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AIP - Adcock Ingram Holdings Limited - Abridged Audited Group Results for
the year ended 30 September 2011
ADCOCK INGRAM HOLDINGS LIMITED
(Registration number 2007/016236/06)
(Incorporated in the Republic of South Africa)
Share code: AIP ISIN: ZAE000123436
("Adcock" or "the company" or "the group" or "Adcock Ingram")
Abridged Audited Group Results for the year ended 30 September 2011
Adcock Ingram is a leading South African pharmaceutical manufacturer,
marketer and distributor. The Company occupies a 10% share of the private
pharmaceutical market in South Africa with a strong presence in over-the-
counter brands. The Company is South Africa`s largest supplier of
hospital and critical care products. Its footprint extends to India and
other territories in sub-Saharan Africa.
The extensive product portfolio includes branded and generic prescription
medicines and over-the-counter/fast moving consumer goods (FMCG) brands,
intravenous solutions, blood collection products and renal dialysis
systems.
Vision
To be recognised as a leading world-class branded healthcare company.
Foreword
The acquisition of NutriLida, a vitamins, minerals and supplements (VMS)
company, on 31 July 2011 makes Adcock Ingram the leader in VMS in the
FMCG sector.
CEO, Jonathan Louw
Financial features
- Turnover from continuing operations increased 8% to R4,454 billion
- EBITDA from continuing operations decreased 7% to R1,170 billion
- HEPS increased 31% to 465,1 cents (2010: 354,8 cents)
- Normalised HEPS decreased 9% to 465,1 cents (2010: 509,6 cents)
- 2,5% ordinary shares bought back
Salient features
- MNC partnerships contributed strong revenue growth
- 39% revenue growth achieved outside of South Africa
- NutriLida business acquired on 31 July 2011
- Excellent performance in over-the-counter (OTC) resulted in Adcock
Ingram rated as the overall leader in the pharmacy categoryout of 41
OTC/self-medication companies in South Africa in the Campbell Belman 2011
survey
- Green Supply Chain Award for the best project (R70 million) awarded for
energy savings in the New Midrand Distribution Centre
- Disappointing ARV tender allocation and still uncertainty on DPP
outcome
- Upgrading of facilities disrupted supply
Consolidated statements of comprehensive income
Audited Audited
30 Sep 30 Sep
2011 Change 2010
Note R`000 % R`000
Continuing operations
REVENUE 2 4 534 235 8 4 200 022
TURNOVER 2 4 453 567 8 4 130 087
Cost of sales (2 284 606) (1 928 956)
Gross profit 2 168 961 (1) 2 201 131
Selling and distribution expenses (530 005) (442 805)
Marketing expenses (206 981) (162 442)
Research and development expenses (70 723) (65 287)
Fixed and administrative expenses (292 614) (362 290)
Operating profit 1 068 638 (9) 1 168 307
Finance income 2 63 778 59 288
Finance costs (30 225) (37 931)
Dividend income 2 16 890 10 647
Profit before taxation and 1 119 081 (7) 1 200 311
abnormal item
Abnormal item 3 - (269 000)
Profit from continuing operations 1 119 081 20 931 311
before taxation
Taxation (326 129) (308 542)
Profit for the year from 792 952 27 622 769
continuing operations
(Loss)/profit after taxation for (28 152) 20 459
the year from a discontinued
operation
Profit for the year 764 800 19 643 228
Other comprehensive income 17 591 (528)
Exchange differences on 4 709 (4 156)
translation of foreign operations
Movement in cash flow hedge 12 882 3 628
accounting reserve, net of tax
Total comprehensive income for 782 391 642 700
the year, net of tax
Net profit attributable to:
Owners of the parent 754 205 631 459
Non-controlling interests 10 595 11 769
764 800 643 228
Total comprehensive income
attributable to:
Owners of the parent 770 658 630 931
Non-controlling interests 11 733 11 769
782 391 642 700
Continuing operations
Basic earnings per ordinary share 458,5 29 354,9
(cents)
Diluted basic earnings per 457,5 29 354,1
ordinary share (cents)
Headline earnings per ordinary 465,1 31 354,8
share (cents)
Diluted headline earnings per 464,2 31 354,0
ordinary share (cents)
Discontinued operation
Basic earnings per ordinary share (16,6) 8,6
(cents)
Diluted basic earnings per (16,6) 8,6
ordinary share (cents)
Headline earnings per ordinary 0,3 8,6
share (cents)
Diluted headline earnings per 0,3 8,6
ordinary share (cents)
Consolidated statement of changes in equity
Attributable to holders of the parent
Non-
distri-
Share Share Retained butable
capital premium income reserves
R`000 R`000 R`000 R`000
Balance at 30 September 17 363 1 203 854 1 001 942 77 494
2009
Share issue 33 4 364
Movement in treasury (31) (17 928)
shares
Share-based payment 272 095
expense
Acquisition of "A"
ordinary shares by Blue
Falcon Trading 69 (Pty)
Limited - non-controlling
interest
Acquisition through
business combination:
Ayrton Drug Manufacturing
Limited
Subsequent acquisition of (922)
non-controlling interests
in Ayrton Drug
Manufacturing Limited
Total comprehensive income 631 459 (528)
Profit for the year 631 459
Other comprehensive income (528)
Dividends (274 540)
Balance at 30 September 17 365 1 190 290 1 357 939 349 061
2010
Share issue 25 3 368
Movement in treasury (502) (291 427)
shares
Share-based payment
expense
- continuing operations 6 685
- discontinued operations (831)
Disposal of business
Acquisition through
business combination
(Note 7.2)
Subsequent acquisition of
non-controlling interests
in:
- Ayrton Drug (4 120)
Manufacturing Limited
- Addclin Research (Pty) 1 345
Limited
Total comprehensive income 754 205 16 453
Profit for the year 754 205
Other comprehensive income 16 453
Dividends (177 157)
Distribution out of share (136 943)
premium
Balance at 30 September 16 888 765 288 1 932 212 371 368
2011
Attributable to
holders of the
parent
Total
attri-
butable to
ordinary Non-
share- controlling
holders interest Total
R`000 R`000 R`000
Balance at 30 September 2 300 653 24 943 2 325 596
2009
Share issue 4 397 4 397
Movement in treasury (17 959) (17 959)
shares
Share-based payment 272 095 272 095
expense
Acquisition of "A" 93 750 93 750
ordinary shares by Blue
Falcon Trading 69 (Pty)
Limited - non-controlling
interest
Acquisition through 33 636 33 636
business combination:
Ayrton Drug Manufacturing
Limited
Subsequent acquisition of (922) (69) (991)
non-controlling interests
in Ayrton Drug
Manufacturing Limited
Total comprehensive income 630 931 11 769 642 700
Profit for the year 631 459 11 769 643 228
Other comprehensive income (528) (528)
Dividends (274 540) (5 344) (279 884)
Balance at 30 September 2 914 655 158 685 3 073 340
2010
Share issue 3 393 3 393
Movement in treasury (291 929) (291 929)
shares
Share-based payment
expense
- continuing operations 6 685 6 685
- discontinued operations (831) (831)
Disposal of business (12 644) (12 644)
Acquisition through 14 072 14 072
business combination
(Note 7.2)
Subsequent acquisition of
non-controlling interests
in:
- Ayrton Drug (4 120) (5 225) (9 345)
Manufacturing Limited
- Addclin Research (Pty) 1 345 (1 345) -
Limited
Total comprehensive income 770 658 11 733 782 391
Profit for the year 754 205 10 595 764 800
Other comprehensive income 16 453 1 138 17 591
Dividends (177 157) (27 652) (204 809)
Distribution out of share (136 943) (136 943)
premium
Balance at 30 September 3 085 756 137 624 3 223 380
2011
Consolidated statements of financial position
Audited Audited
30 Sep 30 Sep
2011 2010
Note R`000 R`000
ASSETS
Property, plant and equipment 1 161 558 857 471
Deferred tax 3 775 23 967
Other financial assets 140 210 139 012
Investment in associate - 12 200
Intangible assets 728 474 424 149
Non-current assets 2 034 017 1 456 799
Inventories 864 465 719 236
Trade and other receivables 1 202 858 1 150 393
Cash and cash equivalents 1 103 977 1 430 917
Taxation receivable 30 143 -
Current assets 3 201 443 3 300 546
Total assets 5 235 460 4 757 345
EQUITY AND LIABILITIES
Capital and reserves
Share capital 10 16 888 17 365
Share premium 765 288 1 190 290
Non-distributable reserves 371 368 349 061
Retained income 1 932 212 1 357 939
Total shareholders` funds 3 085 756 2 914 655
Non-controlling interests 137 624 158 685
Total equity 3 223 380 3 073 340
Long-term borrowings 346 811 453 830
Post-retirement medical liability 13 987 15 808
Deferred tax 93 884 23 961
Non-current liabilities 454 682 493 599
Trade and other payables 954 076 889 162
Short-term borrowings 496 032 126 787
Cash-settled options 64 036 68 760
Provisions 42 859 84 464
Bank overdraft 395 -
Taxation payable - 21 233
Current liabilities 1 557 398 1 190 406
Total equity and liabilities 5 235 460 4 757 345
Consolidated abridged statements of cash flows
Audited Audited
Year ended Year ended
30 Sep 30 Sep
2011 2010
R`000 R`000
Cash flows from operating activities
Profit before taxation from continuing 1 119 081 931 311
operations
Profit before taxation from discontinued (24 255) 29 453
operation
Adjusted for non-cash items and net finance 57 275 358 684
income
Working capital changes (130 197) 115 364
Cash generated from operations 1 021 904 1 434 812
Finance income 63 778 59 288
Finance costs (30 225) (37 931)
Dividend income 16 890 10 647
Dividends paid (204 809) (279 884)
Taxation paid (341 156) (324 832)
Net cash inflow from operating activities 526 382 862 100
Cash flows from investing activities
Increase in other financial assets (6) (975)
Acquisition of businesses, net of cash (328 775) (139 502)
Proceeds on disposal of business 84 989 -
*Purchase of property, plant and equipment - (172 451) (107 723)
Expansion
Purchase of property, plant and equipment (260 528) (225 339)
- Replacement
Proceeds on disposal of plant and equipment 4 220 2 819
Net cash outflow from investing activities (672 551) (470 720)
Cash flows from financing activities
Acquisition of non-controlling interest (9 345) (991)
Proceeds from issue of share capital 3 393 4 397
Purchase of treasury shares (291 929) (17 959)
Subscription for "A" shares - 93 750
Distribution out of share premium (136 943) -
Increase in borrowings 371 536 443 763
Repayment of borrowings (117 329) (174 730)
Net cash (outflow)/inflow from financing (180 617) 348 230
activities
Net (decrease)/increase in cash and cash (326 786) 739 610
equivalents
Net foreign exchange difference on cash and (549) (1 410)
cash equivalents
Cash and cash equivalents at beginning of 1 430 917 692 717
year
Cash and cash equivalents at end of year 1 103 582 1 430 917
* Include interest capitalised in accordance with IAS 23, of R34,7
million.
Notes to the consolidated financial statements
1 BASIS OF PREPARATION
1.1 Introduction
The abridged annual financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS), IAS 34 Interim
financial reporting, the South African Companies Act, the Listings
Requirements of the JSE Limited as well as the AC500 standards as issued
by the Accounting Practices Board or its successor. The condensed
financial information has been audited by Ernst & Young Inc. The
individual auditor assigned to perform the audit is Warren Kinnear. The
auditors` unqualified opinion is available for inspection at the
Company`s registered office.
Mr Andy Hall, Deputy Chief Executive and Financial Director is
responsible for this set of financial results and has supervised the
preparation thereof in conjunction with the finance executives, Mr Greg
Hill and Ms Dorette Neethling.
1.2 Changes in accounting policies
The accounting policies and the methods of computation are in terms of
IFRS and are consistent with those of the previous annual financial
statements except for the adoption of the following new and amended IFRS
interpretations during the year which had no impact on the business:
IFRS 2 Share-based payment amendment
This amendment is effective for the Group from 1 October 2010 and
clarifies the accounting for group cash settled share-based payment
transactions, where a subsidiary receives goods or services from
employees or suppliers, but the parent or another entity in the Group
pays for those goods or services. The amendment clarifies that these
transactions are included within the scope of IFRS 2.
IFRIC 19 Extinguishing financial liabilities with equity instruments
The Group adopted IFRIC 19 from 1 October 2010 which clarifies that
equity instruments issued to a creditor to extinguish a financial
liability qualify as consideration paid. The equity instruments issued
are measured at their fair value. In the case that this cannot be
reliably measured, the instruments are measured at the fair value of the
liability extinguished. Any gain or loss is recognised immediately in
profit or loss.
IAS 32 Financial instruments: Presentation - Classification of rights
issues (Amendment)
The Group adopted this amendment to IAS 32 from 1 October 2010 and
amended the definition of a financial liability in order to classify
rights issues (and certain options or warrants) as equity instruments in
cases where such rights are given pro rata to all of the existing owners
of the same class of an entity`s non-derivate equity instruments, or to
acquire a fixed number of the entity`s own equity instruments for a fixed
amount in any currency.
Audited Audited
30 Sep 30 Sep
2011 2010
R`000 R`000
2 REVENUE
Continuing operations
Revenue comprises
- Turnover 4 453 567 4 130 087
- Finance income 63 778 59 288
- Dividend income 16 890 10 647
4 534 235 4 200 022
3 ABNORMAL ITEM
Share-based payment expenses - (269 000)
Audited Audited
30 Sep 30 Sep
2011 2010
R`000 R`000
4 SEGMENTAL REPORTING
Turnover
Continuing operations
Over the Counter 1 734 666 1 427 291
Prescription 1 646 265 1 666 373
Pharmaceuticals 3 380 931 3 093 664
Hospital Products 1 072 636 1 036 423
4 453 567 4 130 087
Discontinued operation
Hospital Products 90 103 310 567
4 543 670 4 440 654
Operating income
Continuing operations
Over the Counter 615 282 407 082
Prescription 315 849 540 440
Pharmaceuticals 931 131 947 522
Hospital Products 137 507 220 785
1 068 638 1 168 307
Discontinued operation
Hospital Products 4 528 31 995
1 073 166 1 200 302
5 INVENTORY
The amount of inventories written down recognised 20 907 26 821
as an expense in cost of inventories
6 CAPITAL COMMITMENTS
Capital commitments
- contracted 292 983 503 362
- approved 120 845 154 992
413 828 658 354
Audited Audited
30 Sep 30 Sep
2011 2010
R`000 R`000
7 BUSINESS COMBINATIONS
7.1 NutriLida
On 31 July 2011, Adcock Ingram Healthcare (Pty)
Limited acquired 100% of the business of
NutriLida (Pty) Limited, Zeiss Road Manufacturing
(Pty) Limited and Midsummer Assets and Leasing
(Pty) Limited (NutriLida),a vitamins, minerals
and supplements business based in Johannesburg,
as a going concern. The Group has acquired
NutriLida because it significantly enlarges the
range of products in the vitamins, minerals and
supplements category.
The fair value of the identifiable assets as at
the date of acquisition was:
Assets
Property, plant and equipment 1 332
Marketing-related intangible assets 139 307
Cash and cash equivalents 26 595
Investments 1 192
Inventories 36 552
Accounts receivable 47 191
Receiver of Revenue 2 888
255 057
Liabilities
Accounts payable (29 673)
Deferred tax (38 991)
(68 664)
Total identifiable net assets at fair value 186 393
Goodwill arising on acquisition 163 607
Purchase consideration transferred 350 000
Net cash acquired with business (26 595)
Net cash consideration 323 405
The fair value of the trade receivables equals
the gross amount of trade receivables and amounts
to R47,2 million. None of the trade receivables
have been impaired and it is expected that the
full contractual amounts can be collected. An
amount of R50 million was paid into an escrow
account as a guarantee for any returns or
uncollected trade receivables.
The significant factors that contributed to the
recognition of goodwill of R163,6 million
include, but are not limited to, the acquisition
of trade listings of an established product
portfolio within the FMCG channel.
From the date of acquisition, NutriLida
contributed R43,1 million towards revenue and
R15,3 million towards profit before income tax.
Should the NutriLida acquisition have been
included from 1 October 2010, the contribution is
estimated to have been R233,4 million to revenue
and R75,6 million towards profit before income
tax.
Analysis of cash flows on acquisition
Transaction costs of the acquisition (included in (2 441)
cash flows from operating activities)
Net cash acquired with the business (included in 26 595
cash flows from investing activities)
Cash inflow on acquisition 24 154
Transaction costs of R2,4 million have been
expensed and are included in fixed and
administrative expenses.
7.2 Bioswiss (Pty) Limited (Bioswiss)
On 1 April 2011, Adcock Ingram Healthcare (Pty)
Limited acquired 51% of Bioswiss, a specialised
diabetes pharmaceutical company in South Africa.
The Group has acquired Bioswiss as it adds a
diabetes portfolio to the range of products.
The fair value of the identifiable assets as at
the date of acquisition was:
Assets
Accounts receivable 11 812
Marketing-related intangible assets 10 255
Customer-related intangible assets 1 010
Contract-related intangible assets 7 840
Inventories 5 009
Cash and cash equivalents 2 124
Other intangibles 114
Property, plant and equipment 15
38 179
Liabilities
Long-term borrowings (1 922)
Accounts payable (2 161)
Deferred tax (5 342)
Receiver of Revenue (36)
(9 461)
Total identifiable net assets at fair value 28 718
Non-controlling interests measured at fair value (14 072)
Goodwill arising on acquisition 10 354
Purchase consideration 25 000
Deferred consideration (8 506)
Net cash acquired with the business (2 124)
Cash injection (9 000)
Net cash consideration 5 370
The fair value of the trade receivables equals
the gross amount of trade receivables and amounts
to R11,8 million. None of the trade receivables
have been impaired and it is expected that the
full contractual amounts can be collected.
The significant factors that contributed to the
recognition of goodwill include, but are not
limited to, the acquisition of a diabetes product
portfolio.
From the date of acquisition, Bioswiss
contributed R6,8 million towards revenue and
reported a loss before income tax of R2,5
million.
Should the Bioswiss acquisition have been
included from 1 October 2010, the contribution is
estimated to have been R10,8 million to revenue
and a loss of R2,5 million.
Analysis of cash flows on acquisition
Transaction costs of the acquisition (included in (675)
cash flows from operating activities)
Net cash acquired with the business (included in 2 124
cash flows from investing activities)
Cash inflow on acquisition 1 449
Transaction costs of R0,7 million have been
expensed and are included in fixed and
administrative expenses.
Of the total purchase price, a payment of R8,5
million has been deferred. The deferred portion
of the purchase price has been fully provided
for. R2,5 million of the deferred portion is
subject to the achievement of certain revenue
targets.
8 DISPOSAL OF BUSINESS
The Scientific Group (Pty) Limited
On 31 January 2011, the Group disposed of its 74%
holding in The Scientific Group (Pty) Limited.
For more details, please refer to the SENS
announcement published on 24 May 2011.
Cash inflow on disposal:
Consideration received 77 827
Net overdraft disposed of with the discontinued 7 162
operation
Net cash inflow 84 989
Audited Audited
30 Sep 30 Sep
2011 2010
R`000 R`000
9 EARNINGS PER SHARE
Basic earnings per share is derived by dividing
earnings attributable from continuing operations,
to owners of Adcock Ingram for the year by the
weighted average number of shares in issue.
Continued operations
Basic earnings
Earnings attributable to owners of Adcock Ingram 754 205 631 459
from total operations
Adjusted for:
Earnings attributable from discontinued operation 28 397 (14 907)
Earnings from continuing operations attributable 782 602 616 552
to owners of Adcock Ingram
Headline earnings
Earnings attributable to owners of Adcock Ingram 782 602 616 552
Adjusted for:(*)
Profit on disposal of plant and equipment (857) (221)
Impairment of investment in associate 12 200
Headline earnings 793 945 616 331
Discontinued operations
Basic earnings
Net (loss)/profit attributable to ordinary equity (28 397) 14 907
holders of the parent from a discontinued
operation
Adjusted for:
Loss on disposal of business net of tax 28 854 -
Headline earnings from discontinued operation 457 14 907
attributable to owners of Adcock Ingram
Weighted average number of ordinary shares on 170 697 173 712
which basic earnings and headline earnings per
share are based
Diluted weighted average number of shares on 171 049 174 101
which diluted basic earnings and headline
earnings are based
* The adjustments have no tax implications
Number Number
of shares of shares
`000 `000
10 SHARE CAPITAL
Number of ordinary shares in issue 200 156 199 904
Number of "A" and "B" shares held by the (25 944) (25 944)
BEE participants
Number of ordinary shares held by the (1 043) (309)
BEE participants
Number of ordinary shares held by Group (4 285) -
company
Net shares in issue 168 884 173 651
11 SUBSEQUENT EVENTS
11.1 Short-term borrowings
Subsequent to year end, repayment terms of the secured loan amounting to
R290 million bearing interest at JIBAR +230 basis points, originally due
for settlement in November 2011 were re-negotiated as follows:
The secured loan now bears interest at JIBAR +180 basis points. Interest
will continue to be payable quarterly in arrears and the capital will be
repaid in quarterly instalments from March 2012 with the final instalment
due in December 2013.
11.2 ADDvance
On 1 November 2011, Adcock Ingram acquired the ADDvance brand from
Peppina Sales. The acquisition will further enhance Adcock Ingram`s role
in the growing vitamins, minerals and supplements (VMS) market through
entry into yet another niche segment.
SALIENT FEATURES
Turnover from continuing operations increased 8% to R4,454 billion
EBITDA from continuing operations decreased 7% to R1,170 billion
HEPS increased 31% to 465,1 cents (2010: 354,8 cents)
Normalised HEPS decreased 9% to 465,1 cents (2010: 509,6 cents)
2,5% ordinary shares bought back
FINANCIAL REVIEW
Headline earnings
The Group achieved headline earnings from continuing operations for the
year ended 30 September 2011 of R793,9 million (465,1 cents per share).
This represents a 28,8% increase over the comparable figure for 2010 of
R616,3 million and translates into an increase of 31,1% in headline
earnings per share. This result was achieved during a year in which
Adcock Ingram was allocated only 4% of the Anti-retroviral (ARV) tender,
saw the suspension of sales of dextropropoxyphene-containing (DPP)
products and experienced significant upgrade-related production
disruptions in its Critical Care facility. It should be noted that the
increases calculated for Headline Earnings and HEPS incorporate in the
prior year, a R269 million (154,8 cents per share) IFRS 2 charge in
relation to the Broad Based Black Economic Empowerment (BBBEE)
transaction.
Continuing operations
Turnover
The impact of the acquisitions of NutriLida, Bioswiss, as well as Ayrton
Drug Manufacturing Limited (Ayrton) in Ghana, together with the various
co-promotion and distribution agreements with multinational (MNC)
partners, supported turnover growth of 8% to R4 454 million (2010: R4 130
million). With the significant reduction in DPP and ARV revenue, the
decline in revenue excluding acquisitions and MNC revenue was 4.6%.
Price deflation averaged 2% for the year. In the Prescription segment,
the Single Exit Price (SEP) increase of 7,4% granted by Government in
June 2010 was implemented only on products where market conditions
allowed. No SEP price increase was granted during the 2011 year. Prices
in the ARV portfolio reduced by 20%, resulting in overall price deflation
for the segment of 4%. Against this pricing pressure, Prescription
revenue declined by 1,2%. Over-the-counter (OTC) turnover growth of 21,5%
includes 4% price inflation, while the Hospital Products division revenue
growth of 3% includes a 5% decrease in pricing, with increased volumes
being sold into the public sector.
Profits
Gross profit decreased by 1,5% to R2 169 million (2010: R2 201 million)
with margins declining from 53,3% to 48,7%. Gross margin benefited from
the strong Rand, which affected imports of raw materials and finished
products. The average exchange rates for procurement were R6,98 (2010:
R7,50) and R9,76 (2010: R10,52) for US Dollar and Euro imports
respectively, a benefit of R56 million in cost of sales. This benefit was
offset by increased adverse manufacturing variances of R17,1 million in
plants undergoing upgrades, under utilisation of the Wadeville plant
following the low ARV tender allocation, an industry wide strike in July
and August, low margins in Critical Care as finished goods needed to be
imported to meet demand, and the inclusion of MNC revenue at
significantly lower than average gross margins.
Operating profit, excluding the prior year abnormal item, decreased by
8,6% to R1 068 million (2010: R1 168 million) with the percentage on
sales reducing from 28,3% to 24,0%. Operating expenses increased by 6,5%
to R1 100 million (2010: R1 033 million), with new businesses not in the
base contributing 2,6% to the expense increase.
After net finance income and dividends received, profit before tax and
abnormal item decreased 6,8% to R1 119 million (2010: R1 200 million).
The effective tax rate for the year was 29,1% (2010: 33,1%).
Discontinued operation
The Group disposed of its 74% holding in The Scientific Group (Pty)
Limited on 31 January 2011, realising a net cash inflow of R85 million
and a loss, including impairments of intangibles, of R28,2 million.
Cash flows and financial position
Cash generated from operations was R1,0 billion (2010: R1,4 billion)
after working capital increased by R130 million (2010: R115 million
decrease).
Trade accounts and other receivables increased by R70 million from
September 2010, with trade accounts receivable days at the end of the
period at 65 days, a deterioration over the 58 days reported in September
2010. However, this is not an indication of a deterioration in the
general book, as aside from a single debtor provided for to the extent of
R5,4 million in Critical Care, there were no bad debts, and in fact some
small previously written-off debts were recovered in the Pharmaceutical
business.
Inventory increased by R163 million, 134 days of inventory (2010: 121
days), mainly as the inventory holdings of certain key items were
increased to take advantage of the stronger Rand. Trade and other
accounts payable increased by R103 million, the significant movement
being in relation to trade payables.
After net finance income, dividends and taxation, cash inflow from
operations was R526 million. The upgrade at the Aeroton facility and the
construction of the high-volume liquids facility at Clayville continued
with total capital expenditure amounting to R433 million (2010: R333
million).
During the year, the Group bought back 2,5% (4 285 163 shares) of its
ordinary shares over a two week period in February at an average cost,
including taxes and transaction fees, of R58,07 per share, R248 million
in aggregate. A further amount of R43 million of share purchases was made
by the special purpose vehicles party to the BBBEE transaction. During
the year an additional R364 million was drawn down from the Capex loan
facility, with the final draw down of R5,8 million subsequent to year end
on 1 October 2011. Cash equivalents decreased by R327 million, giving the
business a gross cash position of R1,1 billion (September 2010: R1,4
billion).
Distribution incorporating a reduction of share premium in lieu of final
dividend
The Board has declared a distribution of 106 cents per share for the year
ended 30 September 2011 out of share premium, an increase of 4% over the
comparable dividend distribution in 2010. The Company`s objective of an
annual dividend or distribution, covered three times by headline
earnings, remains in place.
BUSINESS OVERVIEW
Pharmaceutical Division
The division has continued with a strong revenue performance in its core
businesses, including a strong OTC performance and an increase of R408
million in turnover from MNC partnerships. Unfortunately the MNC revenue
growth was entirely offset by the setback of the hampered
commercialisation of DPP-containing products and the reduced ARV tender
volumes. Operating profit in the Pharmaceutical division declined by
1,7%.
The business of NutriLida, a vitamins, minerals and supplements (VMS)
company, was acquired on 31 July 2011 and contributed R43,1 million
turnover in the subsequent two months. The acquisition makes Adcock the
leader in VMS in the FMCG sector.
Margins during the year have declined as a result of the increased mix in
turnover towards the lower margin collaboration business. This has been
partially offset by the strong Rand during the year as well as the OTC
performance.
The OTC segment has grown turnover by 21,5% from R1 427 million to R1 735
million for the year, while operating profit increased by 51% to R615
million (2010: R407 million). The operating margin was positively
impacted by synergies achieved from the improved integration of
acquisitions. Economy OTC brands continue to perform well, offering price
sensitive consumers an alternative in the current economic climate. The
Wellbeing portfolio has achieved significant market share gains and ended
the year as number 1 in FMCG by volume and value.
In the Prescription segment, turnover remained relatively flat at R1 646
million (2010: R1 666 million). The MNC partner-of-choice strategy
assisted with top line growth and will continue as Adcock uses its
infrastructure to support the growth strategies of multinational
companies. The generics portfolio, outside of ARVs, has continued to show
good growth in both value and volume terms.
Ayrton continues to deliver a good performance and has grown exports from
Ghana into neighbouring territories. The Adcock Ingram OTC brands
recently registered in Ghana are starting to generate revenue. The East
African operation continues to deliver encouraging results. Strong growth
in the Adcock brands has been bolstered by the performance of the newly
signed multinational contracts. Exports into neighbouring territories
have been positive.
The upgrades to the general facilities and the construction of the high-
volume liquids plant in Clayville continue to be on schedule. The
division experienced a strike during the year which had an impact on
inventory levels, impacting on supply for a period. Despite the strike,
service levels have shown an improvement year on year.
The business has experienced tough trading conditions during the second
half of the year due to the generally difficult economic climate and the
pressure on the consumer. This trend has continued into the new financial
year. The business will continue to focus on branding and innovation to
extract growth in the local market, coupled with a focus on cost
containment. Appropriate acquisitions in current and adjacent categories
will continue to be a focus area.
Hospital Products Division
Turnover increased by 3,5% to R1 073 million (2010: R1 036 million). The
public sector tender gains effective from March 2010 have exceeded
published estimates on critical items, resulting in core product unit
growth, but at significantly lower margins. Products were imported to
meet customer demand, contributing to an erosion of gross margins from
38,2% in the prior year to 30,9% in the current year. Increased
competition in the private sector has also seen lower prices on core
products. Manufacturing disruptions, due to the factory upgrade
activities, contributed to reduced factory output, compounded by product
supply being adversely affected by the national strike.
At the end of the year under review, the R290 million upgrade is
progressing according to planned timeframes, but with greater than
anticipated disruption to production. Final completion and validation of
the facility is planned for January 2012. This facility, the only medical
grade plastics manufacturer in Southern Africa, built to world class
standards, will see the division achieving compliance with the
international Pharmaceutical Inspection Convention and Pharmaceutical Co-
operation Scheme - jointly referred to as PIC/S - standards, adopted by
the South African Medicines Control Council (MCC). On completion of the
upgrade, improved output is expected.
The renal division continues to gain market share with growth reflected
in all portfolios including haemodialysis, peritoneal dialysis and new
dialysis treatments in acute care in the hospital. In the generic market,
the division continued to invest in injectable antibiotics and speciality
drugs. Penetration into the Oncology market has been slow. The
Transfusion Therapy division, in spite of inventory shortages in the
early part of the year due to reduced factory output, achieved growth in
line with expectations. Blood donor numbers increased by 5% and this
trend is expected to continue.
REGULATORY ENVIRONMENT
Indications are that, with the current price calculation procedure, the
Department of Health (DoH), as was the case in 2011, is unlikely to grant
an SEP increase during 2012. If we anticipate that the pricing mechanism
will bring adverse unintended consequences for our customers, we will
engage with DoH.
International benchmarking and the capping of logistics fees are likely
to have an impact on Adcock Ingram, with these regulations anticipated in
the next financial year. However, the quantum for each will not be known
with any certainty until the final regulations are published. Adcock
Ingram has cooperated with the DoH and the Pharmaceutical Task Group in
its submissions made to DoH on these issues.
In 2011, the Minister of Health announced the establishment of a National
Health Insurance (NHI) plan in order to provide better access to quality
care for the South African population. Adcock Ingram embraces the
principles of NHI, and awaits further details on the framework and
implementation.
TRANSFORMATION
Adcock Ingram`s key focus for 2011 was to consolidate the new BEE
shareholdings in the Group and to increase Enterprise Development
activities. The 2010 BEE equity transaction and the awarding of shares in
March 2011 to all qualifying black employees resulted in a maximum BEE
scorecard rating for Equity Ownership. The Owner Driver project which was
initiated earlier in the year, is an important Enterprise Development
initiative which is now being implemented.
DEXTROPROPOXYPHENE (DPP)-CONTAINING MEDICINES
On 15 November 2011, the court has re-instated a `Dear Healthcare
Professional` Letter issued by the Medicines Control Council (MCC) on 28
September 2011, withdrawing DPP-containing products from the market in
South Africa. As a response, the Company immediately suspended the sale
of products containing DPP pending the outcome of the appeal process. In
the best interests of patients requiring analgesia, Adcock has called on
the Department of Health to expedite the appeal committee process into
the review of products containing DPP. The Company believes that this
appeal process remains the most competent channel in resolving any
arguments for, or against, the continued availability of products
containing DPP and that an expedited process is in the best interests of
all parties involved. Critical to this is an understanding that no
scientific evidence exists to substantiate potential risks surrounding
the continued sale and use of these products. Adcock has rejected in the
strongest possible terms any arguments that DPP-containing products are
so called "killer drugs" and fervently maintains that an accelerated MCC
appeal process will correctly position the available scientific data in
support of these objections. Adcock Ingram maintains that the study used
by the MCC as the basis for its actions is not credible enough to
substantiate its actions in respect of DPP-containing products as this
study made use of a single non-representative sample of six patients. We
replicated the study conducted by the FDA through an independent CRO, but
with increased patient numbers, in order to fully outline the suspected
risks with Synap Forte, the results of which did not detect any negative
medical signals, and were comparable to placebo. DPP products remain in
use in both the UK and Europe with tighter controls on scheduling and
availability. In addition to this, the Company has clinical and
epidemiological data that supports the safety of its DPP-containing
products. These products have been used safely for over 30 years, are
still used in 39 countries and DPP use in South Africa represents less
than 1% of global use by value, according to IMS. It is important to note
that DPP containing drugs tested overseas are not the same formulation as
those used in South Africa. Critically, there is no evidence of
cardiotoxicity in SA safety data. We place the health of patients at the
centre of our business. At no stage would we ever compromise on this
ethic.
PROSPECTS
Adcock Ingram maintains its Horizon 1 and 2 focus on the acquisition of
businesses and brands in high growth emerging markets in Africa. Several
acquisition opportunities in South Africa in the personal care and well-
being categories are being investigated by our OTC business development
team and importantly, the business continues to invest in brands, people
and customers from our existing platform.
The multinational partner of choice strategy has delivered attractive
value as Adcock Ingram diversifies its revenue streams and decreases its
dependence on mature products. We expect to extend the MNC partnerships
as Adcock Ingram`s expansion into the rest of Africa continues.
The current economic climate remains uncertain and the impact on consumer
spending is concerning. In addition, if prices for SEP-regulated products
are not able to be adjusted in 2012, margins will be reduced by cost
pressures, particularly in labour, transport and utilities, and active
ingredient prices which are directly impacted by current Rand weakness.
The implementation of international benchmarking and the capping of
logistics fees depending on the final regulations may have a negative
impact on the Group.
The completion of our manufacturing facility upgrades, which will enable
international accreditation of facilities, remains a key focus area
during the next year.
We welcome the recently published amendment to the Preferential
Procurement Policy Framework Act. This is a significant development for
local manufacturers.
Adcock Ingram`s core businesses remain strongly cash generative. This,
together with an ungeared balance sheet, supports continued execution of
the Group`s growth strategies.
The financial information, on which the above prospects statement is
based, has not been reviewed or reported on by the Company`s external
auditors.
For and on behalf of the Board
KDK Mokhele JJ Louw AG Hall
Chairman Chief Executive Officer Deputy Chief Executive and
Financial Director
CAPITAL REDUCTION OUT OF SHARE PREMIUM
The Board has declared a capital reduction distribution (distribution)
out of share premium of 106 cents per ordinary share, payable to
shareholders, in respect of the year ended 30 September 2011.
The salient dates for the distribution are detailed below:
Last day to trade cum distribution Friday, 6 January 2012
Shares trade ex distribution Monday, 9 January 2012
Record date Friday, 13 January 2012
Payment date Monday, 16 January 2012
Share certificates may not be dematerialised or rematerialised between
Monday, 9 January 2012 and Friday, 13 January 2012, both dates inclusive.
By order of the Board
NE Simelane
Company Secretary
Johannesburg
21 November 2011
Comprehensive additional information is available on our website:
www.adcock.com
Corporate Information
Executive directors:
JJ Louw (Chief Executive Officer)
AG Hall (Deputy Chief Executive and Financial Director)
Non-executive directors:
KDK Mokhele (Chairman)
EK Diack, T Lesoli, CD Raphiri
LE Schonknecht
RI Stewart
AM Thompson
Company secretary:
NE Simelane
Registered office:
1 New Road, Midrand, 1682
Postal address:
Private Bag X69, Bryanston, 2021
Share registrars:
Computershare Investor Services (Pty) Limited
70 Marshall Street, Johannesburg, 2001
Postal address:
PO Box 61051, Marshalltown, 2107
Auditors:
Ernst & Young Inc.
Wanderers Office Park, 52 Corlett Drive, Illovo, 2196
Sponsor:
Deutsche Securities (SA) (Pty) Limited
3 Exchange Square, 87 Maude Street, Sandton, 2146
Bankers:
Nedbank Limited
135 Rivonia Road, Sandown, Sandton, 2146
Rand Merchant Bank
1 Merchant Place, cnr Fredman Drive and Rivonia Road, Sandton, 2196
Attorneys:
Read Hope Phillips
30 Melrose Boulevard, Melrose Arch, 2196
Forward-looking statements
Adcock Ingram may, in this document, make certain statements that are not
historical facts and relate to analyses and other information which are
based on forecasts of future results and estimates of amounts not yet
determinable. These statements may also relate to our future prospects,
developments and business strategies. Examples of such forward-looking
statements include, but are not limited to, statements regarding exchange
rate fluctuations, volume growth, increases in market share, total
shareholder return and cost reductions. Words such as "believe",
"anticipate", "expect", "intend", "seek", "will", "plan", "could", "may",
"endeavour" and "project" and similar expressions are intended to
identify such forward-looking statements, but are not the exclusive means
of identifying such statements. By their very nature, forward-looking
statements involve inherent risks and uncertainties, both general and
specific, and there are risks that the predictions, forecasts,
projections and other forward-looking statements will not be achieved. If
one or more of these risks materialise, or should underlying assumptions
prove incorrect, our actual results may differ materially from those
anticipated. Forward-looking statements apply only as of the date on
which they are made, and we do not undertake any obligation to update or
revise any of them, whether as a result of new information, future events
or otherwise.
www.adcock.com
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