Aspen Pharmacare Holdings Limited (APN) Earnings Call Transcript & Summary

Welcome, everybody, to the first JPMorgan South Africa Health Care Conference. I'm sure the day will be fruitful. It's an interesting time, I guess. We already have an engaging dinner with Life overnight and a breakfast this morning with Dis-Chem. We've got an excellent schedule lined up for the rest of the day. And one of the key highlights, of course, is up next. So Steve and Gus, thank you for attending and agreeing to present your results for what's been an exceptionally busy first half for you. So with that, over to you.

All right. Good morning, everyone. Welcome to our interim results presentation. I'm going to run through our financial review, and then hand over to Stephen, who will do a strategic and performance review. Quite a wide audience today and well clustered towards the door. So I'll be keeping an eye on you guys there, making a run for it. Okay. If we just go through the formalities upfront and get onto the sort of overview of the financial results. So I think the takeaway from the set of results is it's a good solid set of results. We've achieved 3% of revenue growth half-on-half. Gross profit percentage is a bit lower, but at the normalized EBITDA line, we come back to even with this time last year. NHEPS is up by 1% on a reported basis despite a higher effective tax rate. That's due to some savings on the finance charges line. And the currency effect is benign. As you can see, the constant exchange rate performance and the reported performance is almost exactly the same with the exception of the normalized headline earnings per share line where there's a small differential. You can also see indicated there, the positive cash flow, debt levels and gearing achievements of the period. We look at a segmental basis, and just to make sure that we're all on the same page here, so the green on the bar is the gross profit. The green and the blue combined is the revenue. So you've got an indication of how much gross profit and how much revenue from each segment. So if we look at Regional Brands, we've had revenue growth driven really out of South Africa, Latin America and Australia, and that's despite some pressure on the oncology portfolio in Europe and the Zantac recall in Australia. The gross profit is flat on Regional Brands. If we move across to Sterile Brands, we've got an improved gross profit percentage. Although revenue is slightly down, gross profit remains pretty much even. Manufacturing. The revenue benefits from ZAR 273 million of heparin sales. However, you will see that the gross profit is down. So I think you can conclude from that the margins on the heparin are not particularly rich. Although they are justifiable for the business, it's not a huge growth driver on the EBITDA line. And there's a bigger story which we'll deal with on the next slide around the differential in gross profit between the first half of this year and last year in Manufacturing. And then if we look at the overall gross profit percentage for the group, as I indicated on the first slide, it is reduced H1-on-H1. But I do want you to just note that over H2 2019, gross profit for the group is actually, in fact, better. So let's dig into that a little bit with the next slide. So on this slide, we've got the 2 halves of last year, the full year number for last year and the first half of this year. And generally, what I'm going to look at is H1 2019 to H1 2020 so that's the most left and the most right of the columns and then to move across and look at H2 2019 versus H1 2020, our reporting period now. So if we look at the group as a whole, you will note that while the gross profit is down from H1 last year, it's actually better than the gross profit we recorded in the second half of year's -- of last year. So from a half-on-half trend, it is actually positive directionally. If we look at Regional Brands, Regional Brands are down, H1 last year to H1 this year. They're also down a little H2 to H1. And that is really indicative of some pricing pressure in the space, particularly around the oncology portfolio. The Zantac product in Australia that was withdrawn is also a good margin product. So that had an effect. If we look at Sterile Focus brands, you can see that margin has increased H1 over H1 but isn't as good as H2 of last year, and that is influenced by the higher heparin costs that we are experiencing, well publicized in the market and well-spoken about. And then the Manufacturing story which I wanted to get to, you can see this time I'm not going to go straight to H1 and H1, but rather, H1 and H2 of last year. So the first 2 columns, bottom right-hand slide, you can see a marked differential between the margins that we had out of manufacturing in the first half and the second half of last year. That was really driven by an alignment of all the stars in the first half of last year. We fortunately had business which really did generate very rich margins in the first half, but that was somewhat compensated into the second half by lower-margin business because we had the advantage of all the high-margin business in the first half. This year, we've sort of come back in line with the average of last year, and that's around the kind of margin I would anticipate through the balance of the year. If we look at the next slide, normalized EBITDA. And really, the purpose of this slide is just to show you some of the movement from the gross profit percentage of 54% last year against 51.1% this year and then down to a much smaller differential in the percentage of the normalized EBITDA level, so 28.6% against 29.3%. And that has been achieved by some really tight expense control. So we kept OpEx well under control. And we've also had the benefit of a $10 million milestone payment from Mylan related to the HPC business we have a partnership with them on. Moving on to currency impact. I know this is a slide which is of interest to those who do some currency variability analysis. And so the first big takeaway here is a low level of volatility. You'll see through both the first half last year and the full year currency rates against the rand, a low level of volatility, a little bit of strength of the rand against the dollar -- the Aussie dollar and weakness against the U.S. dollar being the biggest variabilities. And then just a point to note for those of you who look at this more carefully, the contribution mix has been quite significantly affected by the removal of the Japanese business, which did a lot of, obviously, yen-based revenue, but had euro- and dollar-based costs. So that's changed the mix quite significantly. We've also had quite a bit on the Manufacturing side where there's been an increased U.S. dollar influence and some switch from euro manufacturing to U.S. dollar manufacturing, which has raised the U.S. dollar rate. One of the examples is the heparin business that we've reengaged in. A lot of the base cost of our heparin is in U.S. dollars. Looking at effective tax rates. The key takeaways here, I would say, general alignment between the overall effective tax rate and the normalized tax rate with some occasional spikes. So you can see in 2019, there was a big differential that was caused by the higher-than-usual level of impairments that we booked last year and the tax effect of that, which isn't in the normalized line. So a fairly stable position. We did anticipate when we spoke to you 6 months ago that this rate would be going up, which it has, not quite as much as we thought. We've been able to take some benefit from some tax losses in the system, which offset some of that and the mix wasn't quite -- didn't turn out quite as unfavorable as we expected. Going into the second half of the year, I wouldn't expect any material deviation from these kind of rates. The next slide is a reconciliation of constant exchange rate, normalized headline earnings per share, working from basic earnings per share through the headline earnings per share to get to the normalized number. The real purpose of putting the slide in, as I communicate to the audience each time we present, is just to give you -- each of you the opportunity at which level you really want to measure and analyze the business. Normalized headline earnings per share is management's tool. That's what we believe is the sustainable look-through level to look at the business, but we provide all the information and all the reconciliation here in order for you to be able to measure it at whatever you believe the appropriate level is. I'll put in on the next slide an NHEPS bridge, which just helps you see what the movements are because we've got flat NHEPS and there's a little bit given away on the EBITDA line. We've got a bit extra in depreciation and amortization, and that's been recovered through the finance cost line. So that's how we get from one to the other and end up flat. Looking through working capital, some of the key data presented here. I think one of the things that you need to note is that our working capital cycle tends to be cyclical. We tend to have higher working capital in December than June, and that's quite well reflected on the top line where you can see our working capital is up against this time -- sorry, up against June, so 6 months ago, but it's actually better than it was this time last year. So that cycle, I do expect to continue and that our working capital balance should reflect that cycle in the year-end. Working capital as a percentage of revenue is another internal indicator we have, and we show it including and excluding Oss, which is our big chemical site in the Netherlands, which has a very long working capital cycle. These numbers too have been quite significantly influenced by the removal, in particular, of the Japanese business. So for those of you who go back to the last presentation we did, you will see that the working capital excluding Oss percentage of revenue for financial year 2019 was 34% and restated taking out Japan, which had a low level of inventory and a high level of sales that now rises to 37%. There's a bridge here for you to look at, which shows the movements between the working capital at the end of June and at the end of December. Inventories have moved up a little. You may recall that we noted at the end of December that we were a little bit understocked in some areas. We had Anaesthetic supply constraints, and we also had a strike at our SA factories. And those 2 items have improved stock levels into this period. There is an influence on both the trade debtors and the trade creditors from the sale of the infant milk formula transaction. So just to dig into that, in some of the regions that infant milk formula transaction, we only sold some of the assets, not all of the assets, we didn't sell companies, and we were left with infant milk formula debtors and creditors. So we've collected some of those. We paid off all the creditors. So those have influenced some of those cash flows. And then under other, the biggest influence here is probably being the payment of some of our commitments under the pricing investigations CapEx. In the first half of this year, we spent ZAR 1 billion on PPE CapEx. Our plan to spend ZAR 2.6 billion by the end of the year remains in place. And this profile and expectation hasn't changed from the last presentation. The first commercial production of the major Anaesthetic project, Port Elizabeth and Bad Oldesloe, as previously reported, Notre Dame de Bondeville have shifted by a couple of months due to an equipment delay and now should be in the first half of the 2023 financial year. And substantive commercial benefits from these projects we still expect in financial year 2024. A look into the borrowings. We have H1, H2 -- H1 comparisons here, and we also have a pro forma. So the pro forma on the left-hand column is a restatement of what the numbers at the end of December 2018 would have looked like -- 2019 would have looked like had the proceeds from the Japanese disposal already been received. So you can see the influence of around ZAR 4.5 billion on the net borrowings line and you can see that the net debt to EBITDA, the gearing ratio, which is a key debt covenant, would have come down from 3.5 to 3.3x. On that line I also draw your attention to this time a year ago where we were 4.4x and there was a fair amount of concern amongst those at the presentation around the level of the gearing ratio. It's pleasing to be able to report that our plans have come together, the 3.5x as against the covenant of 4x and we're moving towards our medium-term target of 3 -- 3.0x, in fact below 3.0x. And I do stress that's a medium-term target, but we do expect all things being equal that we would be closer to that again in the 3.3x on a pro forma basis by June. So we're headed in the right direction. Certainly, things very much under control here with a fair amount of comfort. The June covenant measurement level is 3.5x. And just to show how borrowings have evolved over the 6 months since the year-end. Inevitably with the mix of currencies in which we borrow, there's an FX element. And this -- in this particular period, it was ZAR 600-odd million favorable, and that's offset by a change in accounting standards, pretty much in terms of which a number of rental agreements now need to be capitalized and that raised the amount of debt by a similar amount. So you come back to pretty much the same ZAR 39 billion starting point. There's a small amount of transaction-related inflows and then ZAR 1.3 billion of positive cash flow generated by operations. And the 2 things to just bear in mind here is generally a stronger cash generation in the second half of the year for Aspen and the second is, obviously, the transaction-related inflows are going to be fairly significant in the second half with the proceeds from the sale of the Japanese business. And my final slide is one which was receiving key attention from all Aspen watchers last time around, which is our commitments and generally, our commitments to make payments, I think you can study this -- a couple of points, which I'll just take from it for highlighting. We have not paid a dividend. As everyone, I think, who follows Aspen is aware, we suspended the dividend last year, that will be a matter which is reconsidered by the Board in September. Those decisions have been made and none will be taken until that time, and we will assess the circumstances then. The other key takeaway I want you to just cast your eye over the deferred payments line, where in 2018 and 2019, we had substantial deferred payment commitments over ZAR 0.5 billion in 2019 and almost ZAR 0.5 billion in 2018. Those deferred payments are now really very small and this -- next to nothing payable in this half. So the deferred payment overhang that we had from previous transactions is pretty much eliminated. And happily on this occasion, we have a big deferred receipt being the -- largely the Japanese disposal. So quite a turnaround in the stacking of the commitments to a more favorable position. Those are all my observations which I think will be of help to Aspen watchers, and I'm going to now hand over to Stephen for the strategy and performance review. Thank you.

Good morning, everyone, and Att, thanks so much for the introduction. You said it would be an action packed 6 half -- half, sorry, 6 months. I think for many of you in the room that have followed us for 20-plus years, I don't remember a half that hasn't been action packed. I made a few points while Gus was talking because it's interesting when you get a chance at a presentation, I'm so busy thinking about tomorrow, in Aspen, we live to our mojo of Rest is Rust. And so we keep moving forward, and it's actually very good. Just at a point in time, you sit back and look and say, well, what have we done and what have we achieved, and where are we in the -- in our phase in our -- and what we're trying to do here. And I think we really are -- we're making a lot of progress against where we want to be. And what do we want to be, where were we and what did we want to be. We saw real risks about being a regional generic player, in a lot of commoditized products not very long ago. We made the decision to move to global to spread our geographies, and we made a decision to go to branded products. And effectively, what you ask -- what you're saying is how do I protect my margin? That's what that evolution takes. But then it takes some very bold decisions. You've got to make decisions. And I've been to presentations where people will say, you don't -- assets are no longer moat. We look at Uber, look at Airbnb, this is where the businesses are hidden. The reality of the business is that we are investing in assets and they are moat. You cannot make a Sterile product globally in an Airbnb-type model. So we do see a moat in these assets. And for us, as shareholders in this business to make significant long-term investments, investments that pay back in 5 years plus, these are big decisions to make in a listed environment. People might do it privately, but these are big decisions we make in this environment. We do it because we've got -- we believe there's a sustainable moat around our business for a long time to come. So if I have a look at some of the other -- some of the progress that we've made, understand there's been a tremendous amount of investments in what you see in assets, but there's also been a tremendous amount of investment in time. And I think it would be absolutely remiss of me not to start off by thanking all the people within Aspen, who've contributed to where we are and where we're going to. There is a team that's absolutely committed to the success of Aspen and the journey that we're on in taking a South African company global. And there's real skills in that business, and there are really good people. And to them, I must -- before I even start, just say thank you to their team. So if we start in where we are in terms of our medium-term focus here, I've -- where I can make this a bit bigger bullet -- sorry, thank you. We -- our focus has really been on our pharmaceutical business and continuing to build on what we perceive to be our competitive advantage. Well, I now need my glasses. So this is what happens in 20 years. I didn't need this 20 years ago. We're seeking partnering opportunities where we are subscale. So we acquire assets -- when you acquire assets from global companies, you can't say I feel like having South Africa and I don't want Morocco, you get the whole parcel. And we find out in some markets where we're strong, we find out where we need help. And that's something that, I think, we've assessed, we know where we stand, and we continue to assess. We believe we've got strengths. We continue to develop our complex manufacturing facilities. And it's more than just giving us margin, it's also the quality and integrity of manufacturer is what attracts really strong partners and big players in the industry, and I refer mainly to the global multinational businesses. And as you've seen over the past and will continue to see, we review and refine our portfolio depending upon market conditions and how we see the market evolve via acquisitions and disposals. We exited a large part of the commodity generic business 5, 6 years ago when the cycle was at a peak, and people said, why did you do that? Well, a couple of years later, that peak went over the edge. We had -- we exited infant milk formula business where we had achieved what we believe the maximum of our capabilities were, and we didn't have a strategy that we believe we could back or invest in to grow these businesses initially in China, but we've done all the hard work. So we've tended to dispose well. We also -- at this time last year, we took considerable pressure on the fact that we -- that our working capital was not good this time last year, it had gone up. And that was a very big investment in heparin API. And we can always make those numbers look right for analysts and say, "Oh, okay, this was a nice working capital slide." But when you're an owner of a business, you actually look and say, what's the right thing for the business. And we believe that, that time to hold heparin was the right thing for the business. And I'll show you during the results, the value of that decision we made then. So when we -- organic growth, of course, in a business like Aspen where we really don't issue equity, you've got to generate cash to be able to make these big acquisitions globally. And to do that, you need organic growth. We'll show you what we are achieving and not achieving organically, and we need to control costs. So Gus has spoken about commercial costs being pretty well contained. But for another day, we would -- we are going through an extensive exercise in Aspen at analyzing not just our commercial costs, our cost of goods and how we become more efficient and effective globally and this is a very big exercise within Aspen. And hopefully, with the next 6 months, we'll be giving you some report back on what comes -- on what we see we can do within our business. And there's quite a bit to do there. We've had problems in our European CIS business. We report it separately. We showed it separately for you last time. And I've shown it again in this presentation. And I want to show you what we're doing commercially and what's underway in that region. And Gus has taken you through where we are in our debt. We're in a pretty comfortable level, and we see ourselves getting within the range that we had hoped for, maybe a little bit quicker than even we had projected. So let's have a look at our revenue. And what we -- and where the growth has come from. So this is an interesting set of results in that we report to you in constant exchange and actual reported. And it's the first year I've been here they're the same. So we've had very little movement in currencies. I don't have to keep saying that's constant exchange and this is reported. The Regional Brands and Sterile Brands, our commercial pharmaceutical business, those -- that business has grown at 2%, with Regional Brands growing at 6% and the Sterile Focus Brands down by 2%, and the Manufacturing business has grown by 6%. The Regional Brands has been really widespread, and I'll take you through the regions and where the growth has come. The Sterile Focus Brands have tale of 2 stories with a growth in Anaesthetics, which has been offset by a decline in Thrombosis. And then the Thrombosis performance in Europe CIS has been offset by heparin API sales. And you might say, "Well, why would you put your manufacturing next to your commercial revenue." the -- Aspen, we are a little -- we are fortunate compared to just our peers in the heparin business in that we also control our API. It was quite an important strategy for us. And effectively, if the commodity API price goes up, there is profit to be made in the heparin or more profit to be made in the heparin API. Often, the pricing is fixed in price in the finished dose form, which means that your margin is compressed in what you sell in finished dose form. And so you say to yourself, do I want to sell the API, do I want to sell the finished dosage form. And that is some of the -- and that's some of what has influenced some of these results. And then, as Gus said to you, the manufacturing results are impacted positively by the improved heparin API sales. So let's have a look at this by revenue, region, our revenue growth. And this also has very interesting set of numbers. I've never seen a set of numbers like this. Everything is up 6% and one is down by 6%. So we've got a commercial pharma business, which is 70% outside of -- 30% in EU CIS and 70% is not in the EU CIS. We call those for this presentation, Aspen regions and it was exactly as we showed it to you in the last presentation. The Aspen regions have grown by 6%. So that's Asia Pacific, Africa, Middle East and the Americas have grown by 6%. And then the Europe CIS business is down 6%. The Manufacturing is up by 6%. And so what you're seeing is organic growth effectively across the business outside of EU CIS of about 6%. And let's have a look at a breakdown of that 6% growth. So here's our commercial pharma business. It excludes manufacturing, of course, and this is 70% of our sales. And these are the regions excluding Europe. So we do ZAR 10 billion of sales. And as I said, grew at 6%. Now in the same presentation 6 months ago, these regions grew at 2%. So what we're seeing is some acceleration of our growth across these regions. And as I said during the very first slide, organic growth is a critical component. Remember, Aspen doesn't -- is not a company that relies on equity to drive payback an opportunity. So the Regional Brands grew at 6% as did Sterile Focus Brands in these areas. When we look at Regional Brands and Sterile Focus Brands for these regions, it's -- the Sterile -- the Regional Brands are about 70% of the business. And what are these products? These are products that are largely the base South African business and Australian business. So a good performance in South Africa and Australia will drive this base business. And when we look at Sterile Focus Brands in this region, which is the balancing 30%, it's predominantly in Asia Pacific. China, Australia and then actually quite big turnover across what we term other Asia: Thailand, Korea, Philippines, et cetera. So very important if we want to perform in Sterile Brands in these regions, we have to perform in Asia Pacific, and we have. And so that is what's given us a very positive growth momentum across both Regional and Sterile Focus Brands. And so then we come to the projections because we're setting around to H2, how do we go? Will this continue? Certainly, on a business-as-usual basis, we're pretty comfortable with these growth rates, and we're pretty comfortable they can sustain. In South Africa, we also had the advantage of an SEP increase in this period. So we grew at 7% in South Africa, and we got the SEP increase. Latin America, I think we internally have projected for double-digit growth. Asia Pacific is a bit difficult. It's grown very well. But I think what's clear to us is there is a -- there could -- well, there will be an impact of COVID. When we talk about the impact on COVID, I'm not going to speak to you about the humanitarian effect on it because we can have a whole lot of people telling you that it's no worse than flu, it's another -- and it doesn't matter what they say economic. There's going to be an economic impact. That much, I can absolutely assure you, there is an economic impact. Why there's an economic impact? People stop traveling, people stop doing things. And if we take the Aspen portfolio of products, you might say, well, pharmaceutically, you might be in a good position. And we are in a good position as Aspen in certain areas, but we do have exposures as well. So we don't have manufacturing in China. So we don't manufacture in China. Just we put that out. Commercially though, where you have a basket of products in -- which are in hospital and, let's say, nonhospital. So in Australia, we see huge increases in antibiotics and people want to take medicines and trying to have a headache tablets, a whole lot of things, they're stockpiling. And so there might be a slight positive effect there. But this will be more than offset by our hospital business. Why is that? Because people don't -- people are delaying elective surgery. People don't want to go to the hospitals because -- and they're trying to deal with the virus and with the viruses. Even if your reps could call, there's no one in the back office to see them. So yes, they're trying to phone, and they're doing all things. And so we literally -- and from a corona impact, February was probably -- if you had to pick a month in China, that was a good month to pick because they have their Chinese New Year, so they shut down anyway, but it's extended way past the sort of week on the Chinese New Year. So there is an impact, I can't quantify it for you. The impact is spreading as we speak. What I'd tell you in the hospitals is -- happens in hospitals in Italy: if it's short, then it's just to run down the stock. If it's a much longer-term issue, it could go a bit longer. But the reality is people still need to go to hospitals at sometime -- at some point. I cannot quantify the commercial impact for you. From a supply side, this is an important area of supply in a supply side. We are seeing no red flags across -- broadly across our APIs. We have a lot of APIs, but the situation changes weekly. So it was this week, we got a memo, just a straight out, India have cut all supply of 20 products across the world, cannot be exported out of India. So one of the products is paracetamol. So they are big paracetamol players. Just in our South African market, we might not get stock. We are very fortunate in Aspen, we have got stocks. We don't see -- of course, if this lasts for a year, and there's no supplies, of course, we're going to see issues or if it was 6 months or 3 months, but we do have decent stocks around API in supply to be able to weather that tougher storm. In addition, our heparin, heparin is 60% out of China. None of Aspen heparin comes out of China, no intermediate. Our supply chain is fully integrated into Europe and U.S. sourcing only and comes out of our European facilities. So we've absolutely no exposure there, maybe some potential upside. Gus spoke a little bit about Zantac. So Zantac is a -- was an important product for us in Australia, probably did -- probably about ZAR 120 million in sales and at a really good gross margin, a very strong OTC brand. It was record globally. But we've made a lot of effort to be able to bring this product back to market. And certainly, we are hopeful that we will be able to bring it back to market. We can't make any promises, but we're certainly working hard to be able to bring this product back to market. The -- and so for the -- I mean the impact potentially is if we don't get in the second half relative to last year's, and that is ZAR 60 million being half of the ZAR 120 million, but there could be a positive impact if we bring it back. If we don't, there's a ZAR 60 million hole. There was about ZAR 35 million hole in the first half. So if you're looking half and half. Now let's look at Europe CIS. We had guided that we thought the Europe CIS business would be about 5% down at the half, and we hope to pull back much of that in the second half. Our Regional Brands have grown. But I think what we really need to dig a little deeper in is our Sterile Brands' performance. And to show you some of the green shoots that we're seeing across the Anaesthetics -- as a result of some improved Anaesthetics supply and the Thrombosis commercial intervention, I'll remind you, we've made some strong commercial interventions in terms of team structures. It's still work in progress, but I'd like to show you some of the impact of what we've done. So here are the EU CIS Sterile Focus Brands, and Anaesthetics are down 6% in the region. Remember, this region is 30% of our commercial pharma business. We put some increased sales support behind Anaesthetics. It's very hard to put sales support behind products that you don't -- that had so many supply issues because people continue to ask you just we don't want to talk to you, first deliver products to our shelves. And we've managed to start improving the supply of these products. And you'll see we've shown you Q1 and Q2. And you'll see there's a very big positive impact in the second quarter. Developed Europe is 90% of the revenue because I think it was about 3% down at December. By the end of January, so 1 month later, we are flat versus the prior year. So just to give you some sense of the catch up. We -- so the 7 months to January will be flat and we expect growth in the second half in the area. Our supply improvement continues. It's not a very easy business to supply regardless, but it is very hard to just supply this through third parties. And every time we look at this, we just say we just need to turn our own manufacturing on as quickly as possible to really understand what our potential upside is here because if we don't understand, we can't quantify the lost opportunity, the tender that you don't tender for. So outside of this is a lost opportunity. The advantage is that the sterile manufacturer is hard to come by, quality sterile and they're increasing the standards even further, which is a positive for Aspen. If you've taken us, our facility is right at the top end. Bottom line is we expect a better H2 versus the prior year. And so we're going to claw back much, if not all, of that 6% that we believe that we were down at the first half. Thrombosis is an interesting story. We looked at commercial structures. We flattened structures. We brought management a little closer to the businesses. And we're starting to see some impact, you'll see, once again, our Q1 versus Q2 performance. And this better level and higher level of Q2 has given us quite a bit of confidence going forward. We think we've got many of the moving parts sorted. However, there is margin-based pressure on the heparin products. They didn't have very high margins to start with and you've got the cost increases. The cost increases are as a result of the -- initially as a result of African swine fever. It still would impact outside of corona and all the rest of COVID, it would impact the cost. And we thought it might stabilize towards the end of this year. And I think this COVID has added a new dimension to heparin and heparin pricing. Aspen is very fortunate, and we have a choice to sell the finished dose product or the API, and we will make those choices as we go along. The CEE area is particularly impacted. This is a low selling price environment. We've got a lot of sales in that environment, but the profit is impacted. When we look at the sales of Thrombosis, we are very weighted towards heparin-based product. So when we have thrombosis, we've got our heparin-based products, and we've got nonheparin. So we got Arixtra, Orgaran, I'll put those into nonheparin brackets. They're not as impacted by heparin-based pricing. Now we've got a synthetic heparin. We're one of the few people that have a synthetic heparin. And we are probably the only one that can make it competitive globally. So we do have a hedge. Ironically, although heparin-based sales are 2/3 of our business in Europe, we make more gross margin -- we make more margin -- operating margin off the 1/3 that's nonheparin than off the 2/3. So just when we look at turnovers, and we just -- I want to just be clear with you that a lot of our profitability comes from the nonheparin-based business. The positive for us is we believe we can maintain the Q2 performance into Q3 and Q4. And if we maintain that, once again, we will claw back most of the H1 underperformance, which is pretty much in line with where we guided you. We hope to claw back. This was the period to claw back, and we said it was going to be weighted towards the second half. We maintain that view today. Manufacture (sic) [ Manufacturing ]. Well, manufacture, we've got an API business, so that's a chemical business and the finished dose form. So finished dose form is where we make tablets, injections, vaccines, et cetera, eye drops. The API business is, by far, the biggest portion here, it's 80%. A lot of this API business comes out of our facility in the Netherlands. And the growth in API has been driven by heparin, and really, we have had the benefit of that heparin stockpile. So a lot of margin erosion has been mitigated because where we've come under pressure, for example, under the CEE areas, we've been able to sell heparin API. And so it's helped mitigate our overall gross margin. And this is really the benefit of a heparin stockpile. At this stage last year, I think, we had well over 2 years of stock that we had bought in and the logic we used at that time was there was African swine fever. And remember, when you have swine fever, they kill lots of pigs and [ they're slaughtered ]. And when that happened, there actually was an oversupply of API in the market, not API on the mucosa. We took advantage of that. And that has come to benefit, and it will benefit us for a year or so to come. We also had a license agreement that I should tell you for nadroparin in Italy, which we renegotiated. We had a third-party in there called Italfarmaco. We've agreed that they will continue to sell the finished dose form in Italy. They've been very competent. And we would sell nadroparin API only. So nadroparin API is effectively a heparin. It's a heparin that we've modified into a low molecular weight heparin for them. And so therefore, we see this as something that's going to be sustainable. And effectively, this will be reclassified to Manufacture (sic) [ Manufacturing ] by the end of this year. The API business has been very strong. It might even be stronger. Remember, most of these APIs are coming out of Europe in the second half, and we definitely expect a stronger second half than the first half. We expect more heparin sales in the second half than the first half. And we also expect growth in our nonheparin sales, and that's sort of what we call our chemical business. So we treat heparin and some of other products as biochemicals. Chemical business, which is the largest part of these sales, we believe, will also grow. Our finished dose form business, which is the 20%, the smaller piece, that was down 11%, and that was impacted by SAP cutover in Australia. I'm happy to say we didn't impact any patients or no patients were impacted. And we expect a stronger performance in H2, and we expect growth for financial year '20. So we expect the minus 10% to turn into a plus. So I think you should anticipate a much stronger half from manufacturer in the second half as well. So let's have a look, we took you through strategic reviews at Aspen and what we're doing, and I'd like to just give you some feedback on the impact of reviews and the actions taken -- where we have taken actions. So we took our South African business, and we said it's a really big business, and we're trying to be all things to all people, which we're very comfortable with at Aspen. We've always been in the South African market all things to all. But we felt internally, we needed to heighten our focus. And we split our business into 2 portfolios. Our Aspen business, which sits with a lot of products with the regional research, for example, some of our GSK products, some of our own products, and then we've had an OTC consumer business, which is becoming a very important part of our South African business and our branded generic business. So these -- often in South African environment, the branded product has gone away. Aspen is now the branded product. So people -- when people talk about a product for gout, they talk about PURICOS, that's an Aspen brand in South Africa, and that is your standard for branded products. And then we took our Ethicare business, said look, this is where we've got commoditized business, traded business. Now we need a different type of person to manage that business. So branding and branded business with long-term views, brand plans, how do I keep growing for a long period? Commoditization is about trading. How do I trade? How do I trade better? How quickly do I move? And you need to be quick on your feet. And there's almost 2 different mindsets required. So we split our business after a couple of difficult years, exacerbated by strike last year, to see what we could do. I'm happy to report the Aspen part of the business, the private sector business, we have grown 11%. That's a pretty good result against the market and market -- it's a very big result. And we grew in double digits across every one of the sectors, so the scientific sector or our branded sector. We grew in double digits across our OTC consumer business, and that could have been an even bigger result. Unfortunately, because of the strike and capacity which we discussed, which we're now - we're putting in additional capacity and bringing it online, but there is a real growth opportunity in OTC consumer, and we grew our generic business under Aspen. So that was a good performance in the Aspen private sector, and the public sector also grew by 2%. Our traded or commoditized business, Ethicare, was down by 1%. And it was a particularly good result when you take cognizance of the following. We grew our business outside of ARVs by 7%. It's -- it was a very big growth rate. It was a big turnaround internally of our performance in this ratio. And once again, I've got really 2 fantastic management teams in this who've got the right mindset for these 2 different business types. The downside or the negative on this performance has been the private sector ARV business is there's pricing pressure coming in the -- there's more and more competitors coming from India, and there's pricing pressure coming in that market. And that is what took the plus 7% to minus 1% effectively. The public sector in Ethicare grew by 10%. The dynamics of all of this, together with the ARV business, which I'll talk to you about what we're doing in the public sector differently -- separately is that the public sector business in Aspen is less than 15% of our South African revenue across both Ethicare and Aspen. The ARV business is an interesting business because a very big part of your costs, and I did speak about it, but I'm just going to repeat some of it, sits in API. It's a -- I mean you will succeed or fail based on the price of your API. The API is controlled by a handful of manufacturers globally, and they largely sit in and around Hyderabad in India. We feel very strongly about our social commitment. We've done a lot in this field, and we feel a huge social commitment towards the South African patients and trying to make sure they get quality medicines. Now there hasn't been a tender where we haven't been awarded, and then somehow, we have to come back in to sort of save the day. It's happening again in South Africa. We supplied 3 million packs at the end of last year, the last tender, as a one-off, and the government today sits with a deficit of 4 million packs. So what we've done to stay competitive and to stay relevant was to do a transaction with one of the largest, maybe the largest ARV API supplier, called Laurus, in which what we've said is, here, you supply the API on consignment effectively, and we will tell manufacturer for you. We will -- what do we want? We want to keep our factories busy, we want to keep our jobs in South Africa, and we want to make sure our patients get products with the right amount of API. And that might seem like a very strange comment to make, but it's a reality sometimes in some of the products that are out there. So we make sure the patient gets a quality product. And so we convert the product and we'll distribute it to the -- into the market. It really works for us because you are tendering in rands for something which has got a dollar-based input. So we derisk from that exchange rate risk, and we also don't have to make significant working capital investments in API. And we -- the supplementary tender, which is ART at the moment, we expect their adjudication to be imminent. If you look at our presentation, and I urge you to look at last 6 months to this 6 months. I hope you'll see that we've clearly worked to a plan, and there is a trend that follows through. And we always give you clues as to what we're trying to do and where we're going to. And that's for you to believe them or to work through them. But we said we are looking at value-enhancing opportunities. We are always looking at opportunities to increase value in Aspen. And one of the areas that we looked at was our Japanese business. Aspen has performed in Japan. So let's be clear on this. We -- this business has performed. The market itself faces unilateral price decreases. So there was 8%, 2%, 4% decrease over the last 3 years that I can remember. If I add up those price decreases and I don't know, we did about EUR 130 million of sales in there, you're probably looking at EUR 15 million to EUR 20 million of price cuts. When you have a price cut, that goes straight to profitability. You've got to grow quite a lot of volume to cover that or you've got to have something else. And so where we find a partner in Sandoz was they have a pipeline of biosimilars that require them to go to hospitals. And we had set up a very successful hospital institutional platform. And that platform is a good fit for their biosimilars. And it will also mean that we give our employees in Aspen who've been absolutely fantastic, the opportunity to be able to have something sustainable. The problem with unilateral price decreases is that no one takes cognizance of margin. You might have a very low margin already. And you'll see that Japan was at a lower gross margin than the average Aspen business. But if you keep taking an impact like that, there's a point where you say, "I really need something else to help me." And I think a biosimilar pipeline might do it. Another point to bear in mind on Japan is that Japanese supply chain, very little of it is central because the way Japan works, you've got to make a lot of product in Japan. So a lot of this doesn't plug necessarily into the Aspen overall Anaesthetic pipeline scheme, it has Japan -- it has a very big Japanese component, by far the majority, even for the Anaesthetics. We've received ZAR 4.5 billion in February for that, which Gus showed you the impact it has on us. And they are -- we've got numerous milestones for licenses, for providing cost of goods. But half of those milestones, the EUR 50 million is to provide uninterrupted supply over the 3 years. So that's really in our hands to deliver EUR 50 million. The other area is the European strategic review. Now this has been -- it's a very important review this for us, and it's very defining for Aspen, where we're going to go, what we're going to do in Europe. You never want to do a strategic review if you're in trouble. You never -- so we've gone all out to look at the restructuring of our EU business and to make it successful. You've seen the benefits in Q2, and we believe that these initiatives must continue, and we need to sustain these revenues at the higher level, and we're comfortable that we can. However, separately, we're running a process to identify potential partners. And what does a partnership look like? It's someone with regional commercial capability, someone who can give more scale to it, someone who has strategic commitments to the therapeutic area. So you get lots of people tell you, we can do this, and we'll do this. And in 3 years, we'll spend this. In 5 years, we'll do that. By the time I hear all of those stories, I get spun out. And I'd like to see a brand building, someone who's completely focused on the area and feels the same passion for these products that we as an Aspen team feel. And they've also got to recognize the real benefit that Aspen brings with them, one, our manufacturing competencies and two, our commitment to invest in these manufacture. So it's interesting. This process is competitive. I'll put it to you there. We're obviously very cautious to say too much. One never wants to speak so, but the process is competitive. So the final outcome of our strategic review will determine the most appropriate course of action. And I would -- we would hope that before September, which is before our next set of results, we will be sharing with you the path that we have chosen for this region. So let's take a moment just to have a look at our outlook and see where we are. And it's very difficult to call in a fluid environment and COVID had made the environment extremely fluid. So our commercial pharma revenue, we had a good first -- a good first half, and we believe the second half will be even bigger than the first half. We expect growth across both Regional and Sterile brands. And of course, the South Africa and LatAm, the impetus is to be maintained, and we expect a much stronger half from Europe CIS. So we'll see improvement in there. Of course, I'm nervous to put Asia Pacific on here because the COVID effect for us at this stage is unquantifiable. And of course, the COVID effect could impact Europe, it could impact South Africa, it could impact everywhere. I'm not -- I can't go there. I don't -- I can't give you answers there. Our manufacturing revenue, a lot of the manufacturing revenue is booked in advance. So we're very comfortable around saying our H2 would be greater than H1, and that includes both API and finished dose form sales. We received an HPC milestone in this half. It's -- there's some criteria to make the second milestone, but there is a possibility that we could get a second milestone in the second half of this year. If not, it would likely fall in the first half of next year. If we just look at our year last year, we had ZAR 7.07 for H1 last year, and then we had ZAR 6.43 in the second half, giving us ZAR 13.50. We're sort of just a little bit over at the moment H1 versus H1. So we did outperform where we had guided you because we had guided to sort of equal -- sort of coming back to a half that was in line -- or a year that was in line with last year, but we expected a weaker first half and a stronger second half. So we expected that our -- by deduction we expected it to be down at this period. We've sort of outperformed our internal expectations and, in fact, those communicated with yourselves. We expect a much higher second half. We expect a higher second half than the first half. And as a result, mathematically, our financial year guidance would be that we would be higher than the prior year. Once again, we say that with just a caution around COVID. If we have a look at our net debt this time last year when we sat in front of you and if you want to invest in entrepreneurial companies, I understand that you are going to test boundaries. If you don't test boundaries, you're not going to achieve what you might not ordinarily achieve, if you just keep doing the same as everyone else. So unfortunately, generic strategies don't necessarily work in business if you want to differentiate yourself. And so this is the results of testing those boundaries. We see our net debt down from ZAR 53.5 billion, down by 38%, and that's the pro forma number with Japan in and so that's a reduction of about ZAR 20-odd billion. And then if I looked at our sort of EBITDA, 12-month trailing EBITDA at that period, it was ZAR 11.7 billion. If we adjust it for what we'd sold and how we've performed and that includes taking out the Japanese profitability, our profitability has dropped by ZAR 1.4 billion. So we've reduced debt by just over ZAR 20 billion, and we've -- and our EBITDA has come down by ZAR 1.4 billion. So you can do the math there. So we're in a pretty good state around the debt. I mean I think that if Gus keeps us up, he could get the financial director job at Dis-Chem. And I always get a bit excited when the debt drops because acquisitions are quite a bit of fun at Aspen. So we're in a good space. And it's like anything in life, you've got to keep your head down. We've got to deliver -- everything in life is about execution. We've got to deliver on all the potential that we've created. And we think that there's a -- if you look beyond a quarter, a month, a week, a COVID, have a look very carefully at what we're doing and what we're building. And I think we're building a niche place for ourself in the global pharmaceutical industry. And hopefully, we'll have a bit more stories to tell you about how we hope to enhance our margins even further over the next few years. So thank you all, and thank you for your attendance, and thank you for your time. We appreciate it. Are we going to go to questions? Okay. Thank you.

No questions from the room?

This is your conference. You should know everything.

Look, I know it's impossible to quantify the COVID thing, but I'm sort of minded to sort of just help us on a couple of things. If we looked at your Sterile's business, have you any idea how much of that is kind of elective operations versus not elective? Can you give us some idea [ if electives ] get overrun, I mean, obviously, there's going to be demand delayed as opposed to lost, but just potentially?

Sure. I mean different things are happening in different places around the world. So for example, in the U.S., where we don't have a presence, a large presence at all, elective surgery has been brought forward. So people are worried about the effect the virus might have, so they're bringing elective surgery for it. In the markets that we're trading in, that elective surgery as the virus has overtaken elective surgery. There is -- they -- up until last week, there was no one in the back office to see in China. No one wanted to shake hands with you. No one wants to see a rep who could probably bring something into their hospital. The full focus is on the virus. The virus actually does sometimes need Anaesthetics, of course. But there is a big portion of our products that require elective surgery. So if you go in and you want to have hip replacement, you would take one of our antithrombolytics, you might take fraxiparine or Arixtra, and you would need some of our Anaesthetics, you're going to wait. No one wants to go into a place with the viruses as it is that's sort of being overrun. So it's, I would say, if I look -- if I give you an example of our Chinese business, which is -- and it's happening in Italy, but if I take our Chinese business, we had no one calling on hospitals until this week. And on this week, when I see how we're going, everyone is supposed to be back at work, they're working on a rotational basis, which probably means it's about half the -- you've got about half the core right. Now, if it's fixed tomorrow, then obviously, all they've done is run down stock and they buy some more stock the next day. But I'm not an expert on elective and nonelective ratios, but a very large portion of the business is elective because think about people going to -- they do have a choice in a lot of instances not to go to hospital on a particular day or week. And they're also all waiting, do I need to wait a week, a month. Maybe if you say you've got to wait a year, they're going to be in a rush to -- they're going to say, well, I might as well go now.

Any additional granularity, I can add to that, Alex, is that in China, our fraxiparine business is used quite a lot in hemodialysis and that is -- has to carry [ off. It's being throttled back. They're doing it absolutely at the end of the window rather than the normal platelets. ]

Okay. I'll ask one more question. Just maybe you could give us a bit of an update on where we are in terms of your kind of new launches pipeline, Orgaran and women's health, just I want to get some timelines on that?

Great. Thank you for that. So we made significant progress in the women's health assets and driving that forward to commercialization. That commercialization, we need to have a commercial partner, and we could be towards the end of this year, beginning of next. So it's as -- it was -- it's according to the timelines that you would have seen in the prior presentations, we are -- we're sort of a year away from a launch, maybe a little bit less at the women's health that was -- but that's the conjugated estrogens. On Orgaran, we're in the process of clinical trials. So we're doing trials on patients to be able to -- the product has been approved in the U.S. market. So it's on the market. And what we're trying to do there, if I remind you, is to get the indication -- [ sorry, it's a little bit hard, apologies, I will back it ], we are getting the product with all the extra indications, we're looking for the HRT indication on that and that requires us doing clinical trials. And we are -- the speed at which we can draw patients will determine how quickly we get it to market. And I'd say that we'd say, well, it's easy enough to go and get a whole lot of patients. Because of the severity of the disease, it's not very easy to get. It's not like, say, well, look, I've got an itch and come and test our cream. So we are -- and we've got extensive KOL and hospital coverage across the U.S., Europe and more broadly, globally. So perhaps in the next presentation, I'll give you a feedback on the number of patients that we've got relative. But the initial indications were slow, but it's picked up a little bit recently as we've increased the number of hospitals. Okay. Thank you so much. Thank you for all your time, and thank you for your interest. Appreciate it.