PBS changes put the squeeze on Sigma

Analysts have raised concerns about the ability of the drugs distributor Sigma Pharmaceuticals to withstand bad debts.

Tough trading and reduced government subsidies continue to batter chemist retailers' earnings.

Sigma posted a first-half profit of $16.3 million, down 38 per cent from the previous corresponding period. The company blamed recent changes to the Pharmaceutical Benefits Scheme and one-off costs relating to the collapse of its Harrisons chain for the fall.

Its revenue was up 3.1 per cent to $1.5 billion.

About 70 per cent of Sigma's revenue comes from the distribution of government-subsidised drugs to its chemist network, which includes the Amcal and Guardian chemist chains.

Recent changes to the PBS have improved affordability of medicines to patients but have been bad news for companies, which have seen their profit margins squeezed. Sigma said its PBS segment was in danger of moving into negative territory in the current financial year.

When asked by analysts whether it had made more provisions for bad debts, chief executive Mark Hooper said they were not unnecessary.

"I know there's a view out there that this is more of a systemic issue," he said. He doubted there were any other bad debts, but: "We'd be naive to say we don't think there's an increased systemic risk to some extent."

He added that accounting standards did not allow for a provision based on general risk. "Certainly, the industry is going through more challenging times, so there is a heightened focus on credit issues."

It has been a turbulent few years for Sigma, whose share price is below that of 10 years ago.

Mr Hooper said he had spoken to the incoming Coalition government to improve consultation with the industry, but he acknowledged that the push by governments to make medicines more affordable was inevitable. "Our long-term outlook has always been about trying to develop a business model that is less reliant on the PBS," he said.

UBS Healthcare analyst Andrew Goodsall said Sigma's results were weak but expected.

"The industry tells us there is still a high risk of bad debts," he said. "Unfortunately, the community pharmacy sector is under a lot of pressure. PBS is growing by volume, but not price."

Sigma shares lifted 0.8 per cent to close at 64¢.