aspen religare 220811
TRANSCRIPT
Robin Campbell, PhD, Analyst +44 20 7444 0677
Valuation & Recommendation
Share Price 8,170 ZAr
12 month target 10,000 ZAr
Previous target N/A
Rating Buy
Previous N/A- Initiation
% Upside / (Downside) 22.4%
+ Dividend yield 0.6%
Total return 23.0%
Company data
Market JSE
Market cap (ZAR mn / US$ mn) 36,855 / 5,128
EV (ZAR mn / US$ mn) 43,258 / 6,019
Shares in issue (mn) 451
Free float (%) 89
3-month average daily value (ZAR mn) 88.39
52 Week high / low (ZAr) 9,785 / 7,330
Share Price
2,800
4,675
6,550
8,425
10,300
Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11
(ZAr) ASPEN PHARMACARE HOLDINGS LT FTSE JSE All Share
22 Augu st 2011
Share Price Performance
1 month 3 month 12 month
Absolute (1.7) 4.3 7.3
Relative* (5.0) 4.8 (10.3)
* Relative to FTSE JSE All Share
Company Report 22 August 2011
Health Care South Africa listed
Financial highlights
Year End: 30 Jun FY09A FY10A FY11E FY12E FY13E
Revenue (ZAR mn) 8,450 10,147 13,553 16,275 17,883
EBITDA (ZAR mn) 2,407 2,885 3,449 4,560 5,182
Net Profit (adj) (ZAR mn) 1,340 1,979 2,272 2,651 3,138
EPS (adj) (ZAR) 3.63 4.63 4.99 5.88 6.96
EV/Sales (x) 3.70 4.14 3.19 2.58 2.25
EV/EBITDA (x) 13.0 14.6 12.5 9.2 7.8
P/E (x) 20.3 19.9 16.4 13.9 11.7
P/E (recurring) (x) 20.3 19.9 16.4 13.9 11.7
Dividend yield (%) 0.0 0.0 0.6 0.9 1.0
Free Cash yield (%) 3.1 1.3 n.m. 4.0 5.8
ROCE (post-tax) (%) 24.4 18.3 14.6 14.1 15.3
Aspen Pharmacare BLOOMBERG: APN SJ EQUITY
Out of Africa
� Strong Growth Drivers: Medicine prices may be low in many developing
and emerging markets, but appetite for better standards of healthcare is rising,
supporting increased volumes. Higher prices for generic products, branded
extensions and new combinations help to push underlying margins higher,
supporting above-average core profit growth for companies, like APN.
� Growing International Scale: APN experienced a step change for profit
generation in FY09 with a significant move to internationalise the business.
Although recent overall Group profitability has been tempered as a result of
the 2009 asset deal with GlaxoSmithKline, we believe that the medium-term
impact from fast-growing sub-Saharan and International divisions should
more than correct for this.
� Prepared for Domestic pressures in South Africa: Despite aggressive
competition in its home market, APN has become No.1 in the private/retail
pharmaceutical market. However, conditions are likely to get tougher in the
medium term. Importantly, the company has made business streamlining in
manufacturing and supply chain one of its core skills to preserve opportunities
to at least maintain, and potentially, expand Group margins.
� Undemanding valuation: A SoTP valuation analysis suggests that APN shares are
undervalued. We launch coverage with a Price Target of Rcents 10,000. This valuation
is underlined by a Compco analysis highlighting APN’s 16.4.x (FY11E) and 13.9x
(FY12E) PERs and a CAGR EPS growth of 18% (FY11E-FY16E), which compare
favourably to anaemic average growth for pharma companies in developed markets
(8% p.a.) and PERs of 21.0x (FY11E) and 16.4x (FY12E) and EPS growth of 22% for
pharma companies in emerging markets.
Aspen Pharmacare Company Report 22 August 2011
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RELIGARE INSTITUTIONAL RESEARCH
Investment Case Summary
Growing International scale to enhance LT returns
Launch coverage on Aspen with a Buy and TP of Rcents 10,000
FY09 heralded a transformation in APN strategy – through collaboration with
GlaxoSmithKline and selective M&A, the company has extended or entered positions in
international pharmaceutical markets in Sub-Saharan Africa (SSA), Asia Pacific, Latin
America and Rest of World territories. This was a strategic imperative given the domestic
outlook – more medicines pricing pressure and a lack of demand for its consumer products.
The stock’s stellar performance in FY09 (+118%) and FY10 (+25%) underscored the
underlying changes and positive outlook. The pullback in the share in FY11 to date, -14%,
combined with our positive assessment of the company and its valuation strikes us as a good
point to pick up the share.
Despite worries centred on domestic growth and integration issues over the recent Sigma
acquisition, we believe that the growth prospects for the Group are intact.
Our current total (net) revenue forecast of R13.6bn for FY11E represents a 34% growth –
excluding Sigma we estimate that FY11E revenues increase to R12.2bn (+21%). However,
EBITA margin is likely to contract through the tougher anti-retroviral drug (ARV) contract
and more costly international distribution – we forecast 23.8% margin (-280 bps) with EBITA
of R3.4bn (+20%). Furthermore, we forecast progressive margin expansion in FY11E-FY16E.
Our long term CAGR in that period for Group revenue, EBITA and Headline EPS is forecast
to be 12.1%, 14.3% and 18%, respectively.
Aspen plays a stronger international hand: APN aims to supply an increasing number of
branded and generic drug products through its expanding international sales network. Seeking
out new markets and expanding in current ones is key to maintaining its enviable top-line
growth trajectory. Raising profitability levels is a function of product mix (includes new
product launches) and investing in building a super-efficient international manufacturing
network. APN is fortunate to have both.
Strategic template is scalable: Key components of APN’s strategy is accessing growth
markets and developing scale to the business whilst raising efficiency and growing profits at
above-average rates. Developing markets and the branded generics pharma industry lends
itself well to this task.
Domestic pressures to rise, but issues are manageable: Despite aggressive competition in its
home market, APN has thrived – and become Market No.1 – in the private/retail
pharmaceutical market. Conditions are expected to get tougher (through lower ARV margins,
an extended Single Exit Price, SEP, situation and more competition), but we believe APN now
has a suitably diversified business - and ex-SA strategy - to meet these pressures head on.
Valuation
A SoTP valuation analysis suggests that APN shares are undervalued. This current
undemanding valuation is underlined by a Compco analysis highlighting APN’s 16.4x
(FY11E) and 13.9x (FY12E) PERs and a CAGR EPS growth of 18% (FY11E-FY16E), which
compares favourably to anaemic average growth for pharma companies in developed markets
(8% p.a.) and PERs of 21.0x (FY11E) and 16.4x (FY12E) for pharma companies in emerging
markets.
Key risks
These include: reduced product demand, higher raw material costs, API/finished product
supply, competition, legislation (and possible compulsory National Health Insurance scheme),
partner development timelines. We would also highlight delays with business integration, cost
savings and efficiency initiatives, movements in tax rate and FX rate volatility.
FY11E to continue APN’s transition
We are Buying APN for its above-
average growth outlook
An enviable top-line growth
trajectory
Tapping high-growth emerging
markets
Domestic business pressures are
manageable
Launch with a PT of Rcents 10,000
Aspen Pharmacare Company Report 22 August 2011
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RELIGARE INSTITUTIONAL RESEARCH
Valuation & recommendation
We launch coverage on APN with a Buy rating and a price target of 10,100 Rcents/share.
APN’s PT depends on great execution in a number of separate areas, including:
• Product development and market launches to maintain its relatively high-growth
revenue development;
• Continued initiatives to streamline its manufacturing network and further develop its
strategic API (active pharmaceutical ingredient) supply line; and
• Accelerating its move to diversify revenue streams into International markets
(particularly Asia Pacific and Latin America).
In our view the key catalysts to underline successful implementation in the above areas
include:
• Capitalising on the new Asian region springboard that is being assembled in
Australia – particularly post-Sigma acquisition;
• Working to stimulate demand on both the branded and generic medicine sides of the
business – and taking advantage of the significant portfolio of products within the
GSK collaboration;
• Maintaining the company’s international benchmarked status for efficient drug
production – and continuing to squeeze operational and meaningful financial margin
benefits;
• Bringing through a product development pipeline over the next 5 years, valued
conservatively at >R6bn; and
• Identifying further product and regional expansion opportunities to support APN’s
M&A strategy.
We value APN using SoTP and peer group multiple comparisons which, for this category of
company (established pharma, growth profile, stable manufacturing and distribution
operations, strong operating cash flow generation), can be used in a complementary manner.
Most recently, net debt was R2.1bn, a R900mn reduction due to a combination of strong
operating cashflow, asset sales and favourable FX. Following completion of the Sigma
acquisition, this figure is expected to significantly increase to an estimated R6.8bn.`
Our Sum-of-the-parts valuation suggests a PT of Rcents 10,100 and highlights a number of
critical strategic themes which are expected to figure prominently in APN’s operations and
outlook over the next 12 months:
• The potential for the Branded Aspen GSK alliance;
• The rising contribution from Sub-Saharan Africa territories; and
• The future importance of APN’s International operations, notably in Asia Pacific and
Latin America.
Peer comparisons underline an undemanding valuation for premium growth; specifically,
we would highlight APN PERs of 16.4x (FY11E) and 13.9x (FY12E) and a CAGR EPS
growth of 18% (FY11E-FY16E). This compares favourably to anaemic average growth for
pharma companies in developed markets (8% p.a.) and PERs of 21.0x (FY11E) and 16.4x
(FY12E) for pharma companies in emerging markets (across China – listed both in
China/HongKong and the US, MENA, India and South Africa). Our PT of 10,000 Rcents/share
suggests PERs of 20.0x and 17.0x for FY11E and FY12E, respectively. Furthermore, this PT
suggests EV/EBITDA multiples of 14.9x and 11.3x for FY11E and FY12E, respectively, and
EV/Sales multiples of 3.8x and 3.2x.
In our view APN represents a valuable growth story, with core domestic and expanding
international activities tapping emerging pharmaceutical markets. Although a South Africa
government squeeze on the recent anti-retroviral drug (ARV) award is expected to push
domestic growth down (and have an adverse effect on margins), we still forecast a 5YR Group
revenue CAGR of 12%. Highlights are expected to be growth in Sub Saharan Africa (CAGR
Dependent on great execution
Key catalysts to signal corporate
wins
Valued using complementary
techniques
Aspen’s story highlights its potential
growth trajectory
Aspen Pharmacare Company Report 22 August 2011
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RELIGARE INSTITUTIONAL RESEARCH
23%), Asia Pacific and Latin America (both 16%) and RoW markets (14%). This compares
with average major developed market growth of 2-4%.
Potential risks to our forecast 18% 5YR CAGR earnings growth include:
• SA pricing legislation (downward pressure), future adverse ARV tenders,
competition (notably from emerging markets, notably India);
• The outcome of plans for a National Healthcare Insurance (NHI) scheme. Potential
beneficiaries include pharmaceutical companies – those marketing generic drugs.
However, the funding sources, apart from compulsory taxation, are ill-defined and
may include mechanisms to further regulate medicine prices (downwards);
• Delays in implementing further efficiencies in manufacturing;
• Investment in Australia – more required than anticipated, particularly into the
manufacturing infrastructure;
• Problems in generic drug development and API supply that may affect the timelines
for bringing pipeline products to the market (conservatively valued by APN at
>R6bn); and
• FX volatility: so far this year the Rand has been relatively stable versus major
trading currencies, although with some strengthening vs. the USD$ and weakening
vs. the AUD$ (however, it should be noted that currency needs for raw
material/finished goods imports are, to a large degree, matched by income from the
company’s International activities).
Despite these potential risks we believe that APN is a prime investment target for
investors wanting exposure to the high-growth emerging market segment of the
pharmaceutical industry, and its accompanying defensive attributes.
What are the potential risks to this
growth?
Aspen Pharmacare Company Report 22 August 2011
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Company Valuation Year End: 30 Jun FY08A FY09A FY10A FY11E FY12E FY13E
Per Share data (ZAR)
EPS (adj) 2.40 3.63 4.63 4.99 5.88 6.96
DPS 0.48 0.00 0.00 0.48 0.72 0.85
Book value 8.7 11.3 25.4 28.4 33.3 39.0
Valuation ratios
EV/Sales (x) 2.92 3.70 4.14 3.19 2.58 2.25
EV/EBITDA (x) 10.0 13.0 14.6 12.5 9.2 7.8
EV/Capital Employed (x) 2.2 3.7 3.1 2.3 2.0 1.7
P/E (x) 14.0 20.3 19.9 16.4 13.9 11.7
P/E (recurring) (x) 14.0 20.3 19.9 16.4 13.9 11.7
Dividend yield (%) 1.4 0.0 0.0 0.6 0.9 1.0
Free Cash yield (%) 5.1 3.1 1.3 n.m. 4.0 5.8
P/BV (x) 3.9 6.5 3.6 2.9 2.5 2.1
Fig 1 - Peer Compco: World Pharma
As of 22 August 2011 Mkt Cap
PER (x) EV/Sales (x) EV/EBITDA (x) LT EPS PEG
Company Ticker Price Rating USD$
mn FY11E FY12E FY11E FY12E FY11E FY12E Growth (%)
Developed Markets
Avg Europe Large Pharma 83,397 10.3x 9.8x 2.2x 2.1x 6.1x 5.9x 6.6 1.5
Avg Europe Mid-Pharma 4,346 31.1x 14.8x 2.4x 2.2x 12.3x 8.7x 12.0 1.2
Avg US Large Pharma 87,847 10.2x 9.8x 2.0x 2.0x 6.3x 6.2x 4.2 2.3
Avg US Mid-Pharma/Gx 9,550 11.7x 13.7x 2.2x 2.2x 7.4x 8.0x 9.2 1.6
Emerging Markets
MENA
Hikma HIK LN 610.0 BUY 1,930 18.2x 15.0x 2.4 1.9 11.2x 9.1x 20.0 0.8
Avg Chinese Pharma (HK/China listed)
1,273 32.1x 23.4x 4.3x 3.4x 19.9x 15.4x 31.5 0.7
Avg Chinese Pharma (US listed) - excl <$100mn mkt cap
349 10.3x 10.3x 1.3x 1.3x 4.9x 4.1x 18.8 0.6
Avg Indian Pharma 3,439 16.7x 14.1x 2.8x 2.4x 12.4x 10.7x 16.3 0.9
Aspen Pharmacare APN SJ 8,170 Buy 5,128 16.4x 13.9x 3.2x 2.6x 12.5x 9.2x 18.0 0.8
Adcock Ingram Holdings AIP SJ 6,032 NC 1,457 12.7x 10.1x 2.1x 1.9x 7.8x 6.9x 14.3 0.7
Netcare Limited NTC SJ 1,334 NC 2,675 12.3x 10.5x 1.8x 1.7x 9.1x 8.1x 10.4 1.1
Medi-Clinic Corp MDC SJ 3,061 NC 2,771 14.2x 11.7x 1.9x 1.7x 8.6x 7.9x 18.1 0.6
Life Healthcare Group LHC SJ 1,744 NC 2,522 15.0x 12.8x 2.0x 1.8x 7.9x 7.0x 27.7 0.5
Avg South Africa Pharma 3,188 14.6x 12.1x 2.7x 2.2x 10.2x 8.1x 17.1 0.7
Avg South Africa Health 2,869 14.2x 11.8x 2.2x 1.9x 9.2x 7.8x 18.1 0.6
Avg - Pharma developed 15.8x 12.0x 2.2x 2.1x 8.0x 7.2x 7.9 1.6
Avg - Pharma emerging 21.0x 16.4x 3.1x 2.6x 13.8x 11.3x 22.2 0.7
Source: RCML Research, Bloomberg
Aspen Pharmacare Company Report 22 August 2011
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Fig 2 - Aspen: SoTP valuation
FY11E Branded OTC Generics Total
EBITA estimates* 1,120 498 1,790 3,408
Multiple 19.0x 13.5x 13.3x
Value 21,287 6,726 23,869 51,882
Less net debt -6,771
Equity value 45,111
No shares 451.1
Per share value (R cents) 10,000
Current share price (R cents) 8,340
Upside/ (Downside) 20%
Source: RCML Research; RCM EBITA estimates for business categories
Aspen Pharmacare Company Report 22 August 2011
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Financials & Forecasts analysis
P&L Drivers
1. Revenue Drivers
Price & volume: APN’s product portfolio, mainly generic or branded generic versions of medicines, depends on volume sales. General demand is solid, with Group revenues set to grow at 12% CAGR (FY11-16E). However, there are some domestic market pressures on pricing – new ARV tender (lower pricing), extended SEP scheme – and potentially a future introduction of National Healthcare Insurance. Price rises, for branded products, are (in the main) more of a feature in its International markets.
M&A: The recent acquisition of Sigma’s pharmaceutical sales and manufacturing assets represents a strategic purchase for APN to accelerate expansion in Asia Pacific. We anticipate additional fill-in purchases of companies and products.
FX: Group activities are (mainly) in the respective functional currency of each market. FX risk is managed through the selective use of forward exchange contracts. For major FX rates in FY10, a 10% stronger Rand would have resulted in a R30mn negative impact at the PBT level.
2. EBIT Margin Drivers
APN is a profitable company. Growth in segment EBIT is forecast to be CAGR 16% p.a. FY11-16E. Key drivers are Cost of Sales and Selling & Distribution costs: CoS expenses are forecast to grow 11% over this period, less than the expected >12% growth in sales. Key expense lines, S&D and Administrative should be seen to grow at 9-10% and 10-11%, respectively, during this timeframe.
3. Tax rates: Following the Sigma acquisition, guidance is for an effective rate of ~21% for the foreseeable future.
Cash Flow Drivers
1. Working capital movements: Building out its SSA network and acquiring Sigma is expected to lead to a significant increase in working capital in FY11E, though dropping back to historic levels by FY13E.
2. Provision movements: FY11E results are to include five months of Sigma – we expect transaction and restructuring costs of >R100mn.
3. Capital expenditure: FY11E’s capex forecast includes our estimate of assets purchased in the Sigma transactions (details yet to be disclosed); future levels should grow in line with post-acquisition demands.
4. Dividend payments: APN paid a 70 cent dividend in FY10 (paid out in H1’11 accounts) – we anticipate a rising level of dividend per share, in line with earnings growth.
5. Issuance of equity: Future acquisitions are likely to be funded with a combination of cash and new equity.
6. Overall free cash generation: APN is a very strong generator of cash; OCF/EBIT was ~78% in FY10 – although forecast to be at a lower level in FY11E (due to Sigma purchase), we expect it to rise to >80% in FY12-13E.
Balance Sheet Issues
1. Debt: FY10’s net debt was R2.8bn; as a result of the Sigma trasaction we expect FY11E’s figure to be ~R7bn.
2. Pension / Healthcare liabilities: APN provides retirement benefits for employees through contributions to a variety of 3rd party funds. At YE 30 June 2010, the plan was running a deficit of R12.3mn. APN runs comprehensive employee medical/welfare activities at both its SA and main International locations.
3. Other liabilities / assets: Key changes in assets in FY10 reflect the addition of the GSK assets and changes in International territories. Entries in liabilities noted a decrease in gross borrowings – through strong cash generation and paying down debt. This situation is set to be reversed (in the short term at least) by the Sigma transaction.
Aspen Pharmacare Company Report 22 August 2011
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Company Forecasts and Metrics
Profit and Loss statement All figures in (ZAR mn)
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
Revenue 8,450.3 10,146.6 13,552.7 16,274.7 17,882.9
Gross profit 3,886.2 4,604.3 5,827.7 7,030.7 7,797.0
EBITDA 2,406.6 2,884.6 3,448.7 4,560.4 5,181.8
EBIT 2,183.0 2,614.9 3,106.4 3,641.0 4,200.5
Net interest inc./(exp.) (475.0) (370.4) (229.9) (285.0) (228.1)
Exceptional items 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit (stated) 1,715.6 2,446.0 2,876.5 3,355.9 3,972.4
Pre-tax Profit (adj) 1,715.6 2,446.0 2,876.5 3,355.9 3,972.4
Tax paid (362.0) (467.5) (604.1) (704.7) (834.2)
Minorities (13.2) 0.0 0.0 0.0 0.0
Net Profit (stated) 1,340.4 1,978.5 2,272.4 2,651.2 3,138.2
Net Profit (adj) 1,340.4 1,978.5 2,272.4 2,651.2 3,138.2
Shares outstanding (mn) 369 426 451 451 451
EPS (stated) (ZAR) 3.63 4.63 4.99 5.88 6.96
EPS (adj) (ZAR) 3.63 4.63 4.99 5.88 6.96
DPS (ZAR) 0.00 0.00 0.48 0.72 0.85
Cash Flow statement All figures in (ZAR mn)
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
EBIT 2,183.0 2,614.9 3,106.4 3,641.0 4,200.5
Depreciation & Amortisation 223.6 269.7 342.3 919.4 981.4
Change in Working Capital (509.5) (344.5) (769.3) (614.8) (363.2)
Tax Paid 0.0 0.0 0.0 0.0 0.0
Other Items (601.7) (505.4) (767.6) (936.7) (1,030.9)
Cash Flow from Operations 1,295.4 2,034.7 1,911.8 3,008.9 3,787.6
Capital Expenditure (1,253.5) (1,291.5) (5,421.1) (1,464.7) (1,609.5)
Acquisitions & Disposals (2,629.0) 24.8 (106.2) (84.9) (50.2)
Other Items 325.8 232.5 0.0 0.0 0.0
Cash Flow from Investing (3,556.7) (1,034.2) (5,527.3) (1,549.6) (1,659.6)
Debt Raised/ (Repaid) 3,109.4 (500.5) 1,500.0 0.0 0.0
Proceeds from Share Issues 20.4 16.1 0.0 0.0 0.0
Dividends Paid (0.8) (0.8) (302.6) (448.7) (531.1)
Cash Interest Expense 0.0 0.0 0.0 0.0 0.0
Other Items 0.0 0.0 188.5 150.6 89.0
Cash Flow from Financing 3,129.0 (485.2) 1,385.8 (298.1) (442.1)
Change in net cash/(debt) (2,241.7) 1,015.8 (3,729.7) 1,161.2 1,685.9
Ending net cash/(debt) (4,038.8) (2,759.2) (6,394.2) (5,157.4) (3,426.8)
Balance Sheet All figures in (ZAR mn)
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
Tangible Fixed Assets 2,373.5 3,012.4 8,091.2 8,636.5 9,264.6
Intangibles Assets 4,502.0 9,066.0 9,066.0 9,066.0 9,066.0
Associates & Investments 27.6 34.4 45.9 55.2 60.6
Working Capital 2,213.1 2,429.7 3,245.3 3,897.1 4,282.2
Other Assets 17.8 65.5 87.5 105.1 115.4
of which: tax assets 17.8 65.5 87.5 105.1 115.4
Other Liabilities 832.2 1,019.8 1,362.1 1,635.7 1,797.4
of which: tax liabilities 203.0 263.2 351.6 422.2 463.9
of which: pension liabilities 0.0 0.0 0.0 0.0 0.0
Cash & Cash Equivalents 2,065.3 3,221.8 1,086.8 2,323.6 4,054.2
Total Capital Employed 10,367.1 16,867.2 20,337.0 22,539.5 25,146.6
Gross Debt 6,104.1 5,981.0 7,481.0 7,481.0 7,481.0
of which: short term 2,670.3 3,720.8 5,220.8 5,220.8 5,220.8
of which: long term 3,433.8 2,260.2 2,260.2 2,260.2 2,260.2
Shareholders Equity 4,182.7 10,831.0 12,800.8 15,003.3 17,610.4
Minorities 80.3 55.2 55.2 55.2 55.2
Total Capital Employed 10,367.1 16,867.2 20,337.0 22,539.5 25,146.6
Profitability & Returns (%)
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
Gross margin 46.0 45.4 43.0 43.2 43.6
EBITDA margin 28.5 28.4 25.4 28.0 29.0
EBIT margin 25.8 25.8 22.9 22.4 23.5
Net profit margin 15.9 19.5 16.8 16.3 17.5
Tax rate 21.1 19.1 21.0 21.0 21.0
RoE 36.0 26.4 19.2 19.1 19.2
ROCE (post-tax) 24.4 18.3 14.6 14.1 15.3
Growth (YoY, %)
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
Revenue 73.1 20.1 33.6 20.1 9.9
EBITDA 67.7 19.9 19.6 32.2 13.6
Net profit 55.3 47.6 14.9 16.7 18.4
EPS 51.1 27.7 7.8 17.7 18.4
Dividend (99.7) (100.0) n.a. 48.3 18.4
Capital employed 59.5 62.7 20.6 10.8 11.6
Cash Conversion & Capital Intensity metrics
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
Fixed Assets/Sales (%) 24.4 26.5 41.0 51.4 50.1
Working Capital/Sales (%) 26.2 23.9 23.9 23.9 23.9
Working Capital (days) 96 84 76 80 83
Inventory (days) 62 63 64 67 70
Payables (days) 50 58 60 63 66
Receivables (days) 84 79 72 76 79
Op. Cash Flow/EBIT (%) 59.3 77.8 61.5 82.6 90.2
CAPEX/depreciation (%) 560.6 478.9 1,583.7 159.3 164.0
Free Cash Flow/Sales (%) (26.8) 9.9 (26.7) 9.0 11.9
Dividend cover (x) 2,327.1 n.a. 10.4 8.2 8.2
Balance Sheet & Leverage ratios
Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E
Net Debt/Equity (%) 94.7 25.3 49.7 34.2 19.4
Net Debt/EBITDA (x) 1.7 1.0 1.9 1.1 0.7
Gross Debt/Free Cash Flow (x) (2.7) 6.0 (2.1) 5.1 3.5
Net interest cover (x) 4.6 7.1 13.5 12.8 18.4
Cash interest cover (x) n.a. n.a. n.a. n.a. n.a.
Aspen Pharmacare Company Report 22 August 2011
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RELIGARE INSTITUTIONAL RESEARCH
Company Overview Aspen
Company Activities & Operations
Company Strategy
Key Products/Services
Description Generic medicines Products forecast to comprise ~54% of FY11E salesBranded medicines Brand products (Global and Local) to comprise ~34% of FY11E salesOTC/Consumer products OTC, Consumer, Nutritional, Other - constitute ~13% FY11E sales
Management and BoardName Description Stephen Saad Group Chief Executive, since 1999Gus Attridge Deputy Group Chief Executive, appointed 1999Judy Dlamini Chairman, appointed 2005; MD, Mbekani Health ; Chairman, Masibulele PharmaArchie Aaron NED, appointed 1994, former ChairmanShah Abbas-Hussein NED, appointed 2009; currently President, Emerging Markets GSKRoy Andersen NED since 2008; previously with E&Y, JSE Ltd and Liberty Group Ltd Rafique Bagus NED, appointed 2003; CEO Morning-Tide Investments; previously with DTIJohn Buchanan NED, appointed 2002; previously with Cadbury SchweppesChris Mortimer NED, appointed 1999; a practising attorneyDavid Nurek NED, appointed 2001; Executive of Investec BankSindi Zilwa NED, appointed 2006; Chief Exec, Nkonki Chartered Accountants
Company's stated objectivesTiming Description
Near term Maintain leadership positions in SA Branded and Generic marketsNear term Develop expansion initiative into Asia Pacific and SSAMedium term Expand more broadly into Latin AmericaMedium term Consolidate Sigma manufacturing into global networkLong term Evaluate additional product and M&A opportunities in International marketsLong term Reduce dependence on SA; manage issues with ARV tender, SEP and NHI schemes
Share Price DriversProbability Description High (+) Significant operational synergies upside from integrating Sigma AustraliaHigh (+) Continued growth in Asia Pacific/Latin America - internationalisation benefitsMedium (-) Need to invest more than expected in Sigma Australia manufacturing assetsLow (-) Expectations for a tough H2'11 (ARV margins) already discounted in share price Major Shareholders
Name %Public Investment Corp 8.6%
Upcoming Events Allan Gray AM 6.6%
Date Description Fidelity 3.8%Late-August 2011 Trading update not expected - due to low earnings growth in H1'11 Vanguard 2.1%Mid-September 2011 FY11E results Gus Attridge 0.7%Early-March 2012 Interim results for FY12E Stephen Saad 0.6%
Pictet 0.6%
Recent Corporate Action
Date Description Other Information27 January 2011 License for manufacture/supply of generic rilpivirine (TMC278) from Tibotec14 January 2011 Aspen completes on Sigma acquisition14 December 2010 Aspen awarded significant portion of ARV tender (effective from 1 January 2011)
Website: http://www.aspenpharma.comLocation of HQ: Durban, South Africa
APN supplies branded and generic medicines across Africa, Asia Pacific, Latin America and Rest of World regions - in total >100m countries. The company is South Africa's leading producer and seller of pharmaceuticals. APN is one of the world's Top 20 generic medicine producers, with manufacturing capability across four continents, with facilities in South Africa, Kenya, Tanzania, Brazil, Mexico, Germany and Australia. APN has a deep generic product pipeline, with an estimated pipeline value of >R6bn. Aspen is also active across the Consumer and Nutritional segments, selling a range of OTC/self-medication and infant nutritional products. APN is a member of the JSE Top 40.
Generic54%
OTCConsumer
13%
Branded34%
Sales split by product category, FY11E
SA Pharma38%
SAConsumer
9%
AsiaPacific
22% LatinAmerica
10%
RoW12%
SSA9%
Sales split by territory, FY11E
APN aims to deliver an increasing number of branded and generic products through its expanding international sales network. Seeking out new markets and expanding in current ones is key to maintaining its top-line growth trajectory. Raising profitability levels is a function of product mix (new product launches) and investing and building a super-efficient international manufacturing network. APN is fortunate to have both. Key components of APN's current and future strategy is accessing growth markets and developing scale to the business whilst improving profitability and growing profits at above-average rates. Developing markets and the branded/generics pharma industry lends itself well to this task. Key hurdles include the integration of acquisitions, balancing regional investment to optimise market growth, launching new products and addressing government legislation on drug pricing at home and abroad.
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Industry Overview Industry & Competitive analysis
Industry Description
Industry Growth Drivers
SWOT Analysis
Porter's Five Forces
Rivalry/Industry Competitors
Moderate-to-High
Competitors are numerous (+)
Potential market growth is high (+)
Lower fixed cost and high working capital (-)
Very profitable (+)
Threat/New Entrants
Low-to-Moderate
• Regulatory barriers (-)• R&D is capital intensive (-)• Price regulation exists (-)
Power/Customers
Moderate-to-High
• H'care spending is managed centrally (+)• Physicians act as gatekeepers (+)• Little price sensitivity (-)• Size of customer base is increasing - but
fragmented (-)
Threat/Substitutes
Low-to-moderate
• No substitute for medicines (-)• Me-too products threaten franchise (+)• Product development can take years (-)
Power/Suppliers
Low-to-Moderate
• Volume benefits available - low switch cost (-)• API production (particularly locally) secures an
advantage (+)• Suppliers can forward integrate (+)
Aspen Pharma is active in the >$70bn Emerging markets (World Pharma, $650bn). These are relatively large markets (population), high-growth, with developing healthcare systems. Typically with poor access to medicines, paid for 'out-of-pocket'.
These include:-Generics: Growth of this sector matches a growing need in emerging markets for affordable, gold standard drug therapy;Branded medicines: Brands - often generic medicines - represent treatments with established quality and prescriber loyalty;OTC/ Consumer: Growth of Over-The-Counter/Consumer and nutritional products is fueled by higher disposable income.
Strengths
• Established brand value• Increasingly broad geographical presence - not afraid to go international
• No 1 generic producer in Southern hemisphere• High-growth prospects coupled with strong financial performance
Weaknesses
•Raised gearing to purchase Sigma Pharma•Dependence on partner activities in SSA and International activities
Opportunities
•Consolidate position in Australia•Create expansion in Asia Pacific region•Push hard in Latin America
Threats
•Risk attached to proprietary development pipeline•Ability to build new collaborative alliances around new products
•Do generic products in the LT offer secure growth prospects?
•Will manufacturing be less of a strategic advantage in future years?
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Aspen - Company background
Aspen’s pharmaceutical and consumer medicine business comprises core South
African and International businesses, plus an expanding presence into Sub-Saharan
Africa (courtesy of a strategic collaboration with GlaxoSmithKline). Across these
markets APN is active across a broad range of therapy segments, offering Branded
and Generic medicines as well as a number of over-the-counter (OTC) products.
APN’s ambition is to maintain its market leading position in SA whilst increasing its
presence in international markets in order to benefit from above-average growth rates
in emerging pharmaceutical market regions. The company’s main regional activities
are centred on the following areas:
• South Africa (53% of FY10 Group revenues): a business that includes branded
pharmaceuticals and generic medicines, as well as consumer/OTC products.
APN is No 1 in both branded and generic categories;
• Sub-Saharan Africa (9% of FY10 Group revenues): now includes a strategic
alliance with GSK across the region. A branded generic business that operates
(principally) across French West Africa, Nigeria and East Africa; and
• International Markets (38% of FY10 Group revenues) includes activities in
Latin America, Asia Pacific and Rest of World territories – APN’s main targets for
expansion.
Our current total (net) revenue forecast of R13.6bn for FY11E represents a 34%
increase versus FY10. Excluding the addition of Sigma we estimate that FY11E
revenues are likely to increase 21% to R12.2bn. EBITA margins are likely to contract,
given the negative impact of the new ARV contract (effective in H2’11) in the SA
business and a continued step-down in International business margins (as a result of
giving some margin away through Aspen’s distributor network and lower Sigma
margins). We are forecasting a Group EBITA margin of 23.8% for FY11E. EBITA is
forecast to grow 20% this year.
Nevertheless, the growth prospects for the Group are intact, with expected
progressive margin expansion in 2011-2016. Forecast drivers for this improvement
include:
• New product development and market launches – helping generate volume
growth and positive product mix effects;
• Extracting further manufacturing and supply chain efficiencies; and
• Success in developing business through International regions – out of
Australia (for Asia Pacific) and Brazil (in Latin America).
Our long term CAGR (FY11E-FY16E) for Group revenue, EBITA and Headline EPS is
forecast to be 12.1%, 14.3% and 18%, respectively.
Fig 3 - Aspen revenue forecasts – by region
R mn FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E CAGR
FY11E-FY16E
South Africa 3,758 4,309 5,652 6,643 6,680 7,147 7,695 8,400 9,244 6.8%
Sub-Saharan Africa 47 931 910 1,274 1,631 2,055 2,527 3,033 3,548 22.7%
Asia Pacific 908 1,234 1,468 3,170 5,092 5,397 5,775 6,237 6,736 16.3%
Latin America 83 1,144 1,150 1,380 1,656 1,954 2,267 2,584 2,894 16.0%
Rest of World 85 823 1,435 1,722 2,032 2,357 2,687 3,010 3,311 14.0%
Adjustments* 0 0 -469 -637 -815 -1,027 -1,264 -1,516 -1,774
Net revenues 4,881 8,441 10,147 13,553 16,275 17,883 19,687 21,747 23,959 12.1%
Source: RCML Research, Company; *Adjustments are for GSK Aspen Healthcare venture revenues (shown in table as gross revenues)
Aspen Pharma – African and
International branded and generic
medicine sales
FY11E to be a transition year –
negative ARV impact, but positive
Sigma effects
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Group progress through H1’11 was solid, with continued growth across most regions.
Group net revenues increased 33% to R5.99bn, with notable results obtained in South
Africa (SA) – increased 29%, Sub-Saharan Africa (SSA) – grew 139% (gross
revenues), Asia Pacific and Rest of World regions. The SA business has progressed
into a leadership position in the domestic market on continued strong demand, helped
by the integration of the GSK activities (a first full-period contribution). Total Africa
business (including SSA) comprised >66% of adjusted Group (net) revenues.
SA activities saw good continued growth for the Pharma business, revenues rising to
R2.7bn (+36%). Consumer products in the period saw revenues increase 8% to
R618mn.
Fig 4 - Aspen H1’11 revenues – by region
R mn H1 09 H1 10 H1 11E
South Africa 2,066 2,550 3,300
Sub-Saharan Africa 464 279 666
Asia Pacific 484 748 957
Latin America 408 500 599
Rest of World 25 493 867
Adjustments* 0 -50 -399
Net revenues 3,447 4,519 5,990
Source: RCML Research, Company; *Adjustments are for GSK Aspen Healthcare venture revenues.
International activities are growing strongly, and through the Sigma acquisition, should
feature more prominently in future years. Total international revenues grew 39% to
R2.4bn - including Asia Pacific (+28%), Latin America (+20%) and RoW (76%).
Group (segment) operating profit margin (on gross revenues) declined 230bps YoY to
25.3% (although increased versus FY10’s 24.6%). Significant contraction was notable
in the separate SA (-180bps) and International (-290 bps) divisions. The company
highlighted the overall negative impact of the GSK SSA collaboration on the regional
margin (particularly the International business), despite the benefits of a recovery in
Latin America. This margin contraction resulted principally from product distribution
through an extended distributor network (and less direct sales and profit).
Fig 5 - Aspen EBITA results, margins – forecast by region
R mn FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E
South Africa 830 1,632 1,730 1,636 1,825 2,044 2,314 2,636
Sub-Saharan Africa 27 72 183 261 349 455 576 710
International 679 1,114 1,464 1,844 2,136 2,468 2,839 3,235
Group 1,536 2,819 3,378 3,741 4,310 4,966 5,730 6,581
EBITA margin - by region
FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E
South Africa 25.6% 28.9% 26.0% 24.5% 25.5% 26.6% 27.5% 28.5%
Sub-Saharan Africa 19.2% 7.9% 14.4% 16.0% 17.0% 18.0% 19.0% 20.0%
International 31.7% 27.5% 23.3% 21.0% 22.0% 23.0% 24.0% 25.0%
Group 27.2% 26.6% 23.8% 21.9% 22.8% 23.7% 24.6% 25.6%
Source: RCML Research, Company; Group margins are based on gross revenues.
Brief snapshot of Aspen’s H1’11
results
Strong growth for International
activities
Margin contraction in H1: notably in
SA and SSA
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However, normalised margins for the SA business (adjusted to exclude a prior
insurance compensation award for the Aspen Nutritionals business), highlighted an
underlying one percentage point improvement in the business margin (increasing to
30%). Total group operating profit (from continuing operations) increased 27% to
R1.6bn, >67% being generated in the total Africa business (of which 90% derives
from the SA activities).
However, a number of issues are likely to make it tougher for APN to continue on its
high-growth trajectory in SA, certainly in the medium term. The ARV tender was
awarded (December 2010), although government-mandated pricing was slashed to
50% of the previous tender – as a result, we expect potential margin contraction in
H2’11 (particularly) and for the outstanding term of the ARV tender (See Appendix –
ARVs). On a separate note, the ‘Single Exit Price’ (SEP) legislation dictates pricing
levels at the ‘factory gate’. We understand that manufacturers are unlikely to receive
any respite from a freeze on prices before end-2011 (at the earliest).
An improvement in ‘normalised’ segment EBITA margin progression was also
apparent in the Sub-Saharan region result (progressing from H1’10’s 16% to 17% in
H1’11). However, in the International region, although revenues saw a strong growth
progression, the ‘normalised’ segment EBITA margin slipped two percentage points
(to 23% from 25%), as a result of folding in lower margin global distribution activities
and the GSK German contract production facility.
Consumer/OTC sales rose 8% to R618mn – a reasonable result considering the
prevailing difficult retailing climate. However, Aspen’s license to Wyeth’s infant milk
formula (IMF) ended in April; this license provided an annual ~R250mn contribution to
APN’s topline (Wyeth is now owned by Pfizer, and intent to go it alone in SA). We
understand that APN has been working hard to migrate customers over to its own
Infacare Gold range since the beginning of the year.
Clearly a significant boost to revenues in Sub-saharan Africa suggests that the GSK
business has been successfully integrated. We expect further good progress through
2011.
International revenues should start to reflect the Sigma acquisition in H2’11. We
expect the Asia Pacific activities which generated revenues of R957mn (+28%) in the
H1’11 period to increase significantly through the year as Sigma activities are
integrated and revenues folded in. We are forecasting a Sigma contribution of R1.3bn
in the H2, although an estimated R100mn-150mn EBIT contribution is likely to be
swallowed up this year (by various costs associated with the acquisition).
Net borrowings were reduced to R3bn in FY10; although the Sigma transaction is
expected to increase net debt to ~R7bn.
Critical to maintaining APN’s aggressive LT growth trajectory are a number of
catalysts and opportunities, including:
• Setting the potential launch timetable for new products;
• Leveraging the Asia Pacific platform, extended through the addition of
Sigma;
• Bringing more resource to focus on Latin American expansion in the MT; and
• Adding further global brands through selective M&A.
Turbulence in FX markets could be a material factor in determining final results for
FY11E and beyond. For example, a (10%) stronger Rand versus the US$ potentially
spelt a negative impact on PBT in FY10. Similarly, a (10%) weaker € was also
potentially negative, but then balanced by relative (cross FX) weakness of the US$
versus the € and GBP£.
Underlying margin in SA holding up
in H1, but....
....we expect a tougher outlook for
SA activities in H2’11
Diverging routes for margins in SSA
and International
Consumer cycle in a trough....
Successful integration in SSA....
Sigma contribution to become
increasingly valuable in the MT
Critical business milestones for the
next 12 months
Potential FX movement impact on
PBT – a FY10 scenario
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The overall potential effect on PBT for FY10 in this scenario was estimated to be a
R30mn loss. So far this year the Rand has been relatively stable versus major trading
currencies, although with some strengthening vs. the USD$ and weakening vs. the
AUD$.
Fig 6 - Aspen H1’11 results; FY11E forecasts
Rmn H1 10A H1 11A %
change FY10A FY11E
% change
Continuing operations
Revenue 4,519 5,990 32.5% 10,147 13,553 33.6%
CoS 2,441 3,381 38.5% 5,542 7,725 39.4%
Gross profit 2,078 2,609 25.5% 4,604 5,828 26.6%
Expenses
Selling & Distribution 538 664 23.3% 1,189 1,626 36.7%
Administrative 368 360 -2.3% 736 1,016 38.1%
Other operating income 150 108 -27.9% 180 244 35.6%
Other operating exp 62 80 28.9% 244 322 32.2%
Operating profit 1,260 1,614 28.1% 2,615 3,106 18.8%
Investment income 91 128 41.1% 188 73 -61.2%
Financing costs -264 -251 -4.8% -558 -303 -45.7%
Net financials -173 -124 -28.7% -370 -230 -37.9%
Share of after-tax net losses (associates) -1 0 -2 0
Profit before tax 1,085 1,490 37.3% 2,243 2,877 28.3%
Tax -239 -323 35.3% -468 -604 29.2%
Profit after tax from continuing operations
846 1,167 37.9% 1,775 2,272 28.0%
Discontinued operations
Profit from discontinued operations 42 0 203 0
Profit for the year 889 1,167 31.3% 1,979 2,272 14.9%
Other comprehensive income 0 0 0 0
Amounts in equity due to hedge acc'ting of int rate swaps
0 96 0 96
Cash flow hedges realised -5 52 -5 52
Currency translation differences -37 -632 -25 -632
Acquisition of addtnl 1% share in PharmaLatina Holdings Ltd
0 0 0 0
Disposal of Onco Therapies Ltd 0 0 1 0
Total comprehensive income 846 683 -19.3% 1,949 1,788 -8.3%
Headline earnings
From continuing operations 847 1,147 35.4% 1,893 2,253 19.0%
From discontinued operations 42 0 49 0
Headline EPS (cents) 242.3 265.3 9.5% 482.9 521.0 7.9%
From continuing operations 230.8 265.3 14.9% 470.8 521.0 10.7%
From discontinued operations 11.5 0.0 12.1 0.0
Headline EPS - Diluted (cents) 229.6 254.3 10.8% 463.4 499.3 7.8%
From continuing operations 218.7 254.3 16.3% 452.0 499.3 10.5%
From discontinued operations 10.9 0.0 11.4 0.0
Gross margin 46.0% 43.6% 45.4% 43.0%
EBIT margin 27.9% 26.9% 25.8% 22.9%
PBT 24.0% 24.9% 22.1% 21.2%
PAT (continuing ops) 18.7% 19.5% 17.5% 16.8%
Source: RCML Research, Company
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Strategy
Aspen is South Africa’s biggest pharmaceutical company, manufacturing and
marketing branded and generic medicines into >100 markets worldwide.
Domestically, Aspen is the leading marketer of ethical and generic medicines in
the South African market (number 1 in terms of product offerings, size of sales force
and supplier of medicines into the private and public sectors). The company’s
customer base is broad, including pharmacy networks, clinics/hospitals, specialist
prescribers, managed healthcare providers and retail stores. Almost 80% of FY10
revenues were generated by prescription (Rx) products, the rest from various
Consumer products.
Aspen’s strategy is clear – growth through acquiring and maintaining market share
and selective international expansion. Specifically, the company aims to cultivate its
strategic differentiation through maintaining its SA advantage, expanding its
International operations and developing a meaningful presence in sub-Saharan Africa.
Aspen continues to develop its Generic (Gx) business to supply both its SA and
international businesses. Significant investment has been made into the
manufacturing and supply chain, in particular expanding the company’s API (active
pharmaceutical ingredient) activities. APN has the largest drug production capacity in
the southern hemisphere and is one of the world’s Top 20 Gx manufacturers.
APN produces >7bn tablets and capsules across its worldwide business, with
manufacturing sites on four continents; with facilities in SA, India, East Africa, Europe
and Latin America.
APN’s product portfolio comprises a vast range of dosage forms (capsules, creams,
....to enemas), which are produced to support therapeutic category sales across its
market regions (in 16 main therapy categories). APN’s strategic strength in
manufacturing has allowed the company to:
• Transform itself from a domestic producer into an international supplier;
• Transfer production expertise across its facilities network (South Africa,
Australia, Germany, Tanzania, Kenya, Brazil, Mexico);
• Develop a generic product pipeline (alone or in collaboration with other
multinational pharmaceutical companies);
• A vertically-integrated network of JVs responsible for security of the API
supply (including ARVs); and
• Focus on making continuous improvement initiatives in order to extract
process efficiencies and significant cost savings across the network’s
facilities.
Furthermore, APN has a ‘clean bill of health’ for its manufacturing in SA, which is a
significant producer of generic medicines for export – all regulatory re-inspections in
2010 produced no significant (negative) findings.
The company aims to deliver additional growth through its positioning in the sub-
Saharan African region helped by its strategic alliance with GSK. In December 2009,
APN completed a number of related strategic transactions with GSK covering the
South Africa and Sub-Saharan Africa territories, and GSK’s Global Brands and Bad
Oldesloe (Germany) manufacturing facility.
APN gained relevant branded products for its SA, SSA and International businesses.
In return, 68.5mn shares were issued to GSK, an approximate transaction value of
R4.6bn ($550mn). The rational of the transaction was sound, with both parties to
benefit in our view.
GSK was principally marketing into the higher-end, wealthy private channels and the
collaboration with Aspen should allow both companies to tap into much broader
demand channels.
1 in 4 of every oral drug Rx in South
Africa is for an Aspen product
World class manufacturing network
Driving efficiency into manufacturing
GSK collaboration is strategic to
Africa
Broad complementarity between
GSK brands and Aspen generics
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International expansion is set to continue, with a growing presence in Asia Pacific and
Latin America, and smaller but developing activities in other territories (including
Europe, Middle East, N.Africa, Canada).
Fig 7 - Aspen: lead position in private SA Branded Pharma market
Source: Company, IMS MAT Rand share Dec 2010
Fig 8 - Aspen: lead position in SA Generics market
Aspen, 31.0%
Cipla
Medpro, 17.0%Adcock
Ingram, 11.0%
Novartis, 9.0%
Servier, 4.0%
Lupin, 4.0%
Daiichi
Sankyo, 4.0%
Sanofi
Pfizer
Pharmaplan
Ranbaxy
Dr ReddysOther
Source: Company, IMS Dec 2010
The internationalisation strategy
appears to be paying off
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South Africa activities
Aspen Branded Pharma (~10% total SA sales): APN’s branded medicine portfolio
covers the usual extensive range of therapy segments, which are distributed through
wholesalers and pharmacies to reach the patient. APN is SA’s No.1 branded pharma
company.
Aspen Generic medicines (~65% of total SA sales): South Africa legislation
mandates generic substitution, which allows APN to aggressively market its extensive
generic versions of branded medicines. APN is well-recognised as a producer of
generic ARVs in Africa. The company’s first generic ARV, Aspen Stavudine, was
launched in 2003 and APN currently supplies ARVs to ~1.0mn sufferers across Africa.
APN is SA’s No.1 generic medicines company.
Aspen Consumer (~25% of total SA sales): This division incorporates a number of
separate product category businesses, including:
• OTC and self-medication products;
• Cough, cold & flu products (includes Flutex cough mixture range);
• Infant Care (includes Infacare baby formulas and nutritional products);
• Lennon Products business (includes Lennon Balsem and Balm range); and
• Personal Care products
APN’s South African activities are a significant contributor to Group revenues and
profits. Market revenues grew >31% in FY10 to R5.6bn (US$738mn), representing
>55% of the total. In terms of profits, South Africa’s EBITA (continuing operations,
before amortisation and other adjustments) increased 26% to >R1bn, representing
58% of total EBITA.
By category, South African Pharma revenues grew 40% to R4.4bn, whilst Consumer
product revenues grew 5% to R1.16bn. Regional segment operating profit increased
to R1.59bn (+52%), as margins recovered through manufacturing efficiency initiatives
and lower cost raw materials (bought with a stronger Rand). Regional segment
operating margin improved to 28.1% (FY09, 24.3%).
In terms of pharmaceutical (branded and generic) sales (R4.5bn, +40%), FY10’s
significant growth in this region was based on strong demand from both the private
and public sector markets. As part of a series of related transactions within the
agreement with GSK, the latter’s S.African activities were integrated during the
year, representing ~10% of regional sales. A relatively fast and trouble-free
integration resulted in almost immediate positive effects for the business - headline
results reflected an increased market share in the branded pharmaceutical sector
(APN also disclosed that its Pharma segment operating profit rose 56%).
By product category, APN is No 1 both in the generics and branded sectors; the
generic rating is a maintained one, but the branded position represents a move from
No 4 on the back of the GSK deal.
Most recently, H1’11 results suggested that SA activities enjoyed robust revenue
growth of 29% YoY, revenues growing to R3.3bn. SA activities saw good continued
growth for the Pharma business, revenues rising to R2.7bn (+36%). Consumer
products in the period saw revenues increase 8% to R618mn. In fact, APN’s Pharma
activities gained higher (private) market share (by value), to 16.7% (was 16.2%,
Source: IMS).
APN remains No1 in the SA generics market. Furthermore, with the integration of
the GSK activities, the company is also the current leader in the branded pharma
market. We would highlight that GSK product sales grew significantly in the period –
sales in H2 10 (that is, fiscal H1’11) were R463mn versus a run rate of approximately
R320mn in the prior six months (+45%).
SA region segment EBIT margin declined to 30.2% (H1’10 31.8%) generating an EBIT
result of R996mn (+23%), or in terms of EBITA, R1bn (+26%). Headline segment
A 160 yr old South African legacy
FY10 – an exceptional growth year in
SA
APN is the lead SA Pharma company
– and Africa’s largest manufacturer
H1’11 SA revenue growth as robust
APN still No 1 in SA Generics and SA
Branded Rx
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operating profit margin for all SA activities contracted 160bps; however, on a
normalised basis, that is adjusting the EBITA result to exclude effect of ‘compensation
for the loss of profits received from insurers in respect of Aspen Nutritionals’ (factory
explosion in August 2009), then the H1’11 SA EBITA margin has expanded (to 30%)
from the previous H1’10’s 29% and the FY’10 figure of 28%.
Fig 9 - Aspen: Normalised EBITA margins
H1 10 FY10 H1 11
South Africa* 29.0% 28.0% 30.0%
Sub-Saharan Africa 16.0% 8.0% 17.0%
International 25.0% 28.0% 23.0%
Group 27.0% 26.0% 26.0%
Source: Company; *results adjusted to exclude effect of compensation for Aspen Nutritionals
However, growth in consumer was sluggish in FY10, revenues growing 6% to
R1.16bn, due to a recessionary drag on demand and supply chain interruption in the
infant milk formula business (this result was reflected in the segment operating profit,
which for consumer increased by only 12%). The general SA retail cycle was very
depressed through FY10, prompting an internal review with a focus on efficient
operations.
H2’11 should also see the non-renewal of APN’s licence to Wyeth’s Infacare infant
milk formula (IMF) products. Again, this is a situation where APN’s manufacturing and
branding expertise should be of considerable value to rebuilding this business. The
global IMF is worth $4-5bn; SA/Africa is estimated to be ~5-10% of that market – but
growing faster than other global regions (apart from China). APN believe that it has an
opportunity to optimise an extremely complex production process (from ‘wet milk’) and
develop a trusted brand, which can then be taken through to an international
campaign. APN has plans to register the product through African markets, in Latin
America and Asia Pacific, and at the same time, will review its opportunities for tender
contract awards in Africa.
Significant to the strength of these results has been the continued investment,
over >5 years, into APN’s domestic manufacturing facilities and operations;
increased unit capacities and production efficiencies have been instrumental helping
EBITA margins to expand from 25.6% in FY09 to 28.9% in FY10.
During H1’11, APN won a significant 41% share of the most recent anti-retroviral
(ARV) medicine tender award from the South African government for the next two
years. It represents a good win, but to put it into context we believe that this segment
of APN’s business is set to generate lower sales and margins (see Appendix – ARVs).
Additionally, the Branded division launched a number of new products, including:
Prezista (darunavir, previously known as TMC114), a protease inhibitor used in the
treatment of HIV infection (licensed from J&J/Tibotec); Synflorix (GSK’s
pneumococcal vaccine) for childhood immunisation schedules; and Tykerb (GSK’s
lapatinib) for treatment with other chemotherapy in the treatment of advanced or
metastatic refractory HER2 positive breast cancer.
APN continues to invest in its SA manufacturing capabilities, with an eye to
engineering in more production efficiencies; overall, the benefits allow the domestic
business to weather pricing pressure and maintain margins. A significant example of
this financial management is the ARV tender.
Furthermore, APN’s overall generics activities have benefitted significantly from this
investment. Generic sales represent the bulk of its pharmaceutical revenues in the
country; the total market has been growing (+12%) through mainly increased
volumes, with APN out-performing the market both in terms of volume and value
(overall, +14%). The company has been able to benefit from the latter through
continued new product launches – 30 brand extensions (or some 50 SKUs) were
planned for launch during FY11E (of which 20 were launched in H1’11).
Sluggish growth in Consumer in
FY10
Aspen to major on its proprietary
‘infacare’ product...and to look for
African and international
opportunities
Manufacturing investment has paid
off handsomely
Lower sales and margins from public
sector ARVs
Generics – a valuable growth engine
Aspen Pharmacare Company Report 22 August 2011
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Despite increasing competition from both domestic and foreign companies we believe
that this segment continues to be a valuable growth engine for the SA business and
for the Group.
Despite a strong start to FY11E, we believe that the outlook for APN in the SA market
is a lower growth one – for the foreseeable future. The low-priced ARV award,
increased competition (brand erosion for top branded products) and likely further
government and other initiatives pushing for lower medicine prices is expected to
deliver a 5% (or lower) growth for the market in 2011/2012.
On the plus side, we believe that APN’s potential product roll-outs over the next 5
years could generate >R3bn in sales (aiming particularly in the antibiotic,
cardiovascular and CNS treatment segments).
Our 5YR outlook on APN’s total SA Pharma revenue growth is a positive one, with a
forecast CAGR for FY11E-FY16E of 8% p.a.
Fig 10 - Aspen Generics – Strong global industry position (No 8, US$mn revs)
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000
Teva
Sandoz
Mylan
Watson
Stada
Hospira
Perrigo
Aspen
Greenstone
Dr Reddy
Ranbaxy
Fresenius Kabi
Sanofi
Gideon Richter
Krka
Covidien
Cipla
Alapis
Par
Orion
Lupin
Sun
Wockhardt
Zylus Cadila
Source: Company
Lower growth outlook in 2011/2012
5YR outlook is positive for SA
generics
Aspen Pharmacare Company Report 22 August 2011
20
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Sub-Saharan activities
In FY10 a separate management and reporting structure was established for this
expanded business. This includes the activities transferred from GSK, APN’s Shelys
business in East Africa and export sales from South Africa. These various
components are now fully integrated.
FY10 revenues for this division declined 2% to R910mn. However, we understand
that the GSK-Aspen collaboration met all expectations, but a number of other issues
affected the business including:
• Competition from generic ARVs;
• Poor business at Shelys (APN’s 60% owned East African subsidiary); and
• Stock write-offs and other charges.
As a result, profits suffered, with regional segment operating profit dropping 62% to
R66mn. However, new management appears to have grasped the nettle and results
were already improving before year-end.
Most recently, H1’11 results suggest a continued strong momentum in this
business. With the help of a full six-month contribution from the (now) integrated GSK
activities and a rebound in Aspen’s SSA export activities, sales increased to R666mn
(+139%). Similarly, this and a turnaround in the Shelys business, helped segment
operating profitability; the margin expanded 300bps to produce a segment operating
result of R119mn (188%).
The major fixes for Shelys include shedding marginal activities and stepping up detail
activities on key brands. Although coming from a low base this business has the
potential for high growth. Future challenges are likely to include launching the Infant
milk formula across the African network.
International market activities
Key reporting regions in International include Asia Pacific, Latin America and Rest of
World (RoW). Asia Pacific was (marginally) the biggest International region division –
although its importance to the top-line is set to increase substantially through the
Sigma transaction.
Reviewing the FY10 result for International, we note that revenues increased to
R4.1bn (+27%), boosted by the integration of GSK’s Global Brands (acquired from
mid-2008, but most of the integration was actually completed in 2010).
Asia Pacific saw revenues rise to R1.47bn (+19%), RoW revenues increased to
R1.4mn (+74%), although Latin America registered a subdued growth of just 0.5% to
post revenues of R1.15bn.
Global Brand revenues, mainly derived from four products (Eltoxin, Lanoxin, Imuran
and Zyloric), increased to approximately R2bn (+33%). These ‘Big Four’ brands
produced much of this growth – the rest coming from additional products integrated
during the latter part of 2010.
Domestic Brands (that is, products local to the regions) grew revenues to R2.1bn
(+22%), but with mixed results across the territories. Asia Pacific enjoyed buoyant
demand, with domestic brand revenues rising 11% to just over R1bn (despite
regulated price reductions in Australia). However, Latin America saw domestic brands
decline by 3% to R813mn (although growth picked up in the latter part of 2010, with
growth of 8% in H2’10 YoY). A restructuring in Brazil was key to this underlying
improvement, and should see continued positive progress in FY11. The sale of the
Campos production facility to Strides Arcolab (of India) was part of this plan.
APN restructured its agreement with Strides for its oncology joint ventures, Onco
Therapies and Onco Laboratories, selling its interests to the partner for US$117mn
(R854mn) in return for a license (to current and future products) for specific territories.
The sale of Onco Therapies completed before 30 June 2010, generated a profit on
SSA activities now consolidated
Increasing Internationalisation
Asia Pacific and RoW divisions
delivered
Global Brands doing well
Domestic Brands - Asia Pacific
region prominent
Aspen Pharmacare Company Report 22 August 2011
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disposal of R155mn. The planned sale of the Onco Laboratories activities should be
completed during FY11.
FY10 segment operating profit for this division was approximately flat (R961mn,
+0.4%) for two major reasons:
• Transition of the (lower margin) GSK brands into the Aspen business; and
• A reduced profit contribution from the Latam activities
Post period-end, in August 2010, APN announced the acquisition of Sigma, for
AUD900mn (~R6.3bn), Australia’s largest listed Pharmaceutical business. The deal
completed on 31 January 2011. Sigma manufactures and markets an extensive
product portfolio of trusted domestic brands in Australia (and activities split between
marketing branded/generic/OTC products and contract manufacturing). Revenues for
the year-ending 31 January 2010 were >AUD600mn.
APN funded the acquisition with a combination of cash and debt. The rationale for the
deal was based on potential synergies in three areas: merging it with Aspen’s current
Australian business, establishing a significant growth platform in Australia and
leveraging this across the AsiaPac region. Importantly, this growth platform should
include both:
• An entry point for Aspen’s generic and OTC products into the Australian
market; and
• A longer term initiative to integrate APN’s domestic production capacity into
the worldwide manufacturing network.
Most recently, H1’11 revenues for International soared 39% to R2.4bn, benefitting
from the first full period contribution from the GSK activities (global brands and the
German Bad Oldesloe facility). Adjusting for the GSK brands produced divisional
revenue growth of 12% - nevertheless, it was an acceleration over the benchmark
registered for the H1’10 results.
Growth appeared broad-based across the main three regions:
• Asia Pacific - revenues of R957mn (+28%);
• Latin America - revenues of R599mn (+20%); and
• RoW - revenues of R867mn (+76%).
In terms of segment operating margin, the Group margin declined to 20.6% (from
23.5% in H1’10) - mainly as a result of adding GSK products into APN’s distribution
network, which involves paying away some margin to independent distributors.
Nevertheless, the operating profit result increased 27% to R551mn.
Probably the most significant event for APN to look forward to is the acquisition of
Sigma – we understand that the integration, with Aspen’s Australian business, is well
underway.
Asia Pacific activities
H1’11 revenue results underlined the continued strong development for APN in this
region. Currently, Australia generates >70% of regional sales, with a strong focus on
branded, OTC and (selective) generic products. The acquisition of Sigma should
place APN into a much stronger position, particularly to extend its international
operations into some of the high-growth emerging markets (see Appendix –
International regions).
In 2010, APN had a strong underlying position in Australia – ranked No 4 by market
share (prescriptions), or No 3 just on branded medicines. The acquisition of Sigma’s
medicines/OTC business, pushing it into a potential market leadership position,
should transfuse a number of local, and over time regional, advantages into APN’s
enlarged infrastructure and distribution network.
Flat segment EBIT
Sigma acquisition completed 31
January
Ongoing global expansion to reach
>100 markets
Asia Pacific revenues set to grow
strongly
APN Australia – 9th
consecutive year
of double-digit growth
Aspen Pharmacare Company Report 22 August 2011
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APN estimates that it should be in a good position to double Sigma’s profitability
(AUD$75mn in 2010) through a number of initiatives involving its branded/OTC
business (estimated to account for ~60% of revenues), including:
• Driving sales force and distribution synergies to accelerate growth;
• Taking costs out of Sigma’s production facilities; and
• In-licensing new products from multinational companies.
However, the situation with the generics activities is somewhat different. In this
segment, distributors have the channel power. APN historically had attempted to enter
the market, but would have needed to set up its own distribution business. Now, it can
maintain the distribution partnership through Sigma’s wholesaling business and
devote activities towards working together to address market opportunities.
APN believes that it can drive costs out of this business (through selective sourcing
and finishing activities), without hurting profitability. Additional advantages to this
relationship are apparent, particularly the enhanced footprint to capture more
lucrative product in-licensing deals.
Building a bigger regional base should bring better results. Direct selling efforts in
certain distributor-only markets now look like a viable proposition (with enhanced
profitability). Furthermore, APN has been fairly low key with regard to the extent of the
product IP that it has inherited with the Sigma deal. This combined with an extensive
set of domestic production facilities (although some of which are likely to need some
degree of updating) should help APN into a mid tier of companies with extensive
global manufacturing capability.
Fig 11 - Aspen: Asia Pacific markets, % of total H1’11 revenues (R600mn)
Australia
Japan
India
New Zealand
Pakistan
Philippines
Taiwan
China
Indonesia
Malaysia
Other
South Korea
Thailand
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: Company
Latin America activities
This region continues to be a high priority for the Group. APN is gaining more traction in this market after restructuring in Brazil; the strategic aim is to push harder to make the private market the core part of its activities (rather than the public sector business). APN is starting to see new product registrations coming through - notably for a couple of its multinational collaborations in Brazil. Furthermore, APN is planning a range of new products to be launched during FY11E; we understand that a total of 12 brands are in the pipeline – of which five have already been launched.
APN has to tread more carefully with
its Gx portfolio in Australia
Building scale in the region
Important restructuring event
completed – results starting to come
through
Aspen Pharmacare Company Report 22 August 2011
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Fig 12 - Aspen: Latin America markets, % of total H1’11 revenues (R957mn)
0% 10% 20% 30% 40% 50% 60% 70% 80%
Brazil
Mexico
Venezuela
Colombia
Chile
Argentina
Source: Company
Aspen Pharmacare Company Report 22 August 2011
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Appendix
South Africa & Sub-Saharan Africa
Although not (strictly) members of the ‘pharmemerging’ group of countries, the
fundamental drivers for growth in this large, but relatively fragmented, region are
good. The main positives consist of the countries having established local
pharmaceutical markets and a culture of developing local products, formulations and
brands. The opportunities are directed towards investment and licensing – investment
in manufacturing, scale and QA/QC, and establishing product in-licensing and
technology transfer arrangements with multinational pharmaceutical companies.
Disadvantages to regional activities include: production cost inefficiencies, expensive
asset base, lower labour productivity and restrictions in terms of
regulation/distribution. Outright threats concern the high prevalence of counterfeit and
sub-standard drugs and a lack of security in supply of finished goods and APIs
(particularly, but not exclusively HIV and TB drugs).
South Africa (0.3% of the global Pharma market by value)
Based on the above across-region comments, we would place SA on the positive side
of this spectrum. It is the largest market, with a number of advantages versus the
others:
• Some domestic API production;
• Politically stable;
• Strong R&D base (particularly for clinical research); and
• Good communication and distribution links.
The SA medicines market is growing slower YoY into 2011, with an IMS estimate of
8% growth in H1’11 (that compares to almost 14% in H1’10). The major negative
impact has been pricing, although volume growth has been fairly constant, +4.9%
(+4.7%, H1’10).
The generics sector, representing almost 30% of the total SA (private) market’s value
of R23bn (IMS, 2010; USD$3.1bn) but almost 60% of its unit volume, continues to
outpace the general medicines market, growing at 12% (albeit slower than the 19% of
H1’10).
During the year to December 2010, the total market grew 8%, but with mixed figures
for the various components – however, over the similar period APN outpaced these
individual market growth rates, apart from OTC/Consumer, as follows:
• Ethical/ branded, +7.1% (APN growth +13.2%);
• Generic, +12.3% (APN +14.2%); and
• OTC, +7.6% (APN +6.7%).
Nevertheless, the market (and APN) is likely to have to endure further pressures,
stemming from a range of issues including: no increase expected in Single Exit
Pricing in 2011 (see below), a punitive pricing structure for the ARV tender award in
late-2010 (see below) and more costly (often imported) APIs for medicines (where the
SEP is set in Rand).
The growth outlook for 2011/2012 is relatively modest; lacking the potential for
general price rises, market growth could step down to 5% - or less.
Future growth concerns are tied up with a government initiative on International
benchmarketing, which could pressure SA prices to the bottom of a ‘basket of five
International markets’. Many of the important details have yet to evolve, including the
methodology and treatment/ impact of FX rates. APN is keen to avoid chosen
‘comparator’ markets which are biased to (low price) tender business.
Some general notes on APN’s
Pharmaceutical markets
Fundamental dynamics for this
market suggest a sustained increase
in demand
SA private medicines market, 2010
Source: Company, IMS
Aspen Pharmacare Company Report 22 August 2011
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APN sees its GSK portfolio as the most vulnerable candidate to such legislation, since
some of its legacy products have enjoyed a number of price increases over the years
(although we understand that any pain on price cuts would be shared with GSK).
Anti-retroviral drugs (ARVs)
A number of S.African and other pharma companies supply ARVs to the SA
government under a tender system that most recently took place in Q4 2010. The
latest tender has been significantly reduced in value in order to help increase the
number of affected (HIV-positive) persons that are treated.
Aspen was awarded 41% of this tender (by value), representing the estimated ARV
requirements by the SA government over the next two years. The total tender award
was R4.28bn (USD$625mn); this represented a 53% reduction compared to the 2008
tender. A massive reduction in product prices was responsible for this decrease.
Fig 13 - ARV award (R4.28bn): tender participants
Abbott, 9.8%Adcock, 4.0%
A'bindo, 3.1%
Cipla, 5.1%
Medpro, 10.1%
MSD, 0.2%
Aspen
Pharma, 40.6%
Sonke, 21.9%
S'pharm, 0.9% Strides, 4.2%
Source: Company; S’pharm=Specpharma, A’bindo=Aurobindo
During 2010 a number of activist groups (including TAC and Section 27) had put
pressure on the government to improve its side of the ARV deal. Announced on 14
December, the new tender (runs Jan 2011 – Dec 2012) has markedly different terms
to the last one. Procurement prices have been dropped to (approximately)
international prices, that is R115 per patient/month for the standard triple combination
‘cocktail’ of tenofovir/lamivudine/efavirenz (the previous tender was charging R110 for
the efavirenz component alone).
This should help improve access of ARVs through public channels to infected people
in SA; patients treated with ARVs (in the public sector) have increased from <20,000
(2003), through ~225,000 (2006) to a potential 1mn in 2010/2011. Government aims
are to cover >1mn patients – there are currently >5mn HIV positive people in SA.
Average prices for tenofovir (-65%) and efavirenz (-64%) in the new tender have been
slashed. Abacavir, a component for the paediatric version of the cocktail, has been
reduced by ~50% and the tender opened up to Cipla-Medpro and APN, in addition to
the previous sole supplier, GSK (the collaboration between APN and GSK appears to
be behind this move).
We believe that this latest tender represents a positive move in expanding public
access to ARVs; however, a number of issues with the tender’s scope and
transparency remain to be resolved. These include: how will tender prices align with
API cost decreases, how were the bidders chosen, why are there no fixed-dose
combination treatments on the tender (or even approved yet) which could
Companies have had to accept
massive reductions in product
prices
An estimated 1-in-5 South Africans
are infected with HIV
Tender value reduced to R4.8bn
(>50% reduction), a R4.7bn saving
Number of issues with this tender –
and likely future ones – remain to be
aired
Aspen Pharmacare Company Report 22 August 2011
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substantially improve patient compliance, and the central role of the Treasury as
opposed to the Department of Health is a concern.
Aspen pioneered the manufacture and provision of generic ARVs in SA, launching its
first product, Aspen-Stavudine, in 2003. The company’s credentials in ARV
manufacturing are second to none, confirmed by the latest ARV tender award – 41%
(by value) awarded to APN. The company forms collaborations with many
multinationals in this drug category; the aim is to in-license the brand and gain an
agreement to manufacture the generic (at the appropriate time).
APN was pleased with the outcome of the 2010 tender; although awarded the major
portion (41% by value), this does represent a decrease from the 2008 tender’s 50%
share. However, it could have been less than the 41% this time. What helped the
outcome, we believe, was APN’s experience in manufacturing and its API network,
which ultimately determined an acceptable bid price for the SA government. We
understand that this (in the circumstances) was also an acceptable margin for APN –
although markedly less than the margin for the previous award.
By 2008, APN had a market share of >30% in the private ARV market and, overall,
supports ~1mn HIV patients in SA.
Single Exit Pricing (SEP)
Price caps for drug prices were introduced in 2004; the SA government sets a ‘single
exit price’ (SEP) at ex-factory level. This applies to all prescription medicines,
irrespective of the channel of distribution. Price rises are also regulated – in practice,
the situation equates to a freeze on prices. However, price rises were allowed in 2006
(5%), 2007 (6%) and 2008 (6%). Interestingly, with high inflation in 2009, the
government also allowed a price rise of 13%.
Most recently - February 2011 - the SA Minister of Health decided against awarding
any increase in the SEP in 2011 – although we believe that this came as no surprise
to the industry.
National Health Insurance (NHI)
Many have believed an NHI was not possible in SA given the shortages in healthcare
facilities, human resource and (potential lack of) financial support. However, the initial
announcement (in February) by the Health Minister, Aaron Motsoaledi, suggested that
NHI is closer than ever - but in what form?
In line with the experience in a number of countries where an NHI has been
implemented, an increase in the consumption of medicines was observed. However,
the key debate revolves around the affordability of any level of sustainable scheme. A
general view is that hand-in-hand with an increased demand for prescription
medicines from an enhanced population being attended to by medical workers under
the NHI, there would be stronger mechanisms to regulate the price of medicines.
Greater regulation is anticipated on the supply side, with cost containment measures,
like SEP, being added to proposals to make more medicines available under an NHI,
without implementing a patient co-pay mechanism (which would defeat the spirit of
the proposed legislation).
Potential beneficiaries are likely to be companies marketing generic rather than
originator products – and (higher-priced) branded generics would also probably gain
access to restricted ‘formulary lists’ based on pricing (which probably means price
cuts on top of SEP).
In July 2011, the SA government commented that it was expecting to push its NHI
policy document through to legislation. The government is intent on regulating private
sector prices to contain costs and provide greater certainty on medical costs to payors
– which include the insurance schemes and the government itself.
A green paper on a potential compulsory NHI scheme was released on 12 August – to
mixed reactions. The scheme is estimated to cost R125bn in 2012, R214bn in 2020
and R255bn by 2025. It is to be funded by a compulsory (means-tested) tax
deduction. The plan is also to tap the private sector for subsidised service provision
APN has a strong ARV legacy
What is the likely impact on
pharmaceutical companies?
Aspen Pharmacare Company Report 22 August 2011
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(not much detail so far). Public health expenditure is estimated to increase from 3.5%
to >6% GDP over time.
Critics point to a lack of debate and detail on what is being proposed in terms of
service delivery models (across the public health system and the private sector) and,
importantly, financing. Hopefully, more could be revealed later this year.
Sub-Saharan Africa, SSA (0.4% of the global pharma market)
SSA medicines market value is estimated at $2.5bn, growing at ~5-7% annually. Key
country markets are Nigeria, Ghana and Kenya, although there are some 46 countries
altogether, of which >30 have ‘least developed country’ status.
West Africa makes up a majority portion of this region, home to ~250mn people.
Imports of finished products account for >60% of the African pharma industry, and
likely a much higher figure for this region.
Local formulation and packaging takes place on a limited basis, but API production is
restricted to SA.
Africa’s challenges – the high burden of disease, the booming populations – also
represent its opportunities. These markets are at the high end of the growth spectrum
in African terms (approaching 20-25% per annum), but the ‘per capita spend’ on
pharmaceuticals is approaching the lowest in the SSA (and MENA) region, from ~$10
in Nigeria/Ghana/Kenya to ~$100 in SA (versus up to ~$400 in Kuwait, ~$350 in
UAE). The challenge is to address these market opportunities with affordable
medicines.
International regions
Emerging markets are profiled by a number of attributes, including:
• Large markets, and fast growing;
• Evolving healthcare programmes, but a need for greater access (to products
and healthcare services);
• ‘Out of pocket’ healthcare spending models (in the main);
• Domestic products (i.e. not blockbusters) – often very local brands, which are
long-lived; and
• Untapped potential (in general).
Aspen is already connected into a number of these markets, notably Latin America
and Asia Pacific. Strategically, the company needs greater exposure to Asia Pacific –
and particularly markets outside of Australia. Although the Sigma transaction further
increases the revenue dependence on Australia, the new organisation should be in a
far better position to be increasingly active with product development and sales
initiatives throughout this very attractive commercial region.
From a world pharmaceutical market growth perspective the significant opportunities
are likely to be found in China, Korea, Brazil, Mexico, Turkey, India and Russia. These
markets are anticipated to grow, on average, at 12-13% per annum (or better)
compared to single digit growth rates in mature markets. So an aggregate value figure
of the above markets is estimated to grow from $55bn in 2006 to >$400bn by 2020.
Asia Pacific (8% of the global pharma market)
Apart from the highly-developed Japanese market this region comprises a number of
‘pharmemerging’ markets, that is, those characterised by significantly higher than
average growth, notably China and (South) Korea.
Excluding Japan, the pharmaceutical market in this region is estimated to be
~€43bn/$56bn, that is R410bn (or $126bn including Japan). It is estimated by IMS
that 50% of worldwide pharma market growth is likely to come from Asian emerging
markets (with >30% from China, which is likely to be the world’s No 3 pharma market
by 2013). In this region, China, South Korea and a range of the smaller Asian Pacific
markets are expected to be the growth drivers.
West Africa dominates
Challenges – but LT opportunities
More exposure to ‘pharmemerging’
markets required
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Latin America (4% of the global pharma market)
Key pharmaceutical markets in this region include Brazil, Mexico, Venezuela and
Argentina, contributing ~80% of the total estimated value of $30bn. The high-growth
markets are Venezuela and Argentina (both >20%) and Brazil (~13%). Mexico’s
current growth trajectory is lower; however, it is still an attractive market through a
preference for branded generics and its longer-term potential for growth.
Aspen Pharmacare Company Report 22 August 2011
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