We had a fascinating interview on CNBC Africa Power Lunch with the CEO of prospective JSE newcomer Ascendis Health. Dr Karsten Wellner, a German who came to SA in 2000 when sent here by multinational Fresnius, played a central role in the Competition Commission’s investigation into collusion on the pricing of an estimated 17m intravenous drips sold to the State. We spoke to him about that, the business and what he felt would appeal about his group to investors. Off air he told me the listing was likely in November 2013.Â
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ALEC HOGG: Ascendis has signed a large pharmaceutical deal which hopefully will close next month ahead of a planned listing on the main board of the JSE sometime this year. A bit vague, but we will find out more about that in a moment. With these acquisitions the company will push up its number of employees to over 800 people and have sales in the vicinity of R1.5 billion.
Joining us now for more is Dr Karsten Wellner, who is chief executive of Ascendis Health. Well, it’s good to have
you in the studio today because we haven’t seen too many new listings – certainly not in the pharmaceutical area. Your momentum though has been building. Earlier this month you bought a big brand name, Solal. You didn’t disclose the exact number, but with the two acquisitions R300 million (combined) what is Solal worth?
KARSTEN WELLNER: Yes. Normally when we acquire businesses we always try to lump them in the press releases because there are sellers of the businesses. They don’t want to really show what they have got for the acquisition, so that’s the reason. We were a bit vague, I agree…
ALEC HOGG:  You’re going to have a Prospectus (ahead of listing), you’re going to have to disclose….
KARSTEN WELLNER: Yes, going forward, but both together, the acquisitions we signed up, one was Marltons which is a pet and accessories company, a market leader in its area, and the other one is Solal. Of course, Solal is the bigger one of the two acquisitions which adds up to around R300 million (in) value.
LINDSAY WILLIAMS: Karsten, Lindsay Williams in Cape Town. There have been some cynics that have said that all you’re doing is you’re going on the acquisition trail, you’re buying companies, bolting them all together, creating a company to be listed on the JSE, and I don’t know why they particularly think it’s a bad thing, but they seem to. What would you say to them?
KARSTEN WELLNER: What we acquire is businesses in the area of… we call it health and care. It’s not a typical health care business we have. We acquire businesses, strong brands that are in the vicinity of health care companies; all around animal health, plant health and human health. And the environment in South Africa is a little bit volatile on the health care market. We have potential delistings. We have the fight for the acquisition, or the potential acquisition, of Adcock Ingram and we have the Cipla story, Litha was under cautionary for certain types, so we think it’s at the right time for a new player in the market, which is not a typical player… not a typical health care player.
That’s why we say we are focusing on brands, strong brands in health and care, because some of our brands are not typical health care brands. They are care brands like our Marltons business, which is a pet accessory business. Our Nimue business, which a cosmaceuticals or dermacosmaceuticals business, products which go to the dermatologist, products to go to beauty salons and so on… So it’s not a classical health care player. We try to play a little bit between consumer brands and registered products with the medical control council.
ALEC HOGG: Part of the issue here, the questions that many investors have, is in the 1987 (new listings) boom we saw many companies come into the market where they tacked a lot of businesses together. We saw the same thing in 97/98. What one is seeing from your business is many companies that are a very strong acquisition trail and there’s things like culture, there’s things like integration. What makes it different in your case, that the sceptics are concerned about?
KARSTEN WELLNER: First of all, we invest in defensible businesses. That’s very important for us. Defensible business, for us, means strong brands who are somehow in the market, either in a market niche or in an area where they have established themselves as a strong leader. So our business model doesn’t look for short term gains like sometimes you can find in private equity – you restructure the business and after four or five years you sell the business. We have a more long term approach. We want to build an operational business with strong brands in these areas.
Of course, there are synergies which you can find on the vertical side or the horizontal side – horizontal synergies with bolt-ons to the
business, and on the vertical side, synergies where you can increase the value chain by having a procurement, a joint procurement for some other businesses, having maybe a joint production and so on.
ALEC HOGG:  We’ve heard that before. We hear that all the time. I’m not getting the secret bullet or the silver bullet from you. Why are you going to be different?
KARSTEN WELLNER:  We will be different because we are bringing together health aspects out of different areas: of animal health, plant health and human health. And we are not actually… If you look at our brands, these brands are very strong brands, South African brands. A lot of these products, when you go in the health care sector, a lot of products are imported. If you go into medical devices, a lot of products are imported. You are actually dependent on fluctuations in the exchange rate.
Our brands, if you take Efekto as a brand, which is probably 50 years in the South African market; Solal is a South African brand. Nimue is a South African brand. We are taking the South African brand outside of South Africa. If you take, for example, Nimue, we are with more or less 28 international distributors already. If we repeat the success of what we have done with Nimue in South Africa in other markets, we are already strong. We have our foot in the door. Actually, not a foot – a whole leg in the door, in the Scandinavian markets, very quality conscious markets.
So I think the difference is really, first, very strong brands; defensible, and playing in the health and in the care sector, not only the classical health care sector. If you play only in pharma, you are restricted to many regulations. You have single exit pricing, you have government intervention which, of course, is right. You have to regulate the medical market and the pharma market, the classical pharma market.
We are playing in a market where, let’s say, neutraceuticals – sometimes they’re called CAMs products, complementary alternative medicine – they are also regulated. They will be more regulated in the future, but you still have the possibility with a good marketing mix, with good activities in the market to actually shape your business, decide your business, and that’s the reason why we invest into strong brands. And all the brands we have invested in are as a market leader or number two in the market, and are positioned quite well in the market going forward.
LINDSAY WILLIAMS: If you were, again, being cynical about it, would you say you’re actually a consumer beauty business rather than a health care company, because there’s lots of talk about anti-ageing this and it seems to me there’s a lot or, sort of, vanity products there; people like myself who are trying to stave off the ravages of old age which creep up on me every single day, and if you are that type of company, do you think that this is appropriate for the South African market? In other words, do you think there’s growth?
KARSTEN WELLNER: We are in our present investments; are, and you are right in your statement, are more in the preventative space, in the space where you could actually call it a… We also call it in our division, consumer brands division, but at the moment we are actually doing a due diligence of a pharma company which will move us more into the intervention space. So, yes, you’re right. So far, our businesses are more on the consumer brand side and a lot of our customers are big retail chains – the Dischems of this world, the Pick ‘n Pays of this world, Massmart. So all of them are actually our customers.
Like I said, we have at the moment an acquisition running in the pharmaceutical side. We are still at the moment under cautionary or under a non-disclosure agreement because we’re doing the due diligence at the moment. That will move us more into the intervention side rather than the preventative side. And, yes, you’re right. So there’s a lot of focus on consumer brands and if I look at our present business, our biggest part of our business are consumer brands, and Solal plays a big role in that, and if you take the Efekto business – Efekto being a home and garden company – yes, you might ask, what does it have to do with the pharmaceuticals or with health, but it’s health for your garden, health for your house.
That’s why we sometimes have a slogan: we say, health for your home, health for you. That’s actually what we are focusing on. It’s just a little bit of a different approach than to the classical concept where you have a pharma player which only concentrates on registered, medical control registered products. We are playing in that space of, yes, we are moving a little bit into the registered areas, but we are playing very big the consumer brand sector. That’s actually our difference.
ALEC HOGG: When one invests in a new company. Obviously, Gary Shanyne and Cris Dylan are well known in investment markets with
Coast2Coast, but it’s… I’d like to talk a little bit about you. You were the fittest chief executive in South Africa in 2006, according to your website. Your website told me that, from the Iron Man (competition)?
KARSTEN WELLNER: Living in Port Elizabeth for some years, I think you had to do Iron Man, otherwise you’re not socially accepted and the whole town is doing Iron Man it looks like…
ALEC HOGG:Â You should have gone and helped the local rugby team. They could have (done with your help)
KARSTEN WELLNER: They needed (help)… But I’m not such a strong guy….
ALEC HOGG: But the question that has to hang over you is the involvement you had with the Competition Commission, with Adcock Ingram and the fine that was levied. And you actually took advantage, one of the first people in South Africa, the company you worked for, Fresenius, taking advantage of the Leniency Programme. Talk us through that, because Competition (abuse) is very much in focus today with what’s been happening in the construction industry. You didn’t get fined, if my research is correct? Were you the one who went to the Competition Commission and said, we’ve been naughty boys, (but) we want out?
KARSTEN WELLNER:Â It was a difficult time. We invested – Fresenius, a big multinational player with more than 140,000 employees worldwide, listed at New York Stock Excha nge on a double listing at DAX in Frankfurt – invested in South Africa already at the beginning of the 90s in the distributor in South African Druggists. You might recall South African Druggists was actually sold off. They were sold to Aspen and they had a plant in Port Elizabeth which was bought by Macmed. So as Stephen Saad (Aspen CEO) bought that plant, sold it to Macmed, Macmed went bankrupt, and out of the liquidation we bought actually the plant in Port Elizabeth.
And with the liquidation we bought a good plant with good dossiers but also there were some problems, some problems with… that are actually going back already many, many years before. There were actually some talks in the vicinity of collusion and fixing one tender in the State sector, one in intravenous drips which was oversupplied between the two players at that time – South Africa Druggists and Adcock Ingram. We actually went into THAT (market) because we bought the company. We bought also with the company the managers of the company. We went on with that for a certain time and then we actually stopped.
ALEC HOGG:Â So you went on with the collusion.
KARSTEN WELLNER:Â Yes, probably for three or four years because the market was segmented.
I came into the business and we weren’t a big player. At that time we were a small player. Adcock Ingram was the big player at that time. And, yes, in 2006 the Competition Commission knocked on our door. We took the Leniency Policy and there were clear regulations on the leniency policy what are the conditions as a company you can take Leniency Policy. We played all these things along. Nothing in the law. At that time there were four conditions. You weren’t an instigator. You weren’t the biggest player. You actually stopped the collusion.
ALEC HOGG: So you’re happy that you’ve come out of that clean?
KARSTEN WELLNER:  So we came clean – the company and me personally. And I took at that time the stance to say, I come clean, put all the cards on the table and we stopped that completely in 2004/2005. So that’s something which was an alternative…
LINDSAY WILLIAMS: When you do come to market, what would you say to the investment community? Would you say that you are a cyclical stock or you’re a defensive stock? In other words, we talk about the financial health of the South African consumer. Do they take their health seriously enough to, even during bad times, still go and buy expensive supplements, etc?
KARSTEN WELLNER: We are from a portfolio point of view defensible in the area that we say we want to have businesses which are
somehow protected. Protected either via a regulatory environment, protected by a strong brand, or protected by very good education, very good quality of the products, a lot of scientific background of the product. Solal is a company which invests a lot in innovative new products, so from that side that’s what we call under-defensible. Our growth strategy is based on three pillars – on synergetic growth, organic growth and, of course, acquisitive growth.
So if you look at our acquisitive growth which we have shown in the last two years, it doesn’t… definitely doesn’t look defensible. Defensible you think about more slowing down and so on, but I think the brands that we have acquired in the last years, they are in per se defensible because they’ve proven their forte. They are good brands, they have weathered the storms in South Africa for many years, so from that side we are… it’s from our growth strategy is not defensible, but the brand products are definitely defensible.
ALEC HOGG: Dr Karsten Wellner, the doctor not of, as one might think, of medical science but a doctor of international politics and economics, yes. Well, you’ve done pretty well here today and we look forward to talking to you on the day that you list.
KARSTEN WELLNER: Thank you very much for your time.
ALEC HOGG:Â And how much money have you got? How much capital have you got still to play with?
KARSTEN WELLNER: Oh, that depends. When we find the deals we have to raise the capital, for example, our listing we actually want to raise R400 million which we’re investing actually into new deals. We have lined up certain deals, and you know the market in South Africa. The banks are, of course, for certain reasons, conservative, so you have to actually raise the funds on the stock market. We think the stock market is the right place because we think our share, our story which we’re actually putting onto the market is a convincing story because it’s something new, something new we are combining health and care products.
