The share price of Australian Pharmaceutical Industries Ltd (ASX: API) has been on a roller coaster ride over the last 2 years. After reaching a high of $2.38 in May 2017, the company's shares were sold-off on fears that it would not meet profit expectations amid an increasingly difficult trading environment in its retail and pharmacy distribution businesses. Rival Sigma Healthcare Ltd (ASX: SIG) has fared even worse following the loss of its Chemist Warehouse supply contract.
After bottoming at $1.23 in late April 2018, shares of Australian Pharmaceutical Industries have enjoyed a bounce with the $127 million acquisition of Clearskincare Clinics in June leading to a re-rating.
Flat FY18
Last Thursday's release of the company's full-year numbers reaffirmed the tough conditions the company has faced in its core businesses. Australian Pharmaceutical Industries saw revenue fall 0.9% to $4,026 million in FY18, which management attributed to reduced demand for Hepatitis C medicines of around $155 million. The company noted that after excluding Hepatitis C medicines, revenue actually grew by 3.3% over the prior corresponding period.
Underlying EBITDA in FY18 decreased by 1.5% to $118.7 million primarily due to the impact of a rise in the number of price reduction cycles in the PBS and exclusive direct distribution arrangements. Statutory net profit after tax fell by 8.2% to $48.1 million for the period. However, this included one-off costs of $6.6 million from the Cleanskincare purchase and business restructuring expenses to lower the company's cost base. After backing out these costs, underlying net profit after tax was actually up 0.9% to $54.7 million.
Foolish takeaway
Australian Pharmaceutical Industries' share price is down 3% post-earnings to $1.67 at the close of Monday trade. The company posted underlying earnings per share of 11.1 cents in FY18, which sees it currently trading at a reasonable valuation multiple of around 15 times trailing earnings.
Management has indicated it expects growth in FY19 without providing an estimate. The company will wait for the vital Christmas trading period and the result of the Community Service Obligation review, which will examine exclusive supply arrangements among other things before providing further guidance to the market.
The acquisition of Clearskincare and the move into an adjacent market is something to watch as the company integrates the acquisition and expands its network. Nevertheless, the challenging trading environment in the company's core businesses remains a concern, and as such, I think there are better opportunities in other Australian healthcare companies such as CSL Limited (ASX: CSL) and ResMed Inc (ASX: RMD)
