Aspen Hurts

Aspen Pharmacare, a long-beloved Vestact stock, reported its annual results yesterday, for the period to the end of June 2018. Simultaneously, they announced the sale of their global infant nutritional (baby milk formula) business, for just under R13 billion.

The results and the announcement were not well received. The stock fell sharply, gyrated wildly and ended up down 15% at the end of day.

For starters, it seems that some analysts had expected the infant nutritional business to achieve a higher selling price. Bloomberg had been reporting a possible $1 billion price tag when the rumours first hit the market a few days ago. The buyer is a privately-owned French milk producer called Lactalis. Considering that Aspen bought and built up that business for peanuts, the selling price of €740 million ($865 million) looks very good to me?

Tepid results were probably a bigger concern. Group sales growth of only 3% for the year, and normalised headline earnings growth of only 10% were well below expectations. The Rand-denominated results were held back by currency headwinds in the early part of 2018. In addition, spending on the roll out of a sales team in Asia was high, and one product division had weak sales. Worryingly, Aspen reported that the supply of mucosa was constraining their output of heparin at one of their major manufacturing facilities.
Up until five years ago, Aspen regularly delivered 30 to 40% annual growth in earnings, and was much beloved by South African investors. It stood alone in our market, a fresh new company in the exciting global pharmaceutical industry. As you know, we believe that healthcare is one of the most attractive long-term investment themes, as people around the world get richer, live longer and search for therapies to stay alive.

In the last decade, Aspen bulked up substantially by completing a number of acquisitions in Australia, Europe, Asia and the USA. It now has a respectable portfolio of registered anaesthetic and thrombosis products. It has world-class production facilities in South Africa and in Europe. It also has a global team of sales representatives. On top of this they have a well-established European corporate debt programme, and have been well supported by its bankers. All of this a great credit to the management team, led by CEO Stephen Saad.



However, it now competes on the world stage, with other global pharmaceutical titans which have massive drug research and development teams (which Aspen does not). Those competitors are also ambitious, also have well positioned sales teams in every major market, and also have access to boatloads of money to invest.

We are still strong supporters of Aspen. They are tough and talented operators. We feel that the sell off yesterday was unwarranted, and was probably the work of adventurous short-sellers. If the long-term shareholders of Aspen step up in the days ahead, those short-sellers will get their comeuppance. At R232 per share, and a price to earnings ratio of just 15.8, the stock is a bargain.