Sigma's growth prescription

One of the most popular stocks among retail investors in the health sector is Sigma Pharmaceuticals. Strong support among private investors for the stock is closely allied to support for long-time managing director Elmo de Alwis. Earlier this week, de Alwis raised eyebrows among institutional investors with a typically shrewd manoeuvre: After Sigma's takeover target Australian Pharmaceutical Industries (API) announced worse-than-expected annual profits, De Alwis reduced his offer for the troubled stock, from $2.50 to $2.20, upping the pressure against API's struggling management while ensuring his own shareholders get good value with the planned acquisition.

Once de Alwis gets his hands on API it is likely the company will be integrated fairly quickly into the Sigma empire, which is built on strong partnerships in the pharmacy sector. As de Alwis explains to Robert Gottliebsen in today's video interview, a Sigma/API merger will accelerate his plans to deepen partnerships with the at least half the nation’s 5000 pharmacists by providing cheap finance.

The interview

Robert Gottliebsen: Elmo, you’re trying to woo pharmacies into your distribution network. How are you doing this?

Elmo de Alwis: Robert we’re looking at doing this by being the best-provided pharmacy across a wide range of products and services so that where pharmacies are looking for a strong partner to work with to build their businesses, to strengthen their operations, logically they look to Sigma as their best partner.

You have a finance package. How does it work?

Well the finance package is part of the services that we offer to pharmacists. It’s a structure that we have put together in conjunction with some outside partners and what it does, I guess, is provides pharmacists with the opportunity to access funds at a lower interest rate than they would normally get from the bank. They can repay these loans over a longer period, which means cash flow benefits, and they can borrow a bigger proportion of their funding requirements than they otherwise would normally be able to. So this is a big advantage to pharmacists. It is one of the ways that Sigma can support pharmacists in terms of acquiring new businesses, expanding the existing businesses and also refinancing their businesses.

How much is Sigma putting into this scheme?

Well initially, I guess, there are three forms of funding in these packages. There’s equity that’s provided by equity provider. There is mezzanine funding, which is provided by a mezzanine funding provider; at this stage Sigma is taking that role '” we have chosen to take that role and the bulk of the funds are coming through from bank finance.

Elmo, how many pharmacies do you hope to have in your network by 2010.

Well, there are 5000 pharmacies in Australia in round numbers and we would like to have at least half of those working as partners with us.

That would be a big finance commitment by the company.

Well, Sigma’s own finance '¦ is not a mandatory part of this funding package. We have chosen to do that but there are lots of other funding sources that would be happy to participate in this programme.

This exercise really ties your distribution network to pharmacies. Aren’t you frightened of Woolworths and Coles?

Well, the current agreement '” if you’re talking 2010 (the agreement goes to 2010), ownership will be in the hands of individual pharmacists during that period and I think that the best way for pharmacists to ensure that ownership structure continues is to make certain they provide consumers with better health outcomes than any other channel can. There are a number of advantages to our current system. I guess the major one that we shouldn’t overlook is that we have probably the best health care delivery system in the world '” if not the best certainly one of the best, and those who wish to change it are taking on a great responsibility to make sure they can provide something better. So we believe that the strongest reason for maintaining the current system is the results it produces.

How important is the acquisition of API to that Sigma strategy?

I think the potential acquisition period is very important part of our strategy because it will accelerate the rate at which we get to where we’re going. I am confident that Sigma on its own can pursue this strategy but in terms of the time it takes to get there it would be accelerated significantly if this acquisition happened.

Why did you merge with the Arrow generics business?

When we looked forward and looked at the needs of pharmacy, we realised that generics were going to be of increasing importance in the future to pharmacists and if you were to construct a genuine offer in terms of products and services it had to include a strong generic offering. So that underpinned our reasoning for making sure that we were able to acquire, to merge with or to create from ground up a strong generic offer and Arrow was the logical choice.

Will you look for other businesses that can supply pharmacies?

We certainly will. I guess our model is very pharmacy-centric. Our customers are pharmacists and if there were opportunities for us to provide an increased range of goods and services then they’re certainly within our scope of interest.

How big could this distribution operation be for Sigma?

I don’t like to put a limit in terms of growth but we have a market where pharmacies buy probably $8–9 billion of product and I would like to think that Sigma would be the supplier of the majority of that.

Is that why you’re forecasting 15% profit growth rates?

Our growth rates are a function of the fact that we see the business continuing to grow, and we see our growth being leveraged in a way that delivers stronger profit growth than sales growth. So that’s why our forecasts are pointing to 15% growth, year on year.