Local pharmaceutical manufacturer Adcock Ingram says its push into non-regulated products where it has better pricing power is paying off, but it is looking for growth across all its business divisions even as it grapples with pandemic-induced shifts in consumer spending.
The group, in which Bidvest has a controlling stake, has been bulking up its presence in areas such as shoe-care products, a move that has helped the revenue contribution from products that are not price regulated rise from about a third to just under half over the past two years.
CEO Andy Hall told Business Day on Wednesday that the group is looking to preserve this balance and wants to grow across its businesses. For example, Adcock intends to bulk up its over-the-counter products with bolt-on acquisitions. A bolt-on acquisition occurs when a business buys another company in order to merge it into one of its divisions.
Medicines sold in the private sector are subject to government regulations that usually allow for only one price increase a year, capped at a level set by the health minister. But Adcock has argued that consumer inflation is overly weighted in determining prices, while many imported inputs are at the mercy of the rand.
Hall said he doesn’t expect this situation to change soon and while the group, through industry bodies, is engaging with the government, this is more about the sustainability of the local manufacturing industry than simply about formulas.
“It is a more holistic approach, it is a difficult environment to be talking about price increases,” he said. “Socially, it would be difficult to explain.”
Instead, the focus is on issues such as local procurement, said Hall, aimed at reducing risk for companies that invested heavily in order to meet state contracts. This, for example, may be able to guarantee at least part of future contracts, rather than companies running the risk of only having a contract for two to three years.
Covid-19 volatility
Adcock, which counts Panado painkillers and the cold and flu product Corenza C among its brands, had to grapple with the absence of an SA flu season in its year to end-June, when revenue rose 6% to R7.77bn but profit fell 3% to R662m.
Adcock Ingram enjoyed strong demand for immune-boosting products, as well as for some linked to the treatment of Covid-19, with revenue from its biggest unit, prescriptions, growing 9.5% to R3bn.
The group’s over-the-counter divisions, which focus on pain, coughs, colds and flu, and antihistamine products, reported a 15.5% fall in revenue to R1.7bn as the pandemic kept people at home.
Less time outside also hit demand for items such as sun and shoe-care products, but revenue in the group’s consumer business surged 42% to R1.27bn, boosted by its acquisition in early 2020 of Plush Professional Leather Care, which offers a range of shoe and home-care products. Plush contributed R212m in revenue in 2021, having only contributed for one month in the prior year.
Hall said that overall Plush’s performance was better than expected, though revenue came in at R20m, or 10% lower than management’s targets as the pandemic, for example, kept children away from school. However, operating profit of R30m beat management’s target of about R25m, said Hall, citing the “fantastic job” done by Plush in keeping costs lower, particularly in terms of procurement.
Sasfin equity analyst Alec Abraham cited “exceptional operating expense control” as a reason for Adcock beating his expectation of an 8% fall in earnings. The fall in earnings was 3%.
Shareholder returns
Hall said the group is still looking to bulk up its consumer business, including in personal care and baby care, while it also intends to pay dividends “unless something crazy happens”. Adcock plans to ask shareholders to once again approve share buybacks at its annual meeting in November.
Adcock held onto its final dividend for its 2020 year, but on Wednesday declared a 90c dividend, or a R158m payout to shareholders for 2021. It is, however, less than the 100c final dividend paid in 2019.
Along with the 2021 interim dividend and share buybacks at about 3% of shares, the group returned R400m to shareholders in the year.
Hall said majority shareholder Bidvest was supportive of continued buybacks, but the group would be engaging minority shareholders in the coming months. It has been just over two years since Bidvest took a stake of a little over 50% in Adcock. Hall said the model of Bidvest is to give autonomy to subsidiaries and for the group it has been “business as usual”.
Abraham said the Bidvest stake helped with financial discipline while also providing stability for Adcock’s “excellent management team” to focus on driving market share gains.
In afternoon trade on Wednesday, Adcock’s shares were trading 0.31% higher at R45.50.
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