Unpacking: Aspen

Aspen Pharmacare Holdings – previously Aspen Pharmaceuticals – recently hit a 9 year low. On 14 August they were fined by the UK authorities relating to anti-competitive behavior that was first uncovered on 13 October 2017. While the fine was relatively small in the context of Aspen, around  R200 million in total penalties compared to their market cap at the time of roughly R33 billion, there were other conditions imposed and external factors which caused the market to react rather strongly to the news, sending the share price down 10.3% at one point during the day.

As we write the share price continues to hover around these levels. The 10% drop, together with the news of non-compliance with laws, resulted in certain savvy investors qualifying for claims from their InvestSure insurance, effectively capping their losses, but we’ll leave that for another time. More importantly, we’ll briefly unpack the story of Aspen – a JSE darling to a JSE nightmare.

Aspen’s climb

Aspen started trading in 1997 and quickly became a listed company with a growing product line and manufacturing capabilities. Their share price* grew from around R4 per share to R31 between listing and 2008. They then entered into a partnership with a pharma and healthcare giant, GlaxoSmithKline, which helped them establish an international footprint. Over the next few years, they bought many smaller companies and drugs – their belief being (if memory serves correctly) that R&D in the pharma space was expensive and that it was better to buy approved / late-stage development / established products. They eventually employed over 10,000 people across multiple countries and continents. The share price very quickly climbed to highs of around R440 per share. Stephen Saad, founder, and CEO, became a name to be reckoned with in South African business.

Aspen’s ‘downfall’

As with many great acquisitive company’s stories, Aspen eventually acquired too much and their debt levels started to become unsustainable. Growth slowed, as it inevitably does, and the debt burden became a massive red flag to many investors who piled out of the share and drove the price down into the mid R200’s. Many investors piled in between R300 and R440 (a rise which occurred in the space of 6 months) many of whom became victims of not doing their homework before investing / following the crowd. With the share under pressure, the bad news was not likely to be well-received.

Since then the share price has continued to be squeezed, driven by high debt levels, multiple allegations of price-fixing and unethical price practices in numerous territories, loss of trust in major players within the sector (Valeant Pharmaceuticals in the US most likely contributed to this as well) and as Aspen calls it, weak macro-economic conditions. They eventually needed to sell off a very profitable business to reduce debt and go back to their core strengths, a deal that shareholders did not take well at all.

Forced sales are often concluded at prices that are beneficial to the acquirer rather than existing shareholders – the perception here too. The deal dragged on seemingly forever and was shrouded in regulatory scrutiny. More recently Aspen had a 50% intra-day loss recently, a culmination of all the above factors.


Aspen now

To be fair Aspen’s ‘downfall’ has been quite dramatic in terms of their valuation, but they remain the largest manufacturer of generic medicines in Africa. The major concerns have been that they can’t seem to meaningfully reduce their debt levels relative to cash flows, and their growth story seems to be over. A consolidation story never garners quite the same interest as a growth story. Sometimes the downfall in a share price can lead to opportunities for undervalued, quality companies. Is that now the case with Aspen? Or will the lack of trust in the company, together with high debt levels, keep the price depressed?

*all prices adjusted for corporate actions

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