[TOP STORY] Thoughts about Aspen, Mediclinic, Netcare, Life Healthcare and Pfizer


SIMON BROWN: I’m chatting now with [independent analyst] Kea Nonyana. Kea, I appreciate the early morning time. You and I have chatted about Aspen before. To be honest, I hadn’t actually looked at the chart in a bit, and then I looked at it earlier this week. It was at R280/share in September last year and yesterday [October 6, 2022] it closed just below R140/share. I know that they’re not selling any of their Covid vaccines, on which a lot of people had put a lot of hope but, I don’t know, this sell-off – to me, they’re now on a single-digit PE. Even without Covid vaccines my sense is this is a good stock, and probably at really cheap prices.

KEA NONYANA: It really is cheap and I think global big pharmaceuticals are all cheap. I have experienced the same price action at Aspen. I mean, when looking at how far Aspen has fallen – almost 50% since the highs seen – we can see year to date big pharma across the world also almost down on average about 35.4%. So when looking at this pharmaceutical, I think the market, alongside all the risk off sentiment, what I think the market is quite concerned about is the one-off hit on revenue from the Covid-19 vaccine revenue boost.

SIMON BROWN: But in a sense it’s also [that] moving out of the pandemic elective surgeries are returning. And my view has always been that pharma stocks are relatively defensive in tough economic times, in tough bear markets. If you need to go to a doctor, if you need a prescription or over-the-counter drug, you’re going to need it, almost regardless.

KEA NONYANA: They stay in the defensive end, and you can see it in the average revenue growth over certain periods. Seeing that it’s not consistently knockout 20%, 30% revenue growth, but just above-inflation revenue growth, which shows the defensive nature, even through tough economic times you will continue to buy your OTC drugs. I think the value in these businesses lies in the manufacturing capacity, and Aspen has shown that over time.

SIMON BROWN: Yeah, there’s their plant down in Gqeberha, where they are FDA [US Food and Drug Administration] approved. It is a world-class manufacturing plant now. They haven’t got massive throughput there yet, but it is an asset which they will leverage over the years ahead.

KEA NONYANA: They proposed adding about one billion vaccines per year in capacity. But since past September Johnson & Johnson has not put in any new orders for Aspenovax, what they are proposing to do is turn it into an anaesthetic-producing plant. So they still have that asset, still have an opportunity to produce some of the drugs which are in demand from that plant, we probably will see value coming through into the numbers.

SIMON BROWN: Let’s move from the drug manufacturers to the hospital groups. We have three listed now. Mediclinic, which of course is under potential takeover, Netcare and Life Healthcare. Again, elective surgeries are returning, and I appreciate that we are under pressure as citizens. But these stocks are trading almost at their pandemic lows. Both Life Healthcare and Netcare are only just off the lows which they made in late 2020. Again, these are almost like hotels [with] that leverage impact; if they can get more what they call ‘patient nights’, not ‘bed nights’, it falls almost straight to the bottom line.

KEA NONYANA: Essentially you are correct in that. I always look at valuations or, if you are looking at median valuations and you find that most of these stocks are two, maybe even three standard deviations from the median valuation, they do present value for shareholders. And I think in this environment, which I would say is a stockpickers’ environment, you have some low-hanging fruit that investors have to have a look at.

SIMON BROWN: Is it ‘preference between’, or ‘a case of’? I’m ignoring, as I said, Mediclinic because of the proposed takeover by Remgro and Mediterranean Shipping, but Netcare and Life Healthcare frankly just look [equally] cheap.

KEA NONYANA: To be perfectly honest, you could choose either/or. In the sector, I think in the past Life Healthcare for me has been a better pick in terms of capital, in terms of the geographic spacing of where the hospitals are and not the dalliances into Europe and the UAE. So I think Life Healthcare is my choice, picking between Netcare and Life Healthcare. Mediclinic I think has a great operation, hence it being taken over. If I did have a choice, I’d say Mediclinic, but between Netcare and Life Healthcare I’d go for Life.

SIMON BROWN: Mediclinic’s upside is capped because of that takeover.

A quick last question. If we look offshore in the healthcare space, do you have a preferred [one] out there? I’m looking at some of these charts and, as you mentioned earlier, they’re down around a third. They’re back at those pandemic lows. They’ve given back all the gains they made during 2020 and 2021. Do you have a preference in the offshore space?

KEA NONYANA: I’d go to the top, I’d go for Pfizer primarily. The space in itself, I always say, leads for innovation. And for me the problem with these pharma stocks is that the patents do not last long enough for them to actually accrue value before they become generic. So what they will need to do is to always be in core productions, and always be acquiring new business and acquiring new technology.

If you’re going to be needing to acquire, you have to look at balance sheets, and Pfizer has the strongest balance sheet; it has almost $28 billion in cash on its balance sheet and it’s proposing to grow non-Covid vaccine revenue by 5% into 2025.

SIMON BROWN: Yes, I like your point there. Go for the top, Pfizer.

We’ll leave it there. Kea Nonyana is an independent analyst, talking healthcare stocks.

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