Adcock warns of tough times after loss

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Adcock Ingram warned yesterday of tough times ahead as it posted a hefty nine-month loss, hit by write-downs related to a turnaround plan and weak demand.

South Africa’s second-biggest drug maker is trailing rivals such as Aspen Pharmacare as it grapples with slowing sales, an over-reliance on a heavily regulated home market and a poor distribution network.

Adcock is in the middle of a drive aimed at reorganising the business to match the decentralised model of top shareholder Bidvest.

“This is not going to be a quick fix. To put a timeline on it will be difficult,” chief executive Kevin Wakeford said. “It’s too early to provide shareholders with any comfort regarding a return to profitability in the short term.”

The turnaround plan, dealt a blow last week when the competition authorities blocked the firm from cutting jobs for a year, aims at streamlining the business and improving its distribution network.

Bidvest chief executive Brian Joffe has a record of taking stakes in underperforming companies and turning them around by focusing on cash flow, capital allocation and improving distribution.

“Many people look at Adcock as a pharmaceutical business. I don’t. It’s a distribution business,” Reuben Beelders, a portfolio manager at Gryphon Asset Management, which has a small stake in Adcock, said last week.

“From the outset I’ve seen this as a good acquisition for Bidvest. It is the kind of business that Brian Joffe has run very well in the past and I think he’ll run this one very well.”

Adcock fell into a R303 million headline loss, or R1.80 a share, after taking R282m in write-down charges.

Wakeford, a pharmaceutical industry newcomer appointed weeks after Bidvest took its 34.5 percent stake, said the company had to write down the value of everything from drugs inventory, factories and trademarks to businesses in Ghana and India following his appointment in April.

Adcock said sales were flat at R3.6 billion as cash-strapped consumers at home cut back on over-the-counter drugs while the weaker rand pushed up the cost of imported raw materials. Adcock has the largest share of South Africa’s over-the-counter medicines, some of which are not covered by medical schemes and therefore vulnerable to consumer downturns.

It makes 90 percent of its profit in South Africa where it frequently complains that some of the regulated medicine price increases are not enough to cover the rising costs of raw materials.

Shares in the company, down about one-third so far this year, hardly moved in mid-morning trade. Reuters reported last week that Bidvest intended to raise its stake to above 50 percent. The stock, whose 10 percent gain over the past week has helped it recover from a near five-year low, closed 0.77 percent lower at R51.60 on the JSE yesterday.

Bidvest, a vast conglomerate that spans shipping to catering, acquired its 34.5 percent stake in Adcock early this year to block a $1.2bn (R12.8bn) takeover bid from Chile’s CFR Pharmaceuticals.

Bidvest, from which investors expect a lot because some felt it robbed them of an easy payout when it scuppered the CFR transaction, has yet to make a decision on whether to make an offer to shareholders. – Reuters



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