Aspen bid for Sigma not a sure bet

Given the well publicised and deep seated troubles at Sigma Pharmaceuticals, combined with the recent departure of the last remaining senior board member, it was almost inevitable that someone was going to come in with an offer and a relatively low one for the ailing Australian company.

Today, following rumours that saw Ranbaxy Laboratories being linked with the company, South Africa’s Aspen Pharmacare announced that it was going to be the brave corporation taking on Sigma for A$1.49bn ($1.23bn) or 60 cents per share, a price that also includes the group’s debt of A$785m. While this represents a rather nice 71% premium to the group’s previous share price of 35 cents on Thursday it does not come anywhere near the $2.06bn in sales that the group reported in 2008 and the $2.99bn forecast for this year.

Why so cheap?

The reason why Aspen appears to be pitching its bid for the company at this level is due to a large mixture of historical failure and a lot of future uncertainty.

In March, Sigma unveiled a hefty full-year loss of A$389m after it was forced to write down A$424m in goodwill from its merger with Arrow Pharmaceuticals and impairments at its Herron pain business. What this unexpected accounting shock did was cause the shares to lose almost half their value.

The accounting issues in turn caused the group to default on its loan payments and forced it to renegotiate its outstanding debt with much more onerous conditions.

Under pressure

Adding to Sigma’s internal woes has been the increasing external pressure of the Australian generics market, with fierce competition among established players along with new domestic and international entrants. This has resulted in lower margins for both Sigma and the rest of the industry.

This reduction in pricing has also led buyers to reduce their inventory in the hope of getting cheaper prices from the new incumbents, further adding to Sigma’s woes.

However, perhaps most damaging to the future prospects of Sigma and other Australian generics has been the recent news from the government over healthcare spending cuts that will see it reduce spending on the Pharmaceutical Benefits Scheme by A$2.5bn over the next five years. This cut is a lot deeper than many had expected and also comes on top of the damaging decision to continue with price disclosure.

What this essentially means is that the government will pay exactly what pharmacists pay for generic medicines. The cost savings will come as the government monitors these pharmacy prices and then brings this figure in line with what it pays for drugs. 

Dangerous game

As such, with so much uncertainty a deal is far from certain and Aspen, which has made no secret of its ambitions to grow, may decide to walk away, especially if the due diligence process throws up more unexpected financial elements, or the group decides that the coming cuts from the Australian government are just too deep.

Investors in Sigma do not appear to be that convinced either. Following a surge in the shares today they closed at 48 cents, well below the offer price, indicating that some at least believe that there is more value in the company.

This resistance could be led by the likes of Lazard Asset management, which has recently been building its stake in the company and is now thought to hold approximately 8.1% of the shares and alongside venture capital group Orbis Australia with 6.9% could be attempting to wring a little more money out of Aspen.

With no senior management left at the helm these shareholders are essentially now running the company and as such have a large sway in whether any bid will fly.

This, however, could be a very dangerous strategy given both the uncertainty around Sigma’s future performance and that Aspen’s bid already comes with several caveats.

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