Pharmaceutical company Adcock Ingram has set its sights on potential acquisitions in the personal care and baby care segments in a move to reduce exposure to health-care regulations in the country, says CEO Andy Hall.
Through the single exit price mechanism, private sector medicine prices are tightly controlled and manufacturers can only hike prices in line with adjustments determined by the department’s medicine pricing committee, usually done once a year. This means they cannot pass increased input costs onto consumers, putting pressure on their margins. The single exit price mechanism lists the maximum price that a medicine can be charged at.
Speaking after the release of the company’s results for the year to June, Hall said Adcock was looking for growth away from the regulated segments of the industry.
As a result of the appetite for acquisition, Adcock has chosen cash preservation over generous dividends. Hall said the company would stick to its dividend policy of two to three times cover because it needed the cash for acquisitions.
Through the mooted acquisitions, Adcock will increase the share of nonregulated business in its portfolio from the current 35%, Hall said.
He said the company wanted to grow in the personal care and baby care segments through acquisitions "but there are not many assets available".
Hall said the group preferred growth through acquisitions because it was difficult to build a consumer brand from scratch.
"I am not saying it cannot be done, but it is difficult," he said.
Rayhaan Joosub of Sentio Capital Management said Adcock Ingram’s decision to reduce exposure to the single exit price was sensible.
"We think it is a good idea. The personal care and baby care segments are growing segments, especially baby care."
Joosub said funding the deals would not be a problem for the company because of its existing cash reserves. "They can easily fund the acquisitions off the balance sheet. We are not talking about big acquisitions anyway," Joosub said.
Waldo du Plessis of Nitrogen Fund Managers said increasing the company’s nonregulated portfolio was a positive move for investors. But, he said, finding opportunities that fit the business model at an affordable price might prove difficult in the current environment.
He said Hall’s comment on Wednesday that Adcock’s priority was to defend product margins and protect current market share was an indication that the company wanted to maintain current margins through internal efficiencies.
Adcock’s turnover rose 10.2% to R6.5bn. Gross profit was up 14% to R2.6bn, while trading profit soared 20% to R866m. Adcock increased total dividend by 24% to 172c.
Du Plessis said the results were impressive considering the pressure on South African consumers. The company’s management had demonstrated ability to steer a difficult macro operating environment. "As you are aware, the single exit price hike awarded for 2018-19 was only 1.3%, which could be a risk to continued trading profit growth should the South African rand continue to weaken."