Costs and soft sales bleed Adcock

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Reuters

File picture: Siphiwe Sibeko

Johannesburg - Adcock Ingram, which yesterday resolved an embarrassing governance lapse over directors’ remuneration, is between a rock and a hard place as revenue from operations in southern Africa dwindled by 6 percent year on year in the two months to February.

Gross profit as a percentage of sales remained under extreme pressure and the company would incur costs of more than R100 million in the six months to March over the failed CFR Pharmaceuticals bid for the firm, it said in a trading update yesterday.

The drug maker is South Africa’s largest producer of hospital products.

Shares in Adcock declined throughout the session, ending 3.55 percent weaker on the day at R57.01. This brought its fall this year to 20 percent.

“Second-quarter trading as at the end of February has shown no improvement,” the company said, adding that the performances of its over-the-counter and prescription generics were a concern.

March ex-factory sales in the southern Africa business showed “encouraging signs”, although the company said it was not clear whether the growth was due to wholesalers buying ahead of tomorrow’s rise in the single exit price.

Mathew Menezes, an equity analyst at Avior Research, said that while the March figures were promising, sales for April and May “don’t look good”.

Adcock has felt the rand’s 20 percent depreciation, which affected imported active ingredients and other materials. As a result, certain divisions – such as the oral liquids factory in Olifantsfontein – were operating below capacity although there were no shortages.

“The business is in a tough space at the moment,” Menezes said. Adcock could “drive utilisation at the factory, which would be positive for the margin” but it would be difficult to increase volumes in this trading environment. “The only way is to do deals,” he said, but this was unlikely.

Financial director Andy Hall said Adcock had hedged the cost of all purchases denominated in foreign currencies. “However, the absolute cost of foreign-denominated active ingredients and other materials can only be mitigated through relevant and timeous selling price increases, including single exit price increases.”

The company was re-evaluating some of its processes and structures, Hall said.

The single exit price for drugs will rise by 5.8 percent tomorrow. The government-authorised annual raise factors in inflation-linked increases in manufacturers’ costs.

Adcock shareholders, including the Public Investment Corporation, approved a resolution yesterday to pay R5.6 million in directors’ fees.

The fees were paid out last year without prior authorisation, which contravened section 66(9) of the Companies Act, according to analysts. Adcock dismissed the offence as an oversight.

Charl Kocks, the chief executive of Ratings Afrika, said it was a dereliction of duty by directors, who should have known better. “It’s not a small mistake.”

He said the company could recoup losses from directors in their individual capacities. - Business Report


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