Adcock Ingram’s HEPS rise 25.5%, despite economic, consumer headwinds

29th August 2018

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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JSE-listed Adcock Ingram reported headline earnings per share (HEPS) from continuing operations of 387.7c for the year ended June 30, representing a year-on-year increase of 25.5%.

Headline earnings for the period were R644.7-million, up from R513.7-million in the prior financial year.

The company declared a final dividend of 86c a share for the period, out of income reserves. Owing to this, the company on Wednesday said the total dividend distribution will be 172c a share, an improvement of 24% compared with that of 2017.

The improvement in the pharmaceutical company’s net average cash position during the year resulted in net finance cost decreasing to R7.9-million.

According to CEO Andy Hall, the positive results were achieved despite the tough economic environment and sociopolitical challenges currently in South Africa, and were sustained through a continued focus on customer service, as well as in investment in sales and marketing.

This, he said during a conference call on Wednesday, was supported by improved throughput at the company’s Wadeville factory, as well as tailwinds from an improved exchange rate.

All of this, he added, was underpinned by stringent management of operating expenditure during the year.

However, despite the South African company’s turnover having increased by 10.2% for the financial year ended June 30, the company expects trading conditions to remain difficult with limited consumer spend and high levels of unemployment.

Group turnover increased to R6.5-billion from R5.9-billion in the previous year, which was driven by an increase in mix of about 5.4% and includes the Genop Healthcare acquisition, valued at about R223.8-million, from January 1, as well as an average realised price increase of 3.8% and improved volumes.

The South African company achieved an improvement in its gross margin from 37.8% to 39.2%, which it said on Wednesday was realised from an improvement in the exchange rate, a change in the sales mix, as well as improved efficiencies at the company’s Wadeville factory on the back of increased production of antiretroviral drugs (ARVs).

Operating expenses, which included those relating to the Genop acquisition, increased by 12%. Excluding Genop, expenses increased by less than 6%, resulting in a 19.6% improvement in trading profit to R866-million.

In addition, nontrading expenses of R46.9-million included share-based expenses of R34.4-million, corporate activity costs of R7.3-million and impairments of R5.2-million.

In terms of cash flows, however, cash generated from operations amounted to R854.9-million after working capital increased by R343-million with additional investment in inventory as the company took on new product portfolios and increased stockholding of raw materials for the production of ARVs.

Adcock Ingram had net cash resources of R156-million at the end of the year.

BUSINESS OVERVIEW

For its local operations, Adcock Ingram’s over-the-counter (OTC) sales in the pharmacy channel saw a turnover improvement of 7.6% to R1.9-billion, with brands like Adco-Dol, Allergex, Alcophyllex and Napamol achieving “double-digit growth”.

OTC focusses on products in the pain, coughs, cold, flu and antihistamine therapeutic areas.

Turnover for prescription sales, meanwhile, improved by 15.5% to R2.2-billion. This division also achieved double-digit growth in the private market segment as measured by multinational Iqvia, which serves the combined industries of health information technologies and clinical research.

Mix, although adversely impacted on by the loss of a low-margin multinational partner contracts, improved by 10.1%, aided substantially by the acquisition of Genop, and the on-boarding of the Astellas portfolio from Leo Pharma and Topzole from Takeda.

Volumes increased by 3.6%, mainly as a result of the increased demand in the ARV private market, and an average price increase of 1.8% was achieved.

A gross margin improvement was realised in the year, driven by increased ARV throughput at the Wadeville factory and a better sales mix. As a result, the company highlighted that trading profit of R239.4-million is 15.2% ahead of the prior year of R207.8-million.

In a challenging environment, which is characterised by limited consumer discretionary spend, consumer turnover was almost flat at R686.7-million.

Despite the poor trading, the prescriptions division delivered a small improvement in trading profit to R112.2-million.

In the second half of the financial year, however, the division underwent a leadership change, subsequent to which some reorganisation has taken place.

The company is expecting an improvement in customer focus, brand support and trading performance.

Additionally, hospital turnover improved by 7.2% to R1.3-billion with an average realised price increase of 1.9%. Additional volumes contributed 2.9% and mix 2.5%, following the award of the marketing rights to the Pharma Q injectable product range.

The gross margin improved as a result of a change in the sales mix with gains in the private market and the improved exchange rate, the company said. Trading profits improved by 63% to R95.3-million.

On the regulatory front in South Africa, Adcock Ingram reiterated its support of initiatives such as the National Health Insurance Bill, the Medical Schemes Amendment Bill and the Health Market Inquiry Report – to broaden access to healthcare in South Africa.

Hall pointed out that these do not threaten the sustainability of the local pharmaceutical manufacturing industry and said that Adcock Ingram will continue to engage government through the industry bodies in this regard, provided that these initiatives “also help to sustain the local pharmaceutical manufacturing industry in South Africa”.

Adcock, in the meantime, will be making its formal comments on these initiatives through the Pharmaceutical Industry Association of South Africa.

Further afield, for the rest of Africa, turnover in the company’s enterprises in Zimbabwe and Kenya has collectively increased by 7.5% to R222.6-million and trading profit of R18.3-million was achieved, reflecting an improvement on the R2.7-million reported in the previous year.

The positive performance, the company said, is attributable in Zimbabwe to a significant improvement in demand for the top brands following improved stock availability, while the improvement in Kenya is owing to strict management focus by the OTC division from South Africa.

While operations in Zimbabwe remain unpredictable, with investment potentially required in the short to medium term to recapitalise its facilities, the company’s board is currently assessing the viability of the company’s continued presence in that country.

Looking ahead, Hall noted that while trading conditions are expected to remain difficult, the company remains confident in its equity and resilience of its brand portfolio.

The recent decline in the value of the rand was concerning, he added, noting that cost control will remain a focus in the year ahead.

Meanwhile, the company remains committed to seeking additional affordable brands to augment its range of products, and to “defend its position in the market”.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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