Sigma Pharmaceuticals to unveil a shocker next week * John Durie...

Sigma Pharmaceuticals to unveil a shocker next week

* John Durie
* From: The Australian
* March 18, 2010 1:21PM

SIGMA Pharmaceuticals chair John Stocker has prepared the market for a shocker when the company unveils its results next week, after a month off the bourse, as it basically rewrites the values on all its assets to bring them into line with reality.

The market was looking for a profit of around $92 million but this year it will be negative, at least $150 million, after some $250 million in goodwill impairment charges.

These, it should be noted, are one-off changes and are not cash items.

But, which ever way you want to spin the issue, they confirm market suggestions the company overpaid for deals like the Arrow acquisition some five years ago.

The fact the company wont be paying dividends in the second half and admits to balance sheet stress also tells you we are talking about a lot more than merely accounting changes.

The company has about $300 million in debt parked with the big four banks, with ANZ the lead banker on this deal, which will serve as a test to just how accommodative the banks are post GFC.

The present debt covenants are at interest to earnings before interest and tax ratios of three times and right now Sigmas ratio stands at 3.2 times with little wiggle room.

This explains the need to talk to the banks to get more generous terms which, of course, will cost the company more money.

Its operational problems are compounded by the fact the federal government is doing its best to drive down generic drug prices which of course is Sigmas bread and butter.

All the soundings from the company to date have played down the severity of the looming announcement next Tuesday, but todays surprise statement basically rang every warning bell in sight and prepared shareholders for the worst.

The idea being that when the news is finally released it will be better than expected.

Less uncertain is whether chief executive Elmo De Alwis stays in his job.

The bottom line for Stocker is the market has had enough of his games.

This dictates a big red line through the accounts next week.