Ascendis Health’s chronic headache
A dismal share performance and a forced seller add up to a severe headache for CEO Thomas Thomsen
How many shares Ascendis Health’s founder-investor, Coast2Coast, has to sell to pay off its bankers is as much a mystery to the company as it is to the rest of the market.
Former nonexecutive director Gary Shayne, who created the pharmaceutical group in 2008 with Coast2Coast partner Cris Dillon, has been forced to offload stock in the past few months, culminating in a sale of more than 3.25-million shares last week, and his resignation from the board.
Speaking to the FM this week, CEO Thomas Thomsen, who was brought in last year to replace Karsten Wellner, says Shayne "doesn’t want to provide an open book to that … and it’s not for a lack of trying.
"We don’t have visibility as to the [share] overhang and we mentioned during the results that we’ve been trying as a board to get more visibility and that’s not been possible."
Coast2Coast borrowed against the value of its shares to underwrite Ascendis’s R750m rights offer in 2017, when it ended up the only real buyer.
But a slump in Ascendis’s stock since then — it has fallen 64% in the last year — has resulted in forced sales by Coast2Coast’s lenders.
It’s a far cry from 2016, when Ascendis raised R1.2bn from an eager market, with a rights offer that was more than three times oversubscribed.
That rights offer was priced at R22 a share; Ascendis is now trading at just above R3. The share was the worst performer on the JSE in 2018 as investors baled out on fears that the debt taken on in an acquisition frenzy under Wellner would cripple it.
In a recent Investors Monthly opinion piece, analyst Nigel Dunn wrote that Ascendis’s return on equity and return on invested capital "paint a picture of a business struggling to earn an acceptable return … [its] debt-to-equity ratio, sharp increase in shares issued and poor returns confirm a group with a deteriorating capital structure, with a concomitant increase in risk".
Shayne’s resignation from the board means he’ll no longer have to disclose his share sales to the market. It’s an intriguing development given Coast2Coast’s involvement in the company: first as founder, majority shareholder and adviser, and more recently as ordinary investor.
Coast2Coast’s shareholding in Ascendis began at 50.3% in 2014, dropping to 29% as of the end of June 2018. It’s now below 18%. But a more distant relationship is what Thomsen wants. "We have absolutely achieved an arm’s-length relationship with Coast2Coast.
"Now it’s no longer on the board, it is a normal investor and I’ll expect it to behave like a normal investor," he says.
Asked what that means to Ascendis, Thomsen says: "As a shareholder what I would like to see from it is to be extremely supportive to the business and … when we have the investor interactions, being a good sounding board for the business."
Ascendis’s biggest immediate challenge is to pay down its debt, which had risen to R5.3bn at the end of December.
One option is the sale of what Sentio Capital’s Imtiaz Suliman describes as the jewel in Ascendis’s crown: its Cyprus-based generics pharma company Remedica, which received an unsolicited offer from an unnamed bidder earlier this year. Ascendis has since invited other bidders into an auction process, even as it holds talks with its first suitor.
It’s clear that a sale isn’t what Thomsen wants, but it might be what the company needs.
"I guess from a strategic point of view it is a challenge, it’s one of our best assets, it’s performing very, very well, so we’re trying to balance our strategy with our financial situation," he says.
Analysts accuse Ascendis of having overpaid for its assets, and how much it will get for Remedica is anyone’s guess. Ascendis paid €260m upfront for Remedica in 2016, with a further commitment of €75m based on it meeting certain profit targets.
Asked if he expects to get this back, Thomsen says: "As much as I would like to comment on what we expect to get, I can’t. What I can say is that we’ve improved the value of Remedica since we bought the business."
Suliman is also adamant that Ascendis offers plenty of value at its present share price, though he concedes he’s been saying this from at least R8. "It’s now trading on a 2.5-times p:e. Even if you look at it on a break-up or sum-of-the-parts value, we see lots of upside."