Slower than expected government orders for AIDS drugs and unreliable water supplies has knocked production at pharmaceutical manufacturer Adcock Ingram’s local factories, amplifying the effect of weak consumer demand and rising costs that saw the company deliver a mere 1% increase in headline earnings.
Revenue rose 1% to R3.63bn in the six months to end-December 2019, compared to R3.59bn in the corresponding period the year before, while operating profit increased at the same rate (1%) to R462m, up from R457m the year before.
The local pharmaceutical manufacturing sector is grappling with the negative effects on margins of the weak economy, low consumer demand, above-inflation increases in wage and utility costs, and strict government price controls that limit the scope for increasing medicine prices.
During the period under review, Adcock Ingram saw utility costs rise 11.4%, labour costs grow 7%, while the weak rand saw the weighted cost of imports increase 6.1%.
JSE-listed Adcock Ingram is a subsidiary of the Bidvest group, and has three SA manufacturing facilities, as well as a factory in Bangalore.
Adcock Ingram had anticipated that the latest government AIDS drug tender would boost the fortunes of its loss-making Wadeville plant, but orders from provincial health departments were far lower than expected, said CEO Andy Hall. The antiretroviral (ARV) tender kicked in on July 1.
“The ARV tender for us just hasn’t taken off. In annual terms it would have been just short of R700m, but we have only sold R103m in the past six months,” he said in an interview with Business Day.
Orders for the new, triple combination pill containing dolutegravir, which the health department had said would become the backbone of treatment for state patients, was particularly slow, with only R15m in orders in the period under review, he said.
Volumes at its Clayville factory, which makes 12-million litres of liquid products each year, were knocked by the Ekurhuleni municipality's decision to “throttle” water supplies, said Hall. “At certain times the water we were receiving from the municipality was 25% of the normal pressure.”
Adcock Ingram is not the only company to have been hit by unreliable utility supplies. Astral Foods said in November that the water crisis in Standerton is costing it R2m a month.
Adcock Ingram said the challenges it experienced in the regulated, over-the-counter (OTC) and prescription segments of its business had been compensated by the performance of its less regulated consumer and hospital products.
Hall said the company expects margins to face continued pressure from high input costs, and is exploring the scope to expand its portfolio of less regulated products.
The company does not foresee any immediate threat to its supply chain from the Covid-19 coronavirus outbreak in China, said Hall. The outbreak has prompted Chinese authorities to impose strict quarantines in cities hardest hit by the disease, with potential knock-on effects on manufacturing output. Pharmaceutical manufacturers around the world source the majority of the ingredients used in their products from China and India.
Adcock Ingram’s analysis of its top 35 products and molecules concluded there is “absolutely no risk” on imported medicines for the next 90 days, said Hall.
Adcock Ingram declared an interim dividend of 100c, unchanged from the corresponding period the year before.
Correction: February 21 2020
A previous version of this article incorrectly stated that Adcock Ingram recorded only a seventh of its expected sales for the half-year period to end-December 2019. The company recorded 29% of its anticipated sales during this period.
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