Leading pharmaceutical wholesaler, Sigma Pharmaceutical Limited (ASX: SIP), today reported its full year earnings for the financial year ending January 2016.
The shares have trimmed early losses and are now trading 1% higher after the company announced its reported net profit after tax (NPAT) fell by 4.3% to $50.5 million. The reported profit result was impacted by a one-off accounting adjustment based on its recent acquisition of Discount Drug Stores (DDS) and Central Healthcare Services (CHS).
Excluding these acquisition adjustments, underlying NPAT increased by 11.6% to $59.2 million. Other highlights from Sigma's result include (all figures compared against the previous corresponding period):
- Revenue increased by 10.2% to $3.46 billion
- Product volume growth of 9.9%
- Operating costs increased by 17%
- Earnings before interest and tax (EBIT) increased by 13.7% to $89.1 million
- Underlying EBIT margin increased by 0.1% to 2.6%
- Final dividend of 3 cents per share takes the full year dividend to 5 cents per share
- 14 million shares bought-back at a cost of $11.1 million during the financial year
Although recent acquisitions helped to boost Sigma's overall revenue growth, the primary growth driver for the wholesaler was a 17.8% increase in non-PBS (pharmaceutical benefits scheme) revenue. Investors will be pleased to see this as non-PBS revenue is perhaps the most important factor for the growth of the company moving forward. Sigma has made solid progress in this regard with non-PBS revenue now accounting for more than 35% of total revenue.
PBS revenue growth has been subdued over recent years since the Federal government implemented a policy to reduce the price it was willing to pay for medications that it subsidises for Australian residents. While this has saved the government billions of dollars over recent years, it has made life for the pharmaceutical wholesalers, including Australian Pharmaceutical Industries Ltd (ASX: API), much more difficult as they are required to handle an increasingly larger volume of products at lower prices.
Although the worst of the impact from the PBS price reductions may appear to be over, there is likely to be further pain in the short term with the government recently announcing an accelerated price reduction program that will see the value of some medications fall by 90% over the next 12 months.
As a result, it is difficult to see Sigma being able to significantly grow revenues over coming years without exceptionally strong growth from non-PBS lines and growth of its branded pharmacy footprint.
Importantly, Sigma has taken steps over the last year to protect its revenues and build a platform for growth once the industry stabilises. This has included investing in new infrastructure for its distribution centres and undertaking the acquisitions of DDS and CHS – both of which are performing ahead of expectations.
Outlook
Sigma is aiming to deliver EBIT growth of at least 5% per year for the next two years with non-PBS earnings being the key driver behind this outlook.
The company is also aiming to increase its current 5% market share of the $2.5 billion hospital pharmacy market with plans to enter the Queensland hospital market in 2017.
Shareholders can also expect to receive most of the company's earnings paid out in dividends with the board expecting to maintain a very high payout ratio for the foreseeable future.
Foolish takeaway
Sigma has produced a solid result considering the challenges it faces from the decline in PBS revenues.
Despite this, the shares appear over priced at current levels (trading at more than 17x earnings) considering profits are unlikely to grow at more than mid-single digits for at least the next two years.
As a result, I feel investors looking for exposure to the healthcare industry have far more attractive options elsewhere to choose from.
