Sigma Pharmaceuticals

Sigma Pharmaceuticals (SIP) has a share price target of $1.45 from Australian shares analyst Macquarie Research Equities.

Sigma Pharmaceuticals (SIP) – Solid Result

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 Pharmaceutical (SIP) have an upgraded broker call of Outperform and a price target of $2.71 per share from stock analyst Macquarie Research Equities. The upgrade follows an improvement in several key drivers. The 'Embrace' strategy has seen a very impressive take-up, with about 800 pharmacies (or nearly 16% of the industry) now signed up. But the analyst understands that the vast majority were existing customers and that the benefit of the rapid conversion to 'Embrace' will not begin to come through until FY08. Sigma Pharmaceuticals has benefited from the API market share losses in mid-CY06 but not to the same extent as the hospital distribution business gained by SYB. With the PBS growing at 0.77% in 2H07 (including a very weak 4Q), the stock analyst's 5.1% growth forecast for 2H07 wholesaling revenue implies that the API-driven gains earlier in the period were sustained by some share gains from the 'Embrace' strategy (and to a lesser extent the retail strategy) toward the end of the period. Breadth of product offering and depth of pharmacist relationships reduces the effects of PBS changes. Along with building customer loyalty, gaining higher margin private label/OTC sales and supporting wholesaling market share, the 'Embrace’ strategy also allows SIP to cross-discount its non-pharmaceutical products against its pharmaceuticals, which will not be able to receive the same level of discounting as in the past due to tightening of PBS regulations. Generic market share has been growing according to IMS data (which is admittedly limited in Generics), it suggests that SIP has been growing market share principally at the expense of Alphapharm. The recent exit of Ranbaxy from the bidding for Alphapharm's owner, Merck Generics, reduces the risk that Alphapharm may become more competitive under a new owner. The analyst has upgraded their SIP recommendation based on sustained weakness relative to the market and their unchanged share price target. The stock analyst sees value emerging from the 'Embrace' strategy as the new regulatory framework forces PBS price disclosure, and from the increasing urgency of further consolidation in the sector.