Aspen Pharmacare had a strong base business valued lowly by the market as well as significant in-demand unutilised excess sterile manufacturing capacity that the market was placing little to no value on, Mergence Investment Management said.
The investment firm said in a research note they “remain patient and confident” in the long-term investment case and expect strong earnings growth resuming in the 2024 financial year.
JSE data showed the share price increased 0.5% on Friday to R182.66, bringing its increase year-to-date to 33.9%, well outstripping the 6.44% rise in the JSE All Share Index over the same period.
“While the share’s recent out-performance indicates the market is giving them some credit, we think there is more out-performance to come as they execute their plans on filling the spare capacity,” Mergence said.
It said the market was ascribing little to no value to the potential of Aspen’s sought-after excess sterile manufacturing capacity – “we believe this is overly pessimistic”.
“In addition, the company has significant spare manufacturing capacity that will contribute significant growth on top of the base business from 2024 onward,” Mergence said.
Aspen would be filling the spare capacity through initiatives such as moving manufacturing of their anaesthetic products in-house to reduce costs executing on existing contracts and securing further contracts to fill the excess capacity for products in areas such as vaccines and biologicals.
Aspen has outperformed the market in 2023 to date after they provided some additional guidance on the potential of the spare capacity at their interim results in March 2023.
At the interim stage, Aspen said a focus area was to fill existing sterile manufacturing capacities; and “the operating leverage from doing so is significant”.
Aspen had made significant advances in contract negotiations for a portion of the capacity; and the value of the long-term potential contribution (gross profit) from filling available sterile manufacturing capacity had been revised upwards from R3 billion to at least R8bn.
Secured agreements in place include an agreement in 2022 to use a portion of the company’s spare capacity in France; and another agreement early in the 2023 financial year to manufacture and commercialise four paediatric vaccines for the Serum Institute of India for the African continent, which will use a portion of their spare capacity in South Africa.
“Our view remains that the company with such an experienced management team with material skin in the game (the CEO is a large shareholder) will execute and fill the excess sterile capacity over time, leading to strong long-term growth for the company.”
Aspen, according to media reports, concluded an agreement in May with Amgen for Aspen to market, distribute, use and sell Amgen’s products in South Africa for an initial but renewable term of five years.
Amgen is a biotechnology pioneer whose medicines reach millions of seriously ill patients around the world. Amgen’s products include Aranesp, Amgevita, Prolia, Repatha, NPlate, Vectibix and Blincyto.
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