Aspen reviews operations as share plunges on debt concerns
Increase in borrowings, in particular, scared investors, although this has peaked, the company says
Aspen Pharmacare is reviewing its SA and European businesses as part of its plans to slash borrowings, chief executive Stephen Saad said on Friday, as the group’s shares more than halved on concerns that it had taken on too much debt during its acquisition spree.
The global pharmaceutical company’s shares plunged as much as 51% to R68.99 in just two hours, the biggest intra-day fall yet and the stock’s worst level in about nine years.
This was after Aspen said normalised headline earnings in the six months ended December fell 9% to R3.6bn as higher financing costs ate into profits. Revenues edged 1% higher to R19.7bn.
The biggest concern to investors was that borrowings, net of cash, increased by R6.7bn to R53.5bn. This was partly because of the weaker rand, since debt is largely denominated in euros, as well as deferred payments for acquisitions of R4.9bn and capital expenditure of R1.5bn.
“Borrowings, we believe, have peaked now,” deputy CEO Gus Attridge said on Friday. Aspen was “over the hump as far as deferred payables are concerned”.
Attridge said the disposal of the group’s nutritionals business would probably be finalised by the end of May, and the R10.4bn in net proceeds would go towards paying off debt.
The group could also get “material” inflows from other asset sales, Saad said.
Aspen wanted to “deleverage a lot quicker” as the company saw new opportunities, mainly in emerging markets, Saad said, adding that the nutritionals deal would reduce borrowings to within its debt covenants.
“We have two options from there, and they’re not mutually exclusive. The first is to plug away, and that would probably take us a couple of years to get to a very comfortable leverage ratio.
“The other option is to see if there are more strategic opportunities to reduce debt. To that end, we’re looking at what we can do within our SA business and at partnering opportunities across Europe.”
In its home market, Aspen was separating its branded pharmaceuticals business from its commercial portfolio. “And we’re then going to have a look to see what fits and what doesn’t in the longer term.”
In Europe, Aspen’s operations were “subscale”.
“I don’t think we’d look at a divestment, but we’d look at a partnership or collaboration model there.”
Lester Davids, a trading desk analyst at Unum Capital, said the market was worried that cash generated from operations had “become constrained” owing to an increase in working capital.
Aspen’s balance sheet was the single-biggest concern for investors, Davids said. “The build-up of debt may enforce the market’s view that management would have to continue disposing of high-quality – and core – assets in order to shore up its balance sheet.”
That could negatively affect the company’s long-term strategy, Davids said.
Saad said Aspen, which has used cash and debt to fund acquisitions rather than equity, was narrowing its focus, mainly to specialised products and emerging markets.
In the US, however, it saw a big opportunity to supply hormonal products for women. Its partner in that venture was targeting peak sales of more than $500m a year, Saad said.
Aspen’s shares ultimately closed 28.69% lower at R100.66 on Friday, giving it a market capitalisation of R45.946bn.
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