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Johannesburg – JSE Limited listed Aspen Pharmacare Holdings Limited (APN), a global multinational specialty pharmaceutical company, has announced unaudited interim financial results for the six months ended 31 December 2019.

GROUP PERFORMANCE (CONTINUING OPERATIONS)

Aspen increased revenue by 3% to R18,4 billion for the six months ended 31 December 2019. Commercial Pharma increased 2% to R15,2 billion, supported by 6% revenue growth in Regional Brands. Manufacturing revenue grew 6% to R3,2 billion, favourably impacted by the recommencing of commercial sales of heparin API. Normalised EBITDA was flat at R5,3 billion and normalised headline earnings per share (“NHEPS”) increased 1% to 707,0 cents, benefiting from lower net financing costs.

The Group delivered an improved operating cash conversion rate of 87%, up from 43% in the prior comparable period, supported by controlled working capital outflow and reduced taxation payments. Internally generated cash flows have been used to reduce debt, assisting net borrowings to decline to R37,9 billion from R39,0 billion as at 30 June 2019. The implementation of IFRS 16 – leases on a modified retrospective basis resulted in a once off increase in borrowings of R547 million. A leverage ratio of 3,5 times has been achieved, comfortably below the covenant ratio of 4,0 times.

Aspen classifies certain of its intangible assets as being of indefinite life.  Lower performance against prior expectations resulted in the decision to impair certain Regional Brands by R489 million.

The Japanese Business was disposed of, with effect from 31 January 2020. Aspen has exited the commercialisation of public sector ARVs in South Africa. The Group has entered into an agreement with Laurus, a leading Indian producer of ARV APIs, to toll manufacture ARVs, thus ensuring the South African government retains access to competitive prices for these critical medicines. Aspen will continue to sell ARVs in the South African private sector. Both the Japanese Business and the commercialisation of ARVs in the South African public sector have been reclassified to discontinued operations for the period ended 31 December 2019. The results for the comparative period ended 31 December 2018 as well as for the year ended 30 June 2019 have also been restated to exclude these discontinued operations, together with the previously discontinued operations, namely the Nutritionals Business and the Asia Pacific non-core pharmaceutical portfolio.

Relative movements in exchange rates had no material 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 2018 re-state performance for that period using the average exchange rates for the six months ended 31 December 2019.

Six months ended 31 December 2019
Continuing operations Reported H1 2020
Rmillion
Reported restated H1 2019^
Rmillion
Change at reported rates
%
H1 2019^ CER Rmillion Change at CER
%
Revenue 18 417 17 878 3% 17 937 3%
Normalised EBITDA* 5 260 5 241 –  5 259
NHEPS** (cents) 707,0 702,4 1% 706,8
^ H1 2019 has been restated taking into account the impact of discontinued operations, namely the Nutritionals Business, the Asia Pacific non-core pharmaceutical portfolio, Japanese Business and the South African public sector ARVs.
* Operating profit before depreciation and amortisation adjusted for specific non-trading items as defined in the Group’s accounting policy.
** NHEPS is HEPS adjusted for specific non-trading items, being transaction costs and other acquisition and disposal-related gains or losses, restructuring costs, settlement of product related litigation costs, net monetary adjustments and currency devaluations relating to hyperinflationary economies and significant once-off tax provision charges or credits arising from the resolution of prior year tax matters.

SEGMENTAL PERFORMANCE
Note:  CER is used as the reference point for the six months ended 31 December 2018

Commercial Pharma
Commercial Pharma comprises Aspen’s Regional Brands and Sterile Focus Brands. Revenue of R15,2 billion represented 2% growth while gross profit remained flat at R8,6 billion.

Regional Brands
Regional Brands grew 6% to R8,3 billion with positive growth well spread across the Group. Gross profit percentage was negatively impacted by the decline in revenues from the oncology portfolio in Europe CIS and the previously reported recall of Zantac in Australia. Sub-Saharan Africa (+7%) performed well, benefiting from the increased focus achieved by splitting the portfolio into two discrete divisions. Revenue from Latin America (+11%) continued to grow supported by a strong performance from domestic brands.

Sterile Focus Brands
Sterile Focus Brands, comprising Aspen’s Anaesthetics and Thrombosis portfolios, maintained a flat gross profit at R3,9 billion despite revenue reducing 2% to R7,0 billion. The gross margin percentage improved to 56,6 % benefiting from a higher relative weighting of Anaesthetics sales in the product mix.

Revenue from Anaesthetics grew 3% to R 3,9 billion. China (+23%) delivered strong growth. Europe CIS (-6%) was impacted by changes in commercial structures and ongoing Anaesthetics supply constraints. Performance in Europe CIS accelerated over the six months as supply improved and changes to the commercial structure yielded a positive response.

Thrombosis revenue declined 8% to R3,1 billion, negatively impacted by Europe CIS (-10%) which contributes approximately 80% of the Group’s total Thrombosis revenue. Europe CIS commenced a commercial restructure at the start of the half and results have progressively improved since this initiative was implemented resulting in a notably stronger second quarter.

Manufacturing
Manufacturing revenue increased 6% to R3,2 billion. The recommencement of commercial sales of heparin API to third parties added R273 million. Gross profit percentage of 26,6% was in line with that achieved in the full year to 30 June 2019 although lower than the 36,2% in the six months to 31 December 2018 when there was a favourable product mix in the API Business.

PROSPECTS
We anticipate a continuation of the positive progress towards the Group’s medium-term priorities in the second half of the financial year. These priorities are directed towards ensuring Aspen is continuing to adapt effectively to the dynamic environment in which we operate, focusing on our areas of competitive advantage, driving organic growth and delivering the cash flows that will provide the capital capacity for future investment.

The completion of the divesture of the Japanese Business and the discontinuation of the commercial South African public sector ARV Business are further steps in our reshaping of the Group to ensure it remains relevant and robust in the dynamic and challenging environment in which we are operating. We continue to engage with potential partners regarding prospective collaborations to enhance the value proposition of our commercial business in Europe CIS while also working towards achieving structural improvements to bolster performance from this region. Efficiency and cost control remains a key focus area while we continue to invest in our major Anaesthetic capital projects, building production capacity to supplement our performance for the long term. We have embarked on an organisational redesign across our strategic manufacturing sites and are reviewing our manufacturing and procurement processes to ensure we are unlocking all potential efficiencies.

The net proceeds of EUR271 million from the sale of the Japanese Business were received in February 2020. These inflows, together with continued strong operational cash flows, are expected to support a leverage ratio at 30 June 2020 significantly closer to our medium-term target of below 3,0 times (our covenant threshold at 30 June 2020 is 3,5 times).

In the second half of the 2020 financial year, we anticipate Anaesthetics supply to continue to improve with the Europe CIS Thrombosis and Anaesthetics Brands continuing to build on the positive momentum experienced since beginning the restructuring of the commercial team. We expect growth in Regional Brands to be driven by positive performances in Sub-Saharan Africa and Latin America. Our manufacturing segment is set to deliver further revenue growth in the second half.

The outbreak of COVID-19 has created uncertainty and has resulted in our Chinese commercial team being largely inactive since February 2020 which will inevitably impact performance. To date our inventory holdings have been sufficient to prevent any negative impact arising from reliance on API and API intermediaries imported from China, but this risk remains under close assessment.

On a business as usual basis (i.e. excluding the impact of COVID-19), our performance in the first half creates the opportunity to outperform our previous guidance which expected our 2020 financial results to be broadly in line with the results reported for 2019.

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