Aspen – Growth potential trumps short-term headwinds

The release of Aspen’s FY23 results was greeted harshly by the market. The share price fell 8% following the release, which we believe was a knee-jerk reaction.

The results came in largely in-line with the guidance provided by management in the first half. However, a greater than expected jump in interest costs, on the back of elevated foreign exchange losses, weighed on normalised headline earnings per share (NHEPS).

We don’t view the market’s earnings disappointment as a misstep by management, rather an unfortunate result of currency volatility. Forex losses doubled in the second half, taking approximately R1.41/share (9%) off NHEPS by our estimates.

NHEPS would have been flat excluding these losses, which we believe is a resilient performance given several factors:

• Aspen divested a sizeable Regional Product portfolio in South Africa, which accounted for 2% of the division’s revenue.
• Revenue from Russia declined by 70% to R300 million.
• The group’s French Heparin facility was shut down for maintenance in the first half of the year.
• COVID vaccine sales declined by R1.3 billion relative to 2022.

2023 was always going to be a transition year for the business and by our judgement, the results did not reflect any factors that would lead us to reduce our medium term growth forecasts. 

Following a period of disruption due to the disappointing Aspenovax program, the strategic focus has been to fill the idle capacity at the group’s manufacturing sites. In addition to the revenue benefit from obtaining new contracts, the greatest benefit from increasing utilization is on the margin. By management’s estimates, there was an under recovery of R1.1 billion of costs during the year due to unused capacity.

Margins in the manufacturing business recovered as Heparin sales resumed in the second half but remain depressed. Once the group can obtain adequate volumes for its sites, the operating leverage benefit is expected to drive a material improvement in group operating margins. We see this benefit starting to flow through in the second half of 2024.

Aspen is bedding down two contracts in its Port Elizabeth facility – insulin manufacturing for a multinational, and Gavi vaccines with the Serum Institute of India. Together, these two contracts have the potential to fill 40% of the facility’s capacity.

In addition, Aspen has signed manufacturing contracts with three multinational partners for its French facility. Management estimates that these contracts may fill 50% of the French facility’s capacity. The technology transfer phase of onboarding the products is ongoing, so the benefit to the group will only be realised later in the fiscal year.

We believe that filling manufacturing capacity will be the key driver behind Aspen’s share price going forward, however, the Commercial Pharmaceutical business also appears to be on the cusp of its next phase of growth. The business has had no capital allocated to it in 5 years yet has been Aspen’s most consistent performer. The businesses are set to be bolstered by two new deals:

• Aspen acquired a portfolio of off-patent branded products in Latin America from Viatris. Sales for the portfolio are estimated to be ~$92 million, with first sales expected to begin late in 1H23.
• Aspen signed a deal with Eli Lilly to market and distribute a portfolio of its products in Sub-Saharan Africa. Sales of Lilly’s products, together with distribution of Amgen’s products, are expected to deliver R750 million in annualised revenue, beginning in the second half of 2024.
• Cumulatively, the annualized sales of Latin American, Eli Lilly, and Amgen’s products are expected to deliver an 8% uplift to Commercial Pharma revenue.

Within Eli Lilly’s product portfolio includes tirzepatide (branded Mounjaro), which is primarily an injectable diabetes drug. While the distribution agreement for Eli Lilly only applies to Sub-Saharan Africa, Aspen has disclosed that it reached an agreement with a multinational pharmaceutical company to manufacture an insulin product at its Port Elizabeth facility. Management was not allowed to disclose the name of the company until the technology transfer was complete. However, after the distribution agreement with Eli Lilly, there is a favourable opportunity for Aspen to take the Mounjaro manufacturing on board.

The FDA (and subsequently SAHPRA) is expected to approve Mounjaro for the treatment of obesity soon. Novo Nordisk’s competitor product, Wegovy, is very similar and has already received approval for weight loss. This leads us to believe that Mounjaro will follow suit. GLP-1 agonists, the class of drugs to which these weight-loss drugs belong, are exhibiting extraordinary growth due to their effectiveness in treating obesity, which is one of the leading diseases worldwide. Novo Nordisk’s GLP-1 products recently achieved $1 billion in quarterly sales, and the mean expectation is for GLP-1 medications to grow at a 5-year CAGR of 25% to 35%. Morningstar estimates that the GLP-1 market will reach $100 billion by 2030.

There has been a global shortage of GLP-1 medications, as demand for obesity treatment has taken volumes from the diabetes market, requiring patients to procure substitute medications. Novo-Nordisk has been adding new contract manufacturer lines to help alleviate the supply constraints, so it would make sense Eli Lilly would do the same following FDA approval.

For the group, 2024 will be a tale of two halves. The first half is expected to be relatively weak, given the realisation of Volume-Base-Procurement impacts in China. In addition, the group registered decent revenue from Russia, and marginal COVID vaccine sales last year, which will not be repeated.

The acquisitive growth will be weighted to the second half of the year, as will the flow through of manufacturing contract revenue. We expect mid-single digit NHEPS growth in FY-2024, given neutral currency impacts. Growth is expected to accelerate to double-digits thereafter as the full annualization of acquired revenue complements organic growth and manufacturing capacity improvement continues.

Management reaffirmed their gross profit contribution estimate of R8 billion from idle capacity fill. Half of that target has already been secured with the contracts signed to date.