News Room

Adcock Ingram Delivers Strong Revenue Growth

Margins compress due to weaker rand and sales mix in a challenging South African market
Earnings decline due to gearing and tax rate normalisation

- FY13 results highlight the need to expand product and geographic presence through international alliances
- Highlights that the combination with CFR, which will target high-growth emerging markets, makes strategic sense for Adcock Ingram and South Africa

Adcock Ingram today announced that it has delivered a pleasing 18% increase in revenue for the full year to 30 September 2013. These results were achieved in an increasingly competitive market. While the pharmaceutical company managed its costs well and reported an increase in gross profit, this did not counter the impact of lower margin tender sales and a significantly weaker Rand, which affected imported raw materials and products. Combined with the expiry of tax allowances, this resulted in a 17% decline in both headline earnings and HEPS.

Commenting on the results, Adcock Ingram CEO, Dr Jonathan Louw, said, “The growth in turnover is pleasing and is largely the result of strong volume growth in South Africa; driven by new product launches in South African tenders, new multinational contracts in the Prescription business, reasonable organic growth in OTC, and the acquisition of Cosme in India. However, the weaker Rand and competitive trading conditions have seen higher proportions of multinational and tender business at lower margins, which has impacted margins and earnings.”

FY2013 Results Highlights
Adcock Ingram’s Southern African operations posted a sales increase of 13%, despite continued consumer pressure. Volumes were boosted by increased tender awards from new pipeline products and Adcock Ingram expects to see further increases in volumes of ARVs supplied in terms of the national tender award.

Margins were negatively impacted by the weak Rand, competitive trading conditions, inflation-plus cost increases, and the change in mix, with higher proportions of multinational and tender business at lower margins.

Cash generated from operations was R574 million (2012: R785 million). Inventory increases were in part due to a deliberate decision to grow the business and improve service levels, and normalising these holdings will be an area of stringent focus in the coming year.

Total capital expenditure for the year amounted to R344 million (2012: R512 million). This included upgrading the distribution facility, construction of the central laboratory at the high-volume liquids facility in Clayville and the addition of two new granulation suites at Wadeville. Tableting capacity at the Wadeville factory will be doubled by the end of this calendar year, placing Adcock Ingram in a stronger position to take advantage of additional capacity for the SA government’s next general tablet and ARV tablet tenders. The Medicines Control Council (MCC) is making progress with the approval of products manufactured at the Clayville plant, with various multinational partners having also conducted audits at the facility with positive outcomes.

Adcock Ingram’s over-the-counter (OTC) economy brands performed well and independent market research shows that Adcock Ingram’s economy and premium products remain among the top best-sellers across pharmacy and FMCG channels. Turnover in the prescription business increased by 22% due to new multinational collaborations, and the ARV and other oral solid dosage tender awards. The hospital division’s turnover increase was 5%, but margins in this business remain under severe pressure.

The period under review saw pleasing revenue growth in the rest of Africa, up 42% over last year, mainly due to the expansion of the product portfolio and increased marketing activities in East Africa and Ghana, while the Datlabs business specifically added R45.7 million, or around 29% of this growth in the region. India, including the manufacturing joint venture, recorded total sales of R386 million (2012: R140 million) and is well placed to provide satisfactory growth next year.

Adcock Ingram’s multinational partner of choice strategy continues to deliver value with the addition of Lundbeck in the last year. Supply chain collaborations will extend multinational partnerships into sub-Saharan Africa, and the Company’s modern factories are gearing up for the increased demand.

During the period under review, Adcock Ingram strengthened its leadership team with the appointment of four experienced executives including Ashley Pearce, Commercial Executive: Southern Africa; Werner van Rensburg, Chief Operating Officer, Craig St John Ayre, Commercial Executive, Business Intelligence; and Doreen Kosi, Government Relations executive. The revitalised management team is well positioned to drive growth in the Company.

It was a pre-condition to CFR making a firm offer that the Company agree not to pay a final dividend.

The outlook remains mixed. The impact of the current economic climate on consumer spending remains concerning, and margins are expected to continue to be impacted by cost pressures, including the impact of the weak Rand on imported active ingredient and finished product prices. The tender business is benefiting from significantly increased volumes which are expected to drive greater efficiencies in the supply chain. The factories are gearing up for the increased demand and a number of new medicines have been launched successfully; however registration delays at the MCC continue to delay new products to the market.

Consolidation of Global Pharmaceutical Business and CFR Transaction
These results are announced in the context of the continuing consolidation of the global pharmaceuticals sector, which has again challenged the long-term sustainability of Adcock Ingram’s business. Almost 90% of Adcock Ingram’s turnover is derived from South Africa, a small market representing less than 0.5% of the global market. It has become increasingly apparent that Adcock Ingram should pursue a tie-up with another international pharmaceutical player to optimise its value, now that modernisation of its facilities is essentially complete.

The proposal from CFR to acquire control of the company would result in Adcock Ingram becoming part of a leading, diversified, emerging markets pharmaceuticals company with a presence in more than 23 countries and employing more than 10,000 people. The combined company would benefit Adcock Ingram with access to high-growth markets for certain products in its OTC and ARV portfolio, and expanded manufacturing opportunities.

South Africa would remain core to the proposed merged company with Adcock Ingram’s factories playing a key role in the combined group. The planned increase in production in South Africa would require additional investment and increased employment in the factories, and lead to increased exports from South Africa.

How to Vote
The Adcock Ingram board has recommended that shareholders vote in favour of the proposed transaction. Shareholders have been urged to make their vote count by submitting their proxy forms ahead of the shareholder meetings to be held at Adcock Ingram’s offices on Wednesday, 18 December 2013. The rationale and benefits of the proposed transaction, as well as details on how to vote are available at www.cfrtransaction.adcock.com.

For further details on the combination of CFR and Adcock Ingram see www.cfrtransaction.adcock.com

For media enquiries please contact:
Zolani Kunene
External Communications, Adcock Ingram
+27 11 635 0130
+27 82 561 9443
mailto://zolani.kunene@adcock.com

For media queries relating to the CFR transaction, please contact:
Carol Roos
Brunswick Group
+27 (11) 502 7300
+27 (72) 690 1230
mailto://croos@brunswickgroup.com