CAPE TOWN – While its competitor spent the better part of a year negotiating its future, Aspen concluded four acquisitions that will add about R9bn to the top line; advance its entry into 30 new countries and extend both its product range and manufacturing capability.
Despite 15 years of unbroken growth and numerous commercial achievements, the transactions concluded in 2013 “will probably prove to be the most transformational transactions undertaken by the Group to date,” wrote Aspen CEO Stephen Saad in the group’s annual report.
The deals include the acquisition of an API (active pharmaceutical ingredient) manufacturing business based in the Netherlands, from MSD for R525.6m, effective October 1 2013. In a related agreement with MSD Aspen acquired a portfolio of 11 branded finished dose form molecules for R6bn, effective December 31 2013.
Aspen also concluded a deal with its shareholder GSK, from which it acquired the global rights (excluding China, India and Pakistan) to anti-coagulant drugs Arixtra and Fraxiparine. It will also acquire the specialised sterile production site which manufactures these brands in April this year. This will supplement Aspen’s current sterile capability in South Africa. The deal was worth about R11bn and also became effective on the December 31 2013.
Aspen’s financial year ends in June and these deals are expected to enhance earnings in this, the second half of its financial year. In the year to June 2013 the company achieved revenue growth of 27% to R19.3bn and raised operating profit by 28% to R5bn. While every region experienced growth the offshore business grew by 63%. “We expect strong growth across the business which will be enhanced by these pending acquisitions,” Saad said at the financial results presentation last year.
These deals are substantial and transformational from three points of view explained Aslam Dalvi, healthcare analyst at Kagiso Asset Management. “They will transform the company’s geographic sales base – after the close of these deals South Africa and Australia will each only account for 25% of group revenue. They provide Aspen with access to new markets and significant scale in existing markets such as Latin America. Finally, these deals will provide Aspen with the capability to manufacture certain niche APIs.”
In particular the GSK deal strengthens Aspen’s footprint in Europe and opens doors to Eastern Europe and Russia which have big and growing healthcare markets. While competitors are plenty, they are fragmented and disorganised. As part of the deal with GSK, Aspen acquires a European and Russian sales force of about 400 people, 100 of whom are based in Russia.
Arixtra and Fraxiparine have a solid footprint in Europe. Globally the anti-coagulant market is worth R80bn, and developed Europe accounts for more than half of this. Saad expects Aspen’s initial annual sales of these products to be in the order of R5bn. However “the market is expected to double over the next five years, driven by aging populations, the increase in lifestyle diseases and by the present under-utilisation of this treatment in emerging markets.”
The GSK and MSD deals also present several synergistic opportunities for Aspen. For instance Fraxiparine is a biological product (derived from a living organism) which makes it resilient to competitive replication given the difficulties in registering biosimilars (the closest one can get to a generic of a biological). Despite the lack of competitors margins on Fraxiparine are low because of the high cost of the raw material. The primary raw material used is heparin (derived from the lining of a pigs stomach) which coincidentally is manufactured in the API plant acquired from MSD. The acquisition will allow Aspen to develop its supply chain vertically.
“The acquisition of the API plant is highly strategic,” says an analyst who can’t be quoted. All drug development begins with the synthesis of a molecule, making API production a critical element to any drug development program. “This is part of Aspen’s drive to secure its supply chain – many of the products manufactured in the API plant will be used in Aspen’s downstream manufacturing operations,” the analyst says.
Smaller but equally sweet deals concluded last year saw Aspen acquiring the rights to certain of Nestle’s infant nutrition businesses. The first agreement, valued at about R2bn covers South Africa, sub Saharan Africa and Australia. Revenue for the Australian and Southern African IN businesses amounted to R838m and R180m respectively in 2012.
Similarly Aspen acquired the intellectual property rights and assets of Nestle’s infant nutrition business in Latin America.
Acquisitions like these have obviously cost the company. Collectively the MSD and GSK transactions cost about R18bn (depending on currency conversions), pushing total debt up to a chunky R36.2bn ($3.4bn). This is not cause for concern. “Despite the high level of gearing, these deals will see a substantial rise in cash flow to support the higher level of gearing,” Aslam says. In the year to June 2013 cash generated from operations increased 37% to R4.0bn.
The company does not plan more acquisitions in the near term and will now focus on driving growth across its global operations.