Aspen’s profit after tax increases by 35%
Johannesburg – JSE Limited listed Aspen Pharmacare Holdings Limited (APN), a leading pharmaceutical manufacturer in the southern hemisphere, has announced pleasing results for the six months ended 31 December 2015. The Group delivered solid growth in a period marked by economic stress and weakening market currencies.
The factors set out below have significantly affected the comparability of the results with those of the prior period:
- The completion on 31 August 2015 of the divestment of the generics business conducted in Australia as well as certain branded products distributed in Australia to Strides group companies, the related termination of license arrangements in Australia and the completion on 1 October 2015 of the divestment of a portfolio of products distributed in South Africa to Litha Pharma (collectively “the Divestments”). The Divestments gave rise to a pre-tax profit on disposal of R1.7 billion. However, as a consequence of the timing of these transactions, the contribution to the trading results by the Divestments is substantially reduced in the current period. In the period from 1 July 2015 until the effective date of divestment, revenue from the Divestments was R202 million whereas revenue from the Divestments for the six months ended 31 December 2014 was R1 148 million.
- The economic situation in Venezuela deteriorated over the 6 months to December 2015 and the Venezuelan authorities have increasingly limited authorisations to pay for pharmaceutical imports using the official CENCOEX rate during this period of Venezuelan Bolivars (“VEF”) 6.30 per US Dollar (“USD”). As a consequence of the limited payment approvals and the uncertain economic and political situation in Venezuela, the Group has concluded that it would be more appropriate to apply the SIMADI exchange rate of VEF 200 per USD to report the Venezuelan business’ financial position, results of its operations and cash flows for the 6 months ended 31 December 2015. This has resulted in a one-off currency devaluation loss on foreign denominated liabilities of R841million.
The profit arising from the Divestments, the currency devaluation loss and the hyperinflationary adjustments relating to Venezuela are excluded in determining normalised headline earnings per share (“NHEPS”) which increased by 14%. In order to provide meaningful comparability of the financial performance of the ongoing underlying business, a measure described as comparable NHEPS has been determined by removing the contribution by the Divestments from NHEPS and including the results of Aspen’s business in Venezuela translated at VEF 200 per USD in the prior reporting period.
Comparable NHEPS for the 6 months ended 31 December 2015 was 640,9 cents, an increase of 21%. Applying the same principles, comparable revenue increased by 8% and comparable operating profit increased by 8%.
GROUP PERFORMANCE
Revenue excluding the effect of the Divestments, increased by 8% to R 17.3 billion.
Profit after tax increased 35% to R3.3 billion.
Comparable normalised headline earnings per share increased by 21% to 640,9 cents.
Normalised headline earnings per share improved by 14% to 655.5 cents.
Borrowings, net of cash, increased R3.5 billion over the period to R33.5 billion.
Group operating cash flows were negatively affected by a R1.8 billion increase in working capital over the period.
Stephen Saad, Aspen Group Chief Executive said, “Performance was led by the International business where the Europe CIS region made a strong contribution. The nutritional products in South Africa and in Asia Pacific also achieved good growth. The completion of the Divestments marks an important step in achieving increased focus in the South African and Asia Pacific businesses. Further meaningful advances in the implementation of Aspen’s strategic objectives have been made and we are seeking to grow the business in targeted therapeutic categories. We remain alert to opportunities to expand our product portfolio in these areas of focus.”
INTERNATIONAL BUSINESS
The International Business improved revenue 2% to R9.0 billion and raised operating profit before amortisation, adjusted for specific non-trading items (“EBITA”), 16% to R2.8 billion. Revenue was unfavourably affected by R836 million due to the devaluation of the Venezuelan contribution. Excluding the effect of the devaluation, revenue increased 14% in the remainder of the International business.
Revenue from customers in Europe and the Commonwealth of Independent States (“Europe CIS”) increased 21% to R6.1 billion. Finished dose form pharmaceutical sales to healthcare providers were up 20% to R4.1 billion. The acquisition of Mono-Embolex, with almost all of its sales in Germany, in the second half of the previous year further strengthened Aspen’s offering in this therapeutic area and added to growth. However, the contribution from Russia fell sharply due to the significant weakening of the Ruble. API sales continued to grow and were the largest part of the balance of the revenue from Europe CIS.
Sales to customers in Latin America (excluding Venezuela) declined by 1% to R1.7 billion, unfavourably influenced by difficult socio-economic conditions in Brazil. The nutritionals products in the region maintained their positive growth momentum with revenue rising 12%. Demand for Aspen’s pharmaceutical products was strong, but performance has continued to be suppressed by unreliable supply of certain key products by contract manufacturers. The devalued contribution from Venezuela is no longer material to the Group.|
Sales to customers in the Rest of the World increased 4% to R922 million, led by a positive performance in the Middle East North Africa territory.
The installation of a new high-speed pre-filled syringe filling line at Aspen Notre Dame de Bondeville (“Aspen NDB”) was completed during the period and commercial production is about to commence. At Aspen Oss capital expenditure projects are ongoing, focused on the sustainability of the site.
SOUTH AFRICAN BUSINESS
In the South African business revenue was 3% lower at R4.2 billion. Excluding the effect of the Divestments, revenue improved by 4%. The nutritionals products were the leading performer, with revenue growing 15% to R402 million. In the balance of the private sector, branded and generic pharmaceuticals performed satisfactorily. However, supply problems severely undermined the performance of the over-the-counter (“OTC”) products with a consequential decline in key OTC brands. Sales in the public sector (excluding Divestments) were down 4% on the reduced value of the antiretroviral (“ARV”) tender award. Export revenue from finished dose products and APIs continued to expand, rising 16%.
EBITA in South Africa was down 4% to R952 million. Excluding the Divestments, EBITA increased by 6%.
Expansion projects continued at the Port Elizabeth finished dosage form manufacturing site and at the API manufacturing site in Cape Town (“Fine Chemicals”). In Port Elizabeth, the building of the high containment facility is in the qualification process. Construction of the additional specialist sterile manufacturing facility is progressing to plan. While much of the construction at Fine Chemicals is complete, expansion and upgrade projects remain underway.
ASIA PACIFIC BUSINESS
Revenue and EBITA in the Asia Pacific region were both 14% lower at R3.8 billion and R843 million respectively. The decline was led by the Divestments. In Australasia, nutritionals continued to drive revenue growth with an increase of 7% with branded pharmaceuticals also advancing. Sales to customers in Asia accelerated 41%, assisted by a positive contribution from Japan.
SUB-SAHARAN BUSINESS
Gross revenue in Sub-Saharan Africa advanced 11% to R1.6 billion. However, currency weakness across the region and unfavourable new VAT legislation in Tanzania squeezed margins, resulting in a 17% decline in EBITA to R174 million.
PROSPECTS
The period under review has been marked by economic stress in many parts of the world and weakness in most emerging market currencies. Aspen has continued to deliver solid growth notwithstanding this environment. The Group benefits from the pharmaceutical industry’s strong defensive qualities in such times, supported by the essential nature of medicines. Further meaningful advances in the implementation of Aspen’s strategic objectives have been made. The completion of the Divestments marks an important step in achieving increased focus in the
South African and Asia Pacific businesses. Aspen is seeking to grow its business in targeted therapeutic categories and remains alert to opportunities to expand its product portfolio in these areas of focus.
The Aspen business model delivers sustained annuity cash flows which is efficient in translating profits into cash. For the balance of this financial year, necessary additions to inventory carrying levels will continue to weigh on cash flows, but thereafter there is the potential to release working capital as stock builds are depleted. The Group trades in a diversified mix of currencies which generally diminishes currency risk. The material currencies contributing to EBITA are the Australian Dollar (30%), the Rand (27%) and the Euro and Euro-related currencies (21%). In South Africa, the public sector has recently implemented quarterly price adjustments to take account of exchange rate variations. This, together with Aspen’s forward cover policy for procurement in Rand, will effectively neutralise the exposure to USD denominated imports of ARV APIs, a material factor to date. Consequently the Group has little exposure to USD at the EBITA level. The South African private market business will nonetheless be unfavourably affected by raised cost of goods as a result of the sharp decline in the value of the Rand in recent months.
In the 2015 final results announcement, Aspen identified a number of projects aimed at delivering synergies from recent acquisitions, targeting an additional R2.5 billion in EBITA* from these synergies by the 2019 financial year. These projects include lowering the cost of goods for the anti-coagulant portfolio, improving margins in the infant nutritionals business, bringing new manufacturing capacity and technologies on-line, building the third party API business and leveraging acquired intellectual property. Particular opportunities have been identified to build a niche business based on supply of specialised APIs and finished dose forms to the United States. Significant progress has been made over this past period in regard to the realisation of these synergies and Aspen is confident that this target will be achieved and exceeded. A material value of the synergies is expected to be achieved in the next financial year*.
* This sentence has not been reviewed or reported on by Aspen’s external auditors.
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