J&J vaccine gives Aspen's revenue a booster shot

Aspen (JO: APNJ ) has released a business update for the six months to December 2021.

Revenue grew between 9% and 11% when measured against the comparable period in the prior year. This top-line result was driven primarily by Manufacturing revenue, which jumped between 25% and 30%. Commercial Pharma revenue grew between 4% and 5%.

All these numbers are provided on a constant currency basis and Aspen notes that a stronger rand over the period means that the reported result will be lower than these numbers.

Some quick maths in your head would demonstrate that Commercial Pharma is the larger division of the two. It consists of two branded divisions (Regional Brands and Sterile Focus Brands) and the company describes both divisions has having posted "solid results" - this is clearly a mature, slow-growth business.

The more exciting part of the business is the Manufacturing division. Finished dose form sales led the way in a strong result that managed to overcome negative growth in the active pharmaceutical ingredient (API) business.

There is a critical point here. Due to the negative impact of Covid on the API business, the non-binding offers received for this business are no longer satisfactory to Aspen. The SENS doesn't say this bluntly, but it is likely that the offer prices were revised downwards during the due diligence phase to the point where Aspen believes they have become cheeky offers.

For now, at least, discussions to sell the API business have been terminated.

The other critical point relates to the talk of the town for Aspen: the deal with Johnson & Johnson to manufacture its Covid vaccine. The contract generated around R800 million in sales, a major driver in the strong result for finished dose form sales.

Aspen is negotiating a deal with Johnson & Johnson to enable the manufacture and sale of Aspen-branded Covid vaccines throughout Africa. The company is hoping that the first sales of this vaccine will be in the current financial year.

From a profitability perspective and once again on a constant currency basis, normalised Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) growth will be higher than revenue growth (a classic example of operating leverage) and normalised Headline Earnings Per Share (HEPS) will be even higher thanks to lower finance costs, a classic example of financial leverage!

The use of fixed costs and debt in a corporate structure is how a relatively modest revenue result can be "levered up" into a much stronger performance at profit level.

Detailed results for this six-month period are expected to be released on 9 March 2022.

Aspen's share price is down more than 10% in the past 90 days, as the share price has traded in a range since a strong rally in September 2021 that saw it climb from R190 per share to R270 per share in the space of a month!

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