Australia’s healthcare sector is about to undergo significant change with falling profits and two takeovers, one of which has come from a South African generic drugs group.

Changes in federal government pricing on generic drugs, radiology and pathology in the past year are wrecking enormous havoc in the sector, with two major operators, Sonic and Primary, last week producing surprise downgrades. Another hospitals operator in Healthscope received a private equity buyout offer, while the fourth, the almost broke Sigma Pharmaceuticals, received a takeover offer from an unknown group.

That unknown group was revealed today as South African generic drug maker, AspenPharma, which is the biggest generics manufacturer in Africa. According to its Australian website, Aspen has been in the country since 2001 and currently has annual sales of $180 million.

It’s offered 60c a share for Sigma, which has been crippled by incompetent management and a $US389 million loss for the year to January. The CEO, chairman, CFO and one other board member have all departed and the company says it has to raise $90 million in asset sales to satisfy its banks. It doesn’t have $90 million of assets that are readily saleable — so it’s a sitting duck for Aspen.

Sigma shares were trading at 34.5c when the offer was revealed on Friday. They closed at 48c. Aspen’s identity was confirmed this morning.

But the biggest question from this offer (which values Sigma at just $707 million, or less than the amount owed to its banks and other creditors), is what Aspen does with the distribution business, which is a retailing asset? Aspen has no interest and it’s likely to be sold, with Woolies, Coles and Metcash (IGA) all eager to buy. All have wanted to get into the business but have been blocked by strong opposition from the Pharmacy Guild of Australia.

Metcash tried to bid for Symbion in partnership with Sigma back in 2008 but cold feet after the ACCC indicated preliminary concerns to the proposal amid opposition from pharmacists. Sigma and Metcash had entered into an agreement under which they would form a logistics joint venture if Metcash managed to acquire the Symbion pharmacy business. Primary Healthcare had launched a takeover offer for Symbion, but had to sell the distribution and logistics business.

The guild has long opposed attempts by Woolies and Coles to move deeper into pharmacies and prescription drugs. But this ability may now be weakened by the terrible financial condition Sigma is in and the fact it has to be sold or shutdown, such are the losses and the lack of assets and cash flow to sustain the company’s ability to continue trading.

The competition regulator will block any move by Symbion or Australian Pharmaceutical Industries (API) to try and buy Sigma’s distribution business, so it would be left to the big retailers, or a group like Toll Holdings. Toll though is a pure transport/logistics business and is looking to grow in Asia.

The big retailers would see the chance to not only buy the distribution operations of Sigma but establish pharmacy chains of their own. Sigma supplies a number of chains like Amcal and Guardian. API has Priceline and Soul Patts as its major chains.

The banks and financiers of Sigma’s on and off-balance sheet debt will have to approve the transaction with Aspen (the collapsed Allco Financial Group is a major off balance sheet creditor).

Meanwhile Healthscope, a major private hospital operator, is expected to update the market shortly on the $5.75 a share, $1.8 billion offer said to come from TPG and Carlyle private equity groups.

There’s a delicious irony here: TPG sold Myer last year into the market (and the Myer shares have never made the $4.10 issue price to subscribing shareholders) and moved its profits offshore very quickly, generating a furore. There were all sorts of dire predictions it would hit investment in Australia by private equity groups, such as TPG. The claims were reported extensively by The Australian (naturally). Six months later, TPG is back, and no one seemed to mention any of the dire warnings from late last year.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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