Londiwe Buthelezi
AFTER the outstanding results from Aspen Pharmacare’s South African operation in the year to June, the drug maker expressed scepticism yesterday about the country’s ability to deliver the group’s core returns in the current financial year.
Aspen said it expected revenue and profit from its international operations to exceed those of the South African business for the first time.
Aspen chief executive Stephen Saad said the South African business would battle to show the significant growth that the group was seeing from Asia-Pacific and Latin American markets. This was because of reduced pricing and lower-than- expected off-take of the antiretroviral tender, which now had lower-than-expected volumes as the government used substitute donor-funded products.
The government’s proposal not to increase the single exit price for medicines next year would significantly dent the group’s local earnings, he added.
“The South African business has done fantastic if you consider that there was a zero percent increase, because our generic business grew faster than market growth and because we had the best pipeline of new products. But now for the second year, wage costs, the exchange rate and electricity costs are going to put a lot of pressure on our costs unless the rand grows at 6.5 percent.
“I think it’s unrealistic to expect manufacturers to accept a zero percent increase. Someone who produces their medicines locally will be largely affected by this,” Saad said.
Aspen was ramping up its local manufacturing and had projects under way in Port Elizabeth, East London and Cape Town. Saad said the group expected to triple its current volumes after the completion of these projects.
Jean Pierre Verster, an analyst at 36ONE Asset Management, said another 0 percent single exit price increase would make trading tough for the South African operations as they would not be allowed to pass on the cost increases in areas such as electricity, wages, pharmaceutical ingredients, property rates and taxes via price increases.
“All these costs are going up, and as Aspen is currently expanding its manufacturing facilities, it will have to look at cost-cutting strategies and efficiencies of scale in manufacturing in order to increase profits from its local operations.”
Despite the 0 percent increase in the single exit price of medicines this year, Aspen reported a 25 percent increase in operating profit from continuing operations to R3.1 billion.
The continent’s biggest generic drug maker managed to increase its revenue by 29 percent to R12.4bn. Normalised headline earnings from continuing operations rose an annual 29 percent to R2.4bn. Diluted normalised headline earnings a share jumped 20 percent to R5.23.
“We delivered results that are stronger than our first half. This is largely a result of stellar performances we saw in Asia-Pacific after the acquisition Sigma.
“I think this will be the primary driver of growth next year as we will have 12 months’ results compared (with) six months this year,” said Saad.
Aspen acquired the Australian-based Sigma Pharmaceuticals business in January for A$863 million (R6.6bn). Saad said the business had performed ahead of plan, increasing the Asia-Pacific region revenue by 122 percent to R3.1bn. The original Aspen Australia business also performed strongly, growing revenue by 33 percent to R1.7bn.
Verster said the global operations would outperform the local operations due to the Sigma acquisition, not necessarily because South Africa was losing its edge in the pharmaceutical sector.
Saad said sub-Saharan Africa, Latin America and South Africa also performed strongly.
Revenue from the South African business increased by 13 percent to R6.3bn and operating profit was up 17 percent to R1.9bn. The pharmaceutical division led growth, increasing revenue by 15 percent to R5.2bn.
In sub-Saharan Africa, the group’s gross revenue added 43 percent to R1.3bn and operating profits almost tripled to R182m from R66m in June last year.
Aspen’s shares advanced R1.79 to R88.80 on the JSE yesterday.