The once darling of the stock market has had its fair share of challenges. Some originating from its own decisions, others from factors outside of management’s control. However, Aspen Pharmacare enters 2024 with a strong balance sheet, drivers for strong earnings growth and a management team determined to get it right. Warren Buffet once said, “The stock market is a device for transferring money from the impatient to the patient”. This adage runs true with the likes of Aspen Pharmacare.
Results – A Hard Pill to Swallow for Some
Full year 2023 results saw strong topline growth of 5.4% to R40.7bn coming largely in line with market expectations. Commercial Pharmaceuticals saw revenue up 6% while Manufacturing revenue was up 3%. Management had guided for and achieved an impressive recovery in Commercial Pharmaceutical’s gross profit margin with overall group gross profit growing by 3%. However, earnings came in short of expectations, down 11% on the back of the fall in COVID-19 vaccine sales and a negative swing in net financing costs from foreign exchange losses arising from weaker emerging market currencies. The market was disappointed by the earnings print and the stock traded lower on the day.
Commercial Pharma Enhancing its Strategy
Over the course of the last financial year Aspen has announced three transactions in line with its strategy to be the partner of choice to leading global pharmaceutical and biotechnology companies for niche products in emerging markets.
The first with Amgen, to market, distribute, use and sell Amgen’s products in South Africa for an initial term of 5 years. The second saw Aspen’s AGI acquire the commercialisation rights and related intellectual property for several key products in Latin America. The deal includes household names such as Viagra, Zoloft and Celebrex. The last saw Aspen conclude an agreement with Eli Lilly to distribute and promote Lilly’s products in sub-Saharan Africa for an initial term of 10 years. These transactions are anticipated to add incremental annualised revenue upwards of R2bn in Latin America and South Africa.
Commercial Pharmaceuticals is anticipated to achieve double-digit reported revenue growth for FY2024 with stronger performance in the 2H versus the 1H, driven by organic growth and the product portfolio additions listed above.
Manufacturing Laying Idle
Towards the tail end of the COVID-19 pandemic, Aspen Pharma brokered a deal with Johnson & Johnson to package, sell and distribute its COVID-19 vaccine under the brand Aspenovax. Unfortunately for Aspen, the demand for COVID-19 vaccines nose-dived leaving their state-of-the-art sterile facilities idling.
“You can’t sit and cry in the past,” CEO Stephen Saad was quoted as saying. “We found another plan and that plan is going to deliver more than we ever could have hoped for under COVID”. Utilising the spare capacity at their sterile facilities in France and South Africa became key to their future earnings potential and the market has eagerly welcomed any update in line with this.
In 2022 an agreement was signed with the Serum Institute of India to manufacture and sell four Aspen-branded vaccines for Africa, an agreement anticipated to provide a pipeline of vaccine orders for years to come. Further, in their 2023 interims, management guided to R2bn in revenues from the sterile manufacturing business in FY2024, increasing to R4bn by FY2025 with a potential annual contribution of R8bn if all capacity is utilised. Management reiterated this guidance in FY2023 results and indicated capacity utilisation stood at 50%. Progress is being made albeit at a slow pace.
Playing the Long Game
Since the start of the year Aspen has seen its share price move over 40% higher up until their FY2023 results were released. This far surpasses the performance of the market and makes Aspen one of the top movers on the JSE over that period. In our opinion, profit taking played a role in the negative reaction to the earnings result in addition to earnings coming in short of expectations and no updated guidance provided on capacity utilisation in the sterile manufacturing business.
Fundamentally Aspen remains attractive and offers value to the patient investor. Their balance sheet remains strong with incremental earnings drivers anticipated to come online by the 2H of 2024. Management is calling 2H 2024 “a significant inflection point for the group”. They have guided to the uptake of the idle capacity with room for this to grow to a significant earnings contributor on an annual basis. While the market seemed disappointed that this was not revised higher in the 2023 results, management reiterated their target, and we feel it’s fair to give them time to do this. Aspen has also indicated its intention to increase its footprint into China, a strategic growth area going forward.
The stock trades on an undemanding PE ratio of 10x and has the potential to rerate from current levels. Aspen remains a core holding on our growth focussed portfolios. All you need is patience, if only there was a pill for that…