SYB

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Symbion Health (SYB) have a Sell Medium Risk shares recommendation and a 12 month total return of -1.1 percent according to stock analyst Citigroup Investment Research (CIR) who have initiated coverage. According to the analyst, Symbion will suffer from price deflation as PBS drugs switch from branded to generics, although the early impact will be offset by the government CSO payment of $173 million to the industry. At $3.69 the stock has exceeded CIR’s SOP valuation by 8.3%. Management is on target to deliver promised cost recoveries of $30-40m. However, CIR believe all positive scenarios are factored into the current share price and would take profits at this price level. Government policy is a critical determinant of this company's profitability in all key areas, underpinning revenues in pathology and DI. There is a risk of fee cuts in pathology in 2008 or 2009. The recent change to the PBS policy in December has accelerated the likelihood of rationalization among pharmacy distributors. The expansion of generic drugs over the next three years will deflate the revenue available to pharmaceutical distributors. Evidence in the USA suggests discounts of up to 70% on the generic drug compared to the branded product which would be very negative. While management are delivering on the cost line, CIR remain cautious in the absence of a track revenue of delivering revenue growth in these industries. The Pharmacy Distribution industry is set to rationalize in 2007. SYB is one of the three main distributors so will benefit from a reduction in industry capacity and/or a gain in customer pharmacies. A possible takeover offer for the company could be one of many scenarios to evolve as part of any rationalization. A previous Symbion Health (SYB) share recommendation.

Sigma Pharmaceutical (SIP) is bidding for Australian Pharmaceutical Industries (API), a pharmaceutical wholesaler. Sigma Pharmaceutical have announced a bid of $2.20 per share for Australian Pharmaceutical Industries but the market expects another bid as shares surge in API. Stock analyst, Macquarie Research Equities (MRE) said that "expect further bidding to continue, with the key question remaining how much one would pay." MRE expects to see further bidding to continue and likely to come from Symbion (SYB).

Merrill Lynch rates the Symbion Health (SYB) stock as a Buy, Medium Risk. This rating follows Merill Lynch communications with industry sources which give the analysts the opinion that consolidation within the Australian pharmaceutical wholesaling sector is more likely. Symbion Health Ltd. is listed on the Australian Stock Exchange under stock code SYB. Check your charts.