Time to invest in SA pharma stock Aspen? Listen to CEO Stephen Saad #BestofBizNews

Aspen Pharmacare has been through a difficult phase of restructuring but the pharmaceutical giant is in great shape, especially with the latest sale of its thrombosis unit to Mylan. With Covid-19 wreaking havoc, Aspen is also in a great position with the production and distribution of the life-saving drug Dexamethasone. BizNews founder Alec Hogg was joined by CEO Stephen Saad during his Rational Radio webinar to discuss Aspen’s excellent preliminary results as well as his desire to take Aspen further into vaccine territory. Market commentator David Shapiro and Adrian Saville of Cannon Asset Managers also joined the fascinating discussion. – Claire Badenhorst

Aspen Pharmacare

Alec Hogg: We’ll be joined by Stephen Saad, chief executive of Aspen, of course, which released its prelim results last week. Stephen, just to go back a little to last week’s results. What’s your reaction like to people like Adrian who own your stock? Were they universally delighted at the numbers or were there some critics?

Stephen Saad: If you go through our presentation over the last two years and you see what we said we were going to do and what we did do, we’ve been absolutely consistent in delivering on what we said, including saying, we will resolve Europe by September. We did overperform in terms of, you know, we thought we’d be relatively flat with the price earning and then we updated that to growth and we grew 9%. Some of it was rand depreciation because we are 85% offshore, but that was only in the last quarter. But yes, we’re very, very pleased with both the operational and where we are strategically.

Adrian, you’ve got the first bite.

Adrian Saville: I followed Aspen very closely over many, many years. I know a guy called Gus Attridge, who some years ago – around about 1996 – said to me, I should buy as much of this as I could possibly afford. And, you know, we’re talking about a share price that was in the rands then. Now it’s earning multiples of that in earnings. What I would be keen to know is, where you went through that period of specific market stress – what was your thinking in terms of the portfolio? What was a movable and what was a non-negotiable? And now that we’ve got a revised portfolio, what do you think the sum-of-the-parts of that portfolio is? Should I be paying 10 times for those earnings?

If you look at it, we probably sitting at eight times EBIDA. Multiple, if you take our earnings and you see where the rand is and you most probably paying eight times EBIDA. I think most of our transactions have been done in double digits – 10, 12 times. These multiples, even if you put a multiple of 12 times over our earnings- and bear in mind, we didn’t sell the businesses that we overperformed in; these are businesses which we weren’t able to perform at the same level as the rest of our business in – you’re going to get a very different share price. Maybe it’s over R200. I sit and try and run this business and focus on where we’re going to go. We’ve had to focus very heavily on a change in strategy and how we manage that change of strategy through really tricky times.

David?

David Shapiro: You can’t take anything away from Stephen. I mean, they have managed themselves through a very, very difficult time which hit them in 2018. I think everything was against the pharmaceutical industry. Stephen was doing the right thing – transforming the company from what was a generic company into a world-class pharmaceutical business. And things went against you. You got caught with debt which you had to use in order to transform the company. You’re in a decent shape in the sense that you’re now selling into areas in which you’ve got the scale.

How do you see drug prices? We hear Trump all the time going on. We hear governments all the time about wanting to reduce drug prices. Of course, that’s going to hurt your margins. It’s a political issue as well. But it’s very important for you that drug prices are maintained and that you generate the kind of margins so that you can reinvest in the business. What’s your take on drug prices and specifically, with a view to where you want to take the company?

I think your comments are all fair, David, and right, particularly when the government’s a single payer. So, in many European markets, for example, the government are your single payer. I mean, I don’t think I’ve heard an American president not talk about drug pricing coming down. And to balance your budget, one of the easiest ways to balance it is to attack drug prices. So, I am concerned where government’s a single payer, and I’ve tried to position Aspen into a lot of the emerging markets where people go to private hospitals. They still want a quality product. But mostly we’ve made it affordable. So, when we in anaesthetics, we changing our model from commoditisation to speciality. We’ve gone into where we’re strong – in volume businesses. So, we sell our anaesthetics – anaesthetics sell at a dollar. If you’re doing a $20,000 operation – you’ve got to go to hospital, all the rest – you really are not looking at that dollar there because that’s got to put you to sleep and it’s got to wake you up. You really don’t want to have a mess up in that process – not because you’re trying to save 10c.

It was a painful metamorphosis. I often say to people, you know, we went into a cocoon for a while and I know a lot of you thought we weren’t coming out, and at best we were coming out a moth, and we were targeting a butterfly. So, a painful process, a metamorphosis, but a critical process because the importance of what we’ve done is it gives us five, 10 years growth going forward. We’ve got ourselves into an area where other people – it’s very hard to get in; high barriers. You see the pain we’ve been through and we’re number one in the world in anaesthetics and two in anticoagulants at that stage – with all of those volumes, how painful it was.

So, I think we’ve done the right things. I’m very comfortable. We’re in a good space. When Covid came I literally had heads of state phoning me all the time asking me for their share of our anaethetics. Then you saw what happened with Dexamethasone and you know, our facilities are shaped for vaccines. We’ve made sure we can make vaccines. I think that will differentiate us from commodity and commoditised players, and will give us that pricing that we need in order to be able to reinvest and to keep our margin.

Read also: Aspen sale sets hearts racing

How does it affect a business like yours when an old drug like Dexamethasone suddenly becomes very popular?

It’s a small tablet and it’s in a milligram. Tiny little tablet so you can make it quite quickly and easily. It does affect you because you start to look and say, have I got enough stock because it’s not about – you know, you selling at 10c a tablet – it’s not about the massive earnings increment or turnover increment. It’s totally about saving lives and WHO phoning you, etc., etc. So, we were able to scale up. We weren’t prepared for that type of demand, but we were fortunate enough to have enough chemicals, and enough manufacturing capacity and capability to prioritise, and make what the world needed.

Amazing how many lives have been saved just by that one development. So, sitting in your shoes must be extremely satisfying. Adrian?

Adrian Saville: Stephen, I’m interested from the perspective of the pharmaceutical industry. Is Covid a disruptor to industrial structure? Should we expect more M&A or is it, you want to be more diversified? Is geography the risk? Is it a particular drug that’s a risk or is it policy and regulators that are a risk? Has the world been disrupted for you?

Ja, the world has been disrupted. There’s been massive jumps in the supply chains and changes in the supply chain. I think also we finding multinational pharmaceuticals that have used China and India extensively are now really cautious. I mean, you’ve seen all this political stuff but also, during Covid, they actually suspended supply. So, you’ll see that in our results our manufacturing business increased and a lot of it was driven by multinationals now saying, listen, I want to buy from somebody who’s not going to cut my supply. From that perspective, hopefully it’s been positive, permanent adjustments in the supply chain. And it’s not just how much cheaper can I get it, but can I get the quality and can I get certainty around it? You know, there’s massive jolts coming from Covid; we don’t know where all those jolts are going to hit and impact economically. But, you know, I do think that those single payer markets are going to feel pricing pressures and so that might fundamentally change some of the markets.

The one thing that’s been absolutely consistent is the rise in a middle class in emerging markets. Absolute numbers increase. It might be 40% and it might still be 40%, but the population has grown. Everybody wants to get a medicine that’s of the highest possible quality affordably and that is what our entire business is based on, Adrian, is getting millions and millions of products so that we can sell 10 million or 100 million Dexamethasone. I don’t even discuss it. It’s just lots of tablets and it’s not a huge turnover impact, but when you add it all together and it comes into billions, suddenly you realise, we sending R100m or more a day, every day, 24/7, across the world. And that’s what gives us a huge degree of comfort about the sort of breadth of our business.

If you look at our top five markets now, it’s South Africa and Australia – you’re all aware of – but the other three maybe people might not guess straight away. It’s China; it’s Mexico; it’s Brazil. It’s no longer France, Germany, the UK, and in all of those markets we’ve had capability and growth. So, I think in terms of disruptive activity etc., I believe that our opportunity lies in getting stronger in those markets. Other people need partners. They’re all focusing on oncology – the latest greatest oncology products. So, they need partners in those smaller markets. That excludes China. A lot of them are very invested in China.

Are you still making Lennon medicine?

Yes, with a huge amount of focus. It’s our heritage and they are bigger now than they’ve ever been historically. Those are the type of brands that we like investing in. They are brands; they don’t get commoditised. People buy them. You can put some support behind them and so that is a lot of what our regional brands business is having brands like that within our business.

David, your question?

David Shapiro: Stephen – emerging markets – I’m glad you mentioned Mexico, Brazil, because I think the immediate concern is that when you say you’re going to focus on areas where you’ve got the capacity or where you’ve got the reach, the question I was going to ask is Africa because we suddenly seeing companies fleeing from Africa. China and Southeast Asia remain probably your big areas but how do you see Africa? I mean, is it still an issue for you or is there growth? And I’m talking vis-à-vis what we are seeing with the retailers and other businesses now who are starting to find it a little uncomfortable trading there?

Look, Africa is really tricky to trade in. It’s not one market. Logistics and distribution are really tough. We found the business in sub-Saharan Africa also particularly difficult in Nigeria, just to get your money out, David, was not easy. We sort of slowed down a bit in Nigeria but we put roots down, in fact, we’ve got our own facilities in Kenya, in Nairobi and Dar es Salaam, Tanzania, and Accra in Ghana. Our specific non-South African sub-Saharan piece probably grew at about 8% and we’ve grown that from a very small base. So, it does keep ticking along, generally relatively close to double digits. So, ja, I’d say we’ve been strong in East Africa. I am wary of trading in Nigeria.

Very small in the USA relative to the rest of the world. And in fact, that was the only area that fell in the past financial year. Do you want to talk to that quickly?

Yes, it’s largely a Canadian business so we’ve got a very smallish presence in the US and we tend to work through partnerships or through supply of other chemicals, or we licence products into the US market. If you’re going to go into the US market you’ve really got to have a plan, a strategy and be prepared. It looks big and it is big and it looks exciting and it is exciting, but it doesn’t come without risk. It’s one of those markets where your insurance payment is a percentage of your turnover, and that should be enough to tell you a bit about regulators and regulation. But we’ve got our hands full in the markets that we’re in and we’ve got enough size and capacities for them.

And you’ve had long enough to work it out, as you’ve said, over the last few decades of running this business to know where you need to be focusing your attention. Adrian, a follow up from you?

Adrian Saville: I’m curious to know if there is anything sort of on the shopping list, and that’s obviously a sensitive aspect, but is there a sort of a go-to place either geographically or in terms of industry that appeals to you?

Ja, there are go-tos. So, would really like to be part of the Covid vaccine solution and be able to use our capacities and capabilities, particularly if we can contribute, if our production or a portion of our production can go towards Africa. So, really would like to be a part of it and we’re ready for that. So, we’ve got those capacities, capabilities. What we’re also looking for is, together with these multinationals that are so focused on those core geographies for oncology, is how do we partner you across Africa, Latin America, all these areas which are, you know, when you’re doing $20bn in one drug, potentially, you really don’t want to have a distraction. And who can take that distraction away from us? Manage it without Foreign Corrupt Practices Act; manage it in a way that a multinational feels comfortable. And you know, the introduction in our business by bringing these multinationals through our manufacturing channel and the years of just delivery are what’s helped put us on the map. We do many deals with the factory and products you might have noticed. So, we get their factories; we fix their factories, but we say, OK, we want your products. We don’t do it through information memorandums, Adrian, so I think you should see some bolt-on opportunities in our core geographies.

I’d love to know how government has viewed having Aspen in the country because as we’ve looked at the deindustrialisation of South Africa we’ve lost many previously strategic industries. And here’s one right now with Covid-19 that is about as strategic as it possibly could get. Is there a warm feeling towards you guys now that you’re here because you’ve crossed your swords in years gone by?

We really are getting a lot of encouragement and support and there’s a lot of desire. Aspen’s making the news on many, many fronts in anaesthetics, Dexamethasone globally, and, you know, hopefully we contribute a little bit in the vaccines as well. So, ja, we get a lot of positives for it. And, you know, we are as a management team so committed to South Africa and committed to delivering drugs to everybody.

Read also: Steroids like Aspen’s dexamethasone can cut Covid-19 deaths, study shows – Wall Street Journal

David?

David Shapiro: You know what’s so fascinating? Stephen started off with SA Druggists which is a very well-known business on the South African market. I mean, Stephen, you’re a non-medical man. You’re not a scientist, I mean, where did the learning come from? And how have you managed to keep up with what is today an extremely scientific operation?

Certainly my best learnings were in South Africa and in the townships in a business before Aspen, and when I used to go and see the individual doctors one by one. And so I sat and I listened and I learned, and I got a very good understanding of need and where the opportunities lay in the South African market.

That is what so much of Aspen was built on was that, to understand, people want a quality medicine that’s affordable, and you can get to the masses that way. And that is the business that we were in.

How do we do it? We’ve got really good people in the business. They understand trends. I’ve got to say, what does this do? How does this work? We got a sense from there and, as I say, we tend to drive our own opportunities rather than people bringing them to us. I’ve learnt as I’ve gone along, David.

Look at the debt at Aspen and maybe you can talk us through this because there was a lot of excitement in the market after the sale of your European Thrombosis operation. Do you want to just tell us a little more about why this is so relevant? Net funding costs, as we can see, are declining quite significantly and with the sale of that 650 million euro unit, presumably a lot of that, I think you did say, was going to be put into further reducing debt. But at this point in the cycle with debt costing so little, has it changed your view towards this?

So, if you go back, Alec, I think it was last year December, we had R53bn. We were at 30 odd here, 35, I think, and if you subtract the debt we get from Thrombosis it would come down to about R20bn. And our EBIDA will be about 11. So, you’ve got less than probably two – two times – maybe less and a significant reduction. So, that’s what brings your interest costs down or brings it down further together with rates. We’ve got ourselves in a great position debt wise, now. By the time we consummate this transaction I don’t think we’ve been at these levels for maybe 10 years. Now you’ve got to decide what you do with it.

Obviously you’ve got plenty of headroom to pay dividends and all of those good things, but we’ve also – going back to, I think, Adrian’s first point – we’ve got to look very carefully at how we allocate capital. We’ve got to look at that versus acquisitions, so we’ve got some good up-siding having good organic growth. If we get our steriles half right we’re in a very good position. We do churn out a lot of cash. That’s one thing that Aspen has always done and so we look very carefully at how we spend that cash. How do we look at it? We really looking at it in terms of saying, do we pay a dividend? Do we do a share buyback? Do we do bolt-on acquisitions? Do we do all of the above? We’re in a pretty good position. I don’t think you’re going to see anything wildly transformative for us. We’re not going to suddenly say we need a new oncology platform right now. We’d like to bank what we’ve got.

Well, it’s been wonderful having you today. Thank you so much for joining us, Stephen.

  • The full Rational Radio webinar – which includes guests David Shapiro and Adrian Saville with fascinating questions from our listeners – can be found here

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