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Perfect tonic for Sigma shareholders

Drug wholesaler and chemist distributor Sigma Pharmaceutical (ASX: SIP) has announced a 10% buyback of its shares and lifted the interim dividend to 2 cents from 1.5 cents per share last year.

Having previously sold off the manufacturing division and with net cash on the balance sheet, Sigma is a different company now. However, its exposure to the Pharmaceuticals Benefits Scheme (PBS) is as present as ever.

Under the guidance of CEO Mark Hooper since mid-2010, Sigma has progressively restructured and strengthened its business. For investors who purchased Sigma when Hooper was installed as CEO, a time when the company was well and truly out of favour with investors, it has been an outstanding investment. Having sold its manufacturing business and paid off all its debt, Sigma has also reigned in costs to defend itself against the squeeze on revenues caused by changes in government policy.

Both Sigma and major competitor Australian Pharmaceutical Industries (ASX: API) face the hurdle of declining subsidies provided under the PBS where the government is aiming to save over $500 million per annum.

Government policies are a fact of life for the health industry in general, with most medical companies beholden to at least some level of government funding. Medical centre operator Primary Healthcare (ASX: PRY) receives substantial revenue from the provision of bulk billing services for both the General Practitioner division and the pathology division.

Meanwhile, Ramsay Health Care (ASX: RHC), a private operator of medical centres, is more affected by government policy surrounding the support (or lack of support) for private health insurance. Listed health insurer NIB Holdings (ASX: NHF) is also directly affected by this same issue. Thankfully, NIB’s high quality management team is managing to increase market share in the face of proposed changes to private health rebates

The Foolish bottom line

Companies that are beholden to government budget-tightening face a tough headwind, but Sigma has proven that high quality management that acts in shareholders’ interests can provide decent returns to investors even under tough circumstances.

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Motley Fool contributor Tim McArthur owns shares in NIB Holdings, Primary Healthcare and Sigma Pharmaceuticals. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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