Class action, PBS change carve a wedge out of Sigma profit
The leading healthcare company, which makes and distributes prescription and over-the-counter drugs to pharmacies, reported a net profit of $18.7 million - 64 per cent less than it would have without the December settlement.
The class action by retailers involved disclosures during the financial crisis, and forced Sigma to pay $57.5 million in settlement fees.
Sigma said its result was affected by one-off costs, such as the settlement, as well as refrigeration issues at its Newcastle site. It also said changes to the Pharmaceutical Benefits Scheme had hit its bottom line, and would continue to be a challenge in 2013.
"Sigma has delivered continued improvement on its key financial metrics against the backdrop of the toughest era of PBS reform in more than a generation," Sigma chief executive Mark Hooper said.
The federal government last year moved to cut the amount it pays for 180 drugs listed under the PBS by at least 23 per cent.
Sigma, which owns the Amcal chemist brand, delivers many of the generic drugs listed in the PBS. Changes to the scheme mean Sigma and its competitors earn a smaller margin on the wholesale distribution of PBS drugs to their pharmacies.
Sigma shares closed 2¢ higher at 65.5¢.
Analysts said they were concerned about the lack of provisions on Sigma's balance sheet that would secure it against tough times.
UBS analyst Dan Hurren said the pharmacy industry was still under considerable stress due to PBS changes reducing their margins.
"[Sigma] could be viewed as being a little bit aggressive given the rest of the industry is certainly expecting bad debts," he said.
Sigma maintained its dividend, fully franked, of 2¢ a share.
Frequently Asked Questions about this Article…
The December class action settlement reduced Sigma's reported net profit substantially. The article says the settlement took a $48 million chunk out of full‑year profits and the company reported a net profit of $18.7 million — about 64% less than it would have been without that settlement.
Sigma was forced to pay $57.5 million in settlement fees as a result of a class action brought by retailers that related to disclosures made during the financial crisis.
Sigma said other one‑off costs hit results, including refrigeration issues at its Newcastle site, which the company highlighted along with the settlement as affecting its bottom line.
According to the article, federal PBS reforms reduced government payments for around 180 drugs by at least 23%, which squeezed margins. Sigma — a major supplier of generic PBS drugs and owner of the Amcal chemist brand — now earns smaller wholesale distribution margins on PBS medicines, and the company expects PBS changes to remain a challenge into 2013.
Analysts expressed concern about a lack of provisions on Sigma's balance sheet to protect against tougher times. UBS analyst Dan Hurren noted the pharmacy industry was under considerable stress from PBS changes and suggested Sigma could be viewed as somewhat aggressive given expectations of bad debts in the sector.
Yes — despite the hit to profits, Sigma maintained its fully franked dividend of 2 cents per share.
On the day the results were reported, Sigma shares actually finished 2 cents higher, closing at 65.5 cents, according to the article.
Sigma supplies many generic drugs listed on the PBS and owns the Amcal chemist brand, so changes that cut government payments or reduce wholesale margins directly affect its core pharmaceutical distribution business. Everyday investors should watch PBS policy changes, margin pressure on generics distribution, and company provisions for bad debts.
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