Sigma Pharmaceuticals is Australia’s biggest contract maker of drugs and in the past year or so it has been an indifferent performer as costs got out of control, sales growth slowed and competition intensified.
The share price dipped well under a $1 to a new low around 87c in July on worries that it might suffer more pain, but speculation that retail wholesaler Metcash and foreign drugs group, Sanofi might be sniffing around saw the shares rise 55% to $1.35.
The shares rose 4.5c to $1.395, a 3.3% increase, after being 6c higher earlier in the day.
Sigma said yesterday that first-half profit rose 1% as chemist/retailers reduced the quantity of medicines they purchased ahead of changes to the Pharmaceutical Benefits Scheme.
But the company’s plunge into generic drugs has also weighed on the company (it bought Arrow three years ago).
Earnings in 2007 fell to just $77 million after tax, the lowest for three years as the combination of rising costs, falling sales and manufacturing problems crimped profit margins.
The company promised that it could do better and yesterday reported a tiny sign that it was perhaps back on track.
That 1% rise in after tax earnings will help, but it was the $131 million acquisition of the business of Orphan Australia which had an obvious impact on sales and profits. Without Orphan’s contribution, Sigma would have had another difficult half.
Sigma said in the notes to the accounts that "During the period 22 February 2008 to 31 July 2008, Orphan contributed revenues of $17,052,000 and net profit of $1,334,000 to the Group (including the amortisation of identified intangibles)."
With Sigma’s sales revenue for the half year up 2.2% at $1,466 billion, from the the $1.434 billion for the corresponding period in, Orphan’s contribution to that line in the accounts was vital.
Sigma acquired Orphan in February 2008. Orphan Australia’s principal activities are the licensing, marketing and distribution of novel, highly specialised therapeutics from international pharmaceutical and biotech companies for sale in Australia and New Zealand.
"The Directors are pleased with the integration of the Orphan business within Sigma’s operations and the results to 31 July 2008 include the 5 months of Orphan’s post acquisition profit," the company said.
The Group’s earnings before interest and tax for the half year was $80.452 million up 29% from the $62.345 million for the corresponding period in 2007.
The Group’s profit after tax attributable to members of the Company for the half year was $30.669 million, compared with $30.315 for the corresponding period in 2007.
So the $1.3 million from Orphan for the five and a bit months was handy.
With the tax bill down $340,000 in the latest half from the previous corresponding period, and after tax earnings just $354,000 higher, you can see how there’s been little real improvement, despite the management’s tax and highlighting of a 29% improvement in EBIT
The company’s finance bill leapt $18 million in the half, from just over $20 million, to more than $38 million and that chewed up whatever improvement there was in EBIT. That was the $131 million net cost of the acquisition for Orphan.
That left profit before tax all but steady on $42.494 million for the latest half, compared with $42.486 million.
That’s why the small fall in the tax bill was important because it allowed the management and the company to claim a 1% rise in after tax earnings.
Directors said "The six months to 31 July 2008 saw the Group realise some of the benefits associated with prior period investment in rationalisation and restructuring activities. This result is evident from the EBIT contribution to 31 July 2008 as compared to the same period last year. The business is well positioned to generate strong returns to shareholders.”
Sigma expects full year earnings to rise to a range of between $83 million to $88 million in the year ending Jan. 31, 2009. That would at least be up on the $77 million in 2007 and the second half would also see a solid improvement if that forecast is met.
The company is paying an unchanged interim dividend of 3c a share.
"The achievement was primarily on the back of a significant uplift in operating margins and benefits of the renewed focus on Return On Invested Capital measures across the Group. Sigma’s Managing Director, Mr Elmo de Alwis, said in a statement with the results.
"The result reflected Management’s commitment to addressing the key business issues that had confronted Sigma over the past twelve months.
“We have delivered a strong Net Profit After Tax, driven by a pleasing return to prior levels of profitability across both operating divisions.
“With growth in EBIT over the first half of last year of 29.0%, the business is well positioned to generate strong returns to shareholders.”
Sigma’s performance was also positive in light of the recently introduced reforms to the Pharmaceutical Benefits Scheme.
"In the lead-up to the introduction of price cuts under reforms to the PBS, our Retail Pharmacy customers significantly reduced their inventory holdings.
“The destocking saw inventory levels in pharmacy reduced by approximately one month which impacted on first half sales across our key Generics and Wholesale sales channels.
“Pleasingly, there has been no loss of market share in both of these channels, and whilst competition remains fierce, particularly in generics, the business is well positioned to continue to enjoy revenue and EBIT growth,” Mr de Alwis said.
On the outlook Mr de Alwis said, “We reconfirm our full year guidance of Reported N
