Integrated Report

Financial review

“In a year when Aspen increased operating
profit 25% to R3,1 billion, operating cash
flows were even more impressive,
paving the way for a 50% increase
in the distribution made to
shareholders. The Group has the
capacity for further gearing
should the appropriate investments
be identified.”

Gus Attridge

Deputy Group Chief Executive


Taking consideration of one-off items

In assessing the performance of the Group, consideration needs to be taken of a number of items which were one-off or specific in nature and which are not expected to be recurring in arriving at an underlying or normalised result. The more material of these items, net of tax, are as follows:

  • profit on sale of the Oncology business of R368 million;
  • impairment of intangible assets of R84 million;
  • transaction costs of R122 million; and
  • restructuring costs of R27 million.
For this reason, greater insight to the underlying performance of Aspen can be ascertained by considering the adjusted statement of comprehensive income set out in abridged format below. The adjustments made from the statement of comprehensive income disclosed in the audited Annual Financial Statements set out here (which is also set out in abridged format for reference purposes below) are the following:
  • the adjusted statement deals with continuing operations only;
  • all headline earnings adjustments have been made; and
  • adjustments have been made to eliminate transaction costs and restructuring costs, largely related to the acquisition of the Sigma pharmaceuticals business.
year ended  
30 June  
year ended  
30 June  
year ended  
30 June  
  Revenue     12 383       12 383   9 619   +29  
  Gross profit     5 614       5 614   4 477   +25  
  Net operating expenses     (2 322)      (2 126)  (1 740)   
  Operating profit before amortisation     3 292       3 488   2 737   +27  
  Amortisation     (143)      (143)  (101)   
  Operating profit     3 149       3 345   2 636   +27  
  Net funding costs     (412)      (376)  (356)   
  Share of after-tax losses of associates     –       –   (2)   
  Profit before tax     2 737       2 969   2 278   +30  
  Tax     (582)      (602)  (457)   
  Profit after tax     2 155       2 367   1 821   +30  
  Normalised headline earnings per share (cents)          544,3   455,7   +19  
  Diluted normalised headline earnings per share (cents)          523,3   437,7   +20  


Pending dilution in earnings per share

Diluted normalised headline earnings per share is particularly relevant this year as the largest portion of the dilution relates to the convertible preference shares in the hands of BBBEE shareholder, Imithi Investments (Pty) Ltd (“Imithi“). It is expected that Imithi will convert these preference shares into ordinary shares in June 2012, so by next year-end the dilution will most likely have taken place.

Revenue growth across all regions

Gross revenue increased by 31% to R13,2 billion. Net revenue, which is reduced by the value of revenue from the Collaboration which is not recorded in Aspen’s records, was 29% higher at R12,4 billion. Revenue growth was achieved in all of the major customer geographies. The Asia pacific region grew most rapidly, increasing 122%, aided by the acquisition of the Sigma pharmaceutical business. The original Aspen Australia business also performed very well, improving revenue by 33% to R1,7 billion. The South African Consumer division achieved the most modest growth at 3%, suffering from the loss of the Pfizer infant milk licence in the last quarter and a sluggish retail sector.

Group EBITA* margin percentage generally stable

Overall EBITA* margins have remained generally stable in the Group since the internationalisation strategy gained momentum in 2008. Set out below are the three-year trends for EBITA* margins for the three business segments.

South African EBITA* margins have improved as a consequence of production efficiencies, procurement savings, a change in mix away from lower income ARV tender products and the relative strength of the Rand. The outlook for the margin in 2012 was reasonably stable, with further production efficiencies expected to offset pricing pressure. However, there have been recent developments which could cause a dip in the South African EBITA* margin. Lower production volumes have been experienced as expected ARV tender orders have not materialised due to Government using donor funds which procure from alternative suppliers. Lower volumes give rise to higher per unit costs. It is expected that the ARV tender will resume normal ordering patterns by January 2012. The recent Rand weakness could also weigh on the EBITA* margin if appropriate relief is not forthcoming through an increase in the SEP.

SSA EBITA* margins improved well in 2011 with the Shelys business achieving good profit recovery. While there is modest EBITA* margin upside potential in this region, the profit share formula in the Collaboration limits this while it remains the material contributor to profits in SSA.

As expected, the EBITA* margin in the International business declined. This was due to the margin surrendered to third party distributors in the Aspen global distribution network as global brands have increasingly transitioned away from GSK. This process is expected to be materially completed in 2012. The initial savings in cost of goods of the global brands should allow for some EBITA* margin improvement in 2012 in the International business. EBITA* margins in Asia Pacific are also expected to rise as synergies and savings are achieved in the integration of the Sigma pharmaceutical business.

Effective tax rate to rise

Depreciation, amortisation, net funding costs and taxation all increased in 2011 as a consequence of the acquisition of the Sigma pharmaceutical business. This trend can be expected to continue into 2012, given the acquisition was only in the 2011 results for five months. The effective tax rate, 20,3% after the adjustments made to arrive at normalised headline earnings, will also rise in the year ahead given the greater expected contribution from the Asia Pacific region where the largest contributor, Australia, has a corporate tax rate of 30%.

Strong cash flows

The Group delivered another year of very strong operating cash flows.

  Operating cash flows       2011  
Cash generated from operations       2 446   2 033   +20%  
Discontinued operations       (44)  (139)   
Normalisation adjustments       113   7    
Normalised cash generated from continuing operations       2 515   1 901   +32%  
Normalised operating cash flow per share from continuing operations (cents)      580,9   472,9   +23%  
Profit to operating cash flow conversion rate       107%   104%    
Working capital as a percentage of revenue#       22,5%   25,3%    


Normalised operating cash flow per share from continuing operations at 580,9 cents exceed the normalised headline earnings per share from continuing operations of 544,3 cents. For the second successive year Aspen has been able to achieve the enviable position of generating more cash than profits from its operations, with a 107% conversion of profits to operating cash flows in 2011. This has been assisted by the reduction of working capital as a percentage of annualised net revenue to a five-year low of 22,5%. As this is some way below established norms, better understanding of the sustainable working capital cycle of the enlarged Asia Pacific business will be necessary before this kind of level can be established as a new benchmark.

The strong earnings and cash flow performance together with an assessment of existing debt service commitments and future proposed investments allowed the Board to approve an increased capital distribution to shareholders of 105 cents, up 50%. Future distributions will be decided on a year-to-year basis, taking consideration of the prevailing circumstances.

Sigma pharmaceutical business influences statement of financial position

Changes in the statement of financial position have been largely influenced by the acquisition of the Sigma pharmaceutical business which completed on 31 January 2011. The originally contracted purchase consideration of AUD900 million was reduced to AUD863 million (R6,1 billion) due to an adjustment for a reduction in the value of take-on working capital. The cash outflow in settling the transaction was reduced by a further R169 million as a consequence of favourable cash flow hedges put in place. A detailed exercise was undertaken to arrive at the initial accounting for this transaction which will be finalised in the next year. Following the assessment of fair value of the assets and liabilities of the acquired business, goodwill of R4,0 billion was calculated. This value recognises the synergies identified from the consolidation of the Sigma pharmaceutical business with Aspen’s existing Australian business, as well as the capability of Aspen’s global procurement network and manufacturing know-how to achieve significant savings in cost of goods.

Value of intangibles

Goodwill (R4,6 billion) and intangible assets (R8,9 billion) are the two most material asset classes on the Group’s statement of financial position. This is to be expected, as this represents the very essence of Aspen, as it does with many other pharmaceutical companies. Products and the brands under which they are traded are critical to the determination of value of a pharmaceutical company. International Financial Reporting Standards (“IFRS”) accounting protocols require the recognition of intangible assets and goodwill at fair value of acquisition or historic cost of development with stringent tests for any impairment of these values. What IFRS accounting protocols do not allow is the recognition of the additional value created by the promotion and trading activities of the business. While the values of goodwill and intangible assets on Aspen’s statement of financial position may seem relatively high, the true value of these assets is greater.

Favourable debt arrangements

Total debt in the Group was R6,7 billion at 30 June 2011. Net borrowings, calculated by removing the liability component of the convertible preference shares from net debt, stood at R6,3 billion. Gearing was at 34% and interest paid, net of interest received was covered eight times by EBITA*. The Group has capacity and support from its funders for the assumption of further debt should the appropriate investment opportunities arise. Failing this, the strong cash flow profile should result is rapid de-gearing.

* EBITA represents operating profit from continuing operations before amortisation adjusted for specific non-trading items as set out in the Segmental Analysis.


Aspen has concluded negotiations with its major funders around the world following which new funding arrangements have been concluded with the following material terms:
  • three independent “debt pools“ have been formed, one for each of South Africa/SSA, Asia Pacific and International;
  • the “debt pools” are independent of one another; and
  • the “debt pools” are unsecured.
Total net borrowings R6,3 billion

These arrangements allow each of these regions to access and raise its own debt on an independent basis, matched to the cash flows of that region. The blended cost of finance is approximately 7%, variable with the benchmark rate (LIBOR, JIBAR, etc).

Gus Attridge
Deputy Group Chief Executive
21 October 2011