National Health Insurance will be good for business – healthcare CEO

The healthcare business in South Africa is not as volatile as the mining business (what is?), but as a highly regulated sector, it still has its share of complexities and legislative anxieties. The biggest thing that private healthcare companies worry about is the impending National Health Insurance plan, which will see the implementation of a mandatory national healthcare plan. Although details remain scarce, there’s a lot of concern about what impact the NHI will have on South Africa’s large and highly profitable private healthcare system. So it’s refreshing to hear Ascendis Health CEO Karsten Wellner saying that he believes the NHI will be positive for his company – he thinks the recapitalisation of South Africa’s many small clinics will be a boon to medical device manufacturers, and that South Africa’s various generic drug manufacturers will also benefit from the NHI, as more people get access to medicines and generics grab a generous share of that market. – FD

To watch this CNBC Power Lunch video click here Karsten Wellner

ALEC HOGG:  Ascendis Health posted interim results boasting a revenue increase of more than double last year.  Of course, it has only recently listed on the Johannesburg Stock Exchange.  Karsten Wellner, the Chief Executive of Ascendis Health joins us now to unpack the numbers with us.  Karsten, I guess the sad thing – and it must be sad for you – is the reality that the share price is trading at below where you issued ahead of listing, and at the time you raised 453 million Rand.  You would have hoped that by now shareholders would be showing some gain rather than a decline.

KARSTEN WELLNER:  Firstly, thanks for having me here at Power Lunch.  I’m very impressed that you also took me after Warren Buffett.  You and David were talking about sustainability and long-term approaches.  We believe – very much – in long investments, in resilient brands, and therefore our investors should also expect to be with us for the mid-term and not for just a few months.  Of course, when we listed we had certain expectations.  I think we listed at the right price, but the numbers/results will show now that we are on track.  We are keeping our promises and our commitments, which we had given during the road shows and with the pre-listing statement.  I’m pretty sure that our share price will follow the fantastic results, which we are presenting today and tomorrow in Johannesburg.

GUGULETHU MFUPHI:  Karsten what have you managed to do with the capital that’s been raised since the listing?

KARSTEN WELLNER:  Parts of the capital we used to pay back the overdraft facilities, which we still have but we didn’t want to let it lie around.  We’d used our overdraft facilities for some of the businesses.  We paved the way for some businesses, which we still had to pay in November and December, and the big one was Surgical Innovations at the beginning of January.  When you look at our six-month’ results, we have a lot of cash – not a lot – but some cash still lying around.  Our net debt-to-cash ratio is pretty good at the moment, but it’s because we raised 450 million Rand for our organic and acquisitive growth, and our upcoming acquisitions, which have to be paid in the next months.

ALEC HOGG:  It’s very difficult when you have a rapidly growing group like yours to make like-for-like comparisons, but I guess where I would be looking is in the operating margin, which is up very strongly in this period.  Is this as a result of new businesses that you’ve brought in?

KARSTEN WELLNER:  It’s a mix of several businesses.  As you say, bringing new businesses in is very important.  The other thing is some of our synergy projects…to improve the vertical supply chain around the vertical integration of our businesses, is paying off.  The third thing is actually a better mix of our customer base and our product base.  Probably the last thing is the consumer market is a little down at the moment in South Africa, but we focus on the high LSM, on the nine to ten.  We know from studies, which were published recently by the Financial Mail that there around eight to nine million people in South Africa in that high LSM area, and they are quite resilient to economic downturns.  On the other hand, in our Pharma business we have lower LSM business, which will help with the NHI (National Health Insurance) to come.  Yes, we have focused on our margins and we have remained focused on our margins.  Probably the last point why our margins have done relatively well is that we could counteract imported inflation via very strong export growth.  Ascendis grew its exports by 209 percent in a six-month period and of course, that somehow was to hedge the foreign exchange volatility – the Rand had shown.

GUGULETHU MFUPHI:  Karsten, you mentioned the NHI there.  What will your role be?

KARSTEN WELLNER:  We have two businesses in the Pharma space.  One is a Pharma company with generics.  The other one is a medical device company Surgical Innovations, which we included on the 1st of January.  Both of the companies are well positioned.  The NHI will recapitalise some of the clinics in the smaller hospitals and we will bring surgical innovation and expertise in the hospital market into play.  On the other hand, the generics business of Pharma Chem will help with new products.  We’ll be negotiating new dossiers, building on them, and the profits out of them will trigger down to the bottom-line.  I’m very confident that the NHI will be positive for us from an affordability/accessibility point of view for Pharma Chem, and for new bolt-on’s in medical devices, with our strong expertise in surgery in the hospitals, for the medical device division, so we are confident.  Of course, regulations are sometimes an administrative burden for businesses, but there are also positive effects of regulations from the public health point of view, and also for us.  We are well positioned to play along with the increased regulatory hurdles, which the Medical Control Council puts in some sectors in the industry – like the [unclear 5:24] industry.

ALEC HOGG:  The big news since you listed in your sector anyway has been this ongoing battle for Adcock Ingram.  Brian Joffe himself is the Chairman.  He was telling us here at CNBC Africa that he has, together with his consortium, put in four billion Rand, which was a lot of money to make sure that they get a good return on it.  Does it change the playing field at all for you, the fact that Joffe and Bidvest is now in the driving seat at Adcock Ingram?

KARSTEN WELLNER:  No, it’s always good to have a strong Pharma market in South Africa.  Adcock had been a little bit shaken I would say, due to the overtake battle over the last one-and-a-half years, so it’s good that Adcock Ingram gets some strategic direction now again.  Brian Joffe will probably focus very much on the value chain of Adcock Ingram and I hope he also pushes Adcock Ingram for more exports and growing Adcock Ingram in the international market.  What does it mean for us?  Now of course, we are talking to several players in the market and we will also talk to Adcock Ingram to see if there are businesses, which they don’t really fit in their strategy whereas they fit in our strategy, and see if we can get some bolt-on’s onto our businesses.  I’m happy actually, that for the market, the Pharma market, and probably also all the management team at Adcock that this unsolved situation has been solved – for whatever reason there was and whatever direction…  I think it’s good that it was solved.

ALEC HOGG:  The Chileans showed quite a lot of interest in South Africa.  Could that be a partner for you?  Would you consider talking to them?

KARSTEN WELLNER:  We will definitely elaborate on this.  It’s a good idea.  You must have been at our last strategy meeting because we had exactly the same idea.  We thought maybe we should talk to them and see if they can open some international markets for us.  It’s important and internationalisation is on my heart.  It was always my business in the Pharma industry.  I taught International Management at the Stellenbosch MBA School for several years.  I think we have to grow our business internationally.  We have some fantastic brands in our stable and we actually have a lot of room to grow – not only organic growth in South Africa but also international growth will play a big role.  Maybe just to add one more, you talked about Warren Buffett before.  Warren Buffett believes in sustainable resilient businesses and our local brands are long established; some of them – 30/40 years in the market, and we believe in their strong growth locally but we can take some of the South African brands internationally.  That’s what excites me, my management team, and also I think – more and more – our investors.

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