The recent purchase of Scientific Groupâs Diagnostics division should yield more upside if Ascendis Healthâs track record is anything to go by. Karsten Wellner, CEO explains how the moats, calculated risks and diligence around picking Ascendis Healthâs acquisitions are the bedrock of what has fuelled the share price from listing less than a year ago at R11 a share to over R16 currently. A rosy story indeed in a world where both the appetite for extending credit and the concomitant risks seem to have shrivelled. Wellner has negotiated a respectable line of credit as well as promising acquisitions. Watch this space as there’s more to come. – CP
GUGULETHU MFUPHI: Well, Ascendis Health has acquired Scientific Group Diagnosticsâ businesses for R284m, which will position their Pharma-Med division as a significant player in the fast-growing preventative healthcare sector. Here, to tell us more about the deal is Karsten Wellner, the CEO of Ascendis Health. Itâs good to have you with us, Karsten. Perhaps you could tell us the rationale behind this deal.
KARSTEN WELLNER: Our business is a growing business in the Wellness space with pharma products and medical device products, and we have been looking for acquisitions to complement our medical device strategy, being a strong player in the medical sector in South Africa. As we all know, the medical market in South Africa⌠95 percent of medical devices are imported. There are some considerations in that industry and we could find, with the Scientific Group, a very nice complimentary business to our existing products and orientation to the surgeons, to ICU, and now in the diagnostics space.
ALEC HOGG: This is an interesting business because if memory serves, it was a part of Jasco many years ago. Then it became private equity, so now it finally has a home.
KARSTEN WELLNER: It was actually, Adcock for some years in between. Itâs a long-established business. It was founded in 1983 by two South Africans and what we like about the business is firstly, the complimentary part to our businesses. Secondly, (and that is actually also quite exciting for our strategy), 40 percent of the business comes from outside of South Africa in African markets such as Zambia and Botswana. We have representative offices and theyâve recently won some good business in that area, and the business has been performing strongly. You mentioned the private equity businesses Brimstone and Capital Vox owned the business for the last years and we have been knocking on their doors for probably the last two-and-half years. We could finally buy what we were interested in, in the Scientific Group because weâre not buying all of the Scientific Group, but a part we liked â the diagnostics part.
ALEC HOGG: I know youâre an iron man and a runner, but Iâm sure you can bear with me on this baseball analogy. Pitches come all the time. You swing at them â and youâve been doing a lot of swinging. Youâve been doing a lot of purchases. Youâre not going to hit every one out of the park. So far, one of the issues that there is bit of a concern about, is Solal â a couple of major products being taken off the shelves there.  Where, in the overall strategy, do you start taking account of the risks? At some point in time, youâre going to swing and miss.
KARSTEN WELLNER: We constantly look at the risks. Itâs important if youâre an acquisitive company. Our business strategy is âorganic growthâ where we currently deliver 15 percent. We reported this recently. In addition, we have an acquisitive strategy and a synergistic strategy. If you know there is a risk, you can mitigate it and you can work on it. We actually found integration teams that help us during the due diligence and later on, in the integration so thatâs always a risk. If you look at our risk⌠Every business has risks. As long as you mitigate them and work on them, itâs probably fine. As a business, we have the risk of foreign exchange influences and weâre working on that with our export strategy in order to have a natural hedge against Rand volatility. The second risk is âdo you integrate the business properlyâ and I mentioned that weâre working on that. It is important if you are acquisitive.
As long as you know thereâs a problem or there could be a problem, you have to work on that. To integrate as entrepreneursâŚyouâre right. Of course, thereâs the regulatory risk you mentioned â the CAMS with Solal -, but every regulatory risk also gives your business resilience and defensibility. The Pharma market is a much-regulated market and thatâs why investors love the market as well, because it gives them a certain stability and defensibility of the business. The Solal business you mentioned is in the entire picture of Ascendis being a R4bn market cap company â relatively small. Solal contributes probably eight to nine percent of sales and the CAMS product, which affects probably one-point eight to one-point-nine percent of the total business of Ascendis. Ascendis, with this Phyto-Med business, Pharma-Med business, and Consumer Brands, is more than just Solal. Itâs Nimue, Cosmeceutical products, and the Efekto range so itâs quite a wide range.
ALEC HOGG: Yes, I get all of that. However, if youâre the entrepreneur doing the selling, you know youâre only going to sell at a good price or else, you have to believe in the whole of Ascendisâ future. When you do transactions with these entrepreneurs, how much do you pay in cash and how much do you pay in equity?
KARSTEN WELLNER: Firstly, I have to say we never⌠Actually, these guys donât knock on our doors. We actually, have to sometimes do blind calling because we have to work hard. With the Scientific Group, we worked two-and-a-half years to get it over the line, so it was a long process. What do we normally pay? We probably pay one-third in cash, one-third with deferred payments, and one-third in equity. It doesnât always work with that model. For example, if you take a business we bought recently â Surgical Innovations â a business that was owned by Metier and Metier wanted to have cash as soon as possible for the sale of their business. They had a lock in with their shares. They bought/took some Ascendis shares for three/four months and then went out.
ALEC HOGG: Just quickly, because I know Guguâs desperate to ask another question. With the economic climate in South Africa⌠I was reading through the Imperial Annual Report last night and itâs very gloomy, what Thulani Gcabashe had to say in there as the Chairman, about whatâs happening in this country. We heard Mohammed Nalla before. You look at the economic growth rates. Are you finding that there are more entrepreneurs saying âwell, perhaps they wouldnât have answered your calls in the past, but now they are interestedâ, and now they are perhaps looking to sell their businesses?
KARSTEN WELLNER: I donât know, really. What we see is that when talking to the entrepreneurs, we have to stick to our business models and our business model is not to overpay. Even if we listed now at the JSE with a higher multiple, we still pay seven to nine times PE multiples for all businesses. We have to remain diligent in keeping on doing this of course, to create value-add for our investors, but also to be honest to our business model.
ALEC HOGG: Yes, but the question is⌠Are you getting more people wanting to sell because of the economic climate?
KARSTEN WELLNER: I would say âyesâ. That probably has an influence but because we have LSM focus⌠We actually look at high LSM products/good brands. Weâre not interested in rundown businesses or turnaround businesses and thatâs very important in our strategy. Donât invest in bad businesses. We invest in good businesses.
GUGULETHU MFUPHI: Just on that, how do you guard against not picking up anything? Yes, it might appear as a fundamentally good business on a piece of paper, but the value-add that youâre hoping to unlock in the long termâŚ
KARSTEN WELLNER: Yes, we have to integrate the businesses. Thatâs very important. We arenât actually an agglomeration of businesses. We just consolidate and show the consolidated balance sheet of it. We integrate these businesses and there we unlock many synergies between these businesses. You can imagine that when we have three medical businesses, with one focusing on surgeons, one on I.C.U.âs, and one on diagnostics thereâs a lot of complementary possibilities and many synergies achieved with the servicing of products. Weâve done turnkey projects. The NHS talks about many new hospitals and many new day clinics, so we can offer turnkey solutions to them. There, you extract the value of adding something that a single company couldnât do before.
ALEC HOGG: Do you think the NHS is realistic, given the stresses on the public finance now and the amount that it will cost?
KARSTEN WELLNER: It is happening already in many areas. We see it in the recapitalisation of many hospitals, albeit Government hospitals, day clinics, or new licenses dished out. Remember, in the past our medical market was dominated by Netcare Life and MediClinic. Many new companies are coming to the market. We recently saw the listing of Advanced Health, a company specialising in day clinics. All these clinics need equipment, so there is a lot happening there. Yes, I think the NHS will come. It might take a little bit longer. We might have to reach a little bit deeper in all our pockets from an income tax point of view, regarding what we have to pay for it, but in the end, it will come.
GUGULETHU MFUPHI: Just on your pockets⌠Is your balance sheet fit enough to handle all the acquisitions that youâre currently undertaking?
KARSTEN WELLNER: Itâs a good question. I was on Alecâs show recently (a few weeks ago) when we announced the two-billion DMTN program where we issued notes and drew the first 400-million. Our nett debt EBITDA is currently two-and-a-half. We donât want to go over that, so weâre currently doing a little private equity raise in order to finance upcoming acquisitions.
ALEC HOGG: So thereâs more to come.
KARSTEN WELLNER: Thereâs more to come.
ALEC HOGG: I hope you keep swinging as well because so far, I suppose youâre going to hit a few into the stands but by the same token, youâre going to miss a few, too.
KARSTEN WELLNER: We were actually doing our best not to miss some and so far, our numbers show that weâre doing the right thing and we are on that growth of mixing entrepreneurial spirit with corporate governance and corporate scale, and it works very well. Our numbers show it.
GUGULETHU MFUPHI: Well, we certainly wish you the best in your endeavours. Thank you so much for joining us.
KARSTEN WELLNER: Thank you.
GUGULETHU MFUPHI: Thatâs Karsten Wellner, the CEO of Ascendis Health.
