friday as it added 6.5% to R223. Aspen’s share price has gained 81% in the past year.
Though the Merck deal would not affect Aspen’s profitability in the first six months of its new financial year, it is expected to add 18.7% to the company’s earnings for the second half. This will help reduce the p:e ratio, making the shares more of a bargain.
Aspen, which already has net debt of $1-billion, will finance the Merck deal by adding new debt.
Africa’s biggest maker of generic drugs already has a strong alliance with GSK, which owns 19% in the group. Aspen owns the licences of a growing number of Glaxo products in regions across developing countries.
To illustrate that Saad is not just relying on Merck for new growth, Aspen put in an offer to buy branded heart products, Arixtra and Fraxiparine, and a manufacturing plant in France from GSK.
The Merck deal slots neatly into this picture, as Merck’s Active Pharmaceutical Ingredients business makes heparin — the main ingredient used in Fraxiparine.
With the new ingredients, and 400 more representatives across the world, Aspen is justifying its tag as South Africa’s new SABMiller, after the homegrown brewer that is now the second largest in the world.