Johannesburg – JSE Ltd listed Aspen Pharmacare Holdings Limited (Apn), Africa’s largest pharmaceutical manufacturer, has announced pleasing results for the interim period ended 31 December 2011, once again proving Aspen’s resilience across its global businesses.
Group Performance
- Revenue from continuing operations rose by 31 percent to R7.5 billion (R5.7 billion).
- Operating profit before amortisation from continuing operations adjusted for specific non-trading items (“EBITA”), improved by 32 percent to R2.2 billion (R1.6 billion)
- Diluted normalised headline earnings per share (DNHEPS) from continuing operations increased by 22 percent to 308.1 cents (253.3 cents).
- Growth in earnings was affected by higher funding costs on the debt raised to acquire the pharmaceutical division of Sigma Pharmaceuticals Limited in Australia (“the Sigma business”) in January 2011.
Stephen Saad, Aspen Group Chief Executive said, “The Group’s strong showing for the period was the result of excellent performances across the offshore territories with Asia Pacific leading the way. The Asia Pacific region increased its contribution to Group EBITA from 8% to 34% in the current period.”
South African Business
Revenue in the South African business was 11% down at R2908 million with the Pharmaceutical division declining 9% and the Consumer division declining 19%. Despite the headline results, the underlying performance of the Pharmaceutical division was good. Annualised revenue growth measured by IMS at 31 December 2011 indicated Aspen’s generic products increased by 16.2%
The contributing factors to the performance reversal were largely one-offs in nature and, where appropriate, mitigating actions have been taken which will benefit the business going forward. These factors have been well communicated and are as follows:
The Pharmaceutical division’s two biggest products, Seretide and Truvada, both came under pressure from generic substitutes for the first time in the second half of the 2011 financial year;
Offtakes under the antiretroviral (“ARV”) tender were significantly lower than expected during 2011 as the South African government used donor sponsored products rather than accessing the tender awarded;
Aspen retained its leading stake in the recently awarded public health ARV tender which commenced in January 2011. Aspen has both the lower volume share of this tender and reduced pricing on the prior tender. Given the supply of donor funded stock to date, these sales decreases have not been mitigated by the anticipated increases from expanded coverage;
The license with Pfizer for a range of infant milk products which had contributed revenue of approximately R250 million per annum to the Consumer division expired; and
Production for most of July was lost due to a union led strike.
EBITA was 17% lower at R841 million. Profit margins came under pressure due to reduced production volumes as a result of the poor ARV tender offtake, the cost of production lost through the strike, inflationary increases in wages and energy, as well as the weaker Rand.
The revenue lost on the genericisation of Seretide has been recovered by Aspen’s own generic, Foxair. The December 2011 launch of Tribuss, the first generic triple combination ARV to market, provides the opportunity to regain lost revenue incurred on Truvada’s genericisation.
The Consumer division performance was disappointing. It was hoped that securing the major portion of the public healthcare tender for infant milk formula would help offset the loss of the Pfizer license. However, volumes ordered by the state since the tender was awarded have been erratic, and sustainable demand has yet to be established.
Investment in capital projects at the production facilities is ongoing. Major projects underway include adding tableting capacity in Port Elizabeth, moving liquids manufacture to East London and introducing new technologies in Cape Town.
Asia Pacific Business
As anticipated, the Asia Pacific business was the leading growth driver for the Group. Revenue of R2859 million is more than three times greater than the comparative period whilst EBITA has grown from R133 million to R736 million. The EBITA achieved in the past six months is 15% greater than that achieved in the full 2011 financial year.
The acquisition of the Sigma business has clearly played a material role in the exponential growth recorded by the region. The successful merger of the Sigma business with the pre-existing Aspen business in Australia has been fundamental to this achievement. The merged business is operating as a single unified structure allowing the realisation of synergies and efficiencies. Together with the delivery of the first procurement savings, this has translated into a steady improvement in operating profit margins. The strong market position of the Australian business has assisted it in concluding a co-marketing agreement with Lilly for its market leading psychotic disorder product, Zyprexa, and the generic of the molecule, Olanzapine.
The consolidation and rationalisation of the Australian facilities has continued. The Tennyson site has been sold. The Croydon and Noble Park sites are in the process of phased closure. Production is now centred at the Dandenong facility and supported by the Baulkham Hills facility.
Expansion of Aspen’s presence in South East Asia is receiving attention from the regional management team. The newly established business in the Philippines is in full operation with close to 100 sales representatives deployed.
International Business
The International business increased revenue by 5% to R1 443 million and raised EBITA by 17% to R455 million. Latin America was a leading contributor to the growth with sales to customers in that region rising 23% while revenue in the Rest of the World territories remained unchanged on the prior year. The widening of profit margins can be attributed to a favourable position in the cycle of transitioning global brands to Aspen distribution as well as the realisation of the first savings in the global brands cost of goods reduction programme.
Sub-Saharan Africa
Gross revenue improved by 25% to R835 million and EBITA added 23% to R136 million in Sub-Saharan Africa. The primary driver in these positive results was the GSK Aspen Healthcare for Africa collaboration, which performed strongly in Nigeria and French West Africa.
Prospects
Although the South African business will continue to face the influence of unfavourable events in the second half of the 2012 financial year, it is anticipated that further progress will be made in overcoming these factors in the second six months of this financial year. A sound platform is provided by double-digit growth expectations for generic and over-the-counter products. Foxair continues to gain market share, diminishing the losses experienced since the genericisation of Seretide. The first to market status of Tribuss will place Aspen as a leader in the provision of triple combination ARV therapies, helping to compensate for Truvada’s genericisation. With the exhaustion of donor funds, the demand for ARVs under the public sector tender has returned to expected levels. The greater production volumes flowing from this will improve cost effectiveness of production. Profit margins will be further assisted by the 2.14% increase in the single exit price allowed by the Department of Health, which becomes effective in March 2012. In the Consumer division, a re-organisation of management is aimed at achieving improved focus.
The demographic growth drivers present in South Africa are expected to continue to underpin an increasing demand for medicines in the country. As the market leader in both the private and public sectors, Aspen has a pivotal role to play in meeting this demand. Aspen is well equipped to meet this responsibility with a strong pipeline of new products to increase choice and accessibility to medicines in South Africa. Government also remains committed to supporting local manufacture which should benefit the Group as the country’s leading pharmaceutical manufacturer.
In Asia Pacific, the Australian business will continue to focus on delivering improved cost of goods through various projects already underway. The Australian regulator’s price disclosure cuts come into effect from 1 April 2012 and will lead to price reductions on products which were previously discounted by more than 10%. The effect of this legislation on Aspen will be more than offset by realisation of cost of goods savings and new product launches. The revenue Aspen will gain under the Zyprexa/Olanzapine agreement with Lilly, which is at low margins, will distort revenue growth and profit margins until the effect of this product’s genericisation has stabilised. Further expansion of Aspen’s representation in the region is planned with Thailand being among the countries presently under consideration.
The International business will continue to benefit from savings realised in cost of goods on a phased basis over several years. There is ongoing assessment and consideration of opportunities to support the growth momentum in the International business with a particular focus on Latin America. An assessment of market prospects for the introduction of Aspen’s infant milk formula products in this region is underway.
The good performance in Sub-Saharan Africa will be supported by the commencement of new product launches from the Aspen pipeline in the next six months. The Group has reached agreement with the minority shareholder in Shelys, Aspens East Africa business, to acquire their 40% shareholding for USD 24.5 million. The transaction remains subject to exchange control approval.
The results of the Group over the past six months have again proven Aspen’s resilience. Earnings contribution is now spread across a number of geographies, demonstrating the evolution of Aspen into a diverse pharmaceutical group with growing businesses across the globe. Management intends to continue to seek opportunities to widen the extent of the Group’s territorial reach and to increase the depth of its product offering.