Aspen raises profits by 31% as South African business shines

Johannesburg – JSE listed Aspen (Apn), Africa’s largest pharmaceutical manufacturer, has recorded strong returns for the six months ended 31 December 2009. The excellent performance from the South Africa business underpinned the results.

Group Performance:

• Group revenue increased by 10 percent to R4.576 billion (R4.142 billion).
• Group operating profit increased by 16 percent to R1.314 billion (R1.136 billion).
• Group headline earnings per share (HEPS) from continuing operations increased by 27 percent to 242.3 cents (193.8 cents).
• Group profit after tax from continuing operations increased by 31 percent to R889 million (R690 million).

Stephen Saad, Aspen Group Chief Executive said “the excellent performance recorded by the South African business was driven by robust volume growth and margin improvements. Revenue growth in the international business is attributed to gains from Global brands, the Asia Pacific domestic brands, the oncology business and from the Glaxosmithkline (“GSK”) transactions.”

Completion of the GSK transactions:

With effect from 1 December 2009, Aspen completed a series of strategic, interdependent transactions with GSK (“the GSK transactions”) which had been announced on 12 May 2009. The GSK transactions comprise:

• The acquisition of the rights to distribute GSK’s pharmaceutical products in South Africa;
• The formation of a collaboration agreement between Aspen and GSK in relation to the marketing and selling of prescription pharmaceuticals in sub-Saharan Africa;
• The acquisition by Aspen Global of eight specialist branded products (Alkeran, Leukeran, Purinethol, Kemadrin, Lanvis, Myleran, Septrin and Trandate) for worldwide distribution;
• The acquisition of GSK’s manufacturing facility in Bad Oldesloe, Germany; and
• The issue by Aspen of 68.5 million ordinary shares to GSK at R66.80 per share amounting to a total value of R4.576 billion.

South African Business:

The South African business maintained its leadership position across the private and public sectors of the pharmaceutical market and grew revenue by 23% to R2.550 billion. Operating profit from the South African business increased from R484 million to R806 million. Other operating income includes an amount of R145 million received as insurance compensation for loss of profits and asset replacement arising from the explosion which occurred at the Nutritionals Facility in August 2009. Profit margins improved after the contractions in the previous two years caused by a weak Rand and delays in the passing of an increase to the SEP in the private pharmaceutical market.

The pharmaceutical division led growth in the South African business with revenue rising 30% to R1.975 billion. Aspen’s robust growth in pharmaceuticals was characterised by volume gains across the extensive product offering.
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The consumer division increased revenue by 6% to R575 million. This credible performance was recorded despite the prevailing recessionary effects in the retail environment as well as the negative impact on sales of infant milk formula due to the temporary unavailability of certain products resulting from the damage incurred at the Nutritionals Facility.

The Group’s South African manufacturing facilities achieved impressive efficiency gains as the benefits of the significant capital expenditure programme of the last few years begin to be realised. The second Oral Solid Dose Facility and the eye-drop suite of the Sterile Facility commenced production at the Port Elizabeth-based site. The hormonal suite of the Sterile Facility is scheduled to commence commercial production before the end of the 2010 financial year. Capital projects in progress include the addition of increased tableting capacity and the installation of suppository and dutch medicines manufacturing at the East London site. Reconstruction of the drying tower at the Nutritionals Facility is well advanced and production is expected to recommence within the next six months.

Sub-Saharan Africa Business:

In anticipation of the future materiality of this region, Aspen has established a separate management and reporting structure for the sub-Saharan Africa business. Included in this business segment are exports into sub-Saharan Africa from South Africa, the Shelys Africa business based in East Africa and the GSK Aspen Healthcare for Africa collaboration.

Revenue from the sub-Saharan Africa business declined from R464 million in the prior period to R279 million and operating profit decreased from R99 million to R45 million. The steep reversal in results was due to export business lost through the genericisation of patented ARV molecules marketed by Aspen. Sales by Shelys Africa were also reduced as this business shed low margin tenders in accordance with the strategic plan for the operation, without affecting profits. GSK Aspen Healthcare for African began operations on 1 December 2009 and will in future be the most material contributor to the region.

International Business:

Revenue from the international business increased by 12% to R1.797 billion. Gains from Global brands, the Asia Pacific domestic brands, the oncology business and the additional revenue from the GSK transactions were partially offset by reversals in Latin America. Operating profit declined from R554 million to R463 million largely as a consequence of losses in Latin America and a strengthening of the Rand against most of the underlying trading currencies.

An 18% increase in revenue to R824 million from the Global brands is largely attributable to revenue from Eltroxin, Lanoxin, Imuran and Zyloric, which were acquired with effect from 30 June 2008. Worldwide sales from these four Global brands achieved double-digit growth in United States Dollars (“USD”). The balance of the growth in the Global brands came from the addition of Aggrastat and the introduction of the eight products acquired from 1 December 2009 under the GSK transactions.

The Asia Pacific domestic brands increased revenue by 8% to R522 million. This business, largely Australian based, again performed well considering the downward pricing pressure being experienced in this territory.

Aspen has exercised its call on the remaining 49% shareholding in the Latin American businesses. Given that Aspen already has full rights to the economic performance of these businesses there is no further purchase consideration required for the acquisition of this remaining shareholding.

Revenue from domestic brands in Latin America declined by 15% to R345 million. The primary underperformer was the Brazilian business, Aspen’s largest operation in the region. Aspen has assumed full operational control of the Brazilian business and has implemented a restructuring plan to shape this operation in accordance with the business model, which the Group has planned for Brazil. Key actions include:

• Disposal of selected assets, including the Campos Facility and related products to Strides Arcolab (“Strides”). Consideration receivable from Strides amounts to approximately USD 75 million;
• Right sizing of business structures and reshaping of sales teams to take account of the new business model; and
• Identification and pursuit of opportunities to increase the private market product portfolio, of which some are at an advanced stage of negotiations.

The disposal of the Campos Facility will complete as soon as the requisite regulatory approvals are met. In the interim, Strides have been engaged to manage Campos and will assume the risks and rewards of its operation. An improvement in the performance of the Brazilian business is anticipated over the next six months as the restructuring plan takes effect.

The oncology joint ventures which Aspen has with Strides concluded a license and supply agreement with Pfizer in December 2009 in terms of which Pfizer has exclusive rights to market the oncology products in the United States. An upfront non-refundable license fee of USD 12 million was brought to account in the six- month period to December 2009 of which 50% has been recognised, that being Aspen’s share under the joint ventures.

Funding:

Borrowings, net of cash, have been reduced from R4.0 billion at 30 June 2009 to R3.5 billion at 31 December 2009. Strong operating cash flows and favourable exchange rate movements were the biggest contributors to this reduction. The lower debt levels and the additional share capital in issue following the GSK transactions has resulted in gearing in the Group improving from 51% at 30 June 2009 to 29%.

Interest paid, net of interest received, of R190 million was covered seven times by earnings before interest, taxes and amortisation. Gains on foreign exchange and forward cover contracts amounted to R32 million (2008 : R27 million loss) as underlying currencies strengthened against USD denominated obligations.

Prospects:

Aspen has established a leadership position in the South African pharmaceutical sector through more than a decade of unparalleled achievement in the industry. The Group is positively positioned to maintain this leadership with an excellent product pipeline set to add to the most extensive product offering in the market and backed up by an outstanding team. The recently awarded public sector tenders again verified Aspen’s production competitiveness, with the Group continuing as the largest supplier of pharmaceuticals to government. The ARV tender remains to be awarded. The ARV tender documents are yet to be published, although expectations are for an award to be made before the end of this financial year. The recently announced support for local manufacturers under the South African Government’s Industrial Policy Action Plan is encouraging as is the focus on developing the pharmaceutical industry in South Africa.

The fundamental growth drivers of the South African pharmaceutical market remain intact. This growth is however likely to be tempered by a delay in the annual SEP price increase by the Department of Health. South African pharmaceutical companies will therefore absorb the net effects of exchange rate fluctuations and inflation from February 2010 until the date of the award.

Growth in the consumer business in South Africa is likely to be constrained by the economic circumstances. Full supply of the infant milk products has been restored through the importation of product from Europe. Overall performance indicators will continue to be distorted until full production is resumed at the Nutritionals Facility and the insurance payments are settled.

The sub-Saharan Africa business has excellent prospects. The supplementation of GSK’s existing portfolio with Aspen’s pipeline of relevant products and supported by GSK’s proven distribution network should allow the GSK Aspen Healthcare for Africa collaboration to increase access to high quality medication in the region. Shelys Africa has an active product launch plan for the remainder of the financial year as this operation becomes more focused on private sector business.

The transition of Global brands acquired in prior years to the Aspen international distribution network is well advanced. Projects have been implemented which will result in significant cost of goods savings for the Global brands in the medium term and opportunities to supplement the Global brands portfolio will continue to be sought.

The Asia Pacific business is anticipated to continue its excellent record of growth by adding to the range of products under distribution. The Group has established a company in Hong Kong to manage the third party distributors deployed in South East Asia. Prospective investments in the region are also under investigation.

Implementation of the restructuring plan in Brazil is expected to yield positive results before the end of the financial year, improving the performance in the Latin American region. Investment in the international product pipeline continues to be a major Group focus area. This will create growth momentum for all markets over the forthcoming two to three years.

The completion of the GSK transactions will promote the Group’s strategies in South Africa, sub-Saharan Africa and internationally. Over the balance of the financial year growth in South Africa will be restrained by the absence of an increase in the SEP whilst a turnaround in the Latin American business should contribute to an improved performance from the international business in the second half. Relative exchange rate movements will continue to influence results.