- Almost a third of Aspen's value was wiped out in a single session on Friday.
- Investors are concerned about the company's massive debt burden.
- A deal that could help raise money has also been delayed.
On Friday, Aspen’s share price crashed by almost a third – wiping out R19 billion in its market value in a couple of hours.
“That's equivalent to the whole of Massmart [owner of Makro and Game]. Or Pioneer Foods,” tweeted the trader Karin Richards. “Gone.”
The pharmaceutical company which was the same size of Old Mutual (around R120 billion) mere months ago, is now worth less than R46 billion.
Here’s what happened:
Aspen took on massive amounts of debt
Aspen was started in 1997 by Stephen Saad and Gus Attridge in a converted house in Durban. They bought SA Druggists, the oldest pharmaceutical company and listed on the JSE the following year.
Aspen launched Africa's first generic antiretroviral (ARV) in 2003 and by 2006 was the biggest supplier of generic ARVs on the continent.
In the past decade, it branched out from generic medicines and went on a massive international shopping spree - buying the rights to sell GlaxoSmithKline medicines, including treatments for epilepsy, thyroid disorders, herpes, heart failure, gout, Crohn’s disease and antibiotics. It also bought the rights to commercialise AstraZeneca's anaesthetics products in China and dozens of other countries, and bought the rights for Nestlé's infant formula brands in Australia, Latin America and in South Africa for almost R4 billion.
It now has more than 10,000 employees in 52 countries, with 25 factories - including large facilities in Durban, East London and Port Elizabeth. It sells medicines and other products – including the popular Clear Eyes eye drops - in more than 150 countries.
In South Africa, one in every five scripts dispensed by local pharmacists is for an Aspen product. In Australia, it is one of the five biggest pharmaceutical groups, and worldwide, it is a major provider of anaesthetics and thrombosis treatments.
But to fund this huge global expansion it took on massive debts
Last week, the company confirmed that its total debt burden has now reached R53.5 billion - which is more than its market value.
And the problem is that most of the debt is in “hard” currencies like the euro - while the bulk of its sales are in emerging markets, which typically have weak and unstable currencies.
Aspen illustrates clearly why we should be wary of any stock with high debt. Even debt levels that are currently regarded as acceptable should be viewed in the context of potentially slowing sales, negative operational gearing and higher interest rates.— Karin Richards (@Richards_Karin) March 10, 2019
Delay in ‘silver bullet’ deal
To help sort out its debt problem, Aspen announced in September that it would sell its infant formula business to the French-based company Lactalis. The deal is expected to earn it €635 million.
It was also expected to be done within six months.
But last week, Aspen said the finalisation of the deal was delayed to end-May due to regulatory requirements. Meanwhile, financing costs are skyrocketing – it has paid more than R200 million a month in debt costs over the past six months.
The company reported last week that while sales rose 1% to R197 billion, its headline earnings for the past six months fell 9% to R3.6 billion, and manufacturing revenue declined 10% after it lost a large tender in China. It also struggled to supply the blood thinner Heparin to the international market.
All of this scared investors, and Aspen’s hopes that it could soon sign a deal with a supplier to distribute its female health products in the US, as well as the appointment of heavyweight CEOs – Themba Mkhwanazi (Kumba) and Ben Kruger (former Standard Bank co-CEO) to its board – couldn't stop the carnage in its share price, which has been under pressure since the end of last year.
Let’s turn clock back 2 years. The following companies found itself in the Top40 index. This was their mkt cap in billion compared to today:— Schalk Louw (@SchalkLouw) March 8, 2019
Aspen R131 vs R46
Brait R39 vs R14
Intu R63 vs R29
MediClinic R63 vs R44
Steinhoff R305 vs R9
That’s R459bn gone from 5 $JTopi Co’s
How will the Aspen meltdown affect you?
There is a good chance that you may be invested in Aspen via your pension fund or unit trust.
According to the latest Aspen shareholder information, the Government Employees Pension Fund owns more than 12% of Aspen. Unit trusts like the Sanlam Investment Management Industrial Fund and the Foord Equity Fund have invested more than 4% of their holdings in Aspen.
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