Aspen: Saad reckons Doctor Feelgood is back in the house
Despite recent plunges in the share price, and concerns about debt, CEO says operations are healthy
Aspen’s shares have steadied since plunging as much as 50% on the release of the pharma company’s interim results two weeks ago. But the stock has a long way to climb before recouping even this year’s losses, and is trading at less than a quarter of its all time highs. Back then, the market embraced CEO Stephen Saad’s entrepreneurial empire building. Now the market is anxious about Aspen’s debt levels, its acquisitive business model, and its high level of working capital. Stephen Saad explains:
[On working capital] we were at 50% at the half, but for the full-year we expect it to be 90-100% so what that assumes is a contraction in working capital. The biggest component of the working capital is that we think there could be shortages of [blood thinner] heparin. We can always sell the product down if we’re wrong but if there is a shortage in the market I’d rather come back and say: we had stock to cover because the cost of being out of stock is so high.
So you’ve got to balance it: do I hold stock or do I not hold stock, give these analysts a lovely working capital cycle but in six months’ time I come back and say: sorry, we mis-called all of this but as a result we’re out of stock and our turnover’s down?
You’re waiting to complete the sale of your infant milk business, and you’ve said that nothing is being sold on a fire sale basis, but were you not disappointed to offload it, especially given that at one point it seemed like a strategic growth driver for the company?
We actually went out in January 2018 and said we’re doing a strategic review of our milk business. People say “you’ve got such a complex business, have you got the bandwidth?” Well, what is the reality: we were very comfortable with the SA milk business but the rest of the business carried a lot of risk for us because we were subscale and I don’t know that we had the capabilities to manage [it].
Aside from SA we’re battling. And what did we do well there? We did very well out of what we do in a supply chain and that supply chain got us registrations in China, where they’re going from a one to two child policy, which is where there was perceived to be a lot of value ... but I don’t know that we’ve got the formula to crack it and there’s worse things in life than paying R3bn for a business and selling it for R12bn.
What we have demonstrated over and over again is that everything we have sold is at substantially more than we bought it. We’re at an inflection point but we couldn’t sell assets two years ago, they weren’t ready – we hadn’t got a Chinese licence for the milks. We know that when we bought these things there were parts we had to sell otherwise we would have had too much debt. Beyond too much debt, and even if we sell the milk business and get within all the acceptable bands, we still need to de-lever a lot more in order to be acquisitive which is where I think we’re strong.
How much more debt would you have to reduce in order to be acquisitive again, and why would you want to make more acquisitions?
We’d be comfortable if we got our debt below three times multiples, so without losing earnings you’d have to reduce the debt by another R6-R8bn. So we would now have more targeted acquisitions: we look at ourselves and say, OK, we’ve set up these [businesses] around the globe, but actually to be more effective in Europe and with players there that are sitting with sales teams of four or five times our size, have we got scale to compete sustainably? Second, the Aspen business is very dependent on volume growth and volume tends to come out of emerging markets.
How about the strength of the Aspen business model?
We’ve tested our model globally, we’ve definitely got the right strategy on products, and why do I say that? Because our gross margins have improved. You go through the rest of pharma in our industry and you will see that their margins are under enormous pressure. Our model isn’t imploding.
Do you feel you still have the confidence of the investor community?
I can only talk about our major shareholders and there’s nobody that has even raised those type of comments to me. I’ve been through this a few times, but at the end of the day, we’ve seen the industry for what it is and where it was going and maybe what we haven’t been credited with is where we took this business. If we hadn’t made these acquisitions I’d be having a very different discussion with the investor community as to why our profitability is going nowhere.