In a year’s time Sigma Pharmaceuticals reckons it will earn less than it did in 2006-07, not the greatest of forecasts to be making for any company.
The company is our biggest drug group, with extensive interests in wholesaling, manufacturing and distribution: it is especially big in the growing generic drug sector.
And yet it is struggling.
Shareholders will pay for the company’s poor performance: total dividend for the latest year is 7c a share, down from the 8.75c a share for 2006-07 with the slashing of the final payout to 4c a share from 5.15c.
That the company had to force shareholders to share in the costs of its terrible year tells us how much the company has squandered in recent years.
The shares have halved in the past year, earnings are lower; dividend has been cut and there’s no prospect of a meaningful recovery for at least a year, possibly more.
Sigma had lowered its profit forecast in September, saying net profit would be between $88 million and $93 million on an underlying basis. That was its second downgrade last year.
Yesterday it revealed a 24% drop in net earnings thanks in part to a litany of problems in most areas. It said underlying profit came in at $90.2 million.
Several factors stood out, according to the company: the expiry of exclusive generic licenses for cholesterol and depression treatments. Others were the underperformance of its Herron manufacturing subsidiary, higher distribution costs and higher costs associated with Pharmaceutical Benefits Scheme drugs.
SIP said net after tax profit fell to $77.2 million in the 12 months to January 31, compared with $101.8 million in the year to January 2007.
And Sigma forecast that thanks to higher interest charges, net profit probably will rise to between $83 million and $88 million, still well short of the 2007 figure on any basis, net or underlying.
The shares edged higher in the buy anything round, hitting a high of $1.30 before ending up 4c at $1.265.
Depending if you were talking underlying or net profit, SIP’s earnings either bettered market consensus of around $87 million, or fell short.
The company said " The achievement of current guidance was primarily on the back of a significantly stronger second half for the Pharmaceutical Division and consolidation of previous market share gains in the Healthcare Division, with healthy increases in key business metrics over both the first half performance in the current year and over the corresponding second half of the prior year".
Sigma’s Managing Director, Mr Elmo de Alwis, said the result reflected Management’s commitment to addressing the key business issues that confronted Sigma during the 2007/08 year.
"We have delivered an underlying Net Profit After Tax within the current guidance range, driven by a strong second half performance. While we still have a way to go, consolidation of the past twelve months of growth in Healthcare has been achieved. We report an improvement in EBIT (Earnings Before Interest and Tax) margin in the second half. Compliance across the key categories of the Embrace program also continues to improve," Mr de Alwis said.
Sigma’s performance was also positive in the increasingly competitive generics division.
"Competition remains fierce in generics; however, the bottom line performance for the second half of 2007/08 was also particularly pleasing. New generic and OTC (over-the-counter) products continue to be delivered out of the Arrow Group pipeline. The Herron business, for which a new management team was recruited, maintained market share and profitability over the period," Mr de Alwis said.
SIP said that the Pharmaceuticals Division had net sales of $615.8 million, down 2.1% from 2006/07, comprising a decline of 3.3% in the first half and 1.0% in the second half of 2007/08 over the prior corresponding periods; underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of $151.7 million, down 3.4% from 2006/07 and underlying Earnings Before Interest and Tax (EBIT) to External Sales margin of 19.6%, down from 20.2% in 2006/07.
Mr de Alwis said in his statement that "The profitability exhibited by Pharmaceuticals in the second half is due primarily to a number of action plans that were implemented, including lower COGS on certain key licensed generics to improve our competitiveness and profitability on these products, the new Dandenong facility coming on line, and the launch of new products in the second half. The pipeline of new generic molecules out of Arrow Group, the vast majority of which we will manufacture ourselves, along with the impending re-launch of the Herron brand will underpin continued growth for the Division."
The company’s Healthcare Division had net sales revenue of $2,350.7 million, up 13.6% from 2006/07, comprising growth of 19.5% in the first half and 8.7% in the second half of 2007/08 over the prior corresponding periods; underlying EBITDA of $64.5 million, up 6.3% from 2006/07 and the EBIT to External Sales margin of 2.5%, was down from 2.7% in 2006/07.
"The prior period growth has been consolidated with enhanced EBIT margins. The resolution of issues surrounding the Community Service Obligation ("CSO") pool during the second half was welcomed by Sigma and the other complying market participants. Amcal and Guardian remain the largest and second largest retail pharmacy banner groups in Australia," Mr de Alwis said.
Sigma directors declared a final dividend of 4.0c per ordinary share, fully-franked. This brings full-year dividends to 7.0c.
Mr de Alwis said the "improved operating performance achieved in the second half 2007/08 is expected to continue in 2008/09, with EBITDA and EBIT expected to grow by 16% to 19% and 14% to 18% respectively.
"The acquisition of Orphan Aust
