Australia’s biggest pharmaceuticals group, Sigma, has struck some first quarter earnings problems.
The company’s annual meeting was told yesterday that while the first quarter’s sales growth was “consistent with the growth achieved in the latter part of last year,” this hadn’t translated to the bottom line.
“There are various factors that have prevented these increased sales from translating to commensurate profit increases in the quarter,” CEO, Elmo de Alwis told shareholders in the CEO’s address.
He said these factors have included “the impact of regulatory reforms particularly the current allocation of CSO (Community Service Obligation) funds.”
Mr de Alwis said the CSO has been a great step forward in recognising the true cost of supporting timely access to medicines by all consumers: “but now it is up and running there is a need to ensure that the CSO funds are being paid to wholesalers that are delivering this service on a level playing field basis”.
“Our expectations that the 3% reduction in Wholesalers margin would be largely offset by our allocation from the CSO pool of funds under the 4th (Pharmacy) Guild- Government Agreement have not have not been met, with Sigma experiencing a shortfall in margin of approximately 0.9% on sales of PBS products, which in turn represent 70% of total Healthcare sales.
(Under the 4th Government Guild Agreement, introduced, from 1 July 2006, a reduction in Pharmaceutical Wholesaler margins from 10% to 7%, and the introduction of a Community Service Obligation payment, or CSO, to be shared by full line wholesalers.)
With Sigma’s allocation under the CSOless than the corresponding 3% reduction in margin, “Sigma is currently taking steps to address this issue and to ensure that future CSO funds will be applied for the purposes they were originally intended,” the CEO told the meeting.
Brokers said after the meeting that despite this first quarter problem the current market guidance of 10-15 per cent rise in earning remains unchanged, subject to continued growth in the Embrace customer base, and fixing the CSO shortfall, which will require negotiations with the Federal Government.
“Upon review of our current operations we believe that a combination of correcting our CSO allocation and continued growth in our Embrace (Embrace is a new marketing and financial support system for its Amcal and Guardian Chemist chains) customer base will enable us to meet our current market guidance.
Sigma earned a net profit for year to January 31, 2007, of $101.8 million, down 2.9 per cent after one offs. The underlying profit was $104.6 million, up a more impressive 15.4 per cent.
The Embrace membership is now 937 chemists across the country in the program and SIP has raised the 2007 target of 1,000 (which had been increased) to 1250 by the end of the calendar year.
Mr de Alwis also told the meeting the company’s earnings would again be skewed towards the second half of the year, as it has in past years because of the stronger sales at Christmas in its chemist chains and the launching of two new generic drugs.
The company’s chairman, Dr John Stocker, told the meeting that the previously announced 5.5 per cent buyback of the company’s shares will not go ahead because; “we have not been able to agree on the terms of a selective buy-back with the Restricted Shareholders, and we are now considering the appropriate form for a non-selective buy-back”.
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Meanwhile Mr de Alwis told the media after the AGM that Sigma will decide whether it will bid for Symbion Health in the next couple of weeks.
Symbion has a takeover offer from rival, Healthscope, in partnership with two private equity groups.
Mr de Alwis said Sigma was looking at options to be part of a consortium to have a tilt at Symbion.
He said a number of banks have come to the company and said that they are interested in putting together some sort of consortium, or some sort of partnership arrangement.
Mr de Alwis said Sigma was interested in Symbion’s wholesale drugs and consumer businesses.
“We have to put together a structure that would address any concerns that the ACCC would have over a straight-out merger,” he said, referring to possible ACCC concerns that might arise if Symbion, with its wholesale distribution and pharmacy businesses, was bought by a group including SIP, with its strong presence in the same area.
Like Healthscope, it would seem SIP could end up with private equity partners.
Despite the hint of a bid, the shares were unchanged yesterday at $2.42 as investors digested the mixed news from the meeting.
