Adcock Ingram remains under the weather as colds and flu decline

Adcock Ingram has reported a fall in first-half earnings, showing that pharmaceutical companies aren’t as defensive as you’d expect during a pandemic. 

The group, which is controlled by industrial conglomerate Bidvest, blames the decline on the lack of a cold and flu season last year, which resulted in lower sales of over-the-counter medicines that include Cepacol and Corenza, as well as ophthalmic surgical instruments and hospital products after elective surgeries were postponed to free up beds for Covid-19 patients. 

Fewer South Africans visited the doctor, resulting in lower demand for branded prescription drugs too. 

It’s not just Adcock that’s been affected. Recent results from retailers including Clicks and Dis-Chem show that they were also affected as people largely steered clear of close contact with others, wore masks and washed their hands more frequently. 

In Adcock’s case, strong demand for immune-boosting products helped compensate. The Renal segment in its Hospital division benefited from an increased demand for acute renal dialysis due to Covid-19. Still, overall volumes were down by 6%, as cough and cold remedies make up 40% of its over-the-counter (OTC) drug portfolio. 

Revenue for the six months to 31 December rose by 3.6% to R3.76-billion, supported by last year’s acquisition of homecare products company Plush Professional Leather Care. With sales of some of its more profitable, higher-margin products down, profit margins came under pressure due to a higher proportion of less profitable antiretrovirals (ARVs) in the sales mix.

An unfavourable exchange rate and above-inflation wage and utility increases added further pressure. Despite keeping expenses under control, headline earnings for the period fell by 16% to R312-million. Headline earnings per share were down by a lesser 15% to 186.5c after it bought back some of its own shares. After withholding a final dividend last year, it declared an interim payout of 80c per share. 

“This set of results has been achieved in a challenging trading and operating environment, with the uncertainty that the Covid-19 pandemic continues to bring,” CEO Andy Hall said. 

“Despite these challenges, Covid-19 has also presented the company with opportunities to adapt to the ever-changing environment, and at the same time deliver on our promise of ‘Adding value to life’ by producing and supplying life-saving and acute medicines, especially at a time when they are needed the most.” 

FNB portfolio manager Wayne McCurrie said he was surprised Adcock’s shares fell by more than 4% when the market opened on Wednesday, particularly given its undemanding price/earnings ratio of just over 10 times, which means its shares are valued at 10 times annual earnings.

“They didn’t look that bad to me. I know profit was down, but that had a lot to do with the weaker exchange rate and nobody got cold or flu, so OTC suffered,” McCurrie said. 

“This is a reasonably solid business and it also had a fairly large proportion of ARVs in its turnover, so the margin is lower on that.” 

Perhaps the Public Investment Corporation (PIC) got wind of Adcock’s weaker first-half numbers. The company said on Wednesday that the state-owned asset manager had reduced its shareholding to just under 10% from about 15% previously.

Ironically, along with Bidvest, the PIC stood against a R12.6-billion takeover by Chilean pharmaceuticals group CFR close to eight years ago when its stake sat at around 19%. Since then, Bidvest has taken control of Adcock.  

Back in July 2013, CFR was willing to pay R74.50 per share for Adcock. With its stock continuing to tread water below the R50 mark, perhaps an outright takeover by Bidvest is on the cards. 

Due to its strong OTC brands, McCurrie said it would make sense for a fast-moving consumer goods company to make a bid. DM/BM