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Edited Transcript of AIP.J earnings conference call or presentation 28-Aug-19 9:00am GMT

Q4 2019 Adcock Ingram Holdings Ltd Earnings Presentation

Midrand Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Adcock Ingram Holdings Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Gideon Hall

Adcock Ingram Holdings Limited - CEO & Executive Director

* Dorette Neethling

Adcock Ingram Holdings Limited - CFO & Executive Director

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Conference Call Participants

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* Catherine Cunningham

JP Morgan Chase & Co, Research Division - Analyst

* Grant Morris;ClucasGray;Analyst

* Raj Sinha

HSBC, Research Division - Head of EEMEA Equity Research

* Tumi Makoah

Primaresearch (Pty) Ltd. - Healthcare Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Adcock Ingram annual results conference call. (Operator Instructions) Please note that this call is being recorded. To let everyone know, if anyone would like a copy of the results booklet, it is available on the website at www.adcock.com.

I would now like to turn the conference over to Andy Hall, the Chief Executive Officer. Please go ahead, sir.

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [2]

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Thank you, Irene. Good morning, ladies and gentlemen. Welcome to our telecon for the results for the year ended June 2019. We appreciate you taking the time to show an interest in our company today. The format will be that I'll share with you an overview of what we believe is a solid set of results for the year, particularly when we look at it in the context of the current economic environment in South Africa. And thereafter, Dorette Neethling, our CFO, will give you much more detail on the financials. You'll have a chance afterwards to ask questions or make comments if you want to.

When we look at the overall business performance, we're pleased that we achieved group turnover increase, an increase of 11%. This was driven partly by a mix effect of about 5%. So you'll recall, we purchased the Genop business about 18 months ago. So that business is now in these results for the full year, whereas in the previous year, it was only in for 6 months. In addition to that mix effect, we had decent volume increase of about 4%, and then the balance of 2% is made up effectively of price, which you'll see was lower than the 3.78% SEP increase granted for 2019 overall. Trading profit is up by a healthy 12%, despite the depressed environment.

Just looking quickly into the rest of Africa, the group's Zimbabwean subsidiary was disposed off earlier in the financial year, and that's reflected as a discontinued operation. And then we recently in June sold our remaining stake in the business in Ghana, and this is in accordance with our strategy of not investing in any fixed infrastructure on the continent outside of South Africa.

Just taking a quick look at the regulatory environment and the 3.78% SEP increase that we got for 2019 was better than the 1.26% that we got in 2018. But for us, more certainty about the methodology used to calculate the annual increase as well as the timing would assist the industry in operating within this weak and volatile exchange rate environment that we're currently in. Our preference, along with the rest of the industry, is for an annual increase based on CPI with an implementation date of 1 January each calendar year, and the industry has been talking to the pricing committee and the department about that proposal.

The transition from the Medicines Control Council to the South African Health Products Regulatory Authority has still been a challenge. I guess recent efforts from the regulatory body leave us with some reason for optimism as SAHPRA has been focused on this backlog clearance program, and eventually, we have received the submission windows for the various therapeutic classes under which we can now send the dossiers in for evaluation.

This ongoing work at SAHPRA, which is sort of the other half of SAHPRA, has not shown any dramatic improvement over the last year, but we're hopeful that once the advertised vacancies get filled within SAHPRA, this will lead to a fully functional regulatory body for our industry. They have recently communicated that they're in the process of filling about 100 positions.

I guess the most recent development on the regulatory side was the long awaited NHI bill, which was tabled in August in Parliament. There's been a lot said and written in the wake of the bill. So as a company, we will use the opportunity for public coming through the Pharmaceutical Task Group, which represents about 90% of the pharmaceutical industry in South Africa.

Looking at the results. On a divisional basis, our OTC division, which competes in both private and public sector as well as some export markets into Africa, focuses particularly on pain, cough, colds and flu and antihistamines. The impact of the tough trading environment, combined with some out of stocks that we experienced on some of our popular winter brands as well as down scheduling of some former prescription-only analgesic brands, translated into flat turnover year-on-year. Brands like Corenza C and Citro-soda showed good growth, but our cough mixture portfolio suffered from some inconsistent supply during the winter.

The second half of the financial year saw a complete leadership change in this division. This was followed by a reorganization in that business unit, and we think it will result in more sustainable sales and marketing efforts in this business going forward.

On the positive side, Mypaid production has been resumed after a worldwide shortage of ibuprofen, which resulted in that brand being out of stock. And then we've made regulatory headway with SAHPRA for registration of an active pharmaceutical ingredient for our product, Adco-Linctopent, and supply of that brand will commence in the first quarter of 2020. Effectively, we've operated through the last 2 winters without that cough mixture.

The prescription side of the business, very healthy performance. If you look at IQVIA data, which measures effectively in-market performance, this division is showing growth of 6.6% versus market growth in the prescription market of 3.2%. So an excellent performance in-market. Ex-factory, the mix here resulted in a revenue improvement of 14% because Genop reports within this business. And then, they had a couple of nice new product launches during the year, a product called Innuvair, which is for the treatment of obstructive pulmonary disease; Rapacid which is for gastritis; and Versatis, a product for treatment of post-herpes pain. On top of this, volumes grew by an impressive 9% in this business, and this was mainly as a result of increased demand in the antiretroviral private market. So overall, very little to complain about in that business on the top line.

The division continues to build on its ability to sell and market products on behalf of multinationals. You will recall that we generally do about 600 million per annum in this division on behalf of multinationals. Our long-standing partnership with Leo Pharmaceuticals were strengthened this year. We've secured the sales and promotional rights to their recently acquired dermatology business from Bayer, and this establishes Adcock Ingram as the leading prescription dermatology business in South Africa. And as a reminder, their Bayer portfolio includes some great brands such as Advantan, Scheriproct and Travocort. And effectively, we started selling those products on the 1st of July. So we're quite happy with that performance.

In addition, the division secured a 4-year extension of its women's health partnership with another multinational called Novo Nordisk, and this sustains our position as the leading women's health franchise in the country.

The ARV business at Adcock Ingram is currently the second largest in the private sector in the country and has been a good strategic growth driver for this division. Our ARV portfolio now holds an 18% share of the private sector, and Trivenz, which is our premier ARV brand, remains one of the top 10 pharmaceutical brands in the country. The government's ARV tender results were very positive for Adcock Ingram. We were awarded 12% of the 3-year tender, and we estimated that at about ZAR 2 billion for the company over the 3-year period at the volumes that were advertised.

In our consumer business, also a good year. Turnover there increased by 15%, and we saw very strong performances from our leading brands, despite an extremely tough market out there. Both Panado and Compral had double-digit growth in the year. Bioplus kept its market leadership position in the energy supplement segment that also grew in double digits.

As we've said to you before, growing in personal care remains a focus area for this team. So it was pleasing to see GynaGuard achieving growth ahead of 10% in this business unit. You'll recall, we spoke about this a year ago. So this leadership team has been in place since April 2018, and it's commendable to see such a positive outcome after their first full financial year of driving the marketing strategies of these trusted brands.

In our critical care or hospital division, as it's also known, this is the leading manufacturer and supplier of hospital and critical care products in Southern Africa. We had good turnover increase there of 8%, very nice performance from our large volume parenterals, including good gains in the private sector. And our renal portfolio here had double-digit growth, so those 2 business segments doing very well in this business.

Just looking quickly at our manufacturing facilities. Our Clayville manufacturing facility has experienced some production difficulties in the last 6 months on the oral liquids side. So the oral liquids output has not met our expectations, and that had the knock-on effect into the OTC business in winter. However, the production of granules and powders grew significantly year-on-year. So that part of the factory in fact ran well, and that, of course, supports the performance of Citro-soda. The construction work on the ophthalmic facility that we've been busy with now for over a year is pretty close to completion. We're on track to do validations later this year, and we will probably commence commercial production late in our 2020 financial year.

At Wadeville, our liquids, creams and ointments facility is operating optimally, and we're hoping that through the award of the ARV state tender, that production levels in the tableting part of this plant should increase over the year.

We did recently appoint an operations executive to take overall responsibility for the Clayville and Wadeville factories. So we've got someone sort of closer to the exco team, making sure that these 2 factories operate efficiently.

At the Aeroton factory, which is our hospital factory, that factory, in fact, had a standout performance in the year. They did very well in meeting the increased demand in large volume parenterals for both the private and the public sector. And in fact, manufactured 40 million units this year, which is an increase of about 3% or 4% over the prior year. So that factory really ran well, and I think you'll see that in the margins.

On the distribution side, there, we are really committed to regulatory compliance, maintaining service levels and cost containment. Those are the 3 focus areas. Over the last 12 months, our service levels to our customers have remained consistently above 98%. So we're happy from a service level point of view. We are in the process of evaluating our presence in what we call last mile deliveries at Adcock Ingram and are considering outsourcing this function over the course of the next year. So we are obviously looking at that at the moment.

On the transformation side, we are still a certified level 3 B-BBEE contributor, and we're particularly pleased that the youth employment initiative or YES program was successfully implemented at Adcock Ingram this year. And by the end of March, we had a total intake of 132 graduates. That completes my business overview.

I'll hand over to Dorette to talk about the detail on the financials.

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Dorette Neethling, Adcock Ingram Holdings Limited - CFO & Executive Director [3]

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Thank you, Andy. We are indeed very satisfied with the set of financial results, and in particular, with the increase of 12.4% in trading profit and the increase of 11% in headline earnings per share from the continuing operations.

Before I continue to some of the detail, I also just want to inform you that apart from the results booklet, which is available on our website, we have also published the full set of annual financial statements for the year this morning.

So for those of you who have downloaded the booklet, I'll have a closer look at the income statement, which is on Page 5. Revenue from contracts with customers, which is commonly known as turnover of ZAR 7.1 billion, is about ZAR 700 million or 10.9% higher than the prior year, driven by a change in mix of 5.4%, of which Genop contributed ZAR 295 million or 4.6%, following its inclusion for the full year compared with only 6 months in the prior year. Volumes increased by an impressive 3.7%, and we realized an average price increase across the group of 1.8%, mainly in the OTC and consumer businesses.

Gross profit of ZAR 2.8 billion, which is at 39.4% of sales, is ZAR 278 million or 11.1% higher than the previous year, which was at a similar gross margin of 39.3%.

Operating expenses for the year of ZAR 1.8 billion, which includes Genop, ended 10.4% above the prior year, and excluding Genop, operating expenses were reasonably well controlled and increased by 5.1% over the prior year, driven mainly by the sales growth coupled with higher [corporate] costs following a number of increases in the fuel price. That leaves us with trading profit of ZAR 955 million, which is 12.4% ahead of the prior year.

During the year, we incurred non-trading expenses of ZAR 72 million, which includes share-based expenses of ZAR 42 million, retrenchment costs of ZAR 12 million, impairments of ZAR 8.6 million and corporate activity costs of ZAR 6 million. The impairments include ZAR 5.6 million related to the AVL business and ZAR 3 million relating to the investment in the Ghanaian associate, which we recorded at the interim purposes. This resulted in operating profit of ZAR 884 million, which is 10% up on 2018.

The net finance cost for the year is ZAR 11.6 million compared to ZAR 7 million in the prior year. Dividend income from the Tiger Brands Black Managers' Trust is ZAR 3.9 million compared to the ZAR 4.3 million in the prior year and is reducing on an annual basis as employees exercise their rights with regards to the options granted in terms of this scheme.

Equity-accounted earnings increased 14% over the prior year and include the results for the year from National Renal Care, the JV we have with Netcare, the manufacturing plant in India, the JV with Meiji of Japan as well as the group share of the operating loss from the Aeroton business in Ghana up until the date that, that investment was sold.

The effective tax rate adjusted for equity-accounted earnings is 50.8% with nondeductible expenditure causing the increase over the statutory rate. As a consequence of all the above, net profit from continuing operations of ZAR 697 million ended 10.1% ahead of the prior year. The loss from the discontinued operation of ZAR 1.6 million relates to the disposal of the group's Zimbabwean subsidiary, which Andy alluded to earlier. Minorities in Novartis Ophthalmics and Menarini account to ZAR 7.5 million. That leaves us with headline earnings from continuing operations for the year amount to ZAR 701 million compared to the ZAR 634 million recorded in the prior year. This translates into headline earnings per share of ZAR 4.217, an improvement of 10.6%.

I'll look at closer at this segment, and it is on Page 11 and 12 of the booklet. And I'll start with the South African businesses and with the OTC business. This division's turnover of just short of ZAR 2 billion is just below last year as the average price increase realized of 2.6% was offset by a decline in volumes of 2.9%. This business was impacted by the challenging trading environment and the down scheduling of certain competitive brands, which was formerly only available on prescription. This was compounded by the inconsistent stock supply on some of the cough mixtures during winter.

The gross margin was in line with the prior year and operating expenses were well controlled and increased by a meager 1.6%. Trading profit of just short of ZAR 390 million ended 2.8% below the prior year.

Moving to prescription. Turnover in this division of ZAR 2.7 billion improved 22.4%, with Genop's additional 6 months of sales contributing ZAR 295 million or 13.2%. Volumes increased by an impressive 8.7%, driven by growth in most segments, but with exceptional growth of 17.6% in the ARV volume. Price deflation of 0.4% was seen in this division, following the suboptimal SEP increase of 1.26% in March of last year and 3.78% in February 2019.

Pricing was impacted by the decrease in reference pricing of certain generic products and funders putting pressure on the pricing of ARV products. Mix due to new products in the portfolio including those of multinational partners contributed to the balance of the sales growth. The gross margin ended in line with the prior year with a positive sales mix impact, partly mitigating a higher factory under recovery.

The operating expenses ended above the prior year, mainly due to the inclusion of Genop, and is 3.1% ahead of the prior year on a like-for-like basis, below the sales increase on a like-for-like basis. Trading profit of ZAR 310 million ended 29.5% ahead of the prior year, or 16.2% like-for-like.

In looking at the Consumer division, turnover of ZAR 790 million improved by 14.6% compared to the prior year, driven by an average price increase of 7.6% and a volume improvement of 6.5%. This is an excellent result considering the very challenging trading environment and testament to a rejuvenated management team in this business. The gross margin reduced slightly, whilst the operating expenditure increased by 9.5%, a consequence of higher sales and increased marketing expenditure to sustain the flagship brands of the division. This resulted in trading profit of ZAR 134 million, ending 19.6% ahead of the prior year.

Lastly, the Hospital division. Turnover of ZAR 1.5 billion increased by 7.9% over the prior year, driven by volume improvement of 5.5% with good gains in the private market, a mix benefit of 1.8% from new products and an average price increase of just 0.6%. The gross margin ended slightly higher than the prior year, benefiting from improved factory recovery and a beneficial sales mix.

The operating expenditure was 9.2% ahead of the prior year, mainly as a consequence of the higher sales. Trading profit of ZAR 112 million ended a very pleasing 17.7% ahead of the comparative year.

With the volatility in the exchange rate and more so recently after our year-end, I will run you through some of our foreign exchange details in the past year. During the year, the following material foreign currencies were bought in the South African businesses: EUR 39 million at an average rate of ZAR 16.29, a 6.5% weakening in the rand compared to the prior year, which was at ZAR 15.30; and USD 65 million at an average rate of ZAR 14, representing a 5.3% weakening in the rand compared to the prior year. With approximately 58% of FECs in dollar and 41% in euro, the cost of our weighted basket of all currencies weakened by 5.7% in 2019 if compared to 2018.

At year-end, the business was carrying the following open FECs, EUR 18 million at ZAR 16.68 compared to the current spot of around ZAR 17; and USD 22 million at ZAR 14.53 compared to the current spot of around ZAR 15.50.

Then moving on to the foreign or Rest of Africa operations, which now only reflect the performance in Kenya, with turnover ended ahead of the prior year and good trading profit of ZAR 8.6 million was recorded during the year under review.

In looking at the balance sheet, which is on Page 7, I'll just talk through some movements. On the noncurrent assets, we've recorded depreciation charges to property, plant and equipment of ZAR 153 million, pretty much in line with the same amount that we recorded last year. Intangible assets including goodwill have a carrying value of just more than ZAR 600 million and comprised of generic, consumer and OTC trademarks and license agreements as well as intangibles and goodwill recognized on the acquisition of Genop. We've recorded amortization of ZAR 11 million in this year. Other financial assets of just short of ZAR 50 million are primarily the capital contribution made to the Tiger Brands Black Managers' Trust, which has reduced as options were exercised during the year, and the recording of a fair value adjustment of ZAR 1.8 million.

In looking at the current assets, inventory of ZAR 1.3 billion is cited at the lower of cost and net realizable value after provisions of ZAR 200 million. Days in inventory reduced to 108 days compared to the 136 days at June 2018. Days in receivables of 64 days, slightly better than the 65 days reported in June 2018 due to the receipt of payments from government as per the agreed payment plan. The book remains well controlled and 89% of receivables are due within 60 days or less. Government debt is 14% of the total debtor's book for both the current and prior years and around 75% of this customer's total outstanding amount is due within 60 days or less.

Moving to the bottom half of the balance sheet. The group has shareholders' funds of around ZAR 4.3 billion at the end of June. The decrease in the non-distributable reserve since June 2018 relates mainly to a decrease in the cash flow hedging accounting reserve, a decrease in the FCTR, which was partly offset by an increase in the share-based payment reserve. The group remains comfortably able to service its obligations in the short term with headroom in the working capital facility of ZAR 850 million and cash resources of ZAR 450 million as at year-end. That's all from my side.

And I will hand back to Andy to close the session.

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [4]

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Thanks, Dorette, for the comprehensive review. I guess as everyone knows now, Adcock Ingram is a proudly Bidvest company. So Bidvest took its share in Adcock to just over 50% at the end of July or the beginning of August. So we now are a controlled subsidiary of Bidvest. I guess everyone on the call knows who Bidvest is. So it's a well established and highly regarded organization with a vast footprint. So we've been involved with Bidvest, I guess, since around about 2014. We've had Bidvest members on our Board. The good thing for us is that the structure of our business is pretty much set up as Bidvest runs its operating companies.

We operate in a very decentralized and entrepreneurial environment here with autonomous business units. The upping of their share, I guess, is certainly, from our perspective, a positive compliment to our people, our brands as well as our supply chain. I'm pretty sure Bidvest wouldn't have upped this stake if over the last 5 years, they were doubting our ability in those 3 areas. And hopefully, going forward, we will have a closer working relationship with Bidvest, and that, we are hoping, will open up some growth opportunities, both for our people and for our company in general. So we remain committed to the growth of our 4 business units and we continue to look for opportunities, particularly in the nonregulated space to augment our range of products and defend our position within the market in South Africa. On that note, we thank you for dialing in.

And Irene, we're happy to take any questions or comments.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Grant Morris of ClucasGray.

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Grant Morris;ClucasGray;Analyst, [2]

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I've got 2 questions, if you don't mind. The first one, if you could just clarify for me what the down scheduling of drugs really means. I'm just trying to understand what the implication in the OTC business of that actually is. Is that competitors moving drugs from prescription areas into OTC products and that just becomes more competitive for your product lines? Or can you just clarify that for me, if you don't mind?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [3]

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Sure, Grant. First of all, thanks for dialing in and for your compliment. So down scheduling of drugs is pretty commonplace across the globe, and as drugs really develop a better safety profile or better known safety profile, it's not unusual for regulators to down schedule medicines from prescription-only to OTC. So what happened in South Africa about 18 months or so ago was a number of analgesic products got down scheduled from Schedule 3, which is prescription-only, to Schedule 2, which means you can go and access it through a pharmacist. And as you know, in our OTC business, we're the biggest company in the country in pain. So anyone that moves into that space effectively provides more competition for us. So it's been a little bit of a two-edged sword.

So what it's done is whilst it's been a little bit punitive for our OTC business because they've got more competitors out there, it's helped our prescription business because 2 of those products in fact line our prescription business and used to be prescription-only, and those products are Myprodol and Gen-Payne. So there, it's helped that division to cannibalize the OTC division somewhat. And then some of our competitors would have some of these products, which are now effectively in that space and are able to be accessed OTC. And an example would be a very good product like Mybulen, which is an Aspen product. So it just makes life a little bit tougher for us out there in the market on the OTC side.

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Grant Morris;ClucasGray;Analyst, [4]

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And does that -- the impact comes through really in pricing? Is that why we're seeing that in the trading margin?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [5]

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No, it doesn't really come through in pricing. And the reason is these products are SEP regulated. So whatever we sell those products to -- whatever price we sell those products to before, we continue to sell them at the same price, and the retailer has to take them at that price. The difference is the consumer has a broader range of choice now. So where they might have chosen from a range of 10 products, they now could be choosing from a range of 12 or 15 products.

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Grant Morris;ClucasGray;Analyst, [6]

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Okay. And then maybe the second question, if you don't mind, is just the ophthalmic facility, which you mentioned, and the 2020 target, would you mind just giving a little bit more detail on the kind of intended product range there? Just remind me of that. And secondly, ancillary to that, were there any of the ophthalmic products within the Genop acquisition that will be able to utilize that facility?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [7]

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Yes, I'll do that with pleasure. So we've got a fairly extensive range of ophthalmic products in Adcock Ingram. Dorette might know the numbers better than I do. She always does. But I think it's in the region of about ZAR 150 million per annum. Part of it is products that we sell on behalf of another big multinational. And what we found over the years is that because all of our eye drops are effectively contract manufactured, in other words, we don't make them in-house at Adcock Ingram, we've suffered from inconsistent supply year-to-year.

And the reason is when these products are made by big offshore companies, South Africa is a small market, and effectively, we sit at the back end of a queue in terms of when batches get produced. And that's not good for us in terms of our marketing activities. So we made a decision about 18 months ago to build a small ophthalmic facility in Clayville. And our plan is, over time, to bring in as much of our own product as is possible. It does, in fact, include 2 brands from the Genop acquisition. And then we got -- to make that facility operate efficiently, we will also have to go and talk to effectively other players in the market to bring some contract manufacturing in there.

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Grant Morris;ClucasGray;Analyst, [8]

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Okay. And the kind of -- is this something that's likely to come into production within the next financial year? Or is this -- we're talking about the 2021 financial year?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [9]

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Yes. So we're close to getting to do what they call validations in this industry. So we will hopefully get all of those done between now and March 2020. We are thinking we could start commercial production from April or May 2020, and so it should be running at full tilt in the 2021 fiscal.

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Operator [10]

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(Operator Instructions) Our next question is from Catherine Cunningham of JPMorgan.

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Catherine Cunningham, JP Morgan Chase & Co, Research Division - Analyst [11]

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I just had one quick question. Just wanted to clarify from the first question that was asked now, you mentioned that Myprodol and Gen-Payne have been down scheduled. Just in the account, are those still then in the prescription segment? Or are they OTC now?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [12]

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Catherine, so we haven't moved those products into OTC division from a marketing perspective. We've list them with the prescription division just because our marketing people there understand the brand plans for these 2 products. So we've left them in prescription.

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Operator [13]

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Our next question is from Raj Sinha of HSBC.

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Raj Sinha, HSBC, Research Division - Head of EEMEA Equity Research [14]

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Just a couple of questions. The first one is just on the potential [integration of] Bidvest going forward. Just wondering if -- I know you mentioned that you run a decentralized unit and fairly autonomous. But just wondering if there was something within the larger Bidvest group that could help you with your sales or manufacturing or logistics going forward? Any sort of synergies thereon? And second bit was just on -- second question, rather, is just on the hospitals business. Obviously, I want to sort of understand where you are in terms of utilization because if we go back a few years, I was under the impression the strategy was to get the utilization to a relatively high level and then start to bring in more and more profitable products to try and increase the margins. So just wondering where you are on that sort of strategy.

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [15]

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Yes. Sure, Raj. Thanks. I guess on the Bidvest side, the synergies are not big. And the real reason is when Bidvest acquires businesses, it tends to leave them alone to operate on a sort of what they call a decentralized, entrepreneurial or autonomous basis, however one wants to call it. And in fact, they made a public pronouncement lately that, that's their intention with Adcock Ingram, that there's no intention to sort of integrate us into their business because that's not how they run their businesses.

So on the sales or manufacturing and logistics side, I would suggest there aren't going to be any synergies to be extracted there. But I think where there is opportunity for us is in terms of working closer with the Bidvest management team, there may be opportunities for growth that they come across that they potentially feel are complementary to our product portfolio and that we have a better opportunity now of pursuing. So I'm hopeful that on that side, it might accelerate our growth opportunities. And then there may be some areas really in terms of procurement. They are a big corporation. They do procure widely, I mean, particularly on the services side, not really on the finished goods or product side. And there may be some synergies that we can extract there over time by combining our service purchases with Bidvest.

On the hospital question, that factory at Aeroton is operating at 100% capacity. So there's no opportunity for us to put any more production into that business. And the main reason is it won more than 90% of the last government tender in large volume parenteral fluids. So it's been servicing that. And it also has a very good chunk of the private market now. So a very good market share with at least 2 of the big private hospital groups.

The intention there, you're right, is to try and bring in complementary products or complementary portfolios that basically go to the same customer set, so other types of products that the big hospital networks, for instance, might procure, but we've struggled with it. So we've only had new product sales in that business of around about ZAR 15 million over the last year, and that's ZAR 15 million on sort of ZAR 1.4 billion. So we had battled in that area, but it still remains an intention for that business to look at those sort of bolt-on product portfolios that they can take to the common customer set.

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Raj Sinha, HSBC, Research Division - Head of EEMEA Equity Research [16]

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Can I just follow up with the first question? You've mentioned that with Bidvest, you may find some other growth opportunities. Would you be comfortable, now that they're the controlling shareholder, in perhaps leveraging your balance sheet a bit more in terms of acquisitions? Or do you want to keep the leverage around about the levels that you are at currently?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [17]

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Look, I think that's a question that we could answer even if we weren't controlled by Bidvest. So I think the 2 things don't sort of go ahead -- necessarily go together. Our view is that in the sort of areas where we're looking, in that personal care space and the kinds of businesses that we've had an opportunity to either do diligence or talk to, the acquisition process are around about the level that we can cope with just from our internally generated cash flows each year. So transaction values in that area where we're looking tend to vary between about ZAR 100 million and maybe about ZAR 400 million, and we're generating about ZAR 1 billion per annum in operating cash flows.

And then on leveraging issue, I guess, if there were substantial businesses that became available to us, we're not afraid to leverage. So we're quite happy to go to 1 or 2x EBITDA in terms of leveraging if we need to. But there's nothing immediate on the table or anything that's even on the short-term horizon that we think will require that, Raj.

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Operator [18]

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Our next question is from Tumi Makoah of Primaresearch.

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Tumi Makoah, Primaresearch (Pty) Ltd. - Healthcare Analyst [19]

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Just wanted an update on wage negotiations. Did you guys come to an agreement with the union members?

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [20]

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Tumi, I can't give you any detail on that, but I can tell you that the industry and the unions are still in discussions.

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Operator [21]

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(Operator Instructions)

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Andrew Gideon Hall, Adcock Ingram Holdings Limited - CEO & Executive Director [22]

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Okay. Thanks, Irene. Thanks to everybody for dialing in. We wish you all a good day, and I know we'll be seeing some of you over the course of the next couple of days. So we look forward to those interactions with our big shareholders and some of the analysts. Take care.

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Operator [23]

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Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.