While Aspen missed expectations, we believe that group remains strategically/ fundamentally sound and we are pleased with several aspects of the result in this regard. However, the company’s merits and growth glow are somewhat tarnished by two potential detractors; poor visibility of the extent and timing of upside and ongoing price reductions, especially in China. These opposing forces, and past ‘promises that haven’t panned out – not management’s fault, complicate the counter’s valuation.
Key Positives
- Shifted focus towards Manufacturing; Aspen holds a substantial competitive advantage in manufacturing, especially in highly sought-after sterile capacity. In a series of recent transactions, the group has disposed of certain commercialisation rights, while securing contract manufacturing agreements with the new third-party owner.
- De-risked contracts; secured ‘take-or-pay’ clauses with Serum Institute relating to the of paediatric vaccines for Africa, averting the disastrous covid vaccine situation where the group incurred over R400m in costs to gear up for production, but then didn’t get a single order from the African governments.
- Freed up working capital; Prior to disposing of the commercialisation rights of the anticoagulant drugs in Europe, Aspen held stock of Heparin for its own anticoagulant manufacturing requirements, and it would also sell Heparin to 3rd parties. In FY24 the Manufacturing division margin reduced by >200 basis points due to the loss of the higher Heparin sales margin. The silver lining hereof is a substantial reduction in stock holdings, freeing up working capital, reducing debt and lowering the interest expense.
- Added to a potential growth vector; The Regional Brands focusses on selling off-patent prescription and over-the-counter drugs in emerging markets. This high-margin business grows in low single digits; scaling up ion China potentially raises this growth trajectory, while neatly swapping out the sub-scale European business with Sandoz.
Key Negatives
- Quantum and timing risk; The potential revenue and profit growth upside (~70% of contribution to earnings before interest and tax (EBIT) of the 1) vaccines businesses (mRNA and Arica) and 2) insulin and GLP-1 auto-injector and pen filing (estimated 2026) and Chinese volumes, is enormous (>50% uplift).
- However, the realisation depends on regulatory approvals and patent expiries; the timing of both is uncertain, and timing may also affect the ultimate magnitude of the opportunities.
- The out-sized negative earnings impact of the value-based procurement process in China in FY24 speaks to the opacity of the process.
- Management anticipate only a residual annualisation impact on drug pricing in China from volume-based procurement (VBP) in FY2025, then to be normalised in the base thereafter.
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However, who’s to say whether this ‘once-off’ event won’t re-occur? A ‘once-off’ regulated price reduction impacting Aspen in Australia some years ago, has in fact, re-occurred in most years since then. The volume ramp-up and pricing environment in China will both have a weighty influence on the extent and timing of the eventual revenue and profit opportunity.
