Aspen announced yesterday that, following its initial approach to Sigma of Australia, it has agreed a modified deal whereby it will buy Sigma’s pharmaceuticals division for AUD 900m (€630m). This will leave Sigma as a pure-play wholesaler, with a much stronger balance sheet than previously, while Aspen is catapulted into the number one spot in the Australian generics market. In addition, Aspen also gains a portfolio of brands (some of which it already sells in other markets) and some strong OTC products. Total turnover of Sigma’s pharma division in the year to Jan 2010 was AUD671m (€385m), of which we estimate about half was generics. Although Sigma doesn’t disclose its precise generic sales figures, it claims to have a market share of about 25%, putting it in the number two slot after Mylan’s subsidiary, Alphapharm. Aspen itself has AUD180m of sales in Australia, having built up rapidly after founding its operation in 2001, so the enlarged Aspen operation should become the market leader in both prescription and cash terms. We would note in passing that while Sigma has agreed a two-year non-compete clause with Aspen, its generic drug pipeline comes from Arrow (now Watson), with which it merged its local operations back in 2005. And since Arrow has not – as far as we know – signed anything, it is possible that Watson might now set up its own operation in Australia, rather than simply continuing to supply Aspen.
The rationale for the Sigma deal is pretty straightforward. Aspen needs to diversify away from South Africa, but it can’t compete in the commodity markets of the EU and US, so it is focusing on the emerging markets of Asia and Latin America. It already had a small Asian business and now it will have a large one, with the potential to take products out of Australia and into many of the smaller Asian territories where it has a sales presence. Sigma is a big mouthful to swallow, though, particularly as it has five manufacturing plants with a total capacity of only 3bn tablets, making it an inefficient producer. It has also struggled with falling prices and poor inventory management, so Aspen is going to have its hands full.
The deal is expected to complete around the turn of the year and Sigma should therefore start to affect Aspen’s accounts in H2 of its financial year (which ends on 30th June). The purchase price will be debt financed and the EV multiples do not look demanding, at 1.6x sales and 7.4x historic EBITDA, although it will be interesting to hear Aspen’s thoughts on whether earnings for the current year are going to be higher or lower than the previous one.
Overall, this looks like a good deal for Aspen at a good price and provided that it can get a grip on Sigma’s biggest problem areas, it is likely to prove astute.