Adcock Ingram delivers ‘resilient performance’ despite difficult operating environment

25th August 2021 By: Simone Liedtke - Writer

South African pharmaceuticals giant Adcock Ingram delivered a “resilient performance” in the financial year ended June 30, which CEO Andy Hall said was despite the difficult operating environment, which was characterised by the continuing adverse impact of Covid-19, a tough economic environment and high levels of unemployment impacting on consumer spending.

The group’s activities were regarded as essential services during the initial phases of the pandemic, and all business units continued to operate throughout all levels of lockdowns, while maintaining rigorous monitoring and evaluation of Covid-19 protocols to safeguard its employees and customers.

This, Hall said, ensured continuity in producing and supplying medicines, including life-saving products such as intravenous fluids, renal dialysis fluids and antiretroviral drugs (ARVs), as well as other acute medicines and hygiene products used to minimise the impact of the coronavirus.

However, as the disease spread, Adcock had to adopt new operational strategies based on the changes in the market, which the company noted “provided a solid foundation for the continuity of operations”.

Over this period, the group experienced a good demand for immune-boosting products, certain small-volume parenterals (drug products that are sterile and administrated directly into patients) and acute renal dialysis products.

Demand was, however, poor for cough, cold and flu medicines owing to the absence of a flu season in South Africa.

Low levels of patients consulting doctors and the postponement of elective surgeries affected the performance of certain, mainly acute, prescription medicines and ophthalmic surgical products and instruments.

Lockdown restrictions also had an impact on many hospital products, owing to lower trauma and medical admissions, as well as on shoe care and sun care products.

Nonetheless, Hall said that, with the exception of the over-the-counter (OTC) business unit, all business units posted solid trading performances, achieving good growth in turnover, with disciplined cost control and yielding healthy growth in trading profit.

“Adcock Ingram’s strong and adaptable people, and diverse portfolios have proved beneficial in this unprecedented operating environment. In addition, these results could not have been achieved without the support of our customers, partners and suppliers,” he said on August 25.

FINANCIALS

Turnover for the period increased by 6% to R7.8-billion, as all divisions, with the exception of the OTC business unit, posted good growth in sales.

The consumer division, which now includes a full-year’s contribution from the Plush shoe and household care business, increased its turnover by 42% to R1.3-billion.

Gross margin decreased from 37% to 34%, driven by a 9% depreciation of the rand against the dollar and euro, directly affecting the cost of imported goods, as well as by a higher proportion of ARVs in the sales mix.

The reduced demand for OTC products also resulted in lower factory recoveries at the Clayville factory.

Proactive cost saving initiatives implemented at the start of the Covid-19 pandemic, meanwhile, resulted in the group achieving a like-for-like reduction of 6% in operating expenses.

Headline earnings decreased by 5% to R671-million, which following the group’s share repurchases during the year, translated into a decrease of 3% in headline earnings a share.

BUSINESS OVERVIEW

Consumer turnover improved by 42% to R1.2-billion and was substantially aided by the acquisition of Plush, which contributed an additional R212-million, and the inclusion of the Epi-max brand effective January 1, which contributed R90-million after being transferred from the Prescription division.

On a like-for-like basis, sales improved by 8.4%, with all of the core brands achieving growth over the prior year.

There was significant demand for Adcock’s immune-boosting products – Gummy Vites and Viral Guard – owing to Covid-19, which offset the negative impact of lower demand for shoe care, sun care and personal care products.

The launch of Bioplus Vitality, a range of vitamins and minerals, pushed that brand’s overall sales to over R200-million.

Trading profit for the consumer business ended on R235.4-million, 51.7% (13.5% like-for-like) ahead of the prior year's R155.1-million.

The OTC unit’s turnover decreased by 15.5% to R1.7-billion and was adversely impacted on by the absence of cold and flu activity in South Africa in winter 2020 and 2021.

Historically, these medicines comprise 40% of this business unit’s turnover.

Gross margin ended lower compared with the prior year, adversely impacted by the weak rand and lower factory recoveries owing to the decrease in production levels following the decline in demand.

As a result, Adcock’s trading profit for the OTC business decreased by 31.3% to R292.3-million.

The division also recently concluded an agreement with Mundipharma to perform the sales, marketing and distribution activities of its hygiene and personal care portfolio in South Africa, which includes Betadine and Teejel, effective from July 1.

Prescription turnover, meanwhile, improved by 9.5% to just over R3-billion, including volume growth of 5.4%, largely owing to the ARV portfolio growing by 45.2% to R588-million, benefiting from demand on the State tender.

There were lower volumes in the Branded prescription portfolio which was impacted by Covid-19, through lower levels of patients consulting doctors, lower dispensary traffic in pharmacies, as well as the postponement of elective surgeries.

This impacted the pain, dermatology, urology, surgical and instrumentation and ophthalmology portfolios, Adcock said.

The sales mix, excluding the move of Epi-max to Consumer, contributed 2.7%, with the launch of Ynez and Zoely as the division entered the oral contraceptive market, the onboarding of Evorel (hormone replacement therapy) in a partnership with Theramex and the launch of first to market biosimilars, Remsima (Infliximab) and Blitzima (Rituximab).

The gross margin ended lower compared with the prior year, adversely affected by the weak rand and an unfavourable sales mix, with a higher proportion of ARV tender sales.

With cost control and cost-saving initiatives implemented in the latter part of the prior financial year realised, trading profit of R223.8-million is 2.8% ahead of the prior year’s R217.7-million.

Hospital turnover improved by 7.7% to more than R1.7-billion, with the Renal segment benefiting from the on-boarding of the Roche renal portfolio and acute renal dialysis treatments consequent to Covid-19.

The Renal performance compensated for the decline in demand for products used in elective surgeries, and lower levels of trauma and medical cases.

The gross margin declined as a result of a weaker exchange rate and the inclusion of the Roche portfolio.

Cost control, coupled with the impact of Covid-19 on normal operating activities (a reduction in certain selling and marketing activities in the trade), resulted in trading profit improving by 14.9% to R161.4-million.

PROSPECTS

As the effects of the Covid-19 pandemic persist, coupled with the recent civil unrest in South Africa, the economic outlook for Adcock’s market remains uncertain and it faces the reality of living with Covid-19 restrictions until the vaccines have been widely administered.

Although the pharmaceutical group remains cautious about the effects of Covid-19, Adcock said that it has “proved its resilience through its diversified portfolio of products and generated solid cash inflows despite the impact of the lockdowns”.

The group remains confident of continued value creation for its shareholders.

“We are supporting our customers where possible to restore their operations following the recent civil unrest in KwaZulu-Natal and Gauteng, so that they are able to continue delivering essential medicine to the people of South Africa,” Hall said.

The group remains committed to expanding its product portfolio in each of its business units, it confirmed.

Following the resilient performance of the full-year period, Adcock’s board has declared a final dividend of 90c a share.

“We are confident that the broad foundation of our business remains relevant in this uncertain economic environment. We will continue to strive for value-adding portfolio enhancements in each of our business units through acquisitions, partnerships and product innovation,” Hall concluded.