SIMON BROWN: Aspen needs a new prescription

Pharmaceutical giant Aspen’s announcement last month has created two significant challenges that the company must address. The first is trust in management and the second is capacity utilisation at its two sterile plants in France (Notre Dame de Bondeville) and locally at Gqeberha.

Shareholders need to trust management to deliver on their promises, grow revenue and ultimately increase dividends and the share price.

Yet over the past two or more years the company has repeatedly talked up its sterile facilities and how it would be ramping up production and profits in the near term.

In its defence, it has announced some deals to produce a number of drugs but the facilities are still well below full capacity, and this was even before it announced a cancelled contract.

Despite management’s claims, these have not been backed up with tangible results. So because capacity has not increased significantly, the market is understandably worried and Aspen will have to rebuild that trust, which will take years and will require the addition of substantial volume to those sterile facilities.

The lack of capacity utilisation at those facilities is serious because there’s a base cost to keep them operational. Increasing volume is needed to reduce that base cost per unit, so utilisation must be ramped up to get the profits flowing.

The lost contract adds two complexities. First, assuming the contract is lost, how long will it take the company to find a new client to take up capacity?

Second, this will no doubt be harder to do after a major client has cancelled a contract.

Another problem, which was never declared to the market via a Sens announcement, concerns the US Federal Drug Administration. It informed Aspen in February that a September 2024 inspection found some serious issues with the Gqeberha plant and it effectively barred products from the plant being imported into the US. Again this boils down to trust and capacity utilisation.

So the Catch-22 is it needs to regain market trust, which is best done by increasing utilisation at the plants, but the news coming out of the company this year will make that a lot harder to do.

I do not hold Aspen and certainly would not be looking to buy into it right now until I see concrete progress, but that won’t happen for at least another year or two.

This is not the end for Aspen but, as Wayne McCurrie always reminds me, markets have memories and it takes time for bad memories to fade.