Aspen’s encouraging Emerging Market growth

Johannesburg – JSE Limited listed Aspen Pharmacare Holdings Limited (APN), a global multinational specialty pharmaceutical company, has announced interim financial results for the six months ended 31 December 2018 in line with management’s expectations.

Stephen Saad, Aspen Group Chief Executive said, “Revenue increases from Anaesthetics in China and Latin America of 6% and 22% respectively have been very encouraging, despite the supply constraints experienced. China also delivered  strong revenue growth in the Thrombosis portfolio.”

“The disposal of our Nutritionals business is nearing completion which will enable us to put all our focus on pharmaceuticals. We are conducting a strategic review of both our European and South African Commercial Pharma businesses and have already decided to split the latter into two distinct divisions to achieve heightened product and customer focus. The second phase of the South African review will focus on developing strategies specific to each division to optimise value delivery.”

GROUP RESULTS
Aspen’s earnings for the six months ended 31 December 2018 are in line with management’s expectations.  A good performance from Commercial Pharma in Emerging Markets is offset by a decline in revenue from Manufacturing (as guided in the September 2018 result announcement).  Earnings are diluted by higher financing costs.

The published results record the impact of recent transactional activity and changes in accounting standards, namely:-

  • In September 2018 Aspen announced that it had reached an agreement to divest of its Nutritionals Business to the Lactalis Group (“Lactalis”). Positive progress has been made in satisfying of the conditions precedent and all but one of the conditions which are reliant on third party consent had been fulfilled before the end of February 2019.  The outstanding third party condition relates to approval by New Zealand’s Overseas Investment Office for Lactalis to invest in that country.  The remaining conditions precedent are within the control of the parties. The parties are mutually committed to working towards a closing date for this transaction of 31 May 2019. The Nutritionals Business has accordingly been classified as discontinued and the related assets transferred to assets held for sale;
  • The Group has concluded various agreements relating to the divestment and discontinuation of a non-core pharmaceutical portfolio in the Asia Pacific region. These products have also been classified as discontinued operations and the assets relating to this portfolio have been transferred to assets held for sale; and
  • Aspen has adopted two new accounting standards, IFRS 9 (Financial instruments) and IFRS 15 (Revenue from contracts with customers) which have resulted in the re-statement of the disclosed comparable financial information for the six months ended 31 December 2017 and the year ended 30 June 2018.

Relative movements in exchange rates had an impact on financial performance, as is illustrated in the table below which compares performance in the prior comparable period at previously reported exchange rates and then at constant exchange rates (“CER”).  The CER results for the six months ended 31 December 2017 re-state performance for that period using the average exchange rates for the six months ended 31 December 2018.

 

 

Six months ended 31 December

 

Continuing operations

 

Reported 2018
R’billion

Reported 2017^
R’billion

Change at reported rates %

CER 2017^

R’billion

Change 2018/2017
at CER     %

Revenue

19 673

19 509

+1

19 743

0

Normalised EBITDA*

5 535

5 712

-3

5 616

-1

NHEPS (cents)

743

814

-9

792

-6

*Operating profit before depreciation and amortisation adjusted for specific non-trading items as defined in the Group’s accounting policy.
^ Restated for IFRS 9 & 15 implementation.

In order to enhance comparability of relevant underlying performance, in this commentary, (1) all performance references are to continuing operations and (2) all December 2017 revenue numbers are stated in CER and all percentage changes in revenue between December 2018 and December 2017 are based on December 2017 CER revenue.

SEGMENTAL PERFORMANCE
Sterile Focus Brands

Sterile Focus Brands, comprising the Anaesthetics and Thrombosis portfolios, delivered revenue in line with the prior comparable period at R7,8 billion. The gross profit from Sterile Focus Brands of R4,3 billion was at an improved gross margin percentage benefitting from lower Thrombosis manufacturing costs.

Anaesthetics Brands
Revenue from Anaesthetics was 1% lower at R4,4 billion. This is a sound performance given ongoing supply constraints affecting all major territories other than Japan. China (+6%) and Latin America (+22%) are the material regions driving growth. Supply limitations have adversely impacted sales in Europe CIS and Australasia.  Price decreases in Japan offset strong volume gains.  Supply is expected to improve from the commencement of the 2020 financial year and should be unconstrained midway through that year.

Thrombosis Brands
Thrombosis revenue of R3,4 billion is unchanged from the prior comparable period. Emerging Markets are up 7%, propelled by a strong performance in China, which offsets the declines in Developed Markets.

Other Pharmaceuticals
Other Pharmaceuticals, comprising Regional Brands and Manufacturing, deliver revenue of R11,9 billion, flat with the prior comparable period.

Regional Brands
Regional Brands, which comprise 45% of Group revenue, have shown growth of 3%.  The High Potency & Cytotoxic Brands have been reclassified under Regional Brands in line with a change to regional management of this portfolio. Revenue growth has been recorded in most territories, but this has been partially offset by pricing pressure on the oncology portfolio in Europe that also dilutes the margins.

Manufacturing
Manufacturing revenue declines 10% to R3,0 billion, primarily due to a tender lost in the prior year by one of Aspen’s major third party customers, as reported in the results announcement for the 2018 financial year, and the suspension of sales of heparin to third parties due to limited global availability.  Resultant lower volumes weigh on margins.

FUNDING
Borrowings, net of cash, has increased by R6,7 billion to R53,5 billion. R1,0 billion of this increase is the consequence of Rand weakness relative to foreign currency denominated loans.  Payments relating to acquisitions of R4,9 billion and capital expenditure of R1,5 billion have been the main other drivers of the higher debt levels.  The gearing ratio covenant measure is 4,43 times against an upper threshold of 4,75 times in terms of the temporary amendment to this covenant measure.

Operating cash flows have been constrained by an increased working capital investment, largely due to strategic stock builds.  Operating cash flow per share of 317 cents represents a 47% rate of conversion of operating profit.  Net interest paid is covered five times by EBITDA.

De-leveraging the balance sheet is a priority.  The first steps in this process are well progressed with the pending receipt of the proceeds from the Nutritionals disposal, estimated at EUR 635 million, in addition to the inflows received and expected from the divestment of the non-core pharmaceutical portfolio in the Asia Pacific region.   This will bring the gearing ratio covenant measure within the specified level of 4,0 for each of the June and December 2019 measurement periods.  Aspen’s medium term target for the gearing ratio is less than 3,0.  Opportunities to accelerate the achievement of this target include potential collaborations and the ongoing assessment of opportunities to realise value.

PROSPECTS

The pending completion of the Nutritionals disposal will allow complete focus on pharmaceuticals.  Aspen has embarked on a strategic review of its European and South African Commercial Pharma businesses.  As an outcome of the first phase of the South African review it has been decided to split South African Commercial Pharma into two distinct divisions in order to achieve heightened product and customer focus.  The second phase of the review will concentrate on developing strategies specific to each division to optimise value delivery.

Any re-shaping of the Group will be aimed at driving sustainable organic growth with a strong emphasis on Emerging Markets.  Achievement of the de-leveraging objectives will provide headroom for further investment in building Aspen’s product portfolio of niche specialty pharma brands in Emerging Markets.

The Group’s most promising pipeline opportunities in the short to medium term are with the women’s health products that are being developed for launch in the USA.  Aspen has reached a memorandum of understanding with a partner that is committed to building a women’s health franchise in that country.   The partner will distribute Aspen’s pipeline products in this therapeutic area in the USA.

Normalised headline earnings from continuing operations (at CER) for the full year are expected to be in line with the percentage decline recorded in the first half.  Given the diversity of currencies to which the Group is exposed, exchange rate volatility could influence reported results.  Operating cash flows are cyclically stronger in the second half of the financial year and a conversion rate of operating profits to cash of between 90% and 100% is anticipated for the full financial year.