The troubles of Australian Pharmaceutical Industries (owner of Priceline, Priceline Pharmacy, Price Attack as well as a wholesale pharmacy division) have been well covered by the business media. In June, API announced that it had lost $15.8 million from continuing operations (for the period ending 30 April). This followed the company announcing an extraordinary loss in 2006 when it “misplaced” $17.2 million.

API’s 2007 Annual Report, which was released on 31 August, noted that the weak performance was largely due to termination and redundancy costs ($3.4 million), pharmacy inventory obsolescence ($8.2 million), retail shrinkage ($7.7 million), divestment costs ($3.2 million) and corporate expenses and completion costs ($7.3 million).

Aside from the apparently “extraordinary losses”, of concern to shareholders is API’s cash flow from operations. Operating cash flow is an excellent indicator of how a struggling company is performing. API’s cash flow from operations dropped from $147 million in 2006 to a sickly $49.9 million in 2007. This drop was caused partly by higher borrowing costs but predominantly by lower receipts from customers and slightly higher payments to suppliers and employees.

Interestingly, while API was able to grow revenue by $6.8 million during 2007, cash flows from operations actually decreased by $60.3 million. The obvious explanation for the discrepancy is that API has sold products and booked revenue (in an accounting sense) but has not actually been paid by its customers. This was caused by last year’s difficulties, including its shares being suspended from trading and the company operating in a highly competitive environment.

Last week, API announced its results for the four months ending August 2007. While revenue continued to improve, gross profit dropped and the company continues to struggle converting sales into cash. While API reported a strong 7.8 percent revenue increase over the corresponding period in 2006, it still recorded an accounting loss of more than $2.5 million. Further, the cash situation hasn’t improved, with cash generated from operations being negative $12 million. The company reported a total cash balance of $9 million, down from $14 million in April (and down from $30 million in April 2006). That cash balance included $8.5 million from the sale of House in June.

While revenues are improving, API is burning through cash at the moment like a

Operational difficulties aside, Crikey’s interest was also pricked by comments made by API chairman, Philip Robinson, in his 2007 Chairman’s Report. Robinson noted that API sold its House franchise brand for $8.5 million during the year and that the company would “record a profit on the sale of this asset”.

This contradicts with Crikey’s calculations in July, which found that API’s predecessor, New Clicks, paid $16.3 million for House way back in 2000. API was correct in a technical sense as it had written down the value of House such that its sale was for more than what was recorded in API’s books. But to give the impression that the transaction was a good one when the asset was sold for half of what it cost doesn’t inspire confidence.

API last year rejected a takeover bid from Sigma Pharmaceuticals last year worth $2.50 per share. API is currently trading just under $2.00, implying that major shareholders, Washington Soul Pattinson and IWPE Nominees may have been unwise in rejecting Sigma’s offer.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey