Sigma Pharmaceuticals (SIP) Share Trading Update

Submitted by Craig Strzelecki on 16 April, 2007 - 18:53

Sigma Pharmaceuticals (SIP) has a reiterated Outperform rcommendation and a 12 month share price target of $2.72 from sharemarket analyst Macquarie Research Equities. Shares in SIP have edged higher despite news that a major shareholder has sold down a significant portion of their SIP stake. The founders of the Arrow generics business acquired by Sigma Pharmaceuticals in December 2005, the Duchen Family, have sold 8.9% of their remaining 14.4% SIP stake at $2.45 and will exit the business. The analyst believes that an entry price around the $2.50 level for SIP is "attractive" and accordingly reiterate their outperform recommendation. David Duchen will step down from the SIP board. Arrow managing director Paul Duchen will step down from the role but will remain as a consultant until end CY08, with a noncompete agreement until end CY09. The Duchen family exit was largely expected over the long term but the early exit will be a small negative for market sentiment. The risks for SIP shareholders include access to generic products, a risk which is largely offset by the agreement for a further 25 products over next five years (the crucial window of major drug patent expiries). Also, there is the concern of the future competition from the Duchen family. While Paul Duchen will not be able to compete until 2010, the family has a history of selling out of a market leader (Alphapharm) and then setting up in competition (with Arrow) and dramatically eroding that leadership position. This is somewhat mitigated (outside of the non-compete arrangements) by the changed structure of the industry. Sigma Pharmaceuticals is no longer seeking to gain market share in generics through direct generic discounting or breadth of generics offering, but rather breadth of total pharmaceutical offering and ability to spread discounting over the total offering in light of the changed regulatory environment (ie price disclosure). The positives include an improved Return on Equity (ROE) and the potential for further buybacks. Regardless of whether the selective buyback is approved, the estimate of the intended capital management delivered is a 1.0% EPS lift on an annualised basis, with the franking credit capacity for another ~$170m in off-market buybacks. This is supported by the balance sheet. Another positive is the orderly removal of a generally expected stock overhang and improved liquidity.

Sigma Pharmaceuticals Limited is listed on the Australian Stock Exchange (ASX) under stock code SIP. You can view their investor website here. SIP was listed on the ASX on 30 October, 2002. Dr John Wilcox Stocker is the Chairman of Sigma Pharmaceuticals and the Managing Director is Elmo Ranjan De Alwis. The company is involved in the operation of a pharmaceutical business encompassing the manufacturing, development and distribution of own branded and contract OTC (over the counter), prescription and generic pharmaceutical products for the Australian and overseas markets. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade SIP. Check your charts and good luck with your share trading!