Aspen Religare 220811

Robin Campbell, PhD, Analyst +44 20 7444 0677

[email protected]

Valuation & Recommendation

Share Price 8,170 ZAr

12 month target 10,000 ZAr

Previous target N/A

Rating Buy

Previous N/A- Initiation

% Upside / (Downside) 22.4%

+ Dividend yield 0.6%

Total return 23.0%

Company data

Market JSE

Market cap (ZAR mn / US$ mn) 36,855 / 5,128

EV (ZAR mn / US$ mn) 43,258 / 6,019

Shares in issue (mn) 451

Free float (%) 89

3-month average daily value (ZAR mn) 88.39

52 Week high / low (ZAr) 9,785 / 7,330

Share Price

2,800

4,675

6,550

8,425

10,300

Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11

(ZAr) ASPEN PHARMACARE HOLDINGS LT FTSE JSE All Share

22 Augu st 2011

Share Price Performance

1 month 3 month 12 month

Absolute (1.7) 4.3 7.3

Relative* (5.0) 4.8 (10.3)

* Relative to FTSE JSE All Share

Company Report 22 August 2011

Health Care South Africa listed

Financial highlights

Year End: 30 Jun FY09A FY10A FY11E FY12E FY13E

Revenue (ZAR mn) 8,450 10,147 13,553 16,275 17,883

EBITDA (ZAR mn) 2,407 2,885 3,449 4,560 5,182

Net Profit (adj) (ZAR mn) 1,340 1,979 2,272 2,651 3,138

EPS (adj) (ZAR) 3.63 4.63 4.99 5.88 6.96

EV/Sales (x) 3.70 4.14 3.19 2.58 2.25

EV/EBITDA (x) 13.0 14.6 12.5 9.2 7.8

P/E (x) 20.3 19.9 16.4 13.9 11.7

P/E (recurring) (x) 20.3 19.9 16.4 13.9 11.7

Dividend yield (%) 0.0 0.0 0.6 0.9 1.0

Free Cash yield (%) 3.1 1.3 n.m. 4.0 5.8

ROCE (post-tax) (%) 24.4 18.3 14.6 14.1 15.3

Aspen Pharmacare BLOOMBERG: APN SJ EQUITY

Out of Africa

� 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 APN’s 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.

Aspen Pharmacare Company Report 22 August 2011

2

RELIGARE INSTITUTIONAL RESEARCH

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Investment Case Summary

Growing International scale to enhance LT returns

Launch coverage on Aspen with a Buy and TP of Rcents 10,000

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 stock’s 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.

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 APN’s 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.

Valuation

A SoTP valuation analysis suggests that APN shares are undervalued. This current

undemanding valuation is underlined by a Compco analysis highlighting APN’s 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.

FY11E to continue APN’s transition

We are Buying APN for its above-

average growth outlook

An enviable top-line growth

trajectory

Tapping high-growth emerging

markets

Domestic business pressures are

manageable

Launch with a PT of Rcents 10,000


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Valuation & recommendation

We launch coverage on APN with a Buy rating and a price target of 10,100 Rcents/share.

APN’s 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 company’s 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 APN’s

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 APN’s 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 APN’s 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.

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

Dependent on great execution

Key catalysts to signal corporate

wins

Valued using complementary

techniques

Aspen’s story highlights its potential

growth trajectory


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23%), Asia Pacific and Latin America (both 16%) and RoW markets (14%). This compares

with average major developed market growth of 2-4%.

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

company’s 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.

What are the potential risks to this

growth?


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Company Valuation Year End: 30 Jun FY08A FY09A FY10A FY11E FY12E FY13E

Per Share data (ZAR)

EPS (adj) 2.40 3.63 4.63 4.99 5.88 6.96

DPS 0.48 0.00 0.00 0.48 0.72 0.85

Book value 8.7 11.3 25.4 28.4 33.3 39.0

Valuation ratios

EV/Sales (x) 2.92 3.70 4.14 3.19 2.58 2.25

EV/EBITDA (x) 10.0 13.0 14.6 12.5 9.2 7.8

EV/Capital Employed (x) 2.2 3.7 3.1 2.3 2.0 1.7

P/E (x) 14.0 20.3 19.9 16.4 13.9 11.7

P/E (recurring) (x) 14.0 20.3 19.9 16.4 13.9 11.7

Dividend yield (%) 1.4 0.0 0.0 0.6 0.9 1.0

Free Cash yield (%) 5.1 3.1 1.3 n.m. 4.0 5.8

P/BV (x) 3.9 6.5 3.6 2.9 2.5 2.1

Fig 1 - Peer Compco: World Pharma

As of 22 August 2011 Mkt Cap

PER (x) EV/Sales (x) EV/EBITDA (x) LT EPS PEG

Company Ticker Price Rating USD$

mn FY11E FY12E FY11E FY12E FY11E FY12E Growth (%)

Developed Markets

Avg Europe Large Pharma 83,397 10.3x 9.8x 2.2x 2.1x 6.1x 5.9x 6.6 1.5

Avg Europe Mid-Pharma 4,346 31.1x 14.8x 2.4x 2.2x 12.3x 8.7x 12.0 1.2

Avg US Large Pharma 87,847 10.2x 9.8x 2.0x 2.0x 6.3x 6.2x 4.2 2.3

Avg US Mid-Pharma/Gx 9,550 11.7x 13.7x 2.2x 2.2x 7.4x 8.0x 9.2 1.6

Emerging Markets

MENA

Hikma HIK LN 610.0 BUY 1,930 18.2x 15.0x 2.4 1.9 11.2x 9.1x 20.0 0.8

Avg Chinese Pharma (HK/China listed)

1,273 32.1x 23.4x 4.3x 3.4x 19.9x 15.4x 31.5 0.7

Avg Chinese Pharma (US listed) - excl <$100mn mkt cap

349 10.3x 10.3x 1.3x 1.3x 4.9x 4.1x 18.8 0.6

Avg Indian Pharma 3,439 16.7x 14.1x 2.8x 2.4x 12.4x 10.7x 16.3 0.9

Aspen Pharmacare APN SJ 8,170 Buy 5,128 16.4x 13.9x 3.2x 2.6x 12.5x 9.2x 18.0 0.8

Adcock Ingram Holdings AIP SJ 6,032 NC 1,457 12.7x 10.1x 2.1x 1.9x 7.8x 6.9x 14.3 0.7

Netcare Limited NTC SJ 1,334 NC 2,675 12.3x 10.5x 1.8x 1.7x 9.1x 8.1x 10.4 1.1

Medi-Clinic Corp MDC SJ 3,061 NC 2,771 14.2x 11.7x 1.9x 1.7x 8.6x 7.9x 18.1 0.6

Life Healthcare Group LHC SJ 1,744 NC 2,522 15.0x 12.8x 2.0x 1.8x 7.9x 7.0x 27.7 0.5

Avg South Africa Pharma 3,188 14.6x 12.1x 2.7x 2.2x 10.2x 8.1x 17.1 0.7

Avg South Africa Health 2,869 14.2x 11.8x 2.2x 1.9x 9.2x 7.8x 18.1 0.6

Avg - Pharma developed 15.8x 12.0x 2.2x 2.1x 8.0x 7.2x 7.9 1.6

Avg - Pharma emerging 21.0x 16.4x 3.1x 2.6x 13.8x 11.3x 22.2 0.7

Source: RCML Research, Bloomberg


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Fig 2 - Aspen: SoTP valuation

FY11E Branded OTC Generics Total

EBITA estimates* 1,120 498 1,790 3,408

Multiple 19.0x 13.5x 13.3x

Value 21,287 6,726 23,869 51,882

Less net debt -6,771

Equity value 45,111

No shares 451.1

Per share value (R cents) 10,000

Current share price (R cents) 8,340

Upside/ (Downside) 20%

Source: RCML Research; RCM EBITA estimates for business categories


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Financials & Forecasts analysis

P&L Drivers

1. Revenue Drivers

Price & volume: APN’s 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 Sigma’s 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: FY11E’s 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 H1’11 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: FY10’s net debt was R2.8bn; as a result of the Sigma trasaction we expect FY11E’s 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.


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Company Forecasts and Metrics

Profit and Loss statement All figures in (ZAR mn)

Y/E 30 Jun FY09A FY10A FY11E FY12E FY13E

Revenue 8,450.3 10,146.6 13,552.7 16,274.7 17,882.9

Gross profit 3,886.2 4,604.3 5,827.7 7,030.7 7,797.0

EBITDA 2,406.6 2,884.6 3,448.7 4,560.4 5,181.8

EBIT 2,183.0 2,614.9 3,106.4 3,641.0 4,200.5

Net interest inc./(exp.) (475.0) (370.4) (229.9) (285.0) (228.1)

Exceptional items 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit (stated) 1,715.6 2,446.0 2,876.5 3,355.9 3,972.4

Pre-tax Profit (adj) 1,715.6 2,446.0 2,876.5 3,355.9 3,972.4

Tax paid (362.0) (467.5) (604.1) (704.7) (834.2)

Minorities (13.2) 0.0 0.0 0.0 0.0

Net Profit (stated) 1,340.4 1,978.5 2,272.4 2,651.2 3,138.2

Net Profit (adj) 1,340.4 1,978.5 2,272.4 2,651.2 3,138.2

Shares outstanding (mn) 369 426 451 451 451

EPS (stated) (ZAR) 3.63 4.63 4.99 5.88 6.96

EPS (adj) (ZAR) 3.63 4.63 4.99 5.88 6.96

DPS (ZAR) 0.00 0.00 0.48 0.72 0.85

Cash Flow statement All figures in (ZAR mn)


EBIT 2,183.0 2,614.9 3,106.4 3,641.0 4,200.5

Depreciation & Amortisation 223.6 269.7 342.3 919.4 981.4

Change in Working Capital (509.5) (344.5) (769.3) (614.8) (363.2)

Tax Paid 0.0 0.0 0.0 0.0 0.0

Other Items (601.7) (505.4) (767.6) (936.7) (1,030.9)

Cash Flow from Operations 1,295.4 2,034.7 1,911.8 3,008.9 3,787.6

Capital Expenditure (1,253.5) (1,291.5) (5,421.1) (1,464.7) (1,609.5)

Acquisitions & Disposals (2,629.0) 24.8 (106.2) (84.9) (50.2)

Other Items 325.8 232.5 0.0 0.0 0.0

Cash Flow from Investing (3,556.7) (1,034.2) (5,527.3) (1,549.6) (1,659.6)

Debt Raised/ (Repaid) 3,109.4 (500.5) 1,500.0 0.0 0.0

Proceeds from Share Issues 20.4 16.1 0.0 0.0 0.0

Dividends Paid (0.8) (0.8) (302.6) (448.7) (531.1)

Cash Interest Expense 0.0 0.0 0.0 0.0 0.0

Other Items 0.0 0.0 188.5 150.6 89.0

Cash Flow from Financing 3,129.0 (485.2) 1,385.8 (298.1) (442.1)

Change in net cash/(debt) (2,241.7) 1,015.8 (3,729.7) 1,161.2 1,685.9

Ending net cash/(debt) (4,038.8) (2,759.2) (6,394.2) (5,157.4) (3,426.8)

Balance Sheet All figures in (ZAR mn)


Tangible Fixed Assets 2,373.5 3,012.4 8,091.2 8,636.5 9,264.6

Intangibles Assets 4,502.0 9,066.0 9,066.0 9,066.0 9,066.0

Associates & Investments 27.6 34.4 45.9 55.2 60.6

Working Capital 2,213.1 2,429.7 3,245.3 3,897.1 4,282.2

Other Assets 17.8 65.5 87.5 105.1 115.4

of which: tax assets 17.8 65.5 87.5 105.1 115.4

Other Liabilities 832.2 1,019.8 1,362.1 1,635.7 1,797.4

of which: tax liabilities 203.0 263.2 351.6 422.2 463.9

of which: pension liabilities 0.0 0.0 0.0 0.0 0.0

Cash & Cash Equivalents 2,065.3 3,221.8 1,086.8 2,323.6 4,054.2

Total Capital Employed 10,367.1 16,867.2 20,337.0 22,539.5 25,146.6

Gross Debt 6,104.1 5,981.0 7,481.0 7,481.0 7,481.0

of which: short term 2,670.3 3,720.8 5,220.8 5,220.8 5,220.8

of which: long term 3,433.8 2,260.2 2,260.2 2,260.2 2,260.2

Shareholders Equity 4,182.7 10,831.0 12,800.8 15,003.3 17,610.4

Minorities 80.3 55.2 55.2 55.2 55.2

Total Capital Employed 10,367.1 16,867.2 20,337.0 22,539.5 25,146.6

Profitability & Returns (%)


Gross margin 46.0 45.4 43.0 43.2 43.6

EBITDA margin 28.5 28.4 25.4 28.0 29.0

EBIT margin 25.8 25.8 22.9 22.4 23.5

Net profit margin 15.9 19.5 16.8 16.3 17.5

Tax rate 21.1 19.1 21.0 21.0 21.0

RoE 36.0 26.4 19.2 19.1 19.2

ROCE (post-tax) 24.4 18.3 14.6 14.1 15.3

Growth (YoY, %)


Revenue 73.1 20.1 33.6 20.1 9.9

EBITDA 67.7 19.9 19.6 32.2 13.6

Net profit 55.3 47.6 14.9 16.7 18.4

EPS 51.1 27.7 7.8 17.7 18.4

Dividend (99.7) (100.0) n.a. 48.3 18.4

Capital employed 59.5 62.7 20.6 10.8 11.6

Cash Conversion & Capital Intensity metrics


Fixed Assets/Sales (%) 24.4 26.5 41.0 51.4 50.1

Working Capital/Sales (%) 26.2 23.9 23.9 23.9 23.9

Working Capital (days) 96 84 76 80 83

Inventory (days) 62 63 64 67 70

Payables (days) 50 58 60 63 66

Receivables (days) 84 79 72 76 79

Op. Cash Flow/EBIT (%) 59.3 77.8 61.5 82.6 90.2

CAPEX/depreciation (%) 560.6 478.9 1,583.7 159.3 164.0

Free Cash Flow/Sales (%) (26.8) 9.9 (26.7) 9.0 11.9

Dividend cover (x) 2,327.1 n.a. 10.4 8.2 8.2

Balance Sheet & Leverage ratios


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.


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Company Overview Aspen

Company Activities & Operations

Company Strategy

Key Products/Services

Description Generic medicines Products forecast to comprise ~54% of FY11E salesBranded medicines Brand products (Global and Local) to comprise ~34% of FY11E salesOTC/Consumer products OTC, Consumer, Nutritional, Other - constitute ~13% FY11E sales

Management and BoardName Description Stephen Saad Group Chief Executive, since 1999Gus Attridge Deputy Group Chief Executive, appointed 1999Judy Dlamini Chairman, appointed 2005; MD, Mbekani Health ; Chairman, Masibulele PharmaArchie Aaron NED, appointed 1994, former ChairmanShah Abbas-Hussein NED, appointed 2009; currently President, Emerging Markets GSKRoy Andersen NED since 2008; previously with E&Y, JSE Ltd and Liberty Group Ltd Rafique Bagus NED, appointed 2003; CEO Morning-Tide Investments; previously with DTIJohn Buchanan NED, appointed 2002; previously with Cadbury SchweppesChris Mortimer NED, appointed 1999; a practising attorneyDavid Nurek NED, appointed 2001; Executive of Investec BankSindi Zilwa NED, appointed 2006; Chief Exec, Nkonki Chartered Accountants

Company's stated objectivesTiming Description

Near term Maintain leadership positions in SA Branded and Generic marketsNear term Develop expansion initiative into Asia Pacific and SSAMedium term Expand more broadly into Latin AmericaMedium term Consolidate Sigma manufacturing into global networkLong term Evaluate additional product and M&A opportunities in International marketsLong term Reduce dependence on SA; manage issues with ARV tender, SEP and NHI schemes

Share Price DriversProbability Description High (+) Significant operational synergies upside from integrating Sigma AustraliaHigh (+) Continued growth in Asia Pacific/Latin America - internationalisation benefitsMedium (-) Need to invest more than expected in Sigma Australia manufacturing assetsLow (-) Expectations for a tough H2'11 (ARV margins) already discounted in share price Major Shareholders

Name %Public Investment Corp 8.6%

Upcoming Events Allan Gray AM 6.6%

Date Description Fidelity 3.8%Late-August 2011 Trading update not expected - due to low earnings growth in H1'11 Vanguard 2.1%Mid-September 2011 FY11E results Gus Attridge 0.7%Early-March 2012 Interim results for FY12E Stephen Saad 0.6%

Pictet 0.6%

Recent Corporate Action

Date Description Other Information27 January 2011 License for manufacture/supply of generic rilpivirine (TMC278) from Tibotec14 January 2011 Aspen completes on Sigma acquisition14 December 2010 Aspen awarded significant portion of ARV tender (effective from 1 January 2011)

Website: http://www.aspenpharma.comLocation of HQ: Durban, South Africa

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.

Generic54%

OTCConsumer

13%

Branded34%

Sales split by product category, FY11E

SA Pharma38%

SAConsumer

9%

AsiaPacific

22% LatinAmerica

10%

RoW12%

SSA9%

Sales split by territory, FY11E

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.


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Industry Overview Industry & Competitive analysis

Industry Description

Industry Growth Drivers

SWOT Analysis

Porter's Five Forces

Rivalry/Industry Competitors

Moderate-to-High

Competitors are numerous (+)

Potential market growth is high (+)

Lower fixed cost and high working capital (-)

Very profitable (+)

Threat/New Entrants

Low-to-Moderate

• Regulatory barriers (-)• R&D is capital intensive (-)• Price regulation exists (-)

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 (-)

Power/Suppliers

Low-to-Moderate

• Volume benefits available - low switch cost (-)• API production (particularly locally) secures an

advantage (+)• Suppliers can forward integrate (+)

Aspen Pharma is active in the >$70bn Emerging markets (World Pharma, $650bn). These are relatively large markets (population), high-growth, with developing healthcare systems. Typically with poor access to medicines, paid for 'out-of-pocket'.

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.

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?


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Aspen - Company background

Aspen’s 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.

APN’s 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 company’s 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 – APN’s main targets for

expansion.

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 H2’11) in the SA

business and a continued step-down in International business margins (as a result of

giving some margin away through Aspen’s 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 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E CAGR

FY11E-FY16E

South Africa 3,758 4,309 5,652 6,643 6,680 7,147 7,695 8,400 9,244 6.8%

Sub-Saharan Africa 47 931 910 1,274 1,631 2,055 2,527 3,033 3,548 22.7%

Asia Pacific 908 1,234 1,468 3,170 5,092 5,397 5,775 6,237 6,736 16.3%

Latin America 83 1,144 1,150 1,380 1,656 1,954 2,267 2,584 2,894 16.0%

Rest of World 85 823 1,435 1,722 2,032 2,357 2,687 3,010 3,311 14.0%

Adjustments* 0 0 -469 -637 -815 -1,027 -1,264 -1,516 -1,774

Net revenues 4,881 8,441 10,147 13,553 16,275 17,883 19,687 21,747 23,959 12.1%

Source: RCML Research, Company; *Adjustments are for GSK Aspen Healthcare venture revenues (shown in table as gross revenues)

Aspen Pharma – African and

International branded and generic

medicine sales

FY11E to be a transition year –

negative ARV impact, but positive

Sigma effects


12


[email protected]

Group progress through H1’11 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 H1’11 revenues – by region

R mn H1 09 H1 10 H1 11E

South Africa 2,066 2,550 3,300

Sub-Saharan Africa 464 279 666

Asia Pacific 484 748 957

Latin America 408 500 599

Rest of World 25 493 867

Adjustments* 0 -50 -399

Net revenues 3,447 4,519 5,990

Source: RCML Research, Company; *Adjustments are for GSK Aspen Healthcare venture revenues.

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 FY10’s 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).

Fig 5 - Aspen EBITA results, margins – forecast by region

R mn FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E

South Africa 830 1,632 1,730 1,636 1,825 2,044 2,314 2,636

Sub-Saharan Africa 27 72 183 261 349 455 576 710

International 679 1,114 1,464 1,844 2,136 2,468 2,839 3,235

Group 1,536 2,819 3,378 3,741 4,310 4,966 5,730 6,581

EBITA margin - by region

FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E

South Africa 25.6% 28.9% 26.0% 24.5% 25.5% 26.6% 27.5% 28.5%

Sub-Saharan Africa 19.2% 7.9% 14.4% 16.0% 17.0% 18.0% 19.0% 20.0%

International 31.7% 27.5% 23.3% 21.0% 22.0% 23.0% 24.0% 25.0%

Group 27.2% 26.6% 23.8% 21.9% 22.8% 23.7% 24.6% 25.6%

Source: RCML Research, Company; Group margins are based on gross revenues.

Brief snapshot of Aspen’s H1’11

results

Strong growth for International

activities

Margin contraction in H1: notably in

SA and SSA


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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

H2’11 (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 H1’10’s 16% to 17% in

H1’11). 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, Aspen’s license to Wyeth’s infant milk

formula (IMF) ended in April; this license provided an annual ~R250mn contribution to

APN’s 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 H2’11. We

expect the Asia Pacific activities which generated revenues of R957mn (+28%) in the

H1’11 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.

Critical to maintaining APN’s 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.

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£.

Underlying margin in SA holding up

in H1, but....

....we expect a tougher outlook for

SA activities in H2’11

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

Potential FX movement impact on

PBT – a FY10 scenario


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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 H1’11 results; FY11E forecasts

Rmn H1 10A H1 11A %

change FY10A FY11E

% change

Continuing operations

Revenue 4,519 5,990 32.5% 10,147 13,553 33.6%

CoS 2,441 3,381 38.5% 5,542 7,725 39.4%

Gross profit 2,078 2,609 25.5% 4,604 5,828 26.6%

Expenses

Selling & Distribution 538 664 23.3% 1,189 1,626 36.7%

Administrative 368 360 -2.3% 736 1,016 38.1%

Other operating income 150 108 -27.9% 180 244 35.6%

Other operating exp 62 80 28.9% 244 322 32.2%

Operating profit 1,260 1,614 28.1% 2,615 3,106 18.8%

Investment income 91 128 41.1% 188 73 -61.2%

Financing costs -264 -251 -4.8% -558 -303 -45.7%

Net financials -173 -124 -28.7% -370 -230 -37.9%

Share of after-tax net losses (associates) -1 0 -2 0

Profit before tax 1,085 1,490 37.3% 2,243 2,877 28.3%

Tax -239 -323 35.3% -468 -604 29.2%

Profit after tax from continuing operations

846 1,167 37.9% 1,775 2,272 28.0%

Discontinued operations

Profit from discontinued operations 42 0 203 0

Profit for the year 889 1,167 31.3% 1,979 2,272 14.9%

Other comprehensive income 0 0 0 0

Amounts in equity due to hedge acc'ting of int rate swaps

0 96 0 96

Cash flow hedges realised -5 52 -5 52

Currency translation differences -37 -632 -25 -632

Acquisition of addtnl 1% share in PharmaLatina Holdings Ltd

0 0 0 0

Disposal of Onco Therapies Ltd 0 0 1 0

Total comprehensive income 846 683 -19.3% 1,949 1,788 -8.3%

Headline earnings

From continuing operations 847 1,147 35.4% 1,893 2,253 19.0%

From discontinued operations 42 0 49 0

Headline EPS (cents) 242.3 265.3 9.5% 482.9 521.0 7.9%

From continuing operations 230.8 265.3 14.9% 470.8 521.0 10.7%

From discontinued operations 11.5 0.0 12.1 0.0

Headline EPS - Diluted (cents) 229.6 254.3 10.8% 463.4 499.3 7.8%

From continuing operations 218.7 254.3 16.3% 452.0 499.3 10.5%

From discontinued operations 10.9 0.0 11.4 0.0

Gross margin 46.0% 43.6% 45.4% 43.0%

EBIT margin 27.9% 26.9% 25.8% 22.9%

PBT 24.0% 24.9% 22.1% 21.2%

PAT (continuing ops) 18.7% 19.5% 17.5% 16.8%

Source: RCML Research, Company


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Strategy

Aspen is South Africa’s 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 company’s

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.

Aspen’s 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.

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 company’s API (active

pharmaceutical ingredient) activities. APN has the largest drug production capacity in

the southern hemisphere and is one of the world’s 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.

APN’s 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). APN’s 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 network’s

facilities.

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.

The company aims to deliver additional growth through its positioning in the sub-

Saharan 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 GSK’s 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.

1 in 4 of every oral drug Rx in South

Africa is for an Aspen product

World class manufacturing network

Driving efficiency into manufacturing

GSK collaboration is strategic to

Africa

Broad complementarity between

GSK brands and Aspen generics


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[email protected]

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

Aspen, 31.0%

Cipla

Medpro, 17.0%Adcock

Ingram, 11.0%

Novartis, 9.0%

Servier, 4.0%

Lupin, 4.0%

Daiichi

Sankyo, 4.0%

Sanofi

Pfizer

Pharmaplan

Ranbaxy

Dr ReddysOther

Source: Company, IMS Dec 2010

The internationalisation strategy

appears to be paying off


17


[email protected]

South Africa activities

Aspen Branded Pharma (~10% total SA sales): APN’s branded medicine portfolio

covers the usual extensive range of therapy segments, which are distributed through

wholesalers and pharmacies to reach the patient. APN is SA’s 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 company’s first generic ARV, Aspen Stavudine, was

launched in 2003 and APN currently supplies ARVs to ~1.0mn sufferers across Africa.

APN is SA’s 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

APN’s 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 Africa’s 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%).

In terms of pharmaceutical (branded and generic) sales (R4.5bn, +40%), FY10’s

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 latter’s 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.

Most recently, H1’11 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, APN’s 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 H1’11) were R463mn versus a run rate of approximately

R320mn in the prior six months (+45%).

SA region segment EBIT margin declined to 30.2% (H1’10 31.8%) generating an EBIT

result of R996mn (+23%), or in terms of EBITA, R1bn (+26%). Headline segment

A 160 yr old South African legacy

FY10 – an exceptional growth year in

SA

APN is the lead SA Pharma company

– and Africa’s largest manufacturer

H1’11 SA revenue growth as robust

APN still No 1 in SA Generics and SA

Branded Rx


18


[email protected]

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 H1’11 SA EBITA margin has expanded (to 30%)

from the previous H1’10’s 29% and the FY’10 figure of 28%.

Fig 9 - Aspen: Normalised EBITA margins

H1 10 FY10 H1 11

South Africa* 29.0% 28.0% 30.0%

Sub-Saharan Africa 16.0% 8.0% 17.0%

International 25.0% 28.0% 23.0%

Group 27.0% 26.0% 26.0%

Source: Company; *results adjusted to exclude effect of compensation for Aspen Nutritionals

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.

H2’11 should also see the non-renewal of APN’s licence to Wyeth’s Infacare infant

milk formula (IMF) products. Again, this is a situation where APN’s 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 APN’s 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 H1’11, 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 APN’s 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 (GSK’s

pneumococcal vaccine) for childhood immunisation schedules; and Tykerb (GSK’s

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.

Furthermore, APN’s 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 H1’11).

Sluggish growth in Consumer in

FY10

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


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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.

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 APN’s 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 APN’s 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)

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000

Teva

Sandoz

Mylan

Watson

Stada

Hospira

Perrigo

Aspen

Greenstone

Dr Reddy

Ranbaxy

Fresenius Kabi

Sanofi

Gideon Richter

Krka

Covidien

Cipla

Alapis

Par

Orion

Lupin

Sun

Wockhardt

Zylus Cadila

Source: Company

Lower growth outlook in 2011/2012

5YR outlook is positive for SA

generics


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Sub-Saharan activities

In FY10 a separate management and reporting structure was established for this

expanded business. This includes the activities transferred from GSK, APN’s 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 (APN’s 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, H1’11 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 Aspen’s 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

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 GSK’s Global Brands (acquired from

mid-2008, but most of the integration was actually completed in 2010).

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 H2’10 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

SSA activities now consolidated

Increasing Internationalisation

Asia Pacific and RoW divisions

delivered

Global Brands doing well

Domestic Brands - Asia Pacific

region prominent


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[email protected]

disposal of R155mn. The planned sale of the Onco Laboratories activities should be

completed during FY11.

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

Post period-end, in August 2010, APN announced the acquisition of Sigma, for

AUD900mn (~R6.3bn), Australia’s 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 Aspen’s 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 Aspen’s generic and OTC products into the Australian

market; and

• A longer term initiative to integrate APN’s domestic production capacity into

the worldwide manufacturing network.

Most recently, H1’11 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 H1’10 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 H1’10) - mainly as a result of adding GSK products into APN’s 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 Aspen’s Australian business, is well

underway.

Asia Pacific activities

H1’11 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 Sigma’s

medicines/OTC business, pushing it into a potential market leadership position,

should transfuse a number of local, and over time regional, advantages into APN’s

enlarged infrastructure and distribution network.

Flat segment EBIT

Sigma acquisition completed 31

January

Ongoing global expansion to reach

>100 markets

Asia Pacific revenues set to grow

strongly

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 Sigma’s profitability

(AUD$75mn in 2010) through a number of initiatives involving its branded/OTC

business (estimated to account for ~60% of revenues), including:

• Driving sales force and distribution synergies to accelerate growth;

• Taking costs out of Sigma’s 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 Sigma’s 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 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 H1’11 revenues (R600mn)

Australia

Japan

India

New Zealand

Pakistan

Philippines

Taiwan

China

Indonesia

Malaysia

Other

South Korea

Thailand

0% 10% 20% 30% 40% 50% 60% 70% 80%

Source: Company

Latin America activities

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.

APN has to tread more carefully with

its Gx portfolio in Australia

Building scale in the region

Important restructuring event

completed – results starting to come

through


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Fig 12 - Aspen: Latin America markets, % of total H1’11 revenues (R957mn)

0% 10% 20% 30% 40% 50% 60% 70% 80%

Brazil

Mexico

Venezuela

Colombia

Chile

Argentina

Source: Company


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Appendix

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)

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 H1’11 (that compares to almost 14% in H1’10). The major negative

impact has been pricing, although volume growth has been fairly constant, +4.9%

(+4.7%, H1’10).

The generics sector, representing almost 30% of the total SA (private) market’s 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

H1’10).

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%).

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.

Some general notes on APN’s

Pharmaceutical markets

Fundamental dynamics for this

market suggest a sustained increase

in demand

SA private medicines market, 2010

Source: Company, IMS


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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

Abbott, 9.8%Adcock, 4.0%

A'bindo, 3.1%

Cipla, 5.1%

Medpro, 10.1%

MSD, 0.2%

Aspen

Pharma, 40.6%

Sonke, 21.9%

S'pharm, 0.9% Strides, 4.2%

Source: Company; S’pharm=Specpharma, A’bindo=Aurobindo

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 tender’s 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

Companies have had to accept

massive reductions in product

prices

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


26


[email protected]

substantially improve patient compliance, and the central role of the Treasury as

opposed to the Department of Health is a concern.

Aspen pioneered the manufacture and provision of generic ARVs in SA, launching its

first product, Aspen-Stavudine, in 2003. The company’s 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 tender’s 50%

share. However, it could have been less than the 41% this time. What helped the

outcome, we believe, was APN’s 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?

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

APN has a strong ARV legacy

What is the likely impact on

pharmaceutical companies?


27


[email protected]

(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)

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.

Africa’s 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.

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 world’s 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.

West Africa dominates

Challenges – but LT opportunities

More exposure to ‘pharmemerging’

markets required


28


[email protected]

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%). Mexico’s

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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