SA Pharmaceuticals Industry initiation- Leveraging diverse operating models

We initiate coverage of South Africa’s pharmaceuticals sector, by focusing on two listed pharmaceuticals manufacturers: Adcock Ingram (AIP) and Aspen Pharmacare (APN). Each operates a disparate business model as highlighted by their respective contributions of pharmaceuticals intellectual property to their intangible assets. Pharmaceuticals IP and brands account for c.90% of APN’s intangible assets and c.45% of AIP. Adcock is growing a non-pharmaceuticals product portfolio which accounts for the majority of its intangible assets.

The non-medicine product portfolio within Adcock’s Consumer division, is reducing its exposure to regulated single exit medicine prices and therefore this has a foreign exchange impact benefit and lends itself to pricing control. The group’s low leverage has supported shareholder returns and an extensive share repurchase programme since 2020. However, its record of impairments and sale of businesses within a short period after acquisition raise concerns over impairments and longevity within the group for recent acquisitions (Genop and Plush).

Aspen owns a manufacturing asset base that provides some competitive value-chain integration and a significant product portfolio that trades globally across comprehensive therapeutic categories. The sale of the commercialisation rights of the European thrombosis business to Mylan in 2020 (which impacted revenue generated by Europe CIS, the largest contributor to thrombosis brands revenue) and the commitment to the European Commission to reduce prices in its oncology portfolio by 27%-79% for 10 years (starting in 2020), will impact group revenue in the medium term, in our view. However, the group’s debt is lower than historical levels, which will support the bottom line.