A contractual dispute tied to Aspen’s flagship manufacturing business – one that could erase more than half the division’s profits this year and drag on beyond 2026 – is reigniting concerns over the company’s risk controls and long-term outlook.
The share price plummeted 31% to close at R112 on Wednesday, the lowest in more than four years. Clearly, management’s early morning call with investors did nothing to soothe nerves after Aspen warned the market late on Tuesday of a row with a customer at its French steriles facility.
CEO Stephen Saad was tight-lipped on the details of the dispute. “Anything we comment on is going to cause us further problems later on,” he told analysts, saying that the disagreement “really did come from left field”.
“To state the obvious, this is not the position we envisaged when our interim results were released.”
Back then, Aspen was forecasting a bumper year thanks to finally getting more volumes through its steriles manufacturing business. The company has poured about R10bn into the division over the past few years and touted it as the growth engine for the future.
Now, the Durban-born firm is instead staring down a likely R770m impairment because of the dispute, in addition to a more than R2bn knock to earnings. Worse, Saad confirmed on the call, is that “there is spillover into 2026 and subsequent years if not resolved satisfactorily”.
‘Take or pay’
Ninety One analyst John Thompson tells Currency that the problem with losing major deals like this is the length of time it takes to secure new ones, given the regulatory approvals needed around the manufacture of pharmaceuticals. “So it’s going to take 18 months at the very earliest for any new cashflow to come in,” he says.
What also has many analysts scratching their heads is that the contract was a “take or pay” agreement. This is a deal where the customer is obliged to either buy a predetermined amount of goods or services from a supplier or pay for them even if they don’t take delivery. In other words, both parties are protected.
Aspen has declined to say who the customer is, but analysts that Currency spoke to believe it is US group Moderna, given that the contract was for the supply of mRNA products, and the fact that Moderna is facing big cash flow issues of its own.
This might be why they’re looking to end the deal.
“Although we have no line of sight of the contracts, it should be guaranteed annuity income, so this would imply either that Aspen has faulted on one of the clauses or there’s something material on the other side that allows (the customer) to wiggle out of the contract,” says Thompson. “That’s why everyone’s quite unsettled about the fact that a take or pay can be withdrawn, which shouldn’t be the case, along with the concentration of risk. You shouldn’t call it a take or pay because they’re not taking, and apparently, they’re not paying.”
While dividends will take a hit this year, Saad said the group’s debt covenants –previously a real worry for investors – wouldn’t be affected. He’s adamant that it’s not an existential crisis.
“All I can tell everyone who’s listening is that we are not sitting sunning ourselves on the beach; we’re giving 100%, and we’ve had a setback, there’s no denying it. But it’s not fatal, and we will replace that turnover over time.”
‘One disappointment too many’
But some don’t agree. In fact, for many punters who have been leery of Aspen’s stop-start trajectory over the past decade, Tuesday’s news just confirmed that the company is no longer a remotely sure bet.
All Weather Capital’s Shane Watkins was especially scathing.
“Aspen has always been a ‘story stock’ driven more by the prevailing narrative, rather than the facts. This company is an inherently low-quality business but run by a charismatic and entrepreneurial CEO,” he tells Currency.
“Now the narrative has been disrupted (probably permanently), and it appears that even the believers are jumping ship. It’s hard to see how Aspen can ever be highly rated again.”
Aspen shares have been on a rollercoaster over the past decade; peaking at R438 in June 2015, plunging to R85 by August 2019, and then recovering to over R270 by October 2021 on the excitement that they would ride the new vaccine demand wave created by Covid.
But, says Watkins, the “only good outcome from here” would be for Aspen to find a buyer for the business.
“As a listed company, it’s going to be a stranded asset because I just don’t see institutional investors coming back in a hurry,” he adds. “Recent events are just one disappointment too many.”
He has a point: by midday Wednesday, according to Bloomberg data, more than 12 million shares had already traded. That’s more than double the share’s average trade over the past five years.
“As a pharmaceutical share it’s got inherent technical and regulatory risks and management is incentivized by providing the right guidance. Yet they have delivered inconsistently versus their own expectations showing us that they don’t have clear control of their channels,” says Thompson.
Watson especially dislikes the fact that Aspen owns very little molecule intellectual property. “Aspen is just a service provider. Contract packaging, even if the initiative went well (which it hasn’t), was always going to be a low-quality business because of its capital-intensive nature but with low operating margins,” he says.
Last year, Aspen was knocked by challenges in China, where a state purchasing plan to cut drug prices shredded its margins and sales. At the half-year stage, though, that appeared to be out of the way, and Aspen announced that the business was cleared “of material risk”.
The excitement in the half-year numbers, which were released in early March, also hung on the prospect of Aspen hitching its wagon to the frenzied demand for anti-obesity medication.
It is now marketing and distributing Eli Lilly’s obesity wonder-drug Mounjaro, while its agreement to produce, market and distribute generic semaglutides (GLP-1s, the official moniker for anti-obesity and diabetes drugs) are supposed to start bringing in sales as early as the latter part of its 2026 financial year.
“We’ll focus on replacing the lost business, and more, getting the GLP-1s into the facilities and getting our South African business into strong profitability over the next 24 months,” Saad said on Wednesday.
But he acknowledged that until the company’s manufacturing assets start to perform, “no-one’s going to ascribe value to them”.
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