By Sean Riskowitz, Manhattan Financial

The pharmaceutical industry has long been associated with strong dividends, large cash piles and cures for all mankind’s chronic ailments. The lure of annuity revenue streams protected by patents, huge cash piles and ever improving products makes dividend seeking investors one of the biggest holders of pharma stocks, as a group.

One pharma giant currently yielding over 4% in dividends is Pfizer.

Pfizer is a research-based, global biopharmaceutical company. The Company applies science and its global resources to improve health and well-being at every stage of life. Pfizer’s diversified global health care portfolio includes human and animal biologic and small molecule medicines and vaccines, as well as nutritional products and many consumer health care products. Pfizer is the world’s largest drug company by sales ($50 billion in 2009) and Lipitor is the company’s best selling drug.
 
Last year the company completed the acquisition of Wyeth for $68 billion in cash, shares and debt.
 
On a valuation basis Pfizer is attractive. The company is trading at a 12 times PE ratio, a price to book of 1.5 and a price to cash flow of 10. Pfizer also has less debt than its peers. However the company is not very effective: the return on equity is at only 11%, way below the industry average of 26%, and return on assets and return on investment are both half the figures achieved by competitors, at 5% and 6% respectively. This suggests that on its $7.7 billion R&D expense (15% of revenues), Pfizer is earning a paltry 6%. That’s less than the dividend yield on Reynolds American.
 
In a Reuters forecast of top selling drugs by the year 2014, Pfizer appeared just once, for an arthritis drug called Enbrel, jointly developed with Amgen (AMGN). The Reuters poll believes that drug to generate sales of $8 billion in 2014. That same list originally forecast Lipitor and Enbrel to be top selling drugs with a combined market of $18.8 billion in 2010, which was largely accurate. On this crude measure, that represents a 57% drop in top ten selling drugs for Pfizer.
 
The major concern with Pfizer really is the fact that a large part of the company’s revenues are going to lose patent protection (many already have), and the company will be unable to sustain earnings and therefore dividends over the medium to long term, without undergoing expensive acquisitions. Lipitor, which makes up a quarter of the company’s revenues, comes off patent next year. Generic drug companies will stage a run on at least 14 Pfizer patents, which make up about 70% of the company’s sales, over the next five years.
 
A Wall Street Journal article said, “New innovation is funded by previous innovation, but the money sunk over the last decade into the search for the next big lifestyle blockbuster a la Lipitor also doesn’t have much to show for it. The industry is thus turning away from such ‘small molecule’ drugs and toward advanced biotechnology. Biomedicines are made by splicing genetic material into living cell cultures, and they often target rare diseases and unmet needs like cancer and Alzheimer’s.” This in turn creates uncertainty. On top of that, the new Health Care Bill has introduced a whole host of new uncertainties and unknowable factors into the equation, making it very hard to predict what Pfizer will generate in earnings five years out.
 
Investors who are concerned chiefly with the return of capital and a safe dividend would be well advised to thoroughly research Pfizer before committing money for the dividend alone long-term. Pfizer makes for an interesting contrarian play, but if you’re looking for income it’s probably safer to look elsewhere.

Basan has more than 25 years of experience in the cleanroom consumables and garment manufacturing business and has a worldwide network of well-known suppliers.

Basan has a portfolio of over 4,000 high-quality, economical cleanroom products, ranging from cleanroom consumables, such as wipers, gloves, stationery, packaging material, disposable and reusable garments, as well as floorings, equipment and furniture. Basan’s full service include consultancy and service offerings such as training of personnel, symposia, garment programs, logistics services and complete system integration.

In the logistics area, Basan ensures the permanent availability of defined cleanroom consumables and assumes all administrative and logistic functions including consumption planning, local inventory management, and material and transport arrangements.

Our constant growth over the past years we owe to our customer orientation, our service and, above all, our innovative products.

Basan is strongly related to all sectors with a controlled or critical environment, especially pharmaceutical companies, medical devices companies, research institutes, hospitals, biotechnology companies, optics, electronics, food, plastics etc.

We expect this growth in our organisation to bring significant benefits to employees, customers and suppliers due to increased purchase volumes, an improved cost structure and other synergy potentials.

Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.

I should make it clear that I’m not recommending any of the stocks I write about. Any investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and in depth analysis.

The largest drug companies as a group currently sit with large amounts of cash and recurring cash flow streams, which over the past few years have resulted in high dividends to stockholders.

One such company is Sanofi-Aventis (SNY), a French based pharma giant with a market capitalization of just under $100 billion. The company is the the world’s fourth-largest pharmaceutical firm by prescription sales.

Sanofi-Aventis engages in the research and development, manufacturing and marketing of pharmaceutical products for sale principally in the prescription market, but the firm also develops over-the-counter medication. Sanofi-Aventis covers 7 major therapeutic areas: cardiovascular, central nervous system, diabetes, internal medicine, oncology, thrombosis and vaccines (it is the world’s largest producer vaccines). The company’s biggest selling drug is Lovenox, and it also produces Ambien which hopefully you won’t require while reading this article.

At a price of $36.50 the company is sitting on a dividend yield of 4.43% (it paid out $1.63 per share in 2009). The company is cash flush with almost $7 billion in cash on the balance sheet which represents about 20% of current assets. Over the past five years, the company has generated on average about $10 billion in cash from operations. Total dividends paid over the same period average to around $3.1 billion per year, so one can see how this cash cow’s dividend from a historical perspective has been strong.

However dividend investors are concerned with the future viability and sustainability of dividends. Pharmaceutical companies are going to come under pressure when patents on many of their leading drugs expire, opening them up to competition from generic manufacturers which naturally erode margins and lower profits and cash flows. Sanofi is not excluded from this problem.

In saying that, given the large annuity revenue streams these firms have built and the tremendous amounts of cash they throw off, the Sanofi model still present significant barriers to entry from competition. Research shows that the dividend is likely to remain at current yields for the considerable future. While pharma giants are not replacing revenue through new products and research as quickly as it is being eroded through generic competition, the deal between Pfizer (PFE) and Wyeth shows just how easy it is to pick up an entirely new drug pipeline when you’re sitting on copious amounts of cash.

Sanofi is likely to be able to generate more than sufficient cash flow to produce strong dividends to shareholders, and thus the yield is probably relatively secure for the income-seeking investor.

Sanofi trades on a PE ratio of 13.65 times and a price to book of 1.5 times, both of which are conservative by industry standards. Debt is also much lower than peers and return on equity is much higher, albeit at only 11%.

Devices affected, date of last manufacture in the US and manufacturers affected are:

• Tilade Inhaler (nedocromil) – June 14, 2010 – King Pharmaceuticals
• Alupent Inhalation Aerosol (metaproterenol) -June 14, 2010 -Boehringer Ingelheim Pharmaceuticals
• Azmacort Inhalation Aerosol (triamcinolone) – Dec. 31, 2010 – Abbott Laboratories
• Intal Inhaler (cromolyn) – Dec. 31, 2010 – King Pharmaceuticals
• Aerobid Inhaler System (flunisolide)- June 30, 2011 – Forest Laboratories
• Combivent Inhalation Aerosol (albuterol and ipratropium in combination) -Dec. 31, 2013 – Boehringer Ingelheim Pharmaceuticals
• Maxair Autohaler (pirbuterol) – Dec. 31, 2013 – Graceway Pharmaceuticals

Patients using the inhalers scheduled to be phased out should talk to their health care professional about switching to one of several alternative treatments currently available. Until then, patients should continue using their current inhaler medication.

CFCs are harmful because they deplete the ozone layer miles above the Earth that absorb some of the sun’s harmful ultraviolet rays. The United States has banned the general use of CFCs in consumer aerosols for decades, and eliminated the production of CFCs in the United States as of Jan. 1, 1996, except for certain limited uses, such as MDIs.

“During this transition, FDA wants to ensure that patients have access to safe and effective alternative medications to treat their asthma or COPD,” said Badrul Chowdhury, M.D., Ph.D., director of the Division of Pulmonary, Allergy, and Rheumatology Products in FDA’s Center for Drug Evaluation and Research. “We are currently working with professional societies and patient organizations to make sure patients understand which products will no longer be available and have information on which alternative medication might work best for them.”

The CFC phase out is part of an international agreement to ban substances that deplete the Earth’s ozone layer. The Montreal Protocol on Substances that Deplete the Ozone Layer and the U.S. Clean Air Act aim to protect the public health and the environment from the potentially negative effects of ozone depletion. Bans on products containing CFCs began in the late 1970s.

The decision to phase out the products is the latest in a series of decisions related to the removal of CFC inhaler products from the market as required by the Clean Air Act. The agency proposed to phase-out the seven remaining products in 2007 and reached a final decision after reviewing more than 4,000 public comments and information submitted as part of a public meeting.

The need for ongoing confidence in the competence of laboratories is not only essential for laboratories themselves and their customers, but also stakeholders such as regulators, laboratory accreditation bodies and other organizations.

ISO/IEC 17043, Conformity assessment – General requirements for proficiency testing, specifies general requirements for the competence of providers of proficiency testing schemes and for the development and operation of proficiency testing schemes.

Proficiency testing involves use of interlaboratory comparisons in the determination of a laboratory’s performance and, more specifically, in its on-going competence. Laboratories demonstrate their competence by complying with ISO/IEC 17025:2005, General requirements for the competence of testing and calibration laboratories, and the need for additional confidence in their results is achieved through their participation in interlaboratory comparisons managed by proficiency testing provider operating in accordance with ISO/IEC 17043.

The new standard addresses management, planning, design and personnel of the proficiency testing provider. In addition to requirements on the development and operation of proficiency testing, it contains informative annexes on the following:

* Typical types of proficiency testing schemes
* Suitable statistical methods
* Selection and use of proficiency testing schemesby laboratories, accreditation bodies, regulators and other interested parties.

ISO/IEC 17043 is an improvement on and replacement for the two-part ISO/IEC Guide 43:1997.

Dan Tholen, convenor of the group of experts that developed the standard, comments, “There is intense international interest in ISO/IEC 17043. Many ILAC (International Laboratory Accreditation Cooperation) members and regions have plans to implement it and are actively planning or conducting training on the new standard. ILAC and its regional cooperations are taking steps to extend their Mutual Recognition Arrangements to include proficiency testing.”

This will increase the supply and visibility of Vitabiotics products to consumers.

“We chose Clicks due to their level of experience and large number of stores countrywide. Clicks will supply 15 Brands and 50 Brand line extensions in over 240 stores in the country,” said Chomba Chuma, Managing Director, Vitabiotics SA. “Clicks is taking 26 line extensions exclusive to their stores for a period of time.”

In this partnership, Vitabiotics will increase their products by five new brands; Cardioace, Perferctil, Visionace, Wellteen, and Aquamarine and thirty-five brand extensions that did not exist in the South African market.

Dr. Chuma further added that some of these products were only available in Europe but this new partnership will enable their supply and increase the company’s market supply.

According to Health Products Association of South Africa, the nutritional supplements market in the country is worth over R3 billion a year and is estimated to be growing at about 24% annually.

Several incentives have pushed this growth such as; new product development, and an increasing number of patients in South Africa are seeking to self-medicate as a prevention measure, has gained momentum.

The continuous growing awareness of good nutrition has also motivated the industry. South Africa’s expanding middle class has also translated into higher disposable incomes and more stressful lifestyles, thus spending on vitamins, supplements, homeopathic remedies and spa treatments have grown considerably.

“Vitamins and dietary supplements have witnessed double-digit growth in the last few years,” said Chomba Chuma, Managing Director, Vitabiotics SA. “Multivitamins are also extremely popular due to the perceived practicality of having a combination of all the necessary vitamins in a single capsule. This partnership will now enable us to cater for this growing clientele.

Vitabiotics has been in South Africa for 4 years.

The firm identifies itself as one of the India’s largest manufacturers and exportere of biological products including:

• Protein Hydrolysates
• Peptones and derivatives
• Extracts
• Dehydrated Microbiological Culture Media
• Plant Tissue Culture Media
• Laboratory chemicals

Its products are utilised in the fields of agriculture, brewing and fermentation, clinical (medical), food, pharmaceutical, healthcare, sanitary testing, veterinary science and water.

For further information please contact:

Bichitra Barik
Business Development Executive (Export)

TITAN BIOTECH LTD
A 2/3 , 303- 305, 3rd Floor.
Lusa Tower , Azadpur Commercial Complex
Delhi,India – 110033

Direct ph. no: +91-11-47020100
Fax: +91-11-27674181
Ph: 09716003577
E-mail: export@titanbiotechltd.com

www.titanbiotechltd.com

www.plantissueculturemedia.com

CEO Mike Allan and his team were put through the ringer in 2009 with an absolutely torrid year for smaller consumer businesses and it showed in the interim  results that were released yesterday.

Salient numbers for the six months ended 31 December 2009:

Turnover:            Declined from R38m to R28.5m
Operating loss:            R69000
Net loss:            R1.3m
Cash & cash equiv:        Decreased by R800000 to R7.6m
Net asset value per share:     1.95c (trading at 2c)

All in all some grim numbers but if you drill a little deeper there were one or two figures which need to be watched a bit more closely:

Cash flows from operating activities: Swung from a negative R4.7m to a positive R1.4m
Short-term borrowings: Down from R17m to R2.6m
Gross profit margin: Stayed stable year on year

We believe that the improvement in the operating cash-flows are the first signs that the business is turning although we have some concerns that there may need to be some form of capital injection in the coming months unless operating conditions improve. The group has said it expects to be profitable by June 2010.

Plan unfolding
Our key takeaway in 2008 was that management needed to show they had a plan and in follow-up interviews with Mike Allan we were convinced that the group had in fact worked out a sustainable turnaround strategy, even if some of it was a bit touch-and-go given the operating environment.

This was evident in:
A) Clear-cut strategy around reducing manufacturing and packaging costs
B) Improved cash flow
C) Identifying and “fleshing out” their cornerstone brands – BioHarmony and Muscle Science

An important point to highlight for the firm was that in 2009 there was no build-up around the Patrick Holford / BioHarmony product lines as had been experienced in 2008. Wellness guru Holford did not come through to South Africa which meant that BioHarmony lost out on its key anchor marketing tool for the year.

On this front, Allan commented: “Bioharmony`s 13-part television series `Naturally You`, featuring Patrick Holford, is a first for the nutritional supplement industry in South Africa and initial indications are that it is indeed having the desired effect.”

Other moves taken by management to over the year to rejuvenate the company include:

• Xplode launched as a brand with ready-to-drink beverages and shots
• Staminade launched as a brand with ready-to-drink beverages and bars
• Muscle Science re-launched in new packaging and re-formulated
• Muscle Science bars launched
• Herbology, re-formulated and re-branded, has increased its listings into additional customers

Conclusion
We make no secret of the fact that we are fans of this company in the long run and that we intend to add to our shareholding here.

When Allan spoke to ManufacturingHub.co.za last year he looked tired and it was apparent that the tough economic conditions were taking their toll. However he came across well and it was apparent he was working to a plan.

We conclude that the turnaround at Bioscience is well underway and remain upbeat about the prospects for the group going forward.

Kollicoat IR Coating Systems:
Distinctive coloring, robust, protective and rapidly soluble: a new BASF tablet coating system enables individual, on-site production of tablet coatings in countless shades from only seven basic colors.

Since elderly people in particular may have difficulty telling tablets apart, more and more pharmaceutical manufacturers are starting to package active substances in colored tablets. A striking color supports and enhances treatment compliance and also prevents mix-ups during tablet production.

A combination of the tried and tested water-soluble BASF IR film former Kollicoat with a new production process and novel color concept makes tablet coating production more efficient. Its excellent processing properties are what make the polymer so special: Kollicoat IR has low viscosity and allows a shorter spray process because it can accommodate high concentrations of solids. As a result, pharmaceutical manufacturers cut their energy bills and spare the environment by reducing CO2 emissions in the production process. Other benefits: the granules are dust-free and have excellent flowability, which greatly simplifies handling during the production process. The BASF coating system module consists of just seven basic colors which are combined to produce the desired color. Hence, tablet manufacturers can optimize their inventories and the supply chain benefits from less complexity.

Kollicoat IR is a graft copolymer composed of polyethylene glycol and polyvinyl alcohol. It is extremely flexible and does not require additional plasticizer. The polymer dissolves rapidly in the stomach, resulting in prompt release of the active substance and rapid onset of action after the tablet is swallowed.

Stephen Saad, Aspen Group Chief Executive said “the excellent performance recorded by the South African business was driven by robust volume growth and margin improvements. Revenue growth in the international business is attributed to gains from Global brands, the Asia Pacific domestic brands, the oncology business and from the Glaxosmithkline (“GSK”) transactions.”

Completion of the GSK transactions:
With effect from 1 December 2009, Aspen completed a series of strategic, interdependent transactions with GSK (“the GSK transactions”) which had been announced on 12 May 2009.  The GSK transactions comprise:

•    The acquisition of the rights to distribute GSK’s pharmaceutical products in South Africa;
•    The formation of a collaboration agreement between Aspen and GSK in relation to the marketing and selling of prescription pharmaceuticals in sub-Saharan Africa;
•    The acquisition by Aspen Global of eight specialist branded products (Alkeran, Leukeran, Purinethol, Kemadrin, Lanvis, Myleran, Septrin and Trandate) for worldwide distribution;
•    The acquisition of GSK’s manufacturing facility in Bad Oldesloe, Germany; and
•    The issue by Aspen of 68.5 million ordinary shares to GSK at R66.80 per share amounting to a total value of R4.576 billion.

South African Business:
The South African business maintained its leadership position across the private and public sectors of the pharmaceutical market and grew revenue by 23% to R2.550 billion.  Operating profit from the South African business increased from R484 million to R806 million.  Other operating income includes an amount of R145 million received as insurance compensation for loss of profits and asset replacement arising from the explosion which occurred at the Nutritionals Facility in August 2009. Profit margins improved after the contractions in the previous two years caused by a weak Rand and delays in the passing of an increase to the SEP in the private pharmaceutical market.

The pharmaceutical division led growth in the South African business with revenue rising 30% to R1.975 billion.  Aspen’s robust growth in pharmaceuticals was characterised by volume gains across the extensive product offering.
.
The consumer division increased revenue by 6% to R575 million. This credible performance was recorded despite the prevailing recessionary effects in the retail environment as well as the negative impact on sales of infant milk formula due to the temporary unavailability of certain products resulting from the damage incurred at the Nutritionals Facility.

The Group’s South African manufacturing facilities achieved impressive efficiency gains as the benefits of the significant capital expenditure programme of the last few years begin to be realised.  The second Oral Solid Dose Facility and the eye-drop suite of the Sterile Facility commenced production at the Port Elizabeth-based site.  The hormonal suite of the Sterile Facility is scheduled to commence commercial production before the end of the 2010 financial year.  Capital projects in progress include the addition of increased tableting capacity and the installation of suppository and dutch medicines manufacturing at the East London site.  Reconstruction of the drying tower at the Nutritionals Facility is well advanced and production is expected to recommence within the next six months.

Sub-Saharan Africa Business:
In anticipation of the future materiality of this region, Aspen has established a separate management and reporting structure for the sub-Saharan Africa business.  Included in this business segment are exports into sub-Saharan Africa from South Africa, the Shelys Africa business based in East Africa and the GSK Aspen Healthcare for Africa collaboration.

Revenue from the sub-Saharan Africa business declined from R464 million in the prior period to R279 million and operating profit decreased from R99 million to R45 million.  The steep reversal in results was due to export business lost through the genericisation of patented ARV molecules marketed by Aspen. Sales by Shelys Africa were also reduced as this business shed low margin tenders in accordance with the strategic plan for the operation, without affecting profits.  GSK Aspen Healthcare for African began operations on 1 December 2009 and will in future be the most material contributor to the region.

International Business:
Revenue from the international business increased by 12% to R1.797 billion.  Gains from Global brands, the Asia Pacific domestic brands, the oncology business and the additional revenue from the GSK transactions were partially offset by reversals in Latin America.  Operating profit declined from R554 million to R463 million largely as a consequence of losses in Latin America and a strengthening of the Rand against most of the underlying trading currencies.

An 18% increase in revenue to R824 million from the Global brands is largely attributable to revenue from   Eltroxin, Lanoxin, Imuran and Zyloric, which were acquired with effect from 30 June 2008.  Worldwide sales from these four Global brands achieved double-digit growth in United States Dollars (“USD”).   The balance of the growth in the Global brands came from the addition of Aggrastat and the introduction of the eight products acquired from 1 December 2009 under the GSK transactions.

The Asia Pacific domestic brands increased revenue by 8% to R522 million.  This business, largely Australian based, again performed well considering the downward pricing pressure being experienced in this territory.

Aspen has exercised its call on the remaining 49% shareholding in the Latin American businesses.  Given that Aspen already has full rights to the economic performance of these businesses there is no further purchase consideration required for the acquisition of this remaining shareholding.

Revenue from domestic brands in Latin America declined by 15% to R345 million.  The primary underperformer was the Brazilian business, Aspen’s largest operation in the region. Aspen has assumed full operational control of the Brazilian business and has implemented a restructuring plan to shape this operation in accordance with the business model, which the Group has planned for Brazil.  Key actions include:

•    Disposal of selected assets, including the Campos Facility and related products to Strides Arcolab (“Strides”).  Consideration receivable from Strides amounts to approximately USD 75 million;
•    Right sizing of business structures and reshaping of sales teams to take account of the new business model; and
•    Identification and pursuit of opportunities to increase the private market product portfolio, of which some are at an advanced stage of negotiations.

The disposal of the Campos Facility will complete as soon as the requisite regulatory approvals are met.  In the interim, Strides have been engaged to manage Campos and will assume the risks and rewards of its operation.  An improvement in the performance of the Brazilian business is anticipated over the next six months as the restructuring plan takes effect.

The oncology joint ventures which Aspen has with Strides concluded a license and supply agreement with Pfizer in December 2009 in terms of which Pfizer has exclusive rights to market the oncology products in the United States.  An upfront non-refundable license fee of USD 12 million was brought to account in the six- month period to December 2009 of which 50% has been recognised, that being Aspen’s share under the joint ventures.

Funding:
Borrowings, net of cash, have been reduced from R4.0 billion at 30 June 2009 to R3.5 billion at 31 December 2009.  Strong operating cash flows and favourable exchange rate movements were the biggest contributors to this reduction.  The lower debt levels and the additional share capital in issue following the GSK transactions has resulted in gearing in the Group improving from 51% at 30 June 2009 to 29%.

Interest paid, net of interest received, of R190 million was covered seven times by earnings before interest, taxes and amortisation.  Gains on foreign exchange and forward cover contracts amounted to R32 million (2008 : R27 million loss) as underlying currencies strengthened against USD denominated obligations.

Prospects:
Aspen has established a leadership position in the South African pharmaceutical sector through more than a decade of unparalleled achievement in the industry.  The Group is positively positioned to maintain this leadership with an excellent product pipeline set to add to the most extensive product offering in the market and backed up by an outstanding team.  The recently awarded public sector tenders again verified Aspen’s production competitiveness, with the Group continuing as the largest supplier of pharmaceuticals to government.  The ARV tender remains to be awarded.  The ARV tender documents are yet to be published, although expectations are for an award to be made before the end of this financial year.  The recently announced support for local manufacturers under the South African Government’s Industrial Policy Action Plan is encouraging as is the focus on developing the pharmaceutical industry in South Africa.

The fundamental growth drivers of the South African pharmaceutical market remain intact.  This growth is however likely to be tempered by a delay in the annual SEP price increase by the Department of Health.  South African pharmaceutical companies will therefore absorb the net effects of exchange rate fluctuations and inflation from February 2010 until the date of the award.

Growth in the consumer business in South Africa is likely to be constrained by the economic circumstances.  Full supply of the infant milk products has been restored through the importation of product from Europe.  Overall performance indicators will continue to be distorted until full production is resumed at the Nutritionals Facility and the insurance payments are settled.

The sub-Saharan Africa business has excellent prospects.  The supplementation of GSK’s existing portfolio with Aspen’s pipeline of relevant products and supported by GSK’s proven distribution network should allow the GSK Aspen Healthcare for Africa collaboration to increase access to high quality medication in the region.  Shelys Africa has an active product launch plan for the remainder of the financial year as this operation becomes more focused on private sector business.

The transition of Global brands acquired in prior years to the Aspen international distribution network is well advanced.  Projects have been implemented which will result in significant cost of goods savings for the Global brands in the medium term and opportunities to supplement the Global brands portfolio will continue to be sought.