Sigma's retail strategy a concern for brokers

The pharmaceutical company has fallen after two investment banks downgraded it over worries about its multi-channel retail strategy.

Sigma Pharmaceuticals has suffered its biggest two-day fall since April 2011 following disappointing first-half earnings guidance on Friday and a downgrade today by two investment banks.

Credit Suisse cut Sigma to "underperform" from "neutral", while Deutsche bank dropped its recommendation to "hold" from "buy", sending the stock 4.3% lower to 67 cents by lunch time and extending Friday's 6% drop.

Apart from the worse-than-expected first-half earnings guidance, both investment banks were concerned about the increased cost base as a result of Sigma's multi-channel retail strategy.

Credit Suisse is cautious and wants to see some tangible returns from the retail investment before factoring in higher sales growth. 

"With an increased focus on health and beauty by the supermarkets, the ongoing expansion of online retailing and great success of Chemist Warehouse's discount chemist business model... the company needs to prove that it can provide its banner members with a competitive retail offering," it said.

Deutsche Bank was slightly more optimistic, believing that the retail strategy makes sense given the emergence of online shopping in Australia.

"However we increasingly see the investment as a cost of doing business and are not confident it will deliver the returns management are targeting given the lead of other internet offerings in the pharmacy sector," it said.

Both investment banks have a price target on the stock of 70 cents.

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