Pharmacy Industry News: Sigma’s clean bill of health
Sigma’s clean bill of health
Chairman Brian Jamieson and his then-new chief executive Mark Hooper decided last year that Sigma Pharmaceuticals, despite its near-death experiences, did have a down-sized independent future and rejected what appeared to be a reasonable offer in the group’s distressed circumstances. Today’s results would appear to vindicate that decision.
While Sigma rejected the $650 million bid from South Africa’s Aspen Pharmacare, it did strike a deal with its suitor to sell its pharmaceutical division to that group for $900 million. That wiped out Sigma’s net debt, allowed it to pay a special dividend, and created a simpler and less volatile healthcare business focused on wholesaling and distribution and its own retail pharmacy brands.
Today Sigma reported a $26.7 million profit for the six months to end-July, which compares with a $211 million loss for the same half last year. That’s despite losing a contract to distribute Pfizer’s products, representing about 15 per cent of its sales, when Pfizer decided to distribute directly to pharmacists last year.
Sigma’s underlying sales grew 9 per cent and its earnings before interest and tax were up 55 per cent, so Hooper is generating some momentum in what remains a tough sector, where ongoing reform of the Pharmaceutical Benefits Scheme means the wholesalers are under continuing pressure.
Sigma was destabilised by a combination of poor management, too much debt and the difficult industry environment in which its former pharmaceutical business was operating in.
Its inability to extract synergies from acquisitions, blow-outs in inventory levels that inflated its working capital requirements, overly generous payment terms offered to large customers and heavy discounting were contributing factors.
The sectoral issues that afflicted its pharmaceutical business – intense competition for market share in generics in anticipation of a range of blockbuster drugs coming off patent over the next few years – were also an influence in Pfizer’s decision to take control of its own distribution.
Hooper has steadily reduced the group’s working capital position by improving (from Sigma’s perspective) the terms offered to customers and getting its inventory position under control. A year ago, working capital stood at $777 million. Today it is about $522 million.
He’s improved margins and cash flow conversion, with the group’s operating cash flows rising from $40 million to $106 million. Sigma has no net debt – it has net cash of about $88.5 million after making major debt repayments and paying the 15 cents a share special dividend earlier this year.
Future results should also benefit from Sigma’s coup in winning a contract to supply about 300 pharmacies previously aligned with its rival, Australian Pharmaceutical Industries, as well as from further reductions in costs and improvement in the detail of its businesses.
Its now pristine balance sheet, rising cash flows and improving returns on capital provide insurance against the probable contraction in the PBS scheme next year and the continuing ripples from the Pfizer decision.
Sigma may remain a work-in-progress but the decisions to reject Aspen’s bid, sell the pharmaceutical business and concentrate on better managing what was left appear to be paying off.
WellPoint Wants To See Express Scripts, Walgreen Mend Rift
Health-insurer WellPoint Inc. (WLP) is hoping pharmacy-benefit manager and business partner Express Scripts Inc. (ESRX) can mend fences with drugstore chain Walgreen Co. (WAG), and still sees a chance for resolution, a WellPoint executive said Tuesday.
Express Scripts, which handles prescription-drug benefits and claims for employers and health-insurer clients, signed a 10-year deal to serve WellPoint in December 2009. Express Scripts’ customers could lose access to thousands of U.S. pharmacies starting next year because it hasn’t been able to resolve differences over a new contract with Walgreen to replace one that expires at year end.
Though the public dispute has indicated broad differences, “I would not say we’re at the point of no return,” said Wayne DeVeydt, WellPoint’s chief financial officer, during a Morgan Stanley health-care conference.
“We’ve talked to both parties,” he said. “We want to see them settle their dispute.”
DeVeydt noted that WellPoint would like Walgreen to remain in Express Scripts’ network, but also said the insurer can live without Walgreen there, and that the key is getting WellPoint members the best available price. Walgreen has suggested losing access could hurt Express Scripts’ customer relationships, while Express Scripts has countered that it won’t run afoul of access provisions in its contracts and that its customers will have convenient access to other drugstores.
DeVeydt said WellPoint doesn’t see a business impact from the dispute, and that there are “other alternatives available to the customers.”
“Express Scripts is doing very much what we do with hospitals and providers, which is they are trying to get the best rate possible for the consumer,” DeVeydt said. “At the same time, we understand what Walgreens is trying to do as well.”
Express Scripts and Walgreen have offered different views of sticking points in their talks; the drugstore has said its costs are in line with other retail pharmacies, for example, but Express Scripts has said Walgreen would be the highest-cost pharmacy in its network under proposed rates.
Walgreen said last week that talks between the two sides “remain at an impasse” and that it has started informing patients it won’t be part of Express Scripts’ network starting next year. Express Scripts also has been preparing clients and members for the change.
Amid this dispute, Express Scripts plans to acquire rival benefit-manager Medco Health Solutions Inc. (MHS) in a deal that would create a clear industry heavyweight, and was valued at $29.1 billion when first announced in July. The drugstore industry has strongly opposed the deal.
As for the Walgreen talks, “our goal is to really focus that our consumers don’t get hurt in the negotiations,” WellPoint’s DeVeydt said.
The insurers’ shares recently traded up 3.9% to $65.87, following a sectorwide upswing fueled by comments from rival Aetna Inc. (AET), which said its full-year earnings view has improved based on signs that health-care usage trends have remained weak in the current quarter. WellPoint, meantime, confirmed its 2011 earnings estimate in a regulatory filing late Monday.