Ann: Market Update , page-17

In terms of investments, personally not a huge fan of the healthcare sector (only own CSL), so don't follow that closely. I think a lot of people get far too carried with the 'ageing population'. What does Peter Lynch say about people who work in healthcare, yet invest in oil stocks, and oil riggers who invest in healthcare? Probably fits me....

On Sigma, do deal with them everyday, so have a fair idea of what goes on. Tough going at the moment on all levels in the industry in terms of competition, some overcapacity and PBS changes have hurt more than what is probably let on. What is not mentioned when the PBS growth is talked about, is that it is just about all the $ growth is coming from the less frequently used but very expensive newer drugs ie. cancer, autoimmune drugs - often well over $1000 a box, but nothing in it for the wholesaler or pharmacy.

At the moment the big concern from analysts/media seems to be the impending writedown to goodwill -> banking agreements. Not too concerned about this as everyone already knows Arrow is not worth anything close to what is on the books. Sigma overpaid and generics aren't the gold mine everyone thought at the time. However this is well known and a big part of why SIP is no longer a $2 something stock. Similar story with Herron on a smaller scale.

What I'm more concerned about is the moving forward of orders. Mainly done with generics as these are much higher margin relative to low margin regular wholesaling. It started off benignly a few years ago ("we're adjusting to the PBS reforms") where a larger January order was placed, but the deal booked in Sigma sales Jan 2010 was well beyond previous years. That has me concerned that so much generics was brought forward, with still a poor result.... It's such a short sighted strategy as whatever is brought forward one year, you have to do again the next just to stay even. Not to mention inefficient and also there is a limit to just how much can be brought forward (which I think is here)

Two ways I see the results being presented

1. Come half clean
This is the much more likely scenario IMO judging from what I've seen. Large writedowns but not come clean about forward orders ie. "non-cash writedowns but the underlying business still fine"

2. Come completely clean
The writedowns plus the moving forward of orders which does impact "underlying profit". 95% sure this doesn't happen, but if it did I would consider buying stock.


http://www.abc.net.au/insidebusiness/content/2010/s2858137.htm Interesting to see the brokers opinion and they can't seem to work what has changed in a few months. Nothing has changed, orders have been brought forward for years, Arrow's goodwill has always been too high. The difference, this year, is that the auditors cracked it, whereas in previous years had let it go. Short term is obviously going to be very painful, but longer I actually I see it as a positive.


There is an OK business underneath all the accounting and short-sightedness, but its not a great business like a CSL, COH. The problems can be fixed ie. -stop bankrolling some of the major groups(one of which is not in a good financial position) with crazy trading terms just for marginal wholesale volume (these groups also don't generally support SIP in generics) (its also really starting to piss off the loyal independents, "why am I financing these guys expansion?") -take the one off hit from the movement of orders forward as its inefficient, wasteful, costly and requires discounting -stick to its knitting and stop acquiring aging products that others want to get rid off.