JSE-listed pharmaceuticals manufacturer Adcock Ingram has increased its revenue and gross profit by 8% year-on-year for the six-month period ended December 31.

Its trading profit also increased by 15% and it declared a 125c a share dividend.

Revenue grew to R4.67-billion for the six months under review, while gross profit increased to R1.64-billion and trading profit to R623-million. Operating profit increased by 16% to R594-million.

However, the disappointing low Single Exit Price (SEP) adjustment of 3.28% granted to the industry in the current calendar year will not compensate for the abnormal cost increases in certain raw materials and packaging, the weak currency and the above inflationary increases in wages and utilities, resulting in gross margin compression being difficult to avoid, CEO Andy Hall says.

"The 3.28% adjustment for 2023 is significantly below current input inflation and consumer price inflation for the past twelve months. It will lead to inevitable margin pressure on prices, and about 56% of our revenue in the past period was SEP-related," he said during a briefing on the company's interim results.

The pharmaceutical industry associations have engaged with authorities about the pricing challenges and with the Department of Health to determine the reasons that this increase was significantly below inflation. The industry is waiting for the authorities to revert to it about the concerns raised, says Hall.

Margin compression, outside of the general state of the economy and utility challenges, is a significant challenge, he emphasises.

"One of the main reasons the pharmaceutical industry associations are engaging with the Department and the pricing committee is to get information from them to establish how this SEP adjustment figure was arrived at, because it is not reflective of consumer price inflation nor the formula previously used in regulations," he notes.

The SEP adjustments were 3.68% in 2021 and 3.5% in 2022.

Meanwhile, the company saw organic volumes decline marginally, although it saw good growth in core over-the-counter (OTC) and prescription brands, he said.

The gross margin ended at a stable 35%, mainly owing to a favourable sales mix and price increases in the consumer and OTC business units on non-SEP regulated products, he adds.

Increases were mitigated by the weaker rand exchange rate and significant cost-push from suppliers. Despite this, operating expenses were well controlled, seeing an increase of 4%, leading to the 15% improvement in the trading profit, Hall notes.

The SEP adjustment determines the pressure on margins, particularly as raw materials, packaging, utilities, transport and wage cost increases were high, he adds.

DIVISIONAL PERFORMANCE
Revenue in its consumer businesses division increased 6% to R847-million, and trading profit increased 7% to R185-million.

Additionally, innovation is a key strategic driver in its existing consumer portfolio, and innovations added R10-million in revenue for the interim period from new products, added Hall.

Further, revenue in its OTC businesses division increased 15% to R1.14-billion, and trading profit increased 9% to R181-million.

The gross profit of the OTC division was lower than in the interim period a year prior, owing to a weaker local currency, and raw material, freight and utility increases. Despite this, the businesses increased trading profit owing to new launches and strategies to increase shelfspace in retail shops that contributed to the turnover increase, he said.

Additionally, in its prescription businesses, revenue increased 9% to R1.72-billion and trading profit achieved increased 37% to R167-million, he said.

In its hospital division, revenue decreased 2% to R962-million, but trading profit grew 10% to R89-million.

The decrease in turnover is owing to lower demand for products relating to Covid-19 treatments, and there was some recovery in the use of anaesthetics in routine admissions, and it seems that elective surgeries have normalised during the interim period, Hall notes.

FACILITIES
Adcock's facilities are experiencing operational issues owing to the ongoing loadshedding. The group has, however, kept the capacity use rates of its manufacturing facilities high despite this. For example, its Clayville facility's oral liquids division is operating at 70% capacity and its effervescent division is operating at 80% of capacity.

Its new opthalmic facility is ramping up and operating at 30%. The company expects it to reach 40% of capacity by its financial year-end. If the team gets the facility to 50% of capacity by the end of the calendar year, the company will consider it a job well done, Hall notes.

Further, its Wadeville liquids manufacturing facility operated at 60% of capacity during the six-month period and the oral solid dosage section has been reconfigured for shorter runs.

Meanwhile, its Aeroton facility is experiencing utility problems, including loadshedding and its effect on water supply.  Nonetheless, the facility achieved more than 90% capacity use, Hall says.

"Three major risks to our facilities include the fuel price, reliable electricity supply and civil or industrial action impacts on the transport industry," he noted.

Additionally, Adcock Ingram has installed solar photovoltaic panels on its Clayville facility, which generate approximately 30% of its daytime energy needs. It has solar panels on three other facilities as well.

"Solar energy comprised more than 5% of our electricity supplied during this period. When taken with diesel generators, the company generated about 12% of its electricity used during the past six months," Hall highlights.

The company is also installing real-time water and electricity meters at all its sites, and has environmental initiatives underway to harvest water, manage waste and reduce waste to landfill, he adds.

Additionally, Adcock is expanding its pilot project that uses electric vehicles to collect empty pallets from customers, and it is also expanding its enterprise and supplier development initiatives.

"We are also supporting the Hennops River Revival nonprofit organisation, and we sponsor plastic surgery for children born with facial abnormalities. We have done a big push on environmental, social and governance initiatives during the past six months and we will continue to do so," he emphasises.