Shares in pharmaceuticals group Sigma Healthcare plunged almost 30% at one stage yesterday after the company revealed it had started legal action against My Chemist (MC), which owns the Chemist Warehouse (CW) brand.
Sigma said that it had launched the action after My Chemist, which operates more than 300 stores around Australia, said it would start purchasing medicines from a different wholesaler.
Sigma shares fell to a low of 80.7 cents before steadying and edging back up to 81.5 cents, down 31% as Sigma warned that the hit to profit from the move if it continued, could be as high as $10 million.
“Sigma maintains that under the existing agreement MC/CW is not entitled to acquire products from another CSO Wholesaler," the company said in a statement to the ASX.
“Remedies to be sought by Sigma include declarations and injunctions for specific performance of the agreement."
Sigma said that if My Chemist does start purchasing “certain products” from another wholesaler then its earnings before interest and tax (EBIT) would fall by $5 million to $10 million per annum, with earnings hit as soon a this financial year.
“While Sigma remains confident of its position, this action, combined with a continuation of the subdued start to the financial year, may mean that current year underlying EBIT could be up to 5 per cent below FY2016/17 (subject to the outcome of the proposed proceedings).”
Sigma reported underling EBIT of $100.2 million for the year to January 31, 2017. Analysts had expected EBIT would rise to $107.5 million.
The shares sold off because investors were taken by surprise and reacted accordingly when confronted with what could end up to be a profit downgrade instead of the expected higher outcome.
That’s unlike the results yesterday from Programmed Management and ALS. Both released average results with cautious statements about the outlook. Programmed’s was a weaker result because of cost cuts since the end of the financial year and a cut in final dividend and the restarting of the dividend reinvestment program.
And yet their shares were treated more kindly by the market. The reason for that different treatment? Investors were not taken completely by surprise – both Programmed and ALS’s revenue and earnings weaknesses have become well known in the past year or so.
Sigma was supposed to be on an uptrend after a tough few years. No longer, it seems.
