Aspen shares spike on prescription of moves to go off-grid and new manufacturing business

2 Mar 2023

Aspen’s CEO, Stephen Saad, says he is optimistic that the results for the second half of this financial year will not only exceed those reported for the first half but will also exceed those of the second half of the prior year.

Reflecting on the strong headwinds in the first six months of the 2023 financial year, it “felt a bit like a [rugby] flyhalf stuck in a permanent scrum”, Stephen Saad, the chief executive of Aspen Pharmacare, told media and analysts on Thursday.

The sunlight at the end of the tunnel is the fact that management now has much better guidance going into the second half of the year. Saad says he is optimistic that the results for the second half of this financial year will not only exceed those reported for the first half but will also exceed those of the second half of the prior year.

Aspen is also finding its way into the light, with the conclusion of an agreement to use pyrolysis (converting plastic waste to energy) at its manufacturing facility in Gqeberha, where 8% of power requirements are already generated by solar energy. The manufacturer is exempt from load shedding up to Stage 4 as it is classified as an essential service. The move towards pyrolysis and increased solar energy is expected to take Aspen’s manufacturing facility off the grid within two years, “at a cost lower than Eskom’s current tariffs”.

The manufacturer is at an advanced stage of contract negotiations to fill a portion of the additional sterile manufacturing capacities it has developed.

“Once concluded, this new manufacturing business is anticipated to realise a contribution of R2-billion in the 2024 calendar year, increasing to R4-billion in calendar year 2025. During the second half of this financial year we also anticipate closing important product portfolio transactions which will further enhance the commercial pharmaceuticals businesses in Latin America and South Africa,” Saad says.

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Strong headwinds during the period under review included the Russia/Ukraine war, inflationary pressure, Covid lockdowns and volume-based procurement impacts in China as well as the loss of Covid vaccine sales.

Saad maintains that Aspen is not losing market share in Russia, although demand from the state has moved significantly as the state moves expenditure from healthcare towards war efforts. While Russia used to buy about 50,000 product packs a month, this number doubled to 100,000 packs a month during Covid and has now fallen to 7,000 packs a month. “We are not assuming any positives coming out of Russia in terms of turnover,” he says.

Group revenue for the six months ended December 2022 declined by 1% (down by 6% if you apply a constant exchange rate) to R19-billion, with commercial pharmaceuticals revenue growing by 2%. Manufacturing revenue declined by 10% while gross profit fell by 5% as a reduction in manufacturing gross profit margins from lost Covid vaccine contributions more than offset the improvement in commercial pharmaceuticals’ gross profit margins.

Aspen has successfully concluded agreements with the Bill & Melinda Gates Foundation and the Coalition for Epidemic Preparedness Innovations (CEPI) to support African regional manufacturing capacity for an affordable supply of vaccines. Grant funding from the Gates Foundation and CEPI helped to partially offset sterile production costs related to the introduction of the Serum Institute of India vaccines.

Looking ahead, Saad says manufacturing is expected to deliver particularly robust sales growth in the second half, driven by API and Heparin, more than overcoming the loss of the Covid vaccine.

The manufacturer, which is a strong player in the anticoagulant market, had to scramble to find a new API (active pharmaceutical ingredient) supplier for its Warfarin drug earlier this year. The “blood thinner” drug, which patients with mechanical heart valves rely on, was out of stock in pharmacies across the country for a few weeks.

While Adcock Ingram is not as big as Aspen, it does have international exposure to markets in India. Last week, the company reported an 8% growth in turnover, with trading profit growth of 15%, for the six months to the end of December. Chief executive officer Andy Hall says one factor driving the growth in turnover was the onboarding of a range of ophthalmology products from Novartis. Organic volumes declined marginally, due to the normalisation of Panado demand and reduced demand for other products used to treat Covid-19 symptoms. However, management says these declines were well compensated for by good demand in the over-the-counter and prescription portfolios.

Aspen’s results were well received by the market, with the share closing at R168.74 on Thursday. DM/BM

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