Litha Healthcare Group releases results for six months to June 2011

Financial summary

• Revenue increased by 115% from R416 million to R895 million
  - This was mainly due to the inclusion of 100% of the LHH and Pharmafrica businesses for the full six months compared to only two months in the previous comparable reporting period
  
• Operating profit increased by 88% from R42 million to R79 million
  
• Group operating margin was 8.9% (2010: 10.2%)
  - As outlined at the year to December 2010, the decline in operating margin is due to a change in product mix in the enlarged group from originally only medical devices to a broader product basket consisting of both higher and lower margin products. The Biotech division, which contributed 25% to net operating profit, has lower margins as it is purely an importer and distributor. However, as manufacturing commences in 2013, margins are expected to gradually increase
  
• Earnings per share increased by 57% to 11,8 cents per share (2010: 7.5 cents)
  
• Headline earnings per share increased by 26% to 11.8 cents (2010: 9.4 cents)
  - The large difference between HEPS and EPS in the prior period was due to the writing back of the once-off goodwill impairment relating to the Litha Critical Care, previously Capex, business in the headline earnings calculation.
  
• Cash generated from operating activities was R94,6 million from an outflow of R28,1 million in 2010
  - This was due to strong cash generation from the divisions, as well as good working capital management
  - Net cash and cash equivalents at year-end was R236.2 million (2010: R105.7 million)
  
• The interest bearing debt:equity ratio was 31% (2010: 22%)
  - This is well within the group's maximum target of 40% The increase was due to securing funding to acquire the 49% stake in LHH

Commenting on the results, Group CEO Selwyn Kahanovitz, said: "We are very pleased with these results, with all our businesses delivering strong performances in the last six months due to continued focus on quality product and service delivery. The finalisation of the creation of the merged group during this period provided us with renewed impetus to our strategy of creating a diversified healthcare business providing services, products and solutions to the public and private hospitals, independent and corporate pharmacies and government healthcare programmes in southern Africa.

"During the last six months, we continued to successfully integrate the acquired businesses, with our estimated cost-savings well on track. During the period, we appointed executive team member Grant Parker as our chief operating officer to drive the integration process. We have also entered into an agreement to buy and lease premises, which will result in the majority of the group's Gauteng operations being integrated into one building. This will assist with streamlining the logistics function and will enable us to and harness the benefits of synergies between divisions and shared services."

Going forward, Kahanovitz said: "The group's businesses remain well-positioned to benefit from increased government spend on healthcare, as well as to maintain its market share in the private sector through the delivery of quality products and services.

Focus on geographic footprint

"The focus in the next six months will continue to be on bedding down the acquisitions which took place in 2010 and early 2011 and on completing the divisional integration with shared services and logistics across the group. In the next year, the group will continue to focus on increasing its geographic footprint into the SADC region and to tap into growth opportunities on the continent.

"On an operational level, in Biotech the focus will remain on ensuring momentum in the construction of the manufacturing facility at The Biovac Institute to meet the deadlines targeted for 2013. In Litha Medical, the group will continue to focus on business development to further increase agencies and therapeutic areas.

"In Litha Pharma, the main focus will continue to be building critical mass through transactions which will give the division more scale to effectively compete, as well as to develop a balanced product pipeline of its own. The division has recently signed heads of agreements with several top 20 ranked Indian manufacturers as well as a European manufacturer which will enable the group to submit a pipeline of 50 products during the next 12 months for commercial rollout from 2014. The group is also actively looking for other licensing agreements by using its partnership with Cpoint to add to the existing pharma pipeline.

"Management are positive that with the structures of the enlarged group now in place, Litha is on track to fully extract the anticipated benefits from the group services strategy and the resultant cost savings."

Operational overview

Litha Biotech - 73% of group revenue

The division performed in line with expectations due to strong sales at The Biovac Institute from the supply of paediatric vaccines for the Extended Programme on Immunisation in the public sector.

Revenue was R645,8 million (2 months ended 30 June 2010: R243,9 million) and operating profit was R22,6 million (2 months ended 30 June 2010: R18,7 million).

This division continued to focus on rolling out its project plan to manufacture its first vaccine in 2013 through The Biovac Institute. The group's facility in Cape Town is also being geared for potential technology transfers from international vaccine manufacturers to ensure utilisation of its manufacturing facility.

Litha Medical - 22% of group revenue

This division performed exceptionally well, despite pricing pressure from the public and private healthcare sectors.

Revenue increased by 22% from R157 million to R192 million compared to the prior period. Operating profit increased by 80% from R32,2 million to R58,1 million. The Manta Forensic business unit within this division experienced exceptional growth. The other business units all showed improved performance compared to the prior period.

Litha Pharma - 5% of group revenue

This division showed strong growth due to continued acquisitions in line with its strategy of building scale in this business.

Revenue was R50,9 million compared to the R10,7 million for the two months ended 30 June 2010 and operating profit was R10,2 million (R2,8 million for the two months ended 30 June 2010).

The purchase of the Goldex Healthcare business was finalised during the period under review. Goldex is an approved manufacturer and distributor of its own pharmaceutical products, as well as an exclusive distributor for a leading Indian multinational. During the period, to optimise market penetration, this division was split into two business units; - a branded/detailing doctor business unit and a generic/pharmacy/dispensing doctor-focused business unit. Continued increase in scale for these business units remains a key focus to compete against other listed pharmaceutical businesses.