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Matthew Sipos
Articles (9) 

Value Idea Contest: Aspen Pharmacare

Will the South African Aspen follow the footsteps of Teva?

March 17, 2019 | About:

1. Company

Recently, I spotted a sudden price dip on my stock watchlist.

Aspen Pharmacare (APNHY), the largest African generic pharmaceutical company, lost almost half of its market value in 2019, mostly last Friday. The mother company of Aspen was established in 1850 and later acquired by recent CEO Stephen Saad and co-founder and deputy CEO Gus Attridge. What happened thereafter is a real emerging market success story. It managed to become the top drugmaker in Africa with a strong global presence in emerging markets in Asia, Latin America, Europe and Sub-Saharan Africa.

The past prosperity made a fortune for shareholders, but now it has hit turbulent times. The pharma was growing at a rapid pace, financed ny debt. The high debt level combined with the likelihood of higher interest rates has left the company dancing on the razor’s edge. 

Currently, the drugmaker is trending at a seven-year low. The stock price plunged after the half-year 2018 report did not meet investors' expectations. Revenues grew only by 1%, while the rising operating costs affected the earnings per share. The present $3 billion market cap company has net debt of $3.7 billion. In addition to the weak earnings report, the delay of the sale of its nutrition business to Lactalis for $829 million to repay debt in advance and some market turbulence contributed to the large dive in the share price.

At this price, the equity is worth a look.

2. Business

Aspen’s main pharmaceutical operations are Regional Brands, High Potency and Cytotoxics, Anaesthetics and Thrombosis. The bread-and-butter business for the company is the Regional Brands, concentrated in Sub-Saharan Africa, Australasia and Latin-America territories. It provides 34% of revenue. The segment creates generic versions of antiretrovirals and an HIV/AIDS medicine, which greatly expanded the affordable treatment possibilities in the poor African region. Respiratory products, anti-inflammatory and painkillers (Mybulen) are key products for the South African markets. In Australia, it has a prosperous prescription insomnia products portfolio driving revenue.

In 2017, it acquired the Anaesthetics portfolio of GlaxoSmithKline (GSK) and AstraZeneca (AZN). This portfolio provides 19% of revenue. The company has 23% market share in the topical local anaesthetics global market. Revenues compared to the prior period grew by 27%.

The Thrombosis portfolio covered 15% of the group’s revenue, growing by 12% since last year. Aspen Pharmacare has 17.7% market share in the European injectable anti-thrombosis market and 59% market share in selling synthetic antithrombotics drug Fondaparinux Sodium.

The High Potency and Cytotoxics products portfolio comprises Oncology, Endocrinology and Women’s Health products (two conjugated estrogen brands were acquired from Teva in 2017). This segment provides 10% of revenue and declined by 9% from last year’s results. Eltroxin’s (a thyroid hormone replacement drug) market share is 37%, while Ovestin (an estrogen hormone replacement drug) has a 13 % market share globally. The Nutritionals business (7% of total revenue, down by 2% since last year) will be sold this year for an unexpectedly low price, $860 million. Unfortunately, Mr. Market had been expecting a $1 billion to 1.5 billion price tag.

The management has a long-term plan to restructure the business to become a specialty pharma with a portfolio targeting high-margin, niche markets. To do so, they are selling off assets to repay debt in advance and establishing distribution partnerships aimed at the women’s health sector in the U.S. market.

Possibly, a cost-cutting policy is also on its way. The dividend appears unsustainable, too. If management's strategy works well in the future, they can ensure a high-margin, good cashflow-producing business with a remarkable competitive advantage.

3. Financials

First of all, Aspen’s debt needs to be examined. Currently, it owes $3.7 billion to borrowers. Nineteen percent of its debt is in South African rand with an interest rate of 8.8%. Five percent of its debt is in Australian dollars with an interest rate of 4.2%, while most of its debt (76%) is in euros with a low 2% interest rate.

With the selloff of the nutritional segment, the company can reduce debt by 15-20%. The net income for 2018 was $451 million. Mostly, the debt is not a current liability. According to the up-to-date financial report, it has around $685 million in cash and cash equivalents. Therefore, the financial situation of the company appears manageable.

Revenues and net income are growing steadily, while share prices diving deep.

Due to the high-level of debt and higher than anticipated operating costs, the free cash flow-share ratio is declining. The projected free cash flow and book value per share keep climbing up.

Inventories, long-term debt and current liabilities

Increasing inventories may indicate inefficient distribution channel or regulatory issues. The long- and short-term liabilities are high but seem to be manageable.


The return on equity is around 13% and the return on invested capital is around 10%, while Aspen pays roughly 3.4% interest on its borrowings.

Gross margins, operating margins and net margins

The drugmaker operates with good margins and by cutting off lower-margin businesses, net margin may be improved in the future.

4. Management

Since Aspen Pharmacare is publicly traded, the CEO Stephen Saad and deputy CEO Gus Attridge appear to be controlling the business properly. Saad has a 12% stake Attridge a 4% stake, so it is likely that they are in the same boat as common shareholders. The good and steady ROE and ROIC also indicates that the management is doing well. 

5. Valuation

Investors are valuing this equity by as much as 87% of the worth of the assets. Now, the company is worth more dead than alive. Comparing price-book, price-earnings or price-owner earnings ratios to its rivals, it still seems deeply undervalued. Investors do not appreciate intangible assets such as patents, while these may be far more precious than physical assets in the future.

According to GuruFocus' DCF calculator, the market forecasts a -0.10% yearly growth rate. Using the Fair Value DCF model, which subtracts tangible book value, Aspen still has a 63% margin of safety. The Peter Lynch valuation model suggests a price tag of $9.65.

At a seven-year low, the stock may be a good pick for the long term. Using a discrete valuation model (the average of DCF, Peter Lynch valuation and price-book, while taking away 10% to play it safe), the stock is still undervalued by 30%.

6. Risks

Exchange-rate risks and a weak or unstable South African economy are probably the biggest risk factors. Investing in South Africa is not for the conservative investor. However, the most recent credit rating forecasts a stable outlook.

Another risk factor is government regulations. Aspen Pharmacare has been criticized for drug price manipulation in the European Union, Australia, New Zealand and Brazil. The European Commission may investigate these shady practices.

The last risk factor is the high debt level and weakening corporate performance, or the running crusade pushing stock prices even lower (which also creates an opportunity to buy at a discount). The stock’s price may have room to continue to fall.

7. Outlook

This pharma company concentrating on emerging economies may be a very successful business with good management. Africa, Latin America and Asia have the greatest growth potential nowadays. Investors usually fear these markets due to possible regulatory, currency or political risks. With the growing population, people will need more medicine – and while this is a competitive business with high research and development costs, it can provide high margins, proper moat and spectacular returns.

Aspen Pharmacare seems to be an irrationally beaten-down equity. If the management can put restructuring plan through, Aspen will be a good producer of free cash flow with a wide moat.

But with a good price there comes some considerable risks, such as overpriced acquisitions, rushed sales of assets or regulatory issues.

Overall, at this price, Aspen Pharmacare is a deep-value stock and has the potential to become a great investment.

Disclosure: No position.

Rating: 4.0/5 (1 vote)



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