Shares of Australian Pharmaceutical Industries Ltd (ASX: API) are trading mostly flat today after the company released its financial results for the half-year ended 29 February 2016.

The owner of the Priceline, Soul Pattinson and Pharmacist Advice brands reported a healthy increase in underlying net profit after tax (NPAT) of $25.3 million.

Other highlights from its results (taking into account the additional day for the leap year this year) include:

  • Revenue increased by 4.4% to $1.79 billion from the prior corresponding period (pcp)
  • Gross profit increased by 4.7% to $237.9 million from the pcp
  • EBIT increased by 15.6% to $44.6 million from the pcp
  • Underlying NPAT increased by 18.1% to $25.3 million from the pcp
  • Negative operating cash flow of $54.8 million.
  • Return on equity (ROE) increased to 9.5%
  • Net debt to equity of 27.3%, up from 14.1% in the pcp
  • Fully franked interim dividend of 2.5 cents per share, an increase of 25% from the pcp

The company has two main operating divisions  – Retail and Pharmacy Distribution.

Retail

Its retail segment, dominated by the Priceline Pharmacy brand, has been the company’s primary growth driver over recent years and it continued to perform strongly in the first half. The company added 5 new stores during the first half to a record 425 stores.

Source: Company Presentation

Source: Company Presentation

As the graph above shows, retail sales have been trending up over the last four years and total sales increased by 7.1% in the most recent half. Like-for-like sales increased by 2.4% and overall gross profit increased by 8.2% to $120.9 million.

The Priceline franchise now boasts an impressive 6.1 million loyalty members who represent 42% of the brands total sales.

API expects an additional 15 stores to be added to the network by the end of FY16.

Pharmacy Distribution

Unfortunately for API, its pharmacy distribution segment has been a drag on overall earnings growth over recent years and this trend continued in the first half.

Source: Company Presentation

Source: Company Presentation

Revenue growth in this segment was again anaemic due to ongoing Pharmaceutical Benefits Scheme (PBS) price impacts. Revenues increased by less than 1.6% and gross profit by just 0.86%.

Unfortunately for API and the other pharmaceutical wholesalers including Sigma Pharmaceutical Limited (ASX: SIP), PBS pricing is out of their control and they are becoming increasingly more reliant on over-the counter product volumes to drive growth in this segment.

Outlook

API did not provide any specific earnings guidance for the second half, but it does expect that the current trading performance will continue during the second half of FY16.

Foolish takeaway

API is a story of two halves but this was a pretty solid result overall considering it is operating in an increasingly competitive market. It has done well to keep costs under control, although investors should keep a close eye on debt levels and cash flows as these deteriorated in the first half.

Should you buy it?

Assuming API can earn around $25 million in NPAT in the second half, it is currently trading on a price-to-earnings ratio of 18.5. This is not particularly cheap especially when you consider the headwinds still facing the company in the pharmacy distribution segment.

As a result, I wouldn’t be prepared to buy at these levels, but if the share price falls significantly from here then it would definitely become a stock worth a closer look.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.