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HEALTHCARE | Pharmaceutical Distribution & Wholesale
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About Sigma Pharmaceuticals

Sigma Pharmaceuticals offers a complete selection of ophthalmic pharmaceuticals, exam supplies, and eyecare retail products for healthcare professionals at competitive prices with fast shipping.

Sigma Pharmaceuticals Headquarter Location

955 236th Street NE Ste 1

North Liberty, Iowa, 52317,

United States

800-779-3784

Latest Sigma Pharmaceuticals News

Restless Sigma shareholders weigh up merits of API deal

Jul 15, 2021

Share Sigma Pharmaceuticals is on the hunt for a new chief executive, in the process of resuscitating a languishing share price, and right now lacks a merger partner. It is working on solutions to the first two issues, and the live question is what it will choose to do about the third. Following Wesfarmers’ $687 million bid for Australian Pharmaceutical Industries this week, some investors are asking whether the most logical course of action would be for pharmaceutical wholesaler Sigma Healthcare to restart its long-simmering merger talks with the owner of Priceline Pharmacy and Clear Skincare beauty clinics. API, which owns Priceline pharmacies, has received a takeover offer from Wesfarmers. Jessica Hromas For the past decade, API and Sigma, which owns the Amcal and Guardian pharmacy chains, have held on-off merger talks. The most recent of these was reportedly in June, against the backdrop of API’s 19.3 per cent shareholder Washington H. Soul Pattinson quietly shopping its stake to some investors through different brokers. Related Quotes Advertisement ( Soul Patts now says it is supportive of the Wesfarmers offer in the absence of a higher bid, suggesting its willingness to sell may be one factor that helped bring the conglomerate to the deal.) Over the years, the two parties have done more than talk. API bought a 13 per cent stake in Sigma and followed it up with a scrip and cash merger proposal in December 2018. Both companies went through mutual due diligence, only for Sigma to reject the bid and API to sell its holding in December 2019. ‘Dream deal’ Despite Soul Patts’ conditional support for the latest Wesfarmers bid, other API investors have signalled the offer may not be high enough to tempt them. So might Sigma be a potential rival bidder for API? In other words, can Sigma afford to let this so-called “dream deal” – this strategic piece of the pharmacy distribution industry’s consolidation – slip through its fingers? For some investors, the sluggish share price – it has traded within the same narrow band since 2018 – is reason enough to seriously consider M&A. Advertisement The reasoning is simple: pharmacy distribution is a tough business, with a consolidating customer base and margin pressure. Scale helps. There’s a bit more going on in the background, too. Some investors are growing impatient after years of heavy capital expenditure to improve distribution centres, tech systems and cost cutting. One question Sigma investors are pondering is whether letting Wesfarmers take out API changes the game. Now Sigma is through most of that, and investors want to see the share price – which has underperformed the small ordinaries index – improve, alongside the returns to investors. Putting together the two businesses could reap gross cost synergies of up to $40 million, according to one analysis. Back in 2018, API suggested there were $60 million of synergies, so $40 million seems relatively conservative. Sigma accounts for 18.6 per cent of pharmaceutical wholesaling in Australia, and API 17.1 per cent. The biggest player in the $18.2 billion market is EBOS, the former Symbion Health, which accounts for 26.2 per cent. Advertisement It’s this three-player industry structure that always raises questions about how the Australian Competition and Consumer Commission would react to an API-Sigma deal, though the 2018 offer suggested that API at least was confident enough to try. On the pharmacies side, it’s a similar story. Chemist Warehouse, which has been warming up investors about a float, is the largest player with 21.3 per cent of industry revenue, Sigma has 11 per cent, followed by EBOS and API. One investor analysis is that if Sigma were to acquire API at $1.52 (10 per cent above the Wesfarmers bid) funded through scrip and debt (API shareholders receive 90¢ per share and 1.46 Sigma shares per API share), a deal would be more than 50 per cent accretive on an earnings per share basis to Sigma. The combination of using cheap debt and the forecast synergies in a sector that is used to operating on paper-thin 2 per cent EBIT margins all helps turbocharge the EPS accretion. The deal would increase the merged company’s debt levels, but the businesses are both good at throwing off cash, and in Sigma’s case, it’s through the bulk of its capex program. Advertisement This is a deal that doesn’t just appeal to Sigma and API on paper, sources said, but also private equity, though the challenges of wrangling two public companies makes it problematic to say the least. Does Sigma need this deal? But even in such a frenzied M&A environment, it’s worth asking the question: Does Sigma really need this deal? It doesn’t appear to be the top option for chairman Ray Gunston, who has been on the board since 2010 – though M&A has been flagged as a growth option, as Sigma has talked about expanding into higher-margin segments, as EBOS has successfully done with the pet sector. It’s also an unusual time to embark on large-scale M&A, with chief executive Mark Hooper due to leave in October after 11 years in the role. The market likes two internal candidates, CFO Jackie Pearson and head of retail pharmacy Jeff Sells, though it’s not yet clear how a new CEO might wish to reset the business, which in recent years has been focused on investing in its IT systems and distribution centres, and its cost-cutting program. Advertisement One question Sigma investors are pondering is whether letting Wesfarmers take out API changes the game. Wesfarmers has said if its bid is successful, API will form the basis of a new healthcare division. Swapping one owner for another does change the industry dynamics but doesn’t fundamentally change the three-player market. Potentially, in Wesfarmers’ control, API’s turnaround could be fast-tracked. There are also risks attached to any large deal. Synergies are always hard to estimate, let alone deliver. Perhaps a bigger issue is whether API is the right partner. Some investors point out that Sigma is ahead of API in some areas, most notably its investment in systems, and question the laser clinic business. Others are more sceptical still. They point out API downgraded its earnings for the second time since April on Monday, and that it is a company that tends to have a lot of bad debts, one-off costs and provisioning, making it difficult to reliably assess the real health of the underlying businesses. Advertisement Ultimately that’s a matter for the chairman, and some investors are happy to let him make that call. For some investors, Sigma’s low share price also means that it doesn’t need to reap system efficiencies from consolidating the pharmacy wholesale network, though consolidation will keep occurring. And finally, Sigma could consider a share buyback, which could be EPS accretive in the low to mid teens. All up, Sigma’s chairman will be having some interesting conversations with investors in coming weeks. Against the backdrop of a frenzied M&A market, it’s going to be a finely balanced decision. Jemima Whyte writes on business, specialising in companies, capital markets and innovation. Jemima has reported on business for The Australian Financial Review for more than 13 years. Email Jemima at jemima.whyte@afr.com Save

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