SIP Plunges

By Glenn Dyer | More Articles by Glenn Dyer

The market yesterday administered one of the biggest hidings seen for some time to a leading industrial stock when it sold down the shares of Sigma Pharmaceuticals by 20 per cent after a surprise profit downgrade.

The company said its net income in the 12 months ending Jan. 31 will be similar to the year earlier. The company had previously forecast profit growth between 10 percent and 15 percent.

The shares in the country's leading contract maker of drugs, wholesaler and pharmacist operator, tumbled by 42.5c at one stage, to a low of $1.695 before a small recovery back to $1.745.

Turnover was a massive 53.7 million shares, more than five per cent of the capital.

That loss yesterday was 37.5c a share, or Sigma went from being valued at just over $2 billion, to being valued around $1.65 billion.

But its share price had been falling for more than a week as investors fretted about its interest in trying to disrupt the proposed Healthscope-Symbion merger, and then it was said to be taking a third look at the struggling Australian Pharmaceutical Industries (API).

Sigma shares have tumbled from $2.60 in early May, down to Monday's close of $2.12, ostensibly because of that unease about its corporate ambitions.

Analysts and shareholders had been happy with guidance (reduced in May at the annual meeting) for the first half and the year of a smaller rise in earnings.

In fact Citigroup handled a parcel of more than 80 million shares six weeks ago at $2.30, so there are some upset holders and some of those would have been fed into the market yesterday.

To assuage the concern of shareholders, SIP said it was planning to buy backup to 9.9 per cent of its stock, compared to the first offer of 5.5 per cent..

That improvement was obviously ignored yesterday

SIP said earnings before interest, tax, depreciation and amortisation (EBITDA) would increase by five per cent for the full year ending January 31, 2008.

"Due to both higher interest expense and a higher effective tax rate, Sigma expects its underlying net profit after tax for the full year 2007/08 to be in line with the previous financial year," it said.

The forecast excluded the interest impact associated with a planned buy back of shares.

Sigma also said first half net profit would be below the first half of the 2006-07 year.

"With the skew to the second half of new product launches and the impact of Embrace, it is expected that 65 per cent of full year underlying NPAT for 2007/08 will be generated in the second half," it told the ASX.

But that won't be enough.

Sigma said first half earnings for its healthcare business would be impacted by the introduction of regulatory reforms, particularly the allocation of community service obligation (CSO) funds.

"Sigma's full year NPAT forecast now assumes there will be no resolution to the CSO issues during the year," it said.

"Sigma intends to continue to vigorously pursue its rights under the CSO as it strongly believes the current outcome is not consistent with the original stated aims of the scheme."

For its pharmaceutical operations, first half sales and profit from the company's licensed generic products Simvar, Lipostat and Xydep had decreased due to the expiry of their exclusive generic status, resulting in increased competition and price decreases.

"Increased discounting as generics providers seek to gain market share in the lead up to the commencement of new price monitoring mechanisms that come into effect in August 2007," Sigma said.

This discounting is coming from the big Indian generics manufacturer, Ranbaxy, which is trying to buy market share in Australia. So far all it has done is to destabilise the market.

Sigma's Managing Director, Mr Elmo de Alwis, said that whilst disappointed with the revised profit forecast, the company felt it prudent to update its guidance given there is no certainty as to the ultimate correction of the CSO pool allocation.

"These are temporary issues facing the company. Based on our confidence in the future of Sigma, we have decided to increase the size of our share buy-back from 5.5% to 9.9% of the issued shares of the company," Mr de Alwis said.

"The strength of our long-term business model is demonstrated by our continued sales growth, strong underlying cash flow generation, the value of the Arrow product pipeline and the benefits of our Embrace strategy.

"The industry is currently undergoing significant change, and we have positioned the company for the future. We remain committed to continuing our focus on profitable growth and improving business efficiencies, and are confident of our ability to continue to deliver strong results beyond the current year."


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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