The race is on for generic profits

Drugs are recession proof it seems, at least in the case of a company such as Aspen Pharmacare. Aspen’s annual turnover tops R4.8-billion and the company’s recent interim results indicate a 91% revenue leap and operating profits increased by a whopping 84% at a time when business around the world has gone bad.

Aspen, Africa’s largest drug manufacturer, has grown on its strength as a producer of generic drugs.
Generics—unbranded pharmaceuticals, produced once a drug patent has expired—present the largest growth areas for local pharmaceutical companies.

According to recent analysis from growth consultancy Frost & Sullivan the generic market in South Africa will grow at a compound annual rate of 22.3% between 2007 and 2014, whereas the branded pharmaceuticals market will only have an annual compound growth rate of 9.8% in the same period.

The factors combined with the widespread use of generics in emerging markets in Africa, makes the push to consolidate this side of their offering hard for companies to ignore.

Aspen’s competitors include Adcock Ingram, whose recent bid to buy Cipla Medpro can be read as a way for the company to take on Aspen, although Adcock maintains the deal is part of its overall growth strategy.

Adcock, with an annual turnover of R3.3-billion, aims to buy 100% of Cipla Medpro for R4.75 a share, in a deal valued at more than R2-billion. Cipla Medpro is South Africa’s third-largest company manufacturing generics. But the bid has been controversial because Jerome Smith, Cipla chief executive, had initially opposed the deal. There is also a difference of opinion among the company’s shareholders.

According to Tiwonge Mkandawire, analyst at Frost & Sullivan, Adcock Ingram could vastly improve its local production capacity through the Cipla Medpro buyout.

The company has just finished investing in its Durban manufacturing plants, upgrading them to comply with the international pharmaceutical inspection cooperation scheme. It would be a way for Adcock to keep up with Aspen, Mkandawire said.

Aspen already has a foothold in East Africa, owning 60% of Tanzanian company Shelys, a preferred supplier to public sector facilities in the region.

Both Adcock and Aspen intend to expand into West Africa and whoever makes it there first will have a significant advantage on the continent.

Abdul Davids, head of research at Kagiso Asset Management, which holds 7% in Cipla Medpro, said Adcock Ingram’s offer substantially undervalues the company.

He said two elements in particular are not being accounted for in the offer price: Cipla’s upgraded manufacturing capacity and the company’s longstanding relationship with Cipla India (a supply agreement to manufacture Cipla products locally until 2025).

But according to Jonathan Louw, chief executive of Adcock Ingram, the deal is in the best interests of Adcock Ingram, Cipla Medpro South Africa, its employees, Cipla India and its shareholders.

“The merged entity will afford all stakeholders a more sustainable proposition,” said Louw.

“The proposed transaction with Cipla Medpro South Africa will ensure a powerful and complementary portfolio to support expansion into Southern Africa. Cipla India, in turn, will benefit from Adcock’s strong distribution and branding capabilities,” said Louw. 

In addition, South Africa’s regulatory environment governing drug prices has become increasingly tough for pharmaceutical companies in recent years. Proposals such as international benchmarking, in which local drug prices are set comparative to a grouping of other countries, is just one such example.

“The merger will lead to numerous synergies between the two companies as a result of strategic positioning, risk reduction, cost reduction and revenue enhancement,” said Louw.

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