Aspen’s conduct hard to swallow
The earnings growth projected by the company is unlikely to materialise as the drug pricing scandal grows
It takes 20 years for a company to build a reputation and five minutes to ruin it, business magnate Warren Buffett once warned.
If not ruined entirely, the reputation of international generic pharmaceutical giant Aspen has suffered untold damage.
And it’s damage all of its own making.
It is hard to imagine how any headline could be more detrimental than the one The Times of London used for a story on Aspen on April 14: "Drug firm plots to destroy life-saving cancer drugs in bid to drive up prices."
It was a headline that media (formal and social) locked onto.
The focal point of the story was a dispute Aspen had with the state-run Spanish national health service in 2014. At issue was the drug company’s demand for huge price increases of up to 4,000% for five cancer drugs for which there are no alternative therapies.
In a practice that comes with the very unsavoury title of "price gouging", Aspen used strong-arm tactics on the Spanish health service by withholding supplies of the five drugs. The Times reports that this prompted an employee at Aspen’s European head office in Dublin office to ask a senior executive what should be done with existing stocks of the drugs in Spain.
The executive’s response, notes The Times, was: "The only options will be to donate or destroy this stock."
The drugs in question are known as the Cosmos portfolio, for which Aspen bought the rights from GlaxoSmithKline (GSK) for £273m in 2009. The portfolio encompasses Mercaptopurine, used to treat acute lymphoblastic leukaemia, a disease confined to children, Busulfan and Chlorambucil, for treating leukaemia, and drugs for cancer that occurs primarily among the elderly.
According to Aspen, the Cosmos portfolio produced revenue of €60m in the EU in its year to June 2016. It represented 2.7% of total group revenue.
Aspen’s run-in with Spanish health authorities was not the only price-gouging incident it has been accused of. In 2014 it also found itself locking horns with the state-controlled Italian Medicines Agency (AIFA) in a bid to raise the prices of four of its Cosmos drugs by 300%-1,500%. Aspen eventually largely got its way, but fell foul of Italy’s competition authority which, following a lengthy probe, ruled that the pharmaceutical group had at times created shortages of the drugs and threatened to stop supplying them altogether if the AIFA did not bow to its demands.
Giovanni Codacci-Pisanelli, assistant professor in medical oncology at the University of Rome, had harsh words for Aspen.
Media group EU Reporter quoted him as saying: "One of the main criticisms against Aspen Pharma is that they did not ask for an updating of the drug price using the available legal instruments, but rather chose to use aggressive behaviour that jeopardised the availability of these life-saving and irreplaceable agents."
The Italian competition authority slapped a €5.2m fine on Aspen in October 2016 for abuse of its monopoly position and price gouging.
The fine, now the subject of a court appeal by Aspen, was inexcusably not disclosed to its shareholders, despite it being covered by European media.
It is not only in Spain and Italy that Aspen has been on an aggressive pricing drive. The Times revealed that Aspen had exploited a loophole in medicine price control regulations in England and Wales to raise the price of Busulfan from £5.20 to £65.22 a pack and the price of Chlorambucil from £8.36 to £40.51 a pack.
With further probing The Times uncovered what it said has been Aspen’s strategy since 2012 to raise its drug prices aggressively throughout Europe.
Aspen finally conceded in an April Sens release that it was facing severe problems related to its pricing policies. Providing scant detail, Aspen noted: "Out of respect for the integrity of ongoing legal processes with European regulators, [and] the court in Italy, Aspen will not comment on these public allegations. Instead, Aspen looks forward to the opportunity to demonstrate the integrity and legality of its practices in the context of these legal processes."
Aspen has also found itself under the spotlight in SA following a call by DA shadow health minister Wilmot James for a probe by the competition commission into Aspen’s local pricing methods.
It appears to be a misguided call.
All SA pharmaceutical prices are approved by the health department under the single exit-price regulatory regime that lays down a fixed price for each product.
Could allegations being made against Aspen in the UK and Europe also be misguided? Though there is no way of knowing, says Evan Walker of 36One Asset Management, he puts forward a possible reason for Aspen’s aggressive pricing of its Cosmos portfolio: "GSK may have sold it to Aspen because it was reluctant to push up prices to economically viable levels," he says. "Is this what Aspen could be trying to do?"
Old Mutual fund manager Warren Jervis has a clear-cut view. "Any signs of unprofessional behaviour by a company and I exit it right away," he says. "Aspen’s share price will suffer. Reputational damage of this nature brings selling pressure."
There is another aspect to the situation Aspen faces.
"Governments and medical schemes are the biggest buyers of pharmaceuticals and are taking a very strong stance against generic companies as they do not incur any research and development costs," says Alec Abraham of Sasfin Securities.
It is little wonder the generic drug industry’s biggest customers are watching them suspiciously.
Aspen is by no means the first generic pharmaceutical company to come under fire for ramping up prices. Others include Canadian generic pharmaceuticals group Valeant, which in 2010 acquired the rights to Cuprimine and Syprine, the only drugs available for the treatment of the rare Wilson’s disease. If untreated it is deadly. Valeant hiked the prices of Cuprimine by 2,849% and that of Syprine by 1,424%. It ramped the cost of a year’s supply of the drugs to about US$300,000 according to Vanity Fair.
These and huge increases in the prices of four other drugs landed Valeant in hot water. In 2015 US federal prosecutors launched a still ongoing probe into its pricing policies.
In the same year Turing Pharmaceuticals also made headlines in the US for the wrong reasons. Having just gained control of Daraprim, the standard medication for the treatment of toxoplasmosis, a life-threatening parasitic infection, Turing hiked its price 5,000% from $13.50 to $750 a tablet.
A campaign spearheaded by Hillary Clinton achieved some success. Turing agreed to halve the drug’s price.
Legislators are acting. In the UK a bill has been tabled which, if approved, will allow regulators to force drug manufacturers to reduce prices if it finds them to be excessive. In the US a federal lawsuit alleging price gouging has recently been filed by prosecutors in 20 states against five generic pharmaceutical companies: Heritage, Aurobindo (an Indian company), Citron, Mylan and Teva (an Israeli company).
Aspen’s share price has been taking a hammering for some time, falling almost 40% from its January 2015 peak. On its growth delivery it is not surprising. "Aspen keeps pushing out its promise of strong growth," says Alec Abraham of Sasfin Securities.
Indeed, Aspen’s current year to June was to be the start of big things. "You can expect very strong earnings growth this [financial] year, especially in the second half," Aspen CEO Stephen Saad told the Financial Mail in October last year.
His promise proved to be way off at Aspen’s interim stage, with adjusted headline EPS (HEPS) managing only a 6% rise.
Things seem unlikely to improve in the second half. "I expect a 4% rise in full-year adjusted HEPS," says Abraham.
Nonetheless, because of the recent fall in Aspen’s share price, a majority of analysts still rate it a "buy", expecting its share to rise another 16% to R324.
And while its current price:earnings ratio is 25, its forward p:e is a less demanding 18.
Still, with this scandal having wrecked sentiment, another year of pedestrian growth and scrutiny from regulators seems to await Aspen. This makes the pharmaceutical company a stock best watched from a distance.