Aspen Religare 220811

Company Report
Health Care
22 August 2011 South Africa listed
Aspen Pharmacare
BLOOMBERG: APN SJ EQUITY
Robin Campbell, PhD, Analyst
+44 20 7444 0677
robin.campbell@religare.com
Out of Africa
Valuation & Recommendation
Strong Growth Drivers: Medicine prices may be low in many developing and emerging markets, but appetite for better standards of healthcare is rising, supporting increased volumes. Higher prices for generic products, branded extensions and new combinations help to push underlying margins higher, supporting above-average core profit growth for companies, like APN. Growing International Scale: APN experienced a step change for profit generation in FY09 with a significant move to internationalise the business. Although recent overall Group profitability has been tempered as a result of the 2009 asset deal with GlaxoSmithKline, we believe that the medium-term impact from fast-growing sub-Saharan and International divisions should more than correct for this. Prepared for Domestic pressures in South Africa: Despite aggressive competition in its home market, APN has become No.1 in the private/retail pharmaceutical market. However, conditions are likely to get tougher in the medium term. Importantly, the company has made business streamlining in manufacturing and supply chain one of its core skills to preserve opportunities to at least maintain, and potentially, expand Group margins. Undemanding valuation: A SoTP valuation analysis suggests that APN shares are
undervalued. We launch coverage with a Price Target of Rcents 10,000. This valuation is underlined by a Compco analysis highlighting APNs 16.4.x (FY11E) and 13.9x (FY12E) PERs and a CAGR EPS growth of 18% (FY11E-FY16E), which compare favourably to anaemic average growth for pharma companies in developed markets (8% p.a.) and PERs of 21.0x (FY11E) and 16.4x (FY12E) and EPS growth of 22% for pharma companies in emerging markets.
Share Price 12 month target Previous target Rating Previous % Upside / (Downside) + Dividend yield Total return
8,170 ZAr 10,000 ZAr N/A Buy N/A- Initiation 22.4% 0.6% 23.0%
Company data Market Market cap (ZAR mn / US$ mn) EV (ZAR mn / US$ mn) Shares in issue (mn) Free float (%) 3-month average daily value (ZAR mn) 52 Week high / low (ZAr) JSE 36,855 / 5,128 43,258 / 6,019 451 89 88.39 9,785 / 7,330
Share Price
(ZAr) 10,300 8,425 6,550 4,675 2,800 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11
ASPEN PHARMACARE HOLDINGS LT FTSE JSE All Share
22 Augu st 20 11
Financial highlights Year End: 30 Jun Revenue (ZAR mn) EBITDA (ZAR mn) Net Profit (adj) (ZAR mn) EPS (adj) (ZAR) EV/Sales (x) EV/EBITDA (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) ROCE (post-tax) (%) FY09A 8,450 2,407 1,340 3.63 3.70 13.0 20.3 20.3 0.0 3.1 24.4 FY10A 10,147 2,885 1,979 4.63 4.14 14.6 19.9 19.9 0.0 1.3 18.3 FY11E 13,553 3,449 2,272 4.99 3.19 12.5 16.4 16.4 0.6 n.m. 14.6 FY12E 16,275 4,560 2,651 5.88 2.58 9.2 13.9 13.9 0.9 4.0 14.1 FY13E 17,883 5,182 3,138 6.96 2.25 7.8 11.7 11.7 1.0 5.8 15.3 Share Price Performance 1 month (1.7) Absolute (5.0) Relative*
* Relative to FTSE JSE All Share
3 month 4.3 4.8
12 month 7.3 (10.3)
Aspen Pharmacare
Company Report
22 August 2011
Investment Case Summary

Growing International scale to enhance LT returns
Launch coverage on Aspen with a Buy and TP of Rcents 10,000
FY11E to continue APNs transition
FY09 heralded a transformation in APN strategy through collaboration with GlaxoSmithKline and selective M&A, the company has extended or entered positions in international pharmaceutical markets in Sub-Saharan Africa (SSA), Asia Pacific, Latin America and Rest of World territories. This was a strategic imperative given the domestic outlook more medicines pricing pressure and a lack of demand for its consumer products. The stocks stellar performance in FY09 (+118%) and FY10 (+25%) underscored the underlying changes and positive outlook. The pullback in the share in FY11 to date, -14%, combined with our positive assessment of the company and its valuation strikes us as a good point to pick up the share. Despite worries centred on domestic growth and integration issues over the recent Sigma acquisition, we believe that the growth prospects for the Group are intact. Our current total (net) revenue forecast of R13.6bn for FY11E represents a 34% growth excluding Sigma we estimate that FY11E revenues increase to R12.2bn (+21%). However, EBITA margin is likely to contract through the tougher anti-retroviral drug (ARV) contract and more costly international distribution we forecast 23.8% margin (-280 bps) with EBITA of R3.4bn (+20%). Furthermore, we forecast progressive margin expansion in FY11E-FY16E. Our long term CAGR in that period for Group revenue, EBITA and Headline EPS is forecast to be 12.1%, 14.3% and 18%, respectively.
We are Buying APN for its aboveaverage growth outlook
An enviable top-line growth trajectory
Aspen plays a stronger international hand: APN aims to supply an increasing number of branded and generic drug products through its expanding international sales network. Seeking out new markets and expanding in current ones is key to maintaining its enviable top-line growth trajectory. Raising profitability levels is a function of product mix (includes new product launches) and investing in building a super-efficient international manufacturing network. APN is fortunate to have both. Strategic template is scalable: Key components of APNs strategy is accessing growth markets and developing scale to the business whilst raising efficiency and growing profits at above-average rates. Developing markets and the branded generics pharma industry lends itself well to this task. Domestic pressures to rise, but issues are manageable: Despite aggressive competition in its home market, APN has thrived and become Market No.1 in the private/retail pharmaceutical market. Conditions are expected to get tougher (through lower ARV margins, an extended Single Exit Price, SEP, situation and more competition), but we believe APN now has a suitably diversified business - and ex-SA strategy - to meet these pressures head on.
Tapping high-growth emerging markets
Domestic business pressures are manageable
Valuation
Launch with a PT of Rcents 10,000
A SoTP valuation analysis suggests that APN shares are undervalued. This current undemanding valuation is underlined by a Compco analysis highlighting APNs 16.4x (FY11E) and 13.9x (FY12E) PERs and a CAGR EPS growth of 18% (FY11E-FY16E), which compares favourably to anaemic average growth for pharma companies in developed markets (8% p.a.) and PERs of 21.0x (FY11E) and 16.4x (FY12E) for pharma companies in emerging markets.
Key risks
These include: reduced product demand, higher raw material costs, API/finished product supply, competition, legislation (and possible compulsory National Health Insurance scheme), partner development timelines. We would also highlight delays with business integration, cost savings and efficiency initiatives, movements in tax rate and FX rate volatility.
RELIGARE INSTITUTIONAL RESEARCH
Aspen Pharmacare
Company Report
22 August 2011
Valuation & recommendation

Dependent on great execution
We launch coverage on APN with a Buy rating and a price target of 10,100 Rcents/share. APNs PT depends on great execution in a number of separate areas, including: Product development and market launches to maintain its relatively high-growth revenue development; Continued initiatives to streamline its manufacturing network and further develop its strategic API (active pharmaceutical ingredient) supply line; and Accelerating its move to diversify revenue streams into International markets (particularly Asia Pacific and Latin America). In our view the key catalysts to underline successful implementation in the above areas include: Capitalising on the new Asian region springboard that is being assembled in Australia particularly post-Sigma acquisition; Working to stimulate demand on both the branded and generic medicine sides of the business and taking advantage of the significant portfolio of products within the GSK collaboration; Maintaining the companys international benchmarked status for efficient drug production and continuing to squeeze operational and meaningful financial margin benefits; Bringing through a product development pipeline over the next 5 years, valued conservatively at >R6bn; and Identifying further product and regional expansion opportunities to support APNs M&A strategy. We value APN using SoTP and peer group multiple comparisons which, for this category of company (established pharma, growth profile, stable manufacturing and distribution operations, strong operating cash flow generation), can be used in a complementary manner. Most recently, net debt was R2.1bn, a R900mn reduction due to a combination of strong operating cashflow, asset sales and favourable FX. Following completion of the Sigma acquisition, this figure is expected to significantly increase to an estimated R6.8bn.` Our Sum-of-the-parts valuation suggests a PT of Rcents 10,100 and highlights a number of critical strategic themes which are expected to figure prominently in APNs operations and outlook over the next 12 months: The potential for the Branded Aspen GSK alliance; The rising contribution from Sub-Saharan Africa territories; and The future importance of APNs International operations, notably in Asia Pacific and Latin America. Peer comparisons underline an undemanding valuation for premium growth; specifically, we would highlight APN PERs of 16.4x (FY11E) and 13.9x (FY12E) and a CAGR EPS growth of 18% (FY11E-FY16E). This compares favourably to anaemic average growth for pharma companies in developed markets (8% p.a.) and PERs of 21.0x (FY11E) and 16.4x (FY12E) for pharma companies in emerging markets (across China listed both in China/HongKong and the US, MENA, India and South Africa). Our PT of 10,000 Rcents/share suggests PERs of 20.0x and 17.0x for FY11E and FY12E, respectively. Furthermore, this PT suggests EV/EBITDA multiples of 14.9x and 11.3x for FY11E and FY12E, respectively, and EV/Sales multiples of 3.8x and 3.2x.
Key catalysts to signal corporate wins
Valued using techniques
complementary
Aspens story highlights its potential growth trajectory
In our view APN represents a valuable growth story, with core domestic and expanding international activities tapping emerging pharmaceutical markets. Although a South Africa government squeeze on the recent anti-retroviral drug (ARV) award is expected to push domestic growth down (and have an adverse effect on margins), we still forecast a 5YR Group revenue CAGR of 12%. Highlights are expected to be growth in Sub Saharan Africa (CAGR
Aspen Pharmacare
Company Report
22 August 2011
23%), Asia Pacific and Latin America (both 16%) and RoW markets (14%). This compares with average major developed market growth of 2-4%.
What are the potential risks to this growth?
Potential risks to our forecast 18% 5YR CAGR earnings growth include: SA pricing legislation (downward pressure), future adverse ARV tenders, competition (notably from emerging markets, notably India); The outcome of plans for a National Healthcare Insurance (NHI) scheme. Potential beneficiaries include pharmaceutical companies those marketing generic drugs. However, the funding sources, apart from compulsory taxation, are ill-defined and may include mechanisms to further regulate medicine prices (downwards); Delays in implementing further efficiencies in manufacturing; Investment in Australia more required than anticipated, particularly into the manufacturing infrastructure; Problems in generic drug development and API supply that may affect the timelines for bringing pipeline products to the market (conservatively valued by APN at >R6bn); and FX volatility: so far this year the Rand has been relatively stable versus major trading currencies, although with some strengthening vs. the USD$ and weakening vs. the AUD$ (however, it should be noted that currency needs for raw material/finished goods imports are, to a large degree, matched by income from the companys International activities). Despite these potential risks we believe that APN is a prime investment target for investors wanting exposure to the high-growth emerging market segment of the pharmaceutical industry, and its accompanying defensive attributes.
Aspen Pharmacare
Company Report
22 August 2011
Company Valuation
Year End: 30 Jun Per Share data (ZAR) EPS (adj) DPS Book value Valuation ratios EV/Sales (x) EV/EBITDA (x) EV/Capital Employed (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) P/BV (x) FY08A 2.40 0.48 8.7 2.92 10.0 2.2 14.0 14.0 1.4 5.1 3.9 FY09A 3.63 0.00 11.3 3.70 13.0 3.7 20.3 20.3 0.0 3.1 6.5 FY10A 4.63 0.00 25.4 4.14 14.6 3.1 19.9 19.9 0.0 1.3 3.6 FY11E 4.99 0.48 28.4 3.19 12.5 2.3 16.4 16.4 0.6 n.m. 2.9 FY12E 5.88 0.72 33.3 2.58 9.2 2.0 13.9 13.9 0.9 4.0 2.5 FY13E 6.96 0.85 39.0 2.25 7.8 1.7 11.7 11.7 1.0 5.8 2.1
Fig 1 - Peer Compco: World Pharma

As of 22 August 2011 Company Ticker Price Rating Mkt Cap USD$ mn PER (x) FY11E FY12E EV/Sales (x) FY11E FY12E EV/EBITDA (x) FY11E FY12E LT EPS Growth (%) PEG
Developed Markets Avg Europe Large Pharma Avg Europe Mid-Pharma Avg US Large Pharma Avg US Mid-Pharma/Gx Emerging Markets MENA Hikma Avg Chinese Pharma
(HK/China listed)
83,397 4,346 87,847 9,550
10.3x 31.1x 10.2x 11.7x
9.8x 14.8x 9.8x 13.7x
2.2x 2.4x 2.0x 2.2x
2.1x 2.2x 2.0x 2.2x
6.1x 12.3x 6.3x 7.4x
5.9x 8.7x 6.2x 8.0x
6.6 12.0 4.2 9.2
1.5 1.2 2.3 1.6
HIK LN
610.0
BUY
1,930 1,273 349 3,439
18.2x 32.1x 10.3x 16.7x
15.0x 23.4x 10.3x 14.1x
2.4 4.3x 1.3x 2.8x
1.9 3.4x 1.3x 2.4x
11.2x 19.9x 4.9x 12.4x
9.1x 15.4x 4.1x 10.7x
20.0 31.5 18.8 16.3
0.8 0.7 0.6 0.9
Avg Chinese Pharma

(US listed) - excl <$100mn mkt cap
Avg Indian Pharma
Aspen Pharmacare Adcock Ingram Holdings Netcare Limited Medi-Clinic Corp Life Healthcare Group Avg South Africa Pharma Avg South Africa Health Avg - Pharma developed Avg - Pharma emerging
APN SJ AIP SJ NTC SJ MDC SJ LHC SJ
8,170 6,032 1,334 3,061 1,744
Buy NC NC NC NC
5,128 1,457 2,675 2,771 2,522 3,188 2,869
16.4x 12.7x 12.3x 14.2x 15.0x 14.6x 14.2x 15.8x 21.0x
13.9x 10.1x 10.5x 11.7x 12.8x 12.1x 11.8x 12.0x 16.4x
3.2x 2.1x 1.8x 1.9x 2.0x 2.7x 2.2x 2.2x 3.1x
2.6x 1.9x 1.7x 1.7x 1.8x 2.2x 1.9x 2.1x 2.6x
12.5x 7.8x 9.1x 8.6x 7.9x 10.2x 9.2x 8.0x 13.8x
9.2x 6.9x 8.1x 7.9x 7.0x 8.1x 7.8x 7.2x 11.3x
18.0 14.3 10.4 18.1 27.7 17.1 18.1 7.9 22.2
0.8 0.7 1.1 0.6 0.5 0.7 0.6 1.6 0.7
Source: RCML Research, Bloomberg
Aspen Pharmacare
Company Report
22 August 2011
Fig 2 - Aspen: SoTP valuation

FY11E EBITA estimates* Multiple Value Branded 1,120 19.0x 21,287 OTC 498 13.5x 6,726 Generics 1,790 13.3x 23,869 51,882 Total 3,408
Less net debt Equity value No shares Per share value (R cents) Current share price (R cents) Upside/ (Downside)
Source: RCML Research; RCM EBITA estimates for business categories
-6,771 45,111 451.1 10,000 8,340 20%
Aspen Pharmacare
Company Report
22 August 2011
Financials & Forecasts analysis

P&L Drivers
1. Revenue Drivers Price & volume: APNs product portfolio, mainly generic or branded generic versions of medicines, depends on volume sales. General demand is solid, with Group revenues set to grow at 12% CAGR (FY11-16E). However, there are some domestic market pressures on pricing new ARV tender (lower pricing), extended SEP scheme and potentially a future introduction of National Healthcare Insurance. Price rises, for branded products, are (in the main) more of a feature in its International markets. M&A: The recent acquisition of Sigmas pharmaceutical sales and manufacturing assets represents a strategic purchase for APN to accelerate expansion in Asia Pacific. We anticipate additional fill-in purchases of companies and products. FX: Group activities are (mainly) in the respective functional currency of each market. FX risk is managed through the selective use of forward exchange contracts. For major FX rates in FY10, a 10% stronger Rand would have resulted in a R30mn negative impact at the PBT level. 2. EBIT Margin Drivers APN is a profitable company. Growth in segment EBIT is forecast to be CAGR 16% p.a. FY11-16E. Key drivers are Cost of Sales and Selling & Distribution costs: CoS expenses are forecast to grow 11% over this period, less than the expected >12% growth in sales. Key expense lines, S&D and Administrative should be seen to grow at 9-10% and 10-11%, respectively, during this timeframe. 3. Tax rates: Following the Sigma acquisition, guidance is for an effective rate of ~21% for the foreseeable future.
Cash Flow Drivers

1. Working capital movements: Building out its SSA network and acquiring Sigma is expected to lead to a significant increase in working capital in FY11E, though dropping back to historic levels by FY13E. 2. Provision movements: FY11E results are to include five months of Sigma we expect transaction and restructuring costs of >R100mn. 3. Capital expenditure: FY11Es capex forecast includes our estimate of assets purchased in the Sigma transactions (details yet to be disclosed); future levels should grow in line with post-acquisition demands. 4. Dividend payments: APN paid a 70 cent dividend in FY10 (paid out in H111 accounts) we anticipate a rising level of dividend per share, in line with earnings growth. 5. Issuance of equity: Future acquisitions are likely to be funded with a combination of cash and new equity. 6. Overall free cash generation: APN is a very strong generator of cash; OCF/EBIT was ~78% in FY10 although forecast to be at a lower level in FY11E (due to Sigma purchase), we expect it to rise to >80% in FY12-13E.
Balance Sheet Issues

1. Debt: FY10s net debt was R2.8bn; as a result of the Sigma trasaction we expect FY11Es figure to be ~R7bn.
2. Pension / Healthcare liabilities: APN provides retirement benefits for employees through contributions to a variety of 3rd party funds. At YE 30 June 2010, the plan was running a deficit of R12.3mn. APN runs comprehensive employee medical/welfare activities at both its SA and main International locations. 3. Other liabilities / assets: Key changes in assets in FY10 reflect the addition of the GSK assets and changes in International territories. Entries in liabilities noted a decrease in gross borrowings through strong cash generation and paying down debt. This situation is set to be reversed (in the short term at least) by the Sigma transaction.
Aspen Pharmacare
Company Report
22 August 2011
Company Forecasts and Metrics

Profit and Loss statement
All figures in (ZAR mn)
Profitability & Returns (%)

FY10A 10,146.6 4,604.3 2,884.6 2,614.9 (370.4) 0.0 2,446.0 2,446.0 (467.5) 0.0 1,978.5 1,978.5 426 4.63 4.63 0.00 FY11E 13,552.7 5,827.7 3,448.7 3,106.4 (229.9) 0.0 2,876.5 2,876.5 (604.1) 0.0 2,272.4 2,272.4 451 4.99 4.99 0.48 FY12E 16,274.7 7,030.7 4,560.4 3,641.0 (285.0) 0.0 3,355.9 3,355.9 (704.7) 0.0 2,651.2 2,651.2 451 5.88 5.88 0.72 FY13E 17,882.9 7,797.0 5,181.8 4,200.5 (228.1) 0.0 3,972.4 3,972.4 (834.2) 0.0 3,138.2 3,138.2 451 6.96 6.96 0.85 Y/E 30 Jun Gross margin EBITDA margin EBIT margin Net profit margin Tax rate RoE ROCE (post-tax) FY09A 46.0 28.5 25.8 15.9 21.1 36.0 24.4 FY10A 45.4 28.4 25.8 19.5 19.1 26.4 18.3 FY11E 43.0 25.4 22.9 16.8 21.0 19.2 14.6 FY12E 43.2 28.0 22.4 16.3 21.0 19.1 14.1 FY13E 43.6 29.0 23.5 17.5 21.0 19.2 15.3
Y/E 30 Jun Revenue Gross profit EBITDA EBIT Net interest inc./(exp.) Exceptional items Pre-tax Profit (stated) Pre-tax Profit (adj) Tax paid Minorities Net Profit (stated) Net Profit (adj) Shares outstanding (mn) EPS (stated) (ZAR) EPS (adj) (ZAR) DPS (ZAR)
FY09A 8,450.3 3,886.2 2,406.6 2,183.0 (475.0) 0.0 1,715.6 1,715.6 (362.0) (13.2) 1,340.4 1,340.4 369 3.63 3.63 0.00
Growth (YoY, %)
Y/E 30 Jun Revenue EBITDA Net profit EPS Dividend Capital employed FY09A 73.1 67.7 55.3 51.1 (99.7) 59.5 FY10A 20.1 19.9 47.6 27.7 (100.0) 62.7 FY11E 33.6 19.6 14.9 7.8 n.a. 20.6 FY12E 20.1 32.2 16.7 17.7 48.3 10.8 FY13E 9.9 13.6 18.4 18.4 18.4 11.6
Cash Flow statement

Y/E 30 Jun EBIT Depreciation & Amortisation Change in Working Capital Tax Paid Other Items Cash Flow from Operations Capital Expenditure Acquisitions & Disposals Other Items Cash Flow from Investing Debt Raised/ (Repaid) Proceeds from Share Issues Dividends Paid Cash Interest Expense Other Items Cash Flow from Financing Change in net cash/(debt) Ending net cash/(debt) FY09A FY10A FY11E FY12E 2,183.0 2,614.9 3,106.4 3,641.0 223.6 269.7 342.3 919.4 (509.5) (344.5) (769.3) (614.8) 0.0 0.0 0.0 0.0 (601.7) (505.4) (767.6) (936.7) 1,295.4 2,034.7 1,911.8 3,008.9 (1,253.5) (1,291.5) (5,421.1) (1,464.7) (2,629.0) 24.8 (106.2) (84.9) 325.8 232.5 0.0 0.0 (3,556.7) (1,034.2) (5,527.3) (1,549.6) 3,109.4 (500.5) 1,500.0 0.0 20.4 16.1 0.0 0.0 (0.8) (0.8) (302.6) (448.7) 0.0 0.0 0.0 0.0 0.0 0.0 188.5 150.6 3,129.0 (485.2) 1,385.8 (298.1) (2,241.7) 1,015.8 (3,729.7) 1,161.2 (4,038.8) (2,759.2) (6,394.2) (5,157.4) FY13E 4,200.5 981.4 (363.2) 0.0 (1,030.9) 3,787.6 (1,609.5) (50.2) 0.0 (1,659.6) 0.0 0.0 (531.1) 0.0 89.0 (442.1) 1,685.9 (3,426.8)
Cash Conversion & Capital Intensity metrics

Y/E 30 Jun Fixed Assets/Sales (%) Working Capital/Sales (%) Working Capital (days) Inventory (days) Payables (days) Receivables (days) Op. Cash Flow/EBIT (%) CAPEX/depreciation (%) Free Cash Flow/Sales (%) Dividend cover (x) FY09A 24.4 26.2 96 62 50 84 59.3 560.6 (26.8) 2,327.1 FY10A 26.5 23.9 84 63 58 79 77.8 478.9 9.9 n.a. FY11E 41.0 23.9 76 64 60 72 61.5 1,583.7 (26.7) 10.4 FY12E 51.4 23.9 80 67 63 76 82.6 159.3 9.0 8.2 FY13E 50.1 23.9 83 70 66 79 90.2 164.0 11.9 8.2
Balance Sheet & Leverage ratios

Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E Net Debt/Equity (%) 94.7 25.3 49.7 34.2 19.4 Net Debt/EBITDA (x) 1.7 1.0 1.9 1.1 0.7 Gross Debt/Free Cash Flow (x) (2.7) 6.0 (2.1) 5.1 3.5 Net interest cover (x) 4.6 7.1 13.5 12.8 18.4 Cash interest cover (x) n.a. n.a. n.a. n.a. n.a.
Balance Sheet
Y/E 30 Jun Tangible Fixed Assets Intangibles Assets Associates & Investments Working Capital Other Assets of which: tax assets Other Liabilities of which: tax liabilities of which: pension liabilities Cash & Cash Equivalents Total Capital Employed Gross Debt of which: short term of which: long term Shareholders Equity Minorities Total Capital Employed
FY09A 2,373.5 4,502.0 27.6 2,213.1 17.8 17.8 832.2 203.0 0.0 2,065.3 10,367.1 6,104.1 2,670.3 3,433.8 4,182.7 80.3 10,367.1
FY10A 3,012.4 9,066.0 34.4 2,429.7 65.5 65.5 1,019.8 263.2 0.0 3,221.8 16,867.2 5,981.0 3,720.8 2,260.2 10,831.0 55.2 16,867.2
FY11E 8,091.2 9,066.0 45.9 3,245.3 87.5 87.5 1,362.1 351.6 0.0 1,086.8 20,337.0 7,481.0 5,220.8 2,260.2 12,800.8 55.2 20,337.0
FY12E 8,636.5 9,066.0 55.2 3,897.1 105.1 105.1 1,635.7 422.2 0.0 2,323.6 22,539.5 7,481.0 5,220.8 2,260.2 15,003.3 55.2 22,539.5
FY13E 9,264.6 9,066.0 60.6 4,282.2 115.4 115.4 1,797.4 463.9 0.0 4,054.2 25,146.6 7,481.0 5,220.8 2,260.2 17,610.4 55.2 25,146.6
Aspen Pharmacare
Company Report
22 August 2011
Company Overview
Aspen Company Activities & Operations APN supplies branded and generic medicines across Africa, Asia Pacific, Latin America and Rest of World regions - in total >100m countries. The company is South Africa's leading producer and seller of pharmaceuticals. APN is one of the world's Top 20 generic medicine producers, with manufacturing capability across four continents, with facilities in South Africa, Kenya, Tanzania, Brazil, Mexico, Germany and Australia. APN has a deep generic product pipeline, with an estimated pipeline value of >R6bn. Aspen is also active across the Consumer and Nutritional segments, selling a range of OTC/self-medication and infant nutritional products. APN is a member of the JSE Top 40.
Company Strategy APN aims to deliver an increasing number of branded and generic products through its expanding international sales network. Seeking out new markets and expanding in current ones is key to maintaining its top-line growth trajectory. Raising profitability levels is a function of product mix (new product launches) and investing and building a super-efficient international manufacturing network. APN is fortunate to have both. Key components of APN's current and future strategy is accessing growth markets and developing scale to the business whilst improving profitability and growing profits at above-average rates. Developing markets and the branded/generics pharma industry lends itself well to this task. Key hurdles include the integration of acquisitions, balancing regional investment to optimise market growth, launching new products and addressing government legislation on drug pricing at home and abroad.
Key Products/Services Generic medicines Branded medicines OTC/Consumer products Description Products forecast to comprise ~54% of FY11E sales Brand products (Global and Local) to comprise ~34% of FY11E sales OTC, Consumer, Nutritional, Other - constitute ~13% FY11E sales Sales split by product category, FY11E
Branded 34%
Generic 54%
Management and Board Name Stephen Saad Gus Attridge Judy Dlamini Archie Aaron Shah Abbas-Hussein Roy Andersen Rafique Bagus John Buchanan Chris Mortimer David Nurek Sindi Zilwa
Description Group Chief Executive, since 1999 Deputy Group Chief Executive, appointed 1999 Chairman, appointed 2005; MD, Mbekani Health ; Chairman, Masibulele Pharma NED, appointed 1994, former Chairman NED, appointed 2009; currently President, Emerging Markets GSK NED since 2008; previously with E&Y, JSE Ltd and Liberty Group Ltd NED, appointed 2003; CEO Morning-Tide Investments; previously with DTI NED, appointed 2002; previously with Cadbury Schweppes NED, appointed 1999; a practising attorney NED, appointed 2001; Executive of Investec Bank NED, appointed 2006; Chief Exec, Nkonki Chartered Accountants
OTC Consumer 13%
Sales split by territory, FY11E Company's stated objectives

Timing Description SA Consumer 9% Asia Pacific 22% Latin America 10%
Near term Near term Medium term Medium term Long term Long term
Maintain leadership positions in SA Branded and Generic markets Develop expansion initiative into Asia Pacific and SSA Expand more broadly into Latin America Consolidate Sigma manufacturing into global network Evaluate additional product and M&A opportunities in International markets Reduce dependence on SA; manage issues with ARV tender, SEP and NHI schemes
RoW 12%
Share Price Drivers Probability High (+) High (+) Medium (-) Low (-)
Description Significant operational synergies upside from integrating Sigma Australia Continued growth in Asia Pacific/Latin America - internationalisation benefits Need to invest more than expected in Sigma Australia manufacturing assets Expectations for a tough H2'11 (ARV margins) already discounted in share price
SA Pharma 38%
SSA 9%
Upcoming Events Date Late-August 2011 Mid-September 2011 Early-March 2012
Description Trading update not expected - due to low earnings growth in H1'11 FY11E results Interim results for FY12E
Major Shareholders Name Public Investment Corp Allan Gray AM Fidelity Vanguard Gus Attridge Stephen Saad Pictet
% 8.6% 6.6% 3.8% 2.1% 0.7% 0.6% 0.6%
Recent Corporate Action Date 27 January 2011 14 January 2011 14 December 2010
Description License for manufacture/supply of generic rilpivirine (TMC278) from Tibotec Aspen completes on Sigma acquisition Aspen awarded significant portion of ARV tender (effective from 1 January 2011)
Other Information Website: http://www.aspenpharma.com Location of HQ: Durban, South Africa
Aspen Pharmacare
Company Report
22 August 2011
Industry Overview
Industry & Competitive analysis Industry Description Aspen Pharma is active in the >$70bn Emerging markets (World Pharma, $650bn). These are relatively large markets (population), highgrowth, with developing healthcare systems. Typically with poor access to medicines, paid for 'out-of-pocket'. Industry Growth Drivers These include:Generics: Growth of this sector matches a growing need in emerging markets for affordable, gold standard drug therapy; Branded medicines: Brands - often generic medicines - represent treatments with established quality and prescriber loyalty; OTC/ Consumer: Growth of Over-The-Counter/Consumer and nutritional products is fueled by higher disposable income. SWOT Analysis
Strengths
Established brand value Increasingly broad geographical presence - not afraid to go international No 1 generic producer in Southern hemisphere High-growth prospects coupled with strong financial performance
Weaknesses Raised gearing to purchase Sigma Pharma Dependence on partner activities in SSA and International activities
Opportunities Consolidate position in Australia Create expansion in Asia Pacific region Push hard in Latin America
Threats Risk attached to proprietary development pipeline Ability to build new collaborative alliances around new products Do generic products in the LT offer secure growth prospects? Will manufacturing be less of a strategic advantage in future years?
Porter's Five Forces
Threat/New Entrants
Low-to-Moderate Regulatory barriers (-) R&D is capital intensive (-) Price regulation exists (-)
Power/Suppliers
Low-to-Moderate Volume benefits available - low switch cost (-) API production (particularly locally) secures an advantage (+) Suppliers can forward integrate (+)
Rivalry/Industry Competitors
Moderate-to-High Competitors are numerous (+) Potential market growth is high (+) Lower fixed cost and high working capital (-) Very profitable (+)
Power/Customers
Moderate-to-High H'care spending is managed centrally (+) Physicians act as gatekeepers (+) Little price sensitivity (-) Size of customer base is increasing - but fragmented (-)
Threat/Substitutes
Low-to-moderate No substitute for medicines (-) Me-too products threaten franchise (+) Product development can take years (-)
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Aspen Pharmacare
Company Report
22 August 2011
Aspen - Company background

Aspen Pharma African and International branded and generic medicine sales
Aspens pharmaceutical and consumer medicine business comprises core South African and International businesses, plus an expanding presence into Sub-Saharan Africa (courtesy of a strategic collaboration with GlaxoSmithKline). Across these markets APN is active across a broad range of therapy segments, offering Branded and Generic medicines as well as a number of over-the-counter (OTC) products. APNs ambition is to maintain its market leading position in SA whilst increasing its presence in international markets in order to benefit from above-average growth rates in emerging pharmaceutical market regions. The companys main regional activities are centred on the following areas: South Africa (53% of FY10 Group revenues): a business that includes branded pharmaceuticals and generic medicines, as well as consumer/OTC products. APN is No 1 in both branded and generic categories; Sub-Saharan Africa (9% of FY10 Group revenues): now includes a strategic alliance with GSK across the region. A branded generic business that operates (principally) across French West Africa, Nigeria and East Africa; and International Markets (38% of FY10 Group revenues) includes activities in Latin America, Asia Pacific and Rest of World territories APNs main targets for expansion.
FY11E to be a transition year negative ARV impact, but positive Sigma effects
Our current total (net) revenue forecast of R13.6bn for FY11E represents a 34% increase versus FY10. Excluding the addition of Sigma we estimate that FY11E revenues are likely to increase 21% to R12.2bn. EBITA margins are likely to contract, given the negative impact of the new ARV contract (effective in H211) in the SA business and a continued step-down in International business margins (as a result of giving some margin away through Aspens distributor network and lower Sigma margins). We are forecasting a Group EBITA margin of 23.8% for FY11E. EBITA is forecast to grow 20% this year. Nevertheless, the growth prospects for the Group are intact, with expected progressive margin expansion in 2011-2016. Forecast drivers for this improvement include: New product development and market launches helping generate volume growth and positive product mix effects; Extracting further manufacturing and supply chain efficiencies; and Success in developing business through International regions out of Australia (for Asia Pacific) and Brazil (in Latin America).
Our long term CAGR (FY11E-FY16E) for Group revenue, EBITA and Headline EPS is forecast to be 12.1%, 14.3% and 18%, respectively. Fig 3 - Aspen revenue forecasts by region
R mn South Africa Sub-Saharan Africa Asia Pacific Latin America Rest of World Adjustments* Net revenues FY08 3,758 47 908 83 85 0 4,881 FY09 4,309 931 1,234 1,144 823 0 8,441 FY10 5,652 910 1,468 1,150 1,435 -469 10,147 FY11E 6,643 1,274 3,170 1,380 1,722 -637 13,553 FY12E 6,680 1,631 5,092 1,656 2,032 -815 16,275 FY13E 7,147 2,055 5,397 1,954 2,357 -1,027 17,883 FY14E 7,695 2,527 5,775 2,267 2,687 -1,264 19,687 FY15E 8,400 3,033 6,237 2,584 3,010 -1,516 21,747 FY16E 9,244 3,548 6,736 2,894 3,311 -1,774 23,959 12.1% CAGR FY11E-FY16E 6.8% 22.7% 16.3% 16.0% 14.0%
Source: RCML Research, Company; *Adjustments are for GSK Aspen Healthcare venture revenues (shown in table as gross revenues)
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Company Report
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Brief snapshot of Aspens H111 results
Group progress through H111 was solid, with continued growth across most regions. Group net revenues increased 33% to R5.99bn, with notable results obtained in South Africa (SA) increased 29%, Sub-Saharan Africa (SSA) grew 139% (gross revenues), Asia Pacific and Rest of World regions. The SA business has progressed into a leadership position in the domestic market on continued strong demand, helped by the integration of the GSK activities (a first full-period contribution). Total Africa business (including SSA) comprised >66% of adjusted Group (net) revenues. SA activities saw good continued growth for the Pharma business, revenues rising to R2.7bn (+36%). Consumer products in the period saw revenues increase 8% to R618mn. Fig 4 - Aspen H111 revenues by region
R mn South Africa Sub-Saharan Africa Asia Pacific Latin America Rest of World Adjustments* Net revenues H1 09 2,066 464 484 408 25 0 3,447 H1 10 2,550 279 748 500 493 -50 4,519 H1 11E 3,300 666 957 599 867 -399 5,990
Source: RCML Research, Company; *Adjustments are for GSK Aspen Healthcare venture revenues.
Strong growth for International activities
International activities are growing strongly, and through the Sigma acquisition, should feature more prominently in future years. Total international revenues grew 39% to R2.4bn - including Asia Pacific (+28%), Latin America (+20%) and RoW (76%). Group (segment) operating profit margin (on gross revenues) declined 230bps YoY to 25.3% (although increased versus FY10s 24.6%). Significant contraction was notable in the separate SA (-180bps) and International (-290 bps) divisions. The company highlighted the overall negative impact of the GSK SSA collaboration on the regional margin (particularly the International business), despite the benefits of a recovery in Latin America. This margin contraction resulted principally from product distribution through an extended distributor network (and less direct sales and profit).
Margin contraction in H1: notably in SA and SSA
Fig 5 - Aspen EBITA results, margins forecast by region

R mn South Africa Sub-Saharan Africa International Group EBITA margin - by region FY09 South Africa Sub-Saharan Africa International Group 25.6% 19.2% 31.7% 27.2% FY10 28.9% 7.9% 27.5% 26.6% FY11E 26.0% 14.4% 23.3% 23.8% FY12E 24.5% 16.0% 21.0% 21.9% FY13E 25.5% 17.0% 22.0% 22.8% FY14E 26.6% 18.0% 23.0% 23.7% FY15E 27.5% 19.0% 24.0% 24.6% FY16E 28.5% 20.0% 25.0% 25.6% FY09 830 27 679 1,536 FY10 1,632 72 1,114 2,819 FY11E 1,730 183 1,464 3,378 FY12E 1,636 261 1,844 3,741 FY13E 1,825 349 2,136 4,310 FY14E 2,044 455 2,468 4,966 FY15E 2,314 576 2,839 5,730 FY16E 2,636 710 3,235 6,581
Source: RCML Research, Company; Group margins are based on gross revenues.
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Aspen Pharmacare
Company Report
22 August 2011
Underlying margin in SA holding up in H1, but....
However, normalised margins for the SA business (adjusted to exclude a prior insurance compensation award for the Aspen Nutritionals business), highlighted an underlying one percentage point improvement in the business margin (increasing to 30%). Total group operating profit (from continuing operations) increased 27% to R1.6bn, >67% being generated in the total Africa business (of which 90% derives from the SA activities). However, a number of issues are likely to make it tougher for APN to continue on its high-growth trajectory in SA, certainly in the medium term. The ARV tender was awarded (December 2010), although government-mandated pricing was slashed to 50% of the previous tender as a result, we expect potential margin contraction in H211 (particularly) and for the outstanding term of the ARV tender (See Appendix ARVs). On a separate note, the Single Exit Price (SEP) legislation dictates pricing levels at the factory gate. We understand that manufacturers are unlikely to receive any respite from a freeze on prices before end-2011 (at the earliest). An improvement in normalised segment EBITA margin progression was also apparent in the Sub-Saharan region result (progressing from H110s 16% to 17% in H111). However, in the International region, although revenues saw a strong growth progression, the normalised segment EBITA margin slipped two percentage points (to 23% from 25%), as a result of folding in lower margin global distribution activities and the GSK German contract production facility. Consumer/OTC sales rose 8% to R618mn a reasonable result considering the prevailing difficult retailing climate. However, Aspens license to Wyeths infant milk formula (IMF) ended in April; this license provided an annual ~R250mn contribution to APNs topline (Wyeth is now owned by Pfizer, and intent to go it alone in SA). We understand that APN has been working hard to migrate customers over to its own Infacare Gold range since the beginning of the year. Clearly a significant boost to revenues in Sub-saharan Africa suggests that the GSK business has been successfully integrated. We expect further good progress through 2011. International revenues should start to reflect the Sigma acquisition in H211. We expect the Asia Pacific activities which generated revenues of R957mn (+28%) in the H111 period to increase significantly through the year as Sigma activities are integrated and revenues folded in. We are forecasting a Sigma contribution of R1.3bn in the H2, although an estimated R100mn-150mn EBIT contribution is likely to be swallowed up this year (by various costs associated with the acquisition). Net borrowings were reduced to R3bn in FY10; although the Sigma transaction is expected to increase net debt to ~R7bn.
....we expect a tougher outlook for SA activities in H211
Diverging routes for margins in SSA and International
Consumer cycle in a trough....
Successful integration in SSA....
Sigma contribution to become increasingly valuable in the MT
Critical business milestones for the next 12 months
Critical to maintaining APNs aggressive LT growth trajectory are a number of catalysts and opportunities, including: Setting the potential launch timetable for new products; Leveraging the Asia Pacific platform, extended through the addition of Sigma; Bringing more resource to focus on Latin American expansion in the MT; and Adding further global brands through selective M&A.
Potential FX movement impact on PBT a FY10 scenario
Turbulence in FX markets could be a material factor in determining final results for FY11E and beyond. For example, a (10%) stronger Rand versus the US$ potentially spelt a negative impact on PBT in FY10. Similarly, a (10%) weaker was also potentially negative, but then balanced by relative (cross FX) weakness of the US$ versus the and GBP.
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Aspen Pharmacare
Company Report
22 August 2011
The overall potential effect on PBT for FY10 in this scenario was estimated to be a R30mn loss. So far this year the Rand has been relatively stable versus major trading currencies, although with some strengthening vs. the USD$ and weakening vs. the AUD$. Fig 6 - Aspen H111 results; FY11E forecasts
Rmn Continuing operations Revenue CoS Gross profit Expenses Selling & Distribution Administrative Other operating income Other operating exp Operating profit Investment income Financing costs Net financials Share of after-tax net losses (associates) Profit before tax Tax Profit after tax from continuing operations Discontinued operations Profit from discontinued operations Profit for the year Other comprehensive income Amounts in equity due to hedge acc'ting of int rate swaps Cash flow hedges realised Currency translation differences Acquisition of addtnl 1% share in PharmaLatina Holdings Ltd Disposal of Onco Therapies Ltd Total comprehensive income Headline earnings From continuing operations From discontinued operations Headline EPS (cents) From continuing operations From discontinued operations Headline EPS - Diluted (cents) From continuing operations From discontinued operations Gross margin EBIT margin PBT PAT (continuing ops)
Source: RCML Research, Company
H1 10A
H1 11A
% change 32.5% 38.5% 25.5%
FY10A FY11E
% change 33.6% 39.4% 26.6%
4,519 2,441 2,078
5,990 3,381 2,609
10,147 13,553 5,542 4,604 7,725 5,828
538 368 150 62 1,260 91 -264 -173 -1 1,085 -239 846
664 360 108 80 1,614 128 -251 -124 0 1,490 -323 1,167
23.3% -2.3% -27.9% 28.9% 28.1% 41.1% -4.8% -28.7%
1,189 736 180 244 2,615 188 -558 -370 -2
1,626 1,016 244 322 3,106 73 -303 -230 0 2,877 -604 2,272
36.7% 38.1% 35.6% 32.2% 18.8% -61.2% -45.7% -37.9%
37.3% 35.3% 37.9%
2,243 -468 1,775
28.3% 29.2% 28.0%
42 889 0 0 -5 -37 0 0 846
0 1,167 0 96 52 -632 0 0 683 -19.3% 31.3%
203 1,979 0 0 -5 -25 0 1 1,949
0 2,272 0 96 52 -632 0 0 1,788 -8.3% 14.9%
847 42 242.3 230.8 11.5 229.6 218.7 10.9 46.0% 27.9% 24.0% 18.7%
1,147 0 265.3 265.3 0.0 254.3 254.3 0.0 43.6% 26.9% 24.9% 19.5%
35.4%
1,893 49
2,253 0 521.0 521.0 0.0 499.3 499.3 0.0 43.0% 22.9% 21.2% 16.8%
19.0%
9.5% 14.9%
482.9 470.8 12.1
7.9% 10.7%
10.8% 16.3%
463.4 452.0 11.4 45.4% 25.8% 22.1% 17.5%
7.8% 10.5%
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Aspen Pharmacare
Company Report
22 August 2011
Strategy
1 in 4 of every oral drug Rx in South Africa is for an Aspen product
Aspen is South Africas biggest pharmaceutical company, manufacturing and marketing branded and generic medicines into >100 markets worldwide. Domestically, Aspen is the leading marketer of ethical and generic medicines in the South African market (number 1 in terms of product offerings, size of sales force and supplier of medicines into the private and public sectors). The companys customer base is broad, including pharmacy networks, clinics/hospitals, specialist prescribers, managed healthcare providers and retail stores. Almost 80% of FY10 revenues were generated by prescription (Rx) products, the rest from various Consumer products. Aspens strategy is clear growth through acquiring and maintaining market share and selective international expansion. Specifically, the company aims to cultivate its strategic differentiation through maintaining its SA advantage, expanding its International operations and developing a meaningful presence in sub-Saharan Africa.
World class manufacturing network
Aspen continues to develop its Generic (Gx) business to supply both its SA and international businesses. Significant investment has been made into the manufacturing and supply chain, in particular expanding the companys API (active pharmaceutical ingredient) activities. APN has the largest drug production capacity in the southern hemisphere and is one of the worlds Top 20 Gx manufacturers. APN produces >7bn tablets and capsules across its worldwide business, with manufacturing sites on four continents; with facilities in SA, India, East Africa, Europe and Latin America. APNs product portfolio comprises a vast range of dosage forms (capsules, creams, ....to enemas), which are produced to support therapeutic category sales across its market regions (in 16 main therapy categories). APNs strategic strength in manufacturing has allowed the company to: Transform itself from a domestic producer into an international supplier; Transfer production expertise across its facilities network (South Africa, Australia, Germany, Tanzania, Kenya, Brazil, Mexico); Develop a generic product pipeline (alone or in collaboration with other multinational pharmaceutical companies); A vertically-integrated network of JVs responsible for security of the API supply (including ARVs); and Focus on making continuous improvement initiatives in order to extract process efficiencies and significant cost savings across the networks facilities.
Driving efficiency into manufacturing
Furthermore, APN has a clean bill of health for its manufacturing in SA, which is a significant producer of generic medicines for export all regulatory re-inspections in 2010 produced no significant (negative) findings.
GSK collaboration is strategic to Africa
The company aims to deliver additional growth through its positioning in the subSaharan African region helped by its strategic alliance with GSK. In December 2009, APN completed a number of related strategic transactions with GSK covering the South Africa and Sub-Saharan Africa territories, and GSKs Global Brands and Bad Oldesloe (Germany) manufacturing facility. APN gained relevant branded products for its SA, SSA and International businesses. In return, 68.5mn shares were issued to GSK, an approximate transaction value of R4.6bn ($550mn). The rational of the transaction was sound, with both parties to benefit in our view. GSK was principally marketing into the higher-end, wealthy private channels and the collaboration with Aspen should allow both companies to tap into much broader demand channels.
Broad complementarity between GSK brands and Aspen generics
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Aspen Pharmacare
Company Report
22 August 2011
The internationalisation strategy appears to be paying off
International expansion is set to continue, with a growing presence in Asia Pacific and Latin America, and smaller but developing activities in other territories (including Europe, Middle East, N.Africa, Canada).
Fig 7 - Aspen: lead position in private SA Branded Pharma market
Source: Company, IMS MAT Rand share Dec 2010
Fig 8 - Aspen: lead position in SA Generics market
Pharmaplan Pfizer Sanofi Daiichi Sankyo, 4.0%
Dr Reddys Ranbaxy
Other
Aspen, 31.0%
Lupin, 4.0% Servier, 4.0% Novartis, 9.0%
Adcock Ingram, 11.0%
Cipla Medpro, 17.0%
Source: Company, IMS Dec 2010
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Aspen Pharmacare
Company Report
22 August 2011
South Africa activities

A 160 yr old South African legacy
Aspen Branded Pharma (~10% total SA sales): APNs branded medicine portfolio covers the usual extensive range of therapy segments, which are distributed through wholesalers and pharmacies to reach the patient. APN is SAs No.1 branded pharma company. Aspen Generic medicines (~65% of total SA sales): South Africa legislation mandates generic substitution, which allows APN to aggressively market its extensive generic versions of branded medicines. APN is well-recognised as a producer of generic ARVs in Africa. The companys first generic ARV, Aspen Stavudine, was launched in 2003 and APN currently supplies ARVs to ~1.0mn sufferers across Africa. APN is SAs No.1 generic medicines company. Aspen Consumer (~25% of total SA sales): This division incorporates a number of separate product category businesses, including: OTC and self-medication products; Cough, cold & flu products (includes Flutex cough mixture range); Infant Care (includes Infacare baby formulas and nutritional products); Lennon Products business (includes Lennon Balsem and Balm range); and Personal Care products
FY10 an exceptional growth year in SA
APNs South African activities are a significant contributor to Group revenues and profits. Market revenues grew >31% in FY10 to R5.6bn (US$738mn), representing >55% of the total. In terms of profits, South Africas EBITA (continuing operations, before amortisation and other adjustments) increased 26% to >R1bn, representing 58% of total EBITA. By category, South African Pharma revenues grew 40% to R4.4bn, whilst Consumer product revenues grew 5% to R1.16bn. Regional segment operating profit increased to R1.59bn (+52%), as margins recovered through manufacturing efficiency initiatives and lower cost raw materials (bought with a stronger Rand). Regional segment operating margin improved to 28.1% (FY09, 24.3%).
APN is the lead SA Pharma company and Africas largest manufacturer
In terms of pharmaceutical (branded and generic) sales (R4.5bn, +40%), FY10s significant growth in this region was based on strong demand from both the private and public sector markets. As part of a series of related transactions within the agreement with GSK, the latters S.African activities were integrated during the year, representing ~10% of regional sales. A relatively fast and trouble-free integration resulted in almost immediate positive effects for the business - headline results reflected an increased market share in the branded pharmaceutical sector (APN also disclosed that its Pharma segment operating profit rose 56%). By product category, APN is No 1 both in the generics and branded sectors; the generic rating is a maintained one, but the branded position represents a move from No 4 on the back of the GSK deal.
H111 SA revenue growth as robust
Most recently, H111 results suggested that SA activities enjoyed robust revenue growth of 29% YoY, revenues growing to R3.3bn. SA activities saw good continued growth for the Pharma business, revenues rising to R2.7bn (+36%). Consumer products in the period saw revenues increase 8% to R618mn. In fact, APNs Pharma activities gained higher (private) market share (by value), to 16.7% (was 16.2%, Source: IMS). APN remains No1 in the SA generics market. Furthermore, with the integration of the GSK activities, the company is also the current leader in the branded pharma market. We would highlight that GSK product sales grew significantly in the period sales in H2 10 (that is, fiscal H111) were R463mn versus a run rate of approximately R320mn in the prior six months (+45%). SA region segment EBIT margin declined to 30.2% (H110 31.8%) generating an EBIT result of R996mn (+23%), or in terms of EBITA, R1bn (+26%). Headline segment
APN still No 1 in SA Generics and SA Branded Rx
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Aspen Pharmacare
Company Report
22 August 2011
operating profit margin for all SA activities contracted 160bps; however, on a normalised basis, that is adjusting the EBITA result to exclude effect of compensation for the loss of profits received from insurers in respect of Aspen Nutritionals (factory explosion in August 2009), then the H111 SA EBITA margin has expanded (to 30%) from the previous H110s 29% and the FY10 figure of 28%. Fig 9 - Aspen: Normalised EBITA margins
H1 10 South Africa* Sub-Saharan Africa International 29.0% 16.0% 25.0% FY10 28.0% 8.0% 28.0% H1 11 30.0% 17.0% 23.0%
Group
27.0%
26.0%
26.0%
Source: Company; *results adjusted to exclude effect of compensation for Aspen Nutritionals
Sluggish growth in Consumer in FY10
However, growth in consumer was sluggish in FY10, revenues growing 6% to R1.16bn, due to a recessionary drag on demand and supply chain interruption in the infant milk formula business (this result was reflected in the segment operating profit, which for consumer increased by only 12%). The general SA retail cycle was very depressed through FY10, prompting an internal review with a focus on efficient operations. H211 should also see the non-renewal of APNs licence to Wyeths Infacare infant milk formula (IMF) products. Again, this is a situation where APNs manufacturing and branding expertise should be of considerable value to rebuilding this business. The global IMF is worth $4-5bn; SA/Africa is estimated to be ~5-10% of that market but growing faster than other global regions (apart from China). APN believe that it has an opportunity to optimise an extremely complex production process (from wet milk) and develop a trusted brand, which can then be taken through to an international campaign. APN has plans to register the product through African markets, in Latin America and Asia Pacific, and at the same time, will review its opportunities for tender contract awards in Africa. Significant to the strength of these results has been the continued investment, over >5 years, into APNs domestic manufacturing facilities and operations; increased unit capacities and production efficiencies have been instrumental helping EBITA margins to expand from 25.6% in FY09 to 28.9% in FY10. During H111, APN won a significant 41% share of the most recent anti-retroviral (ARV) medicine tender award from the South African government for the next two years. It represents a good win, but to put it into context we believe that this segment of APNs business is set to generate lower sales and margins (see Appendix ARVs). Additionally, the Branded division launched a number of new products, including: Prezista (darunavir, previously known as TMC114), a protease inhibitor used in the treatment of HIV infection (licensed from J&J/Tibotec); Synflorix (GSKs pneumococcal vaccine) for childhood immunisation schedules; and Tykerb (GSKs lapatinib) for treatment with other chemotherapy in the treatment of advanced or metastatic refractory HER2 positive breast cancer. APN continues to invest in its SA manufacturing capabilities, with an eye to engineering in more production efficiencies; overall, the benefits allow the domestic business to weather pricing pressure and maintain margins. A significant example of this financial management is the ARV tender.
Aspen to major on its proprietary infacare product...and to look for African and international opportunities
Manufacturing investment has paid off handsomely
Lower sales and margins from public sector ARVs
Generics a valuable growth engine
Furthermore, APNs overall generics activities have benefitted significantly from this investment. Generic sales represent the bulk of its pharmaceutical revenues in the country; the total market has been growing (+12%) through mainly increased volumes, with APN out-performing the market both in terms of volume and value (overall, +14%). The company has been able to benefit from the latter through continued new product launches 30 brand extensions (or some 50 SKUs) were planned for launch during FY11E (of which 20 were launched in H111).
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Despite increasing competition from both domestic and foreign companies we believe that this segment continues to be a valuable growth engine for the SA business and for the Group.
Lower growth outlook in 2011/2012
Despite a strong start to FY11E, we believe that the outlook for APN in the SA market is a lower growth one for the foreseeable future. The low-priced ARV award, increased competition (brand erosion for top branded products) and likely further government and other initiatives pushing for lower medicine prices is expected to deliver a 5% (or lower) growth for the market in 2011/2012. On the plus side, we believe that APNs potential product roll-outs over the next 5 years could generate >R3bn in sales (aiming particularly in the antibiotic, cardiovascular and CNS treatment segments). Our 5YR outlook on APNs total SA Pharma revenue growth is a positive one, with a forecast CAGR for FY11E-FY16E of 8% p.a. Fig 10 - Aspen Generics Strong global industry position (No 8, US$mn revs)
Zylus Cadila Wockhardt Sun Lupin Orion Par Alapis Cipla Covidien Krka Gideon Richter Sanofi Fresenius Kabi Ranbaxy Dr Reddy Greenstone Aspen Perrigo Hospira Stada Watson Mylan Sandoz Teva
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000
5YR outlook is positive for SA generics
Source: Company
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Aspen Pharmacare
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22 August 2011
Sub-Saharan activities
SSA activities now consolidated
In FY10 a separate management and reporting structure was established for this expanded business. This includes the activities transferred from GSK, APNs Shelys business in East Africa and export sales from South Africa. These various components are now fully integrated. FY10 revenues for this division declined 2% to R910mn. However, we understand that the GSK-Aspen collaboration met all expectations, but a number of other issues affected the business including: Competition from generic ARVs; Poor business at Shelys (APNs 60% owned East African subsidiary); and Stock write-offs and other charges.
As a result, profits suffered, with regional segment operating profit dropping 62% to R66mn. However, new management appears to have grasped the nettle and results were already improving before year-end. Most recently, H111 results suggest a continued strong momentum in this business. With the help of a full six-month contribution from the (now) integrated GSK activities and a rebound in Aspens SSA export activities, sales increased to R666mn (+139%). Similarly, this and a turnaround in the Shelys business, helped segment operating profitability; the margin expanded 300bps to produce a segment operating result of R119mn (188%). The major fixes for Shelys include shedding marginal activities and stepping up detail activities on key brands. Although coming from a low base this business has the potential for high growth. Future challenges are likely to include launching the Infant milk formula across the African network.
International market activities

Increasing Internationalisation
Key reporting regions in International include Asia Pacific, Latin America and Rest of World (RoW). Asia Pacific was (marginally) the biggest International region division although its importance to the top-line is set to increase substantially through the Sigma transaction. Reviewing the FY10 result for International, we note that revenues increased to R4.1bn (+27%), boosted by the integration of GSKs Global Brands (acquired from mid-2008, but most of the integration was actually completed in 2010).
Asia Pacific and RoW divisions delivered
Asia Pacific saw revenues rise to R1.47bn (+19%), RoW revenues increased to R1.4mn (+74%), although Latin America registered a subdued growth of just 0.5% to post revenues of R1.15bn. Global Brand revenues, mainly derived from four products (Eltoxin, Lanoxin, Imuran and Zyloric), increased to approximately R2bn (+33%). These Big Four brands produced much of this growth the rest coming from additional products integrated during the latter part of 2010. Domestic Brands (that is, products local to the regions) grew revenues to R2.1bn (+22%), but with mixed results across the territories. Asia Pacific enjoyed buoyant demand, with domestic brand revenues rising 11% to just over R1bn (despite regulated price reductions in Australia). However, Latin America saw domestic brands decline by 3% to R813mn (although growth picked up in the latter part of 2010, with growth of 8% in H210 YoY). A restructuring in Brazil was key to this underlying improvement, and should see continued positive progress in FY11. The sale of the Campos production facility to Strides Arcolab (of India) was part of this plan. APN restructured its agreement with Strides for its oncology joint ventures, Onco Therapies and Onco Laboratories, selling its interests to the partner for US$117mn (R854mn) in return for a license (to current and future products) for specific territories. The sale of Onco Therapies completed before 30 June 2010, generated a profit on
Global Brands doing well
Domestic Brands - Asia Pacific region prominent
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Aspen Pharmacare
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disposal of R155mn. The planned sale of the Onco Laboratories activities should be completed during FY11.
Flat segment EBIT
FY10 segment operating profit for this division was approximately flat (R961mn, +0.4%) for two major reasons: Transition of the (lower margin) GSK brands into the Aspen business; and A reduced profit contribution from the Latam activities
Sigma acquisition completed 31 January
Post period-end, in August 2010, APN announced the acquisition of Sigma, for AUD900mn (~R6.3bn), Australias largest listed Pharmaceutical business. The deal completed on 31 January 2011. Sigma manufactures and markets an extensive product portfolio of trusted domestic brands in Australia (and activities split between marketing branded/generic/OTC products and contract manufacturing). Revenues for the year-ending 31 January 2010 were >AUD600mn. APN funded the acquisition with a combination of cash and debt. The rationale for the deal was based on potential synergies in three areas: merging it with Aspens current Australian business, establishing a significant growth platform in Australia and leveraging this across the AsiaPac region. Importantly, this growth platform should include both: An entry point for Aspens generic and OTC products into the Australian market; and A longer term initiative to integrate APNs domestic production capacity into the worldwide manufacturing network.
Ongoing global expansion to reach >100 markets
Most recently, H111 revenues for International soared 39% to R2.4bn, benefitting from the first full period contribution from the GSK activities (global brands and the German Bad Oldesloe facility). Adjusting for the GSK brands produced divisional revenue growth of 12% - nevertheless, it was an acceleration over the benchmark registered for the H110 results. Growth appeared broad-based across the main three regions: Asia Pacific - revenues of R957mn (+28%); Latin America - revenues of R599mn (+20%); and RoW - revenues of R867mn (+76%).
In terms of segment operating margin, the Group margin declined to 20.6% (from 23.5% in H110) - mainly as a result of adding GSK products into APNs distribution network, which involves paying away some margin to independent distributors. Nevertheless, the operating profit result increased 27% to R551mn. Probably the most significant event for APN to look forward to is the acquisition of Sigma we understand that the integration, with Aspens Australian business, is well underway. Asia Pacific activities
Asia Pacific revenues set to grow strongly
H111 revenue results underlined the continued strong development for APN in this region. Currently, Australia generates >70% of regional sales, with a strong focus on branded, OTC and (selective) generic products. The acquisition of Sigma should place APN into a much stronger position, particularly to extend its international operations into some of the high-growth emerging markets (see Appendix International regions). In 2010, APN had a strong underlying position in Australia ranked No 4 by market share (prescriptions), or No 3 just on branded medicines. The acquisition of Sigmas medicines/OTC business, pushing it into a potential market leadership position, should transfuse a number of local, and over time regional, advantages into APNs enlarged infrastructure and distribution network.
APN Australia 9th consecutive year of double-digit growth
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APN estimates that it should be in a good position to double Sigmas profitability (AUD$75mn in 2010) through a number of initiatives involving its branded/OTC business (estimated to account for ~60% of revenues), including:
APN has to tread more carefully with its Gx portfolio in Australia
Driving sales force and distribution synergies to accelerate growth; Taking costs out of Sigmas production facilities; and In-licensing new products from multinational companies.
However, the situation with the generics activities is somewhat different. In this segment, distributors have the channel power. APN historically had attempted to enter the market, but would have needed to set up its own distribution business. Now, it can maintain the distribution partnership through Sigmas wholesaling business and devote activities towards working together to address market opportunities. APN believes that it can drive costs out of this business (through selective sourcing and finishing activities), without hurting profitability. Additional advantages to this relationship are apparent, particularly the enhanced footprint to capture more lucrative product in-licensing deals.
Building scale in the region
Building a bigger regional base should bring better results. Direct selling efforts in certain distributor-only markets now look like a viable proposition (with enhanced profitability). Furthermore, APN has been fairly low key with regard to the extent of the product IP that it has inherited with the Sigma deal. This combined with an extensive set of domestic production facilities (although some of which are likely to need some degree of updating) should help APN into a mid tier of companies with extensive global manufacturing capability. Fig 11 - Aspen: Asia Pacific markets, % of total H111 revenues (R600mn)
Thailand South Korea Other Malaysia Indonesia China Taiwan Philippines Pakistan New Zealand India Japan Australia 0%
Source: Company
10%
20%
30%
40%
50%
60%
70%
80%
Latin America activities

Important restructuring event completed results starting to come through
This region continues to be a high priority for the Group. APN is gaining more traction in this market after restructuring in Brazil; the strategic aim is to push harder to make the private market the core part of its activities (rather than the public sector business). APN is starting to see new product registrations coming through - notably for a couple of its multinational collaborations in Brazil. Furthermore, APN is planning a range of new products to be launched during FY11E; we understand that a total of 12 brands are in the pipeline of which five have already been launched.
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Fig 12 - Aspen: Latin America markets, % of total H111 revenues (R957mn)
Argentina Chile Colombia Venezuela Mexico Brazil 0%

Source: Company
10%
20%
30%
40%
50%
60%
70%
80%
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Appendix
Some general notes on APNs Pharmaceutical markets
South Africa & Sub-Saharan Africa Although not (strictly) members of the pharmemerging group of countries, the fundamental drivers for growth in this large, but relatively fragmented, region are good. The main positives consist of the countries having established local pharmaceutical markets and a culture of developing local products, formulations and brands. The opportunities are directed towards investment and licensing investment in manufacturing, scale and QA/QC, and establishing product in-licensing and technology transfer arrangements with multinational pharmaceutical companies. Disadvantages to regional activities include: production cost inefficiencies, expensive asset base, lower labour productivity and restrictions in terms of regulation/distribution. Outright threats concern the high prevalence of counterfeit and sub-standard drugs and a lack of security in supply of finished goods and APIs (particularly, but not exclusively HIV and TB drugs). South Africa (0.3% of the global Pharma market by value)
Fundamental dynamics for this market suggest a sustained increase in demand
Based on the above across-region comments, we would place SA on the positive side of this spectrum. It is the largest market, with a number of advantages versus the others: Some domestic API production; Politically stable; Strong R&D base (particularly for clinical research); and Good communication and distribution links.
The SA medicines market is growing slower YoY into 2011, with an IMS estimate of 8% growth in H111 (that compares to almost 14% in H110). The major negative impact has been pricing, although volume growth has been fairly constant, +4.9% (+4.7%, H110). The generics sector, representing almost 30% of the total SA (private) markets value of R23bn (IMS, 2010; USD$3.1bn) but almost 60% of its unit volume, continues to outpace the general medicines market, growing at 12% (albeit slower than the 19% of H110).
SA private medicines market, 2010
During the year to December 2010, the total market grew 8%, but with mixed figures for the various components however, over the similar period APN outpaced these individual market growth rates, apart from OTC/Consumer, as follows: Ethical/ branded, +7.1% (APN growth +13.2%); Generic, +12.3% (APN +14.2%); and OTC, +7.6% (APN +6.7%).
Source: Company, IMS
Nevertheless, the market (and APN) is likely to have to endure further pressures, stemming from a range of issues including: no increase expected in Single Exit Pricing in 2011 (see below), a punitive pricing structure for the ARV tender award in late-2010 (see below) and more costly (often imported) APIs for medicines (where the SEP is set in Rand). The growth outlook for 2011/2012 is relatively modest; lacking the potential for general price rises, market growth could step down to 5% - or less. Future growth concerns are tied up with a government initiative on International benchmarketing, which could pressure SA prices to the bottom of a basket of five International markets. Many of the important details have yet to evolve, including the methodology and treatment/ impact of FX rates. APN is keen to avoid chosen comparator markets which are biased to (low price) tender business.
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APN sees its GSK portfolio as the most vulnerable candidate to such legislation, since some of its legacy products have enjoyed a number of price increases over the years (although we understand that any pain on price cuts would be shared with GSK). Anti-retroviral drugs (ARVs) A number of S.African and other pharma companies supply ARVs to the SA government under a tender system that most recently took place in Q4 2010. The latest tender has been significantly reduced in value in order to help increase the number of affected (HIV-positive) persons that are treated. Aspen was awarded 41% of this tender (by value), representing the estimated ARV requirements by the SA government over the next two years. The total tender award was R4.28bn (USD$625mn); this represented a 53% reduction compared to the 2008 tender. A massive reduction in product prices was responsible for this decrease. Fig 13 - ARV award (R4.28bn): tender participants
S'pharm, 0.9% Sonke, 21.9% Strides, 4.2% Abbott, 9.8% Adcock, 4.0% A'bindo, 3.1% Cipla, 5.1%
Aspen Pharma, 40.6%
MSD, 0.2% Medpro, 10.1%

Source: Company; Spharm=Specpharma, Abindo=Aurobindo
Companies have had to accept massive reductions in product prices
During 2010 a number of activist groups (including TAC and Section 27) had put pressure on the government to improve its side of the ARV deal. Announced on 14 December, the new tender (runs Jan 2011 Dec 2012) has markedly different terms to the last one. Procurement prices have been dropped to (approximately) international prices, that is R115 per patient/month for the standard triple combination cocktail of tenofovir/lamivudine/efavirenz (the previous tender was charging R110 for the efavirenz component alone). This should help improve access of ARVs through public channels to infected people in SA; patients treated with ARVs (in the public sector) have increased from <20,000 (2003), through ~225,000 (2006) to a potential 1mn in 2010/2011. Government aims are to cover >1mn patients there are currently >5mn HIV positive people in SA. Average prices for tenofovir (-65%) and efavirenz (-64%) in the new tender have been slashed. Abacavir, a component for the paediatric version of the cocktail, has been reduced by ~50% and the tender opened up to Cipla-Medpro and APN, in addition to the previous sole supplier, GSK (the collaboration between APN and GSK appears to be behind this move). We believe that this latest tender represents a positive move in expanding public access to ARVs; however, a number of issues with the tenders scope and transparency remain to be resolved. These include: how will tender prices align with API cost decreases, how were the bidders chosen, why are there no fixed-dose combination treatments on the tender (or even approved yet) which could
An estimated 1-in-5 South Africans are infected with HIV
Tender value reduced to R4.8bn (>50% reduction), a R4.7bn saving
Number of issues with this tender and likely future ones remain to be aired
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substantially improve patient compliance, and the central role of the Treasury as opposed to the Department of Health is a concern.
APN has a strong ARV legacy
Aspen pioneered the manufacture and provision of generic ARVs in SA, launching its first product, Aspen-Stavudine, in 2003. The companys credentials in ARV manufacturing are second to none, confirmed by the latest ARV tender award 41% (by value) awarded to APN. The company forms collaborations with many multinationals in this drug category; the aim is to in-license the brand and gain an agreement to manufacture the generic (at the appropriate time). APN was pleased with the outcome of the 2010 tender; although awarded the major portion (41% by value), this does represent a decrease from the 2008 tenders 50% share. However, it could have been less than the 41% this time. What helped the outcome, we believe, was APNs experience in manufacturing and its API network, which ultimately determined an acceptable bid price for the SA government. We understand that this (in the circumstances) was also an acceptable margin for APN although markedly less than the margin for the previous award. By 2008, APN had a market share of >30% in the private ARV market and, overall, supports ~1mn HIV patients in SA. Single Exit Pricing (SEP) Price caps for drug prices were introduced in 2004; the SA government sets a single exit price (SEP) at ex-factory level. This applies to all prescription medicines, irrespective of the channel of distribution. Price rises are also regulated in practice, the situation equates to a freeze on prices. However, price rises were allowed in 2006 (5%), 2007 (6%) and 2008 (6%). Interestingly, with high inflation in 2009, the government also allowed a price rise of 13%. Most recently - February 2011 - the SA Minister of Health decided against awarding any increase in the SEP in 2011 although we believe that this came as no surprise to the industry. National Health Insurance (NHI) Many have believed an NHI was not possible in SA given the shortages in healthcare facilities, human resource and (potential lack of) financial support. However, the initial announcement (in February) by the Health Minister, Aaron Motsoaledi, suggested that NHI is closer than ever - but in what form?
What is the likely impact on pharmaceutical companies?
In line with the experience in a number of countries where an NHI has been implemented, an increase in the consumption of medicines was observed. However, the key debate revolves around the affordability of any level of sustainable scheme. A general view is that hand-in-hand with an increased demand for prescription medicines from an enhanced population being attended to by medical workers under the NHI, there would be stronger mechanisms to regulate the price of medicines. Greater regulation is anticipated on the supply side, with cost containment measures, like SEP, being added to proposals to make more medicines available under an NHI, without implementing a patient co-pay mechanism (which would defeat the spirit of the proposed legislation). Potential beneficiaries are likely to be companies marketing generic rather than originator products and (higher-priced) branded generics would also probably gain access to restricted formulary lists based on pricing (which probably means price cuts on top of SEP). In July 2011, the SA government commented that it was expecting to push its NHI policy document through to legislation. The government is intent on regulating private sector prices to contain costs and provide greater certainty on medical costs to payors which include the insurance schemes and the government itself. A green paper on a potential compulsory NHI scheme was released on 12 August to mixed reactions. The scheme is estimated to cost R125bn in 2012, R214bn in 2020 and R255bn by 2025. It is to be funded by a compulsory (means-tested) tax deduction. The plan is also to tap the private sector for subsidised service provision
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(not much detail so far). Public health expenditure is estimated to increase from 3.5% to >6% GDP over time. Critics point to a lack of debate and detail on what is being proposed in terms of service delivery models (across the public health system and the private sector) and, importantly, financing. Hopefully, more could be revealed later this year. Sub-Saharan Africa, SSA (0.4% of the global pharma market)
West Africa dominates
SSA medicines market value is estimated at $2.5bn, growing at ~5-7% annually. Key country markets are Nigeria, Ghana and Kenya, although there are some 46 countries altogether, of which >30 have least developed country status. West Africa makes up a majority portion of this region, home to ~250mn people. Imports of finished products account for >60% of the African pharma industry, and likely a much higher figure for this region. Local formulation and packaging takes place on a limited basis, but API production is restricted to SA.
Challenges but LT opportunities
Africas challenges the high burden of disease, the booming populations also represent its opportunities. These markets are at the high end of the growth spectrum in African terms (approaching 20-25% per annum), but the per capita spend on pharmaceuticals is approaching the lowest in the SSA (and MENA) region, from ~$10 in Nigeria/Ghana/Kenya to ~$100 in SA (versus up to ~$400 in Kuwait, ~$350 in UAE). The challenge is to address these market opportunities with affordable medicines. International regions Emerging markets are profiled by a number of attributes, including: Large markets, and fast growing; Evolving healthcare programmes, but a need for greater access (to products and healthcare services); Out of pocket healthcare spending models (in the main); Domestic products (i.e. not blockbusters) often very local brands, which are long-lived; and Untapped potential (in general).
Aspen is already connected into a number of these markets, notably Latin America and Asia Pacific. Strategically, the company needs greater exposure to Asia Pacific and particularly markets outside of Australia. Although the Sigma transaction further increases the revenue dependence on Australia, the new organisation should be in a far better position to be increasingly active with product development and sales initiatives throughout this very attractive commercial region.
More exposure to pharmemerging markets required
From a world pharmaceutical market growth perspective the significant opportunities are likely to be found in China, Korea, Brazil, Mexico, Turkey, India and Russia. These markets are anticipated to grow, on average, at 12-13% per annum (or better) compared to single digit growth rates in mature markets. So an aggregate value figure of the above markets is estimated to grow from $55bn in 2006 to >$400bn by 2020. Asia Pacific (8% of the global pharma market) Apart from the highly-developed Japanese market this region comprises a number of pharmemerging markets, that is, those characterised by significantly higher than average growth, notably China and (South) Korea. Excluding Japan, the pharmaceutical market in this region is estimated to be ~43bn/$56bn, that is R410bn (or $126bn including Japan). It is estimated by IMS that 50% of worldwide pharma market growth is likely to come from Asian emerging markets (with >30% from China, which is likely to be the worlds No 3 pharma market by 2013). In this region, China, South Korea and a range of the smaller Asian Pacific markets are expected to be the growth drivers.
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Latin America (4% of the global pharma market) Key pharmaceutical markets in this region include Brazil, Mexico, Venezuela and Argentina, contributing ~80% of the total estimated value of $30bn. The high-growth markets are Venezuela and Argentina (both >20%) and Brazil (~13%). Mexicos current growth trajectory is lower; however, it is still an attractive market through a preference for branded generics and its longer-term potential for growth.
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Aspen Religare 220811

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Company Report

22 August 2011 South Africa listed

Robin Campbell, PhD, Analyst

+44 20 7444 0677

3 month 4.3 4.8

12 month 7.3 (10.3)

Investment Case Summary

We are Buying APN for its aboveaverage growth outlook

An enviable top-line growth trajectory

Tapping high-growth emerging markets

Domestic business pressures are manageable

Valuation & recommendation

Key catalysts to signal corporate wins

Valued using techniques

Aspens story highlights its potential growth trajectory

RELIGARE INSTITUTIONAL RESEARCH

RELIGARE INSTITUTIONAL RESEARCH

Fig 1 - Peer Compco: World Pharma

83,397 4,346 87,847 9,550

10.3x 31.1x 10.2x 11.7x

9.8x 14.8x 9.8x 13.7x

2.2x 2.4x 2.0x 2.2x

2.1x 2.2x 2.0x 2.2x

6.1x 12.3x 6.3x 7.4x

5.9x 8.7x 6.2x 8.0x

6.6 12.0 4.2 9.2

1.5 1.2 2.3 1.6

1,930 1,273 349 3,439

18.2x 32.1x 10.3x 16.7x

15.0x 23.4x 10.3x 14.1x

2.4 4.3x 1.3x 2.8x

1.9 3.4x 1.3x 2.4x

11.2x 19.9x 4.9x 12.4x

9.1x 15.4x 4.1x 10.7x

20.0 31.5 18.8 16.3

0.8 0.7 0.6 0.9

Avg Chinese Pharma

Avg Indian Pharma

APN SJ AIP SJ NTC SJ MDC SJ LHC SJ

8,170 6,032 1,334 3,061 1,744

5,128 1,457 2,675 2,771 2,522 3,188 2,869

16.4x 12.7x 12.3x 14.2x 15.0x 14.6x 14.2x 15.8x 21.0x

13.9x 10.1x 10.5x 11.7x 12.8x 12.1x 11.8x 12.0x 16.4x

3.2x 2.1x 1.8x 1.9x 2.0x 2.7x 2.2x 2.2x 3.1x

2.6x 1.9x 1.7x 1.7x 1.8x 2.2x 1.9x 2.1x 2.6x

12.5x 7.8x 9.1x 8.6x 7.9x 10.2x 9.2x 8.0x 13.8x

9.2x 6.9x 8.1x 7.9x 7.0x 8.1x 7.8x 7.2x 11.3x

18.0 14.3 10.4 18.1 27.7 17.1 18.1 7.9 22.2

0.8 0.7 1.1 0.6 0.5 0.7 0.6 1.6 0.7

Source: RCML Research, Bloomberg

RELIGARE INSTITUTIONAL RESEARCH

Fig 2 - Aspen: SoTP valuation

-6,771 45,111 451.1 10,000 8,340 20%

RELIGARE INSTITUTIONAL RESEARCH

Financials & Forecasts analysis

Cash Flow Drivers

Balance Sheet Issues

RELIGARE INSTITUTIONAL RESEARCH

Company Forecasts and Metrics

Profitability & Returns (%)

Cash Flow statement

Cash Conversion & Capital Intensity metrics

Balance Sheet & Leverage ratios