More challenges for Sigma

Sigma has had a tough few years, with challenges seemingly coming from all angles.

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Sigma Pharmaceutical Limited (ASX: SIP) doesn't seem to be able to take a trick.

The company today announced that workers at its Rowville site who are members of the National Union of Workers intend to continue industrial action. Sigma has made an application to Fair Work Australia to bring the matter to a head, according to an announcement from this company this morning.

Sigma has had a tough few years, with challenges seemingly coming from all angles.

The consumer business it bought from Bristol Myers Squibb in 2009 was a constant underperformer, and the company's Herron brand, though steeped in heritage, was unable to remain relevant for consumers in either the complementary health or pharmaceutical arenas.

A reassessment of these brands led the company to announce a $390m loss for its 2010 financial year, including a $424m goodwill impairment. That loss led the business to breach certain banking covenants and ended up costing its then-CEO his job.

The consumer business was sold to Aspen Pharmacare early in 2011; the sale allowing Sigma to retire debt of over $650 million, putting it on much surer footing.

Barely recovering, Sigma and wholesale competitor Australian Pharmaceutical Industries Ltd (ASX: API) (the latter part-owned by Washington H. Soul Pattinson and Co. Ltd (ASX:SOL)) were then confronted by major supplier Pfizer pulling its products out of the wholesale channel, preferring instead to distribute directly to pharmacies itself. Among other products, Pfizer produces and distributes the cholesterol blockbuster drug Lipitor.

Being wholesalers – and with significant logistics footprints to support next-day delivery to every pharmacy in Australia – Sigma and API exist on a high-volume, low-margin business model. The removal of Pfizer's volume from the supply chain meant further pressure for both wholesalers.

Completing the full-court press, the federal government is reducing payments under the Pharmaceutical Benefits Scheme, putting pressure on pharmacies and wholesalers alike.

In that context, a strike at Rowville isn't the biggest problem Sigma has faced recently, but it's certainly yet another unwelcome disruption to a simple business with immensely difficult headwinds to face.

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Scott Phillips is a Motley Fool investment analyst. Scott owns shares in Washington H. Soul Pattinson. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).


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