Call for changes in leadership team

● Pharmaceutical company Aspen’s tumultuous six months, which culminated in an almost 50% crash in its share price, has resulted in a call for an overhaul of the board and splitting of the business.

Zwelakhe Mnguni, chief investment officer at Benguela Global Fund Managers, said this week a change to the management team would work wonders for the company and that it could be time for its founding group CEO, Stephen Saad and his deputy Gus Attridge, to resign.

“These guys started the business, they are emotionally attached to it and it’s no longer about generating returns, it’s about the prestige,” Mnguni said.

The appointment of Kumba Iron Ore CEO Themba Mkhwanazi and former Standard Bank joint-CEO Ben Kruger as independent nonexecutive directors was unlikely to remedy the situation, he added.

“I doubt that board members would have the ability to stand up to [Saad]. He’s not an easy guy to deal with and those board members would always have to respect that he founded the business with Gus. How do they challenge those guys?”

Apart from changing its management team, Mnguni said Aspen could simplify its business by breaking it up into developedmarket and emerging-market businesses, and manufacturing.

For more than 20 years, the company has been one of SA’s stars since its beginnings in the garage of a house in Durban.

But now Saad and Attridge are fighting to regain the confidence of a distrustful market.

After it released its interim results for the six months ending in December 2018, more than a week ago, Aspen’s share price tumbled.

This week the price recovered marginally before dipping 3% and at more than R97, it has a long way to go before it can reach its previous heights — once it was priced at more than R400.

The pressure comes after Aspen said it would take longer to begin settling its R53.5bn debt — which is higher than its market capitalisation — due to the delay in the sale of its nutritionals business.

The business was set to be sold to French dairy company Lactalis at the end of December but the sale has been delayed. This means Aspen will have to wait longer for the more than R10bn it is due from the sale, which it plans to use towards paying off its debt.

Mnguni said the company would have to pay R24bn of its debt by June 2020 and even if it started bringing the debt down now, it would struggle to drive growth. Another solution for Aspen would be a rights issue, which would enable it to meet its debt obligations.

Nishlen Govender, a portfolio manager at Citadel Wealth Management, said it was highly likely that Aspen could have a rights issue to shore up its balance sheet but this would disadvantage shareholders.

Of the possible break-up of the business, Govender said: “If it is done now it may seem more like a fire sale … In this environment, I doubt Aspen would get reasonable valuations for their drugs portfolio.

“The ideal scenario would be weathering this phase, shoring up the balance sheet, growing sales organically and avoiding issues in key areas like manufacturing.”

Mnguni said those who expect the stock to get back to over R200 are in for a surprise. “This is a stock that used to beloved by many investors. The price fall may have brought some of these investors back. [But] if people expect Aspen to get back over R200 very soon, they are in for a shock.”

He said the market was speculating on whether Aspen could finalise the sale of the nutritionals business and use the proceeds from it to start settling its debt.

Mnguni added that Aspen had diluted its growth by going into branded products, especially in developed markets where competition and regulation are a challenge.

“Aspen was an emerging-market champion in generics. They had production plants that matched their sales capacity. They expanded ahead of that and relied on contract manufacturing to fill up the excess capacity.

“Management became too ambitious and abandoned the things that made them successful,” Mnguni said.

It’s no longer about generating returns, it’s about the prestige Zwelakhe Mnguni

Chief investment officer at Benguela Global Fund Managers