The hedge fund poser behind Aspen’s slide

ASPEN CEO Stephen Saad is mystified by the recent frailty in the share price of the high-flying drug manufacturer he founded.

“I can’t really comment because there’s no major issue that would be causing these gyrations in our share price. Nothing has changed in the last month,” he said.

Aspen is perhaps South Africa’s single greatest corporate success story in recent years.

From his house in Greyville, Durban, Saad and Gus Attridge built a company that is now the fifth-largest generic drugs maker in the world, manufacturing 20 billion tablets a year. Today, Aspen is represented in 47 countries, and it makes one in every four drugs prescribed by doctors in South Africa.

But now, perhaps for the first time in the past 18 years, Aspen has looked less than superhuman, vulnerable even. In the last three months, Aspen’s stock has fallen 18.3% — a pretty steep plunge for a share that has given investors a total return of 371% in the past five years.

Word on the street is that the stock has fallen thanks to some hedge fund hotshots, who’ve made a killing shorting the share — in other words, betting the share would fall.

These hedge funds, the theory goes, snapped up large chunks of the 6.2% of Aspen offloaded in recent months by UK drugmaker GlaxoSmithKline. Says one analyst: “What we heard was that hedge funds took up nearly 50% of those Glaxo shares, and are now shorting the stock.”

At the same time, however, a number of bizarre — and apparently unfounded — rumours have been doing the rounds about Aspen.

One rumour is that top management has been silently cleared out, while another is that Aspen’s infant milk formula has been pulled off the shelves. A third suggestion is that Aspen’s stock is set to tank because of steep foreign exchange losses it incurred in its second half.

“None of those is true,” says someone close to the company. He points out that Aspen’s second-half ends in June — weeks from now.

There is also speculation that Glaxo may dump its remaining 6.2% in Aspen before September, which would put pressure on the stock. But this seems unlikely because Glaxo is locked into holding those shares.

Not everyone buys the hedge fund theory. For one, David Fraser, who manages hedge funds at Peregrine Capital, says this seems unlikely.

“When those [Glaxo] shares were placed, hardly any were allocated to hedge funds. Most were placed with people who’d held long positions in the stock,” he said.

It’s more likely, Fraser says, that Aspen’s shares are just shedding some of the 28.8% gain made in the past year — an entirely reasonable response for a stock with a price-toearnings ratio of around 30.

“You can’t entirely rule out the possibility that global hedge funds might be looking to short relatively expensive emerging market stocks in general, including Aspen. But it’s more likely that the stock is just giving up recent gains,” he says.

It’s tricky to say, partly because there’s no transparency over who holds a short position on a share, or how many shares are being sold.

But even if hedge funds were responsible for hammering Aspen’s share price, does this really matter?

Well, no. Provided this doesn’t weaken the stock enough for a global rival to swoop in for a takeover bid.

In fact, if you believe in the Aspen narrative, the share price drop only makes the stock more compelling.

In a research note, Investec Securities said since Aspen’s fundamentals remain in place, “long-term investors should take advantage of the short-term price weakness”.

JP Morgan also upgraded Aspen to a “buy” a few weeks ago, saying the price fall provides a “decent entry point for a quality company”.

Although Aspen’s stock seems relatively pricey, once you factor in the expected growth in profit, this makes it cheaper than drug firms in comparable markets, such as India.

Seven out of 12 analysts rate Aspen a “buy”, with an average 12month target price of R434 per share — 22% above its current R356.05.

One of the reasons JP Morgan likes Aspen is its expertise in doing deals, especially because experts are predicting a flurry of acquisitions in the global pharmaceutical industry.

“Management [has an] excellent historic track record [when it comes to deals] and whilst the balance sheet remains relatively stretched, we would expect Aspen to prove inventive,” says JP Morgan.

Provided Aspen doesn’t produce a horror show of foreign exchange losses for the full year, there’s no reason to bet against Saad now.