Headaches for Sigma Pharmaceuticals

Subdued retail conditions add to an already difficult trading environment.

Sigma Pharmaceuticals (ASX: SIP) posted a first-half net profit of $16.3 million on Thursday, down 38% on last year’s corresponding period. The bottom line was hit by a $3.7 million litigation settlement and higher operating costs, particularly for electricity and logistical services. Among the group’s network are the Amcal, Amcal Max and Guardian pharmaceutical brands.

Revenues for the period were impacted by government cuts to the Pharmaceutical Benefits Scheme, under which the government subsidises drugs sales. Sigma will be hoping the new federal government resists the temptation to make further cuts. Despite the headwind, total revenue was up 3.1%, to $1.46 billion.

The company says it has been implementing its growth strategy and expects a stronger second half as the benefits show. Significant investments have been made to upgrade the supply chain infrastructure and improve information technology synergies.

For the six months ending July 31, earnings per share were down 35.4%, to 1.5 cents. Today’s share price of 64 cents, reflecting a relatively high trailing earnings per share ratio.

The group announced a fully franked interim dividend of 2 cents per share, the record date is September 23.

Foolish takeaway

On yesterday’s results the group appears at fair value. It will need to find earnings growth sooner rather than later.  A tough outlook includes competitive pressures from discount chemists and uncertainty over further reform to the Pharmaceutical Benefits Scheme.

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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.

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