The least favourite part of Aspen CEO Stephen Saad’s job, it seems, is delivering the firm’s twice-yearly results presentations. It’s hard to blame him this time around, given the market’s hostile reception to the drugmaker’s full-year numbers to end-June.
Its shares slid 13% on one day, September 3, taking the stock back to below R200 a share – erasing all of this year’s gains in one fell swoop. Just as Aspen, Africa’s largest pharmaceutical company, takes one step forward, it is hauled right back by a sceptical market.
This reaction was clearly not the “bull case” scenario punted by Standard Bank Securities only a few days earlier. In its report, the bank had suggested a base-case valuation of R251 for Aspen stock, and a bull case valuation of R292, based on the expected addition of obesity drug contracts – first flagged at an investor day in France – as well as new vaccines from India’s Serum Institute.
The truth is, Aspen has secured a licence “for the intellectual property necessary to commercialise GLP-1s [glucagon-like peptides, the drugs that manage type 2 diabetes and obesity]” once the existing patents expire. Not only that, but Aspen will be “the exclusive global supplier” of these products to an unnamed licensor – but the catch is this opportunity could only benefit it from 2026.
Plump expectations
So why the rout? Was it a case of overcooked expectations that Aspen will join the weight-loss drug fray that has made Ozempic-maker Novo Nordisk the most valuable company in Europe?
Asked about this, Saad responds: “We have been working on where we want to go with GLP-1s and we had a full market day in France with all the analysts and I think they looked at it and said: the major players will come here and take all the capacity in one go; and there’s X billion [to be made] and it’s done.”
Instead, he tells Currency, the company will produce drugs exclusively for this unnamed licensor because “they don’t have their own manufacturing capacity so they would need us much more than any of the big pharma groups in time”.
Saad says Aspen’s strategy is to own the intellectual property under its name.
“We believe we’re better off in a situation like this where we control our manufacturing, have our own end-product and we will be more profitable than in making 100-million units for somebody at a lower price. So, that was our logic,” he says.
The other issue that appears to have blindsided the market was the “volume-based procurement” (VBP) policy in China – a state purchasing plan to cut drug prices in that country.
Aspen had been warning about this for months, but the effect was worse than it had expected: revenue from Asia slumped 25%, with R2bn sliced from sales, and R1bn from gross margins.
This Asian hit hurt Aspen’s overall operating profit, which fell 13% at constant currency exchange rates, and its headline earnings, which dropped 7% per share to R13.57.
Saad, as anyone who has spent time with him will tell you, is an irretrievable optimist, so he’ll point out that the upside is that VBP is now factored in, and shouldn’t affect Aspen’s results again. And Aspen also said the growth in its second half of the year – its “highest-ever” earnings before interest, tax, depreciation and amortisation growth of 17% – is far more indicative of what to expect for the next two years.
“Commercial pharma is going to grow double digits, currency dependent, and then our manufacturing business will grow by R2.5bn over the next two years,” he says.
But, despite the rosy picture painted by Saad, investors are still wary. There’s evidently a gulf of trust between what Aspen says it will do and what the market believes it will achieve.
This is with justification too. Aspen’s previous guidance for its manufacturing arm was for a R3bn increase, for instance; falling short of what you’ve told the market to expect will do you no favours with investors.
Guide me, Aspen
Urquhart Partners founder and analyst Richard Cheesman says constantly shifting expectations may have created guidance fatigue – a result of the company’s own doing.
“Management teams don’t have to guide the market. Nonetheless, when results are underwhelming, it can create pressure to extol an optimistic outlook. But no-one forces a company to give that guidance.”
“Aspen has been a ‘just around the corner’ story for a while now and it seems that the market was disappointed that this is still yet to substantially materialise,” he says. But, he adds, “outside of this, the reported results seemed solid”.
Aspen shareholder Graeme Körner, founder of Körner Perspective, is a little more forgiving.
“The market had certain expectations that by now the momentum would have been building and they’re pissed off all over again, but [Aspen] has actually given pretty good guidance on where the manufacturing business is going to be,” he says.
But, he adds, if the guidance is for R15.60 per share of earnings, and the company reports R13, investors will have a fit.
“It’s disappointing that for people who are so good at what they do and have a great strategic bent, they’re just unable to manage expectations for shareholders and the investor community,” Körner says.
Cheesman – who acknowledges that Aspen is an “incredibly complex” business – is more sceptical.
For example, he says Aspen stripped out R600m of transaction and restructuring costs from the group’s normalised results, but “every year Aspen does significant transactions and restructuring. If something happens every year then it is recurring and it is part of the business model, so it is difficult to see why these should be adjusted for.”
What’s more, he says, Aspen “seems to change segmental disclosure every other year so it is difficult to keep a good track of how exactly the different areas are performing over time. This is complicated by the acquisitions and disposals as well, and all of this contributes to why the market relies so much on management [for guidance].”
Too complex to handle?
Körner argues that Saad’s management team does not appreciate the fact that there’s too much complexity for investors to digest.
“The core of the business is actually looking a lot better and is growing up,” he says. “It’s more diversified across [its] products and manufacturing. The business is being set on firmer foundations but it’s still in the ugly duckling phase – it’s not quite there yet.”
This impression is reinforced by the extent of the spare capacity it still has in its sterile manufacturing plants – an indicator of inefficient processes. In South Africa, for example, Aspen’s sterile business is running at just 10% capacity; in France, it’s about 50%-60%.
Asked about this, Saad says that filling that capacity depends on regulators and the results which come “out of a batch”. Once that is addressed, this utilisation “will shoot up”.
“We’re losing R100m a month but when it comes right – South Africa will kick in in 2026 or 2027, hopefully even 2025 – then when you start filling those capacities, you not only erase that loss, but you get big profitability.”
Saad says that if that capacity in France and South Africa is used to a greater extent, there will be at least R5bn of profit. “We’ve got half of that banked by financial year 2026 so we are on track.”
To some extent, this capacity issue in its sterile drug arm speaks to the essential dilemma for those analysts who hesitate when it comes to calling Aspen a “buy”: is the company a bet on “when”, or will it remain a perpetually unfulfilled “if”?
Aspen has a small army of evangelists, who will tell you this is simply a chance to get a quality global stock on the cheap; that it will soar to new heights once these efficiency issues are sorted out. The doubters will claim that Aspen has a long history of addressing one problem, only for another to pop up.
Körner, for one, says he’s not one of the “card-carrying members of the Aspen fan club”. But, barring a catastrophic lack of delivery, “I’d say the market has it completely wrong.”
Top image: Collage. Currency / Unsplash.