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Why Australian Pharmaceutical Industries Ltd (ASX:API) shares have been smashed today

One of the worst performers on the market today has been the Australian Pharmaceutical Industries Ltd (ASX: API) share price.

In late morning trade the pharmacy chain operator and wholesaler’s shares are down 8.5% to $1.73.

At one stage the shares of the company behind the Priceline pharmacy chain were as much as 10% lower at $1.70.

Why are Australian Pharmaceutical Industries’ shares sinking lower?

With no news out of the company, it appears as though a broker note out of Credit Suisse this morning has been the catalyst for the selloff.

According to the note, the broker has downgraded Australian Pharmaceutical Industries’ shares to an underperform rating from neutral and cut the price target on them from $1.63 to $1.55.

This price target implies further downside of almost 10.5% over the next 12 months for the company’s shares.

Credit Suisse fears that the impressive share price rise since its Clearskincare acquisition in August means its shares are now in danger of a sharp pullback when its releases its results in October.

The company’s shares recently hit a 52-week high of $1.94 on the back of its expansion into the skincare market.

Management’s belief that the acquisition is highly compelling, complementary, and will lead to a more diversified business with accelerated growth potential appears to have gone down well with investors.

However, Credit Suisse doesn’t think investors should get too excited just yet. Especially with the company’s core business operating in a challenging environment with both PBS and retail revenues coming under pressure.

The broker believes that its shares could be de-rated next month when the full extent of the tough trading conditions are revealed.

Should you buy the dip?

While I do like that management is diversifying its business, for now I completely agree with Credit Suisse on Australian Pharmaceutical Industries and think investors would be better off staying clear of its shares until after its full year results release.

In addition to this, I think industry peer Sigma Healthcare Ltd (ASX: SIG) would be best avoided. As well as suffering from tough trading conditions, Sigma has just lost one of its biggest supply contracts. I think this earnings gap will be hard to fill.

Instead of these shares, I would consider up and coming healthcare sector peers Paragon Care Ltd (ASX: PGC) and Volpara Health Technologies Ltd (ASX: VHT).

Alternatively, this top growth share has just been given a buy rating.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended VOLPARA FPO NZ. The Motley Fool Australia has recommended Paragon Care Limited. 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 Scott Phillips.

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