IHS Global Insight Perspective | |
Significance | South African generic giant Aspen Pharmacare has offered A$900 million (US$802 million) to Australian generic giant Sigma for its pharmaceutical business arm. |
Implications | The offer will be accepted subject to the conclusion of a business- and/or share-purchase agreement between Aspen and Sigma, as well as meeting the necessary regulatory approvals, and approval from Sigma shareholders. Sigma will retain its more profitable healthcare business and a firm capital base, as the offer exceeds Sigma's net debt. For Aspen, the deal increases the firm's presence in the Australian market and its product portfolio. |
Outlook | Aspen will look to integrate Sigma's Pharmaceutical arm with its operations, resulting in cost-effective restructures such as a reduction of product overlap through divesting shared products. Aspen's Australian market share will increase by 25%, and the firm gains a base to further expand into other Asia-Pacific markets. Sigma will continue to expand and grow its Healthcare business as it becomes Aspen's preferred supplier. |
South African generic giant Aspen Pharmacare Holdings and Australian counterpart Sigma have agreed in principle on the sale of Sigma's pharmaceutical business segment to Aspen on a debt-free basis for a consideration of A$900 million (US$802million). The offer will be funded from a mixture of Aspen's available cash resources as well as some cash being raised through banks. The deal is subject to conditions, including the conclusion of a business- and/or share-purchase agreement between Aspen and Sigma, meeting the necessary regulatory approvals, and gaining approval from Sigma Shareholders. Sigma will retain its healthcare business, which includes the retail and wholesale businesses. Sigma has agreed to deal exclusively with Aspen until 15 October 2010, however should the transaction not proceed for reasons relating to Sigma, Aspen will be entitled to a break fee of 0.5% of the purchase price.
Sigma's pharmaceutical business consists of its generics, consumer healthcare, over-the-counter (OTC) products, the Herron brand, ethical, medical, and orphan products, and manufacturing businesses. The unit has an extensive product portfolio previously bolstered by the acquisition of Arrow Pharmaceuticals (Australia). The division achieved sales of A$671 million for the financial year ending 31 January 2010. However, Sigma still saw a 5.6% decline in sales from its pharmaceuticals business. The generics segment currently holds an approximately 25% share of the Australian generics market. The firm also has the largest Australian owned OTC portfolio, the largest Australian-owned supplier of prescription pharmaceuticals, and is the largest pharmaceutical manufacturer in Australia.
Sigma: Selected Financial Highlights, FY 2010 | ||
Financial Particulars | FY 2010 (A$ Mil.) | % Change Y/Y |
Sales | 3,220.4 | 4.5 |
Pharmaceuticals | 671 | -5.6 |
Healthcare | 2,549.5 | 7.5 |
EBITDA (reported) | -263.2 | - |
NPAT (reported) | -389.0 | - |
Source: Sigma March 2010 Annual report | ||
Through the deal, Aspen will gain an established point of entry to the Australian generic and OTC market for its pipeline. The acquisition will strengthen Aspen's presence in the Australian market, which could form a base for future Asia-Pacific expansion. It will also bring an Australian manufacturing presence for the firm's global manufacturing capabilities. For Sigma, the deal means that it continues to operate as a wholesale pharmaceutical business, and with a firm capital base given that the offer exceeds Sigma's net debt. As part of the offer, Aspen's expanded pharmaceutical business will commit to a long-term supply, distribution, and logistics arrangement with Sigma. The Australian firm will also have a long-term preferred supplier status with the pharmaceutical division, with Aspen supporting Sigma's existing pharmacy sales programmes and providing contract manufacturing services.
Outlook and Implications
Following months of uncertainty and due diligence, Aspen has come to a settlement with Sigma for the firm's pharmaceutical arm, rather than acquiring the whole company (see South Africa - Australia: 24 May 2010: Aspen Bids to Acquire Sigma for US$1.2 Bil.). The offer is significantly better than Aspen's previous offer of A$648 million (US$551 million) for the whole business, which made the acquisition look highly unlikely after Sigma held out for a better offer (see South Africa - Australia: 7 July 2010: Aspen Reduces Takeover Offer for Sigma Pharmaceuticals). The deal will make the South African firm the largest generics manufacturer and distributor in the Australian market with a solid base for expansion into Asia-Pacific markets—it is the first African firm to make such a large acquisition. The move to acquire only the pharmaceutical arm of Sigma lowers the financial risk represented by acquiring the whole business, while for Sigma it means the disposal of an arm that contributed significant losses in the results released in March this year, and continues to perform below par. On completion of the acquisition, Aspen will look to integrate Sigma's Pharmaceutical business with its own in order to recoup the costs of the acquisition. Aspen should have the ability to cost-effectively restructure the business to return it to profitability, by reducing product and manufacturing overlaps, and divesting shared products, especially antibiotics such as penicillin. The acquisition will expand Aspen's product portfolio to include orphan status drugs such as hairy cell leukaemia treatment Litak (cladribine) and an orphan drug pipeline that includes AMR101 (ethyl-eicosapentaenoic acid) for Huntington's disease. Other products to be added to the Australian portfolio include attention deficit drug dexamphetamine, anti-diabetics including glimepiride, and anti-virals such as herpes treatment famciclovir. The acquisition expands the South African firm's Australian product profile from 130 products to more than 250 products, which also increases its global product portfolio by over 100 products and could potentially translate into increased revenues for the firm. The acquisition of manufacturing facilities will expand Aspen's manufacturing capabilities, which will help the firm increase its output volume in order to meet different market needs, such as government tenders. Governments around the world are cutting the prices of drugs, including generics, meaning that pharma firms are looking to increase their market access in order to drive up demand. The acquisition of Sigma will help Aspen increase its Australian market share by 25%, which should be reflected in revenues. This number of major generic competitors in the Australia market is reduced, however, leaving a potential gap for other generic firms to enter the market.