Aspen to Buy Sigma’s Drugs Unit for A$900 Million

Sigma Pharmaceuticals Ltd.'s Herron brand
Bottles of Sigma Pharmaceuticals Ltd.'s Herron brand of vitamins and supplements are stacked on the shelf of an Amcal Max pharmacy in Doncaster East, an eastern suburb of Melbourne. Photographer: Carla Gottgens/Bloomberg

Aspen Pharmacare Holdings Ltd., Africa’s largest drugmaker, agreed to buy a unit of Sigma Pharmaceuticals Ltd. for A$900 million ($806 million) in cash to gain assets from a company that’s lost about half its value in the past year.

Sigma is selling the unit, whose operations include sales of generic medicines and manufacturing, at about 12 times forecast earnings before interest and taxes for the year ending Jan. 31. Melbourne-based Sigma said today the sale proceeds exceed its net debt and will leave the company with wholesale and retail operations.

Aspen said the deal, the biggest purchase of overseas assets by an African company announced in the past three years, will lead to cost savings and allow the company to introduce its own generic and over-the-counter products in Australia. The Durban, South Africa-based company is buying a business that Sigma blamed for a record loss in March and reduced earnings forecast in July.

“We think Aspen more likely than not got a good deal,” said David Low, a health-care analyst at Deutsche Bank AG in Sydney. “They’ve taken on some risk with generics, but a number of the other parts of the business have solid earnings and an attractive outlook,” such as treatments for rare diseases and manufacturing operations, he said in a telephone interview.

Aspen rose 1.5 percent to 120 rand at 5 p.m. in Johannesburg trading and has gained 10 percent this year. Sigma climbed 4 percent to close at 52 Australian cents in Sydney trading. The stock has plunged 47 percent in 2010, poised for its fifth straight year of losses.

Cash Payment

After the transaction, Aspen will become the largest manufacturer of prescription pharmaceuticals in Australia, Chief Executive Officer Stephen Saad said in a telephone interview today.

“It’s earnings-neutral in year one and I would think that from year two we should see a nice kicker as we start to harness some of those synergies,” Saad said. “It’s a nice platform to be able to drive our generics business through.”

The larger business “will be a nice point to enter the Asia Pacific market,” Saad said. “There are territories in the region where we are strong and we would like to strengthen those” further, such as Japan, Taiwan, Thailand and the Philippines, he said.

‘All About Scale’

The generic-drug business “is all about scale,” Saad said. The transaction would possibly push Aspen into the top 10 generic-drug manufacturers, allowing it to “become the partner of choice” for drug development or biotech companies that seek emerging-market partners for their products, he said.

Aspen, which has a marketing and distribution business in Australia, will pay for the purchase using its cash reserves and funds to be raised from bankers, the company said.

The acquisition will strengthen “Aspen’s position in the Australian market, which will form the foundation for further development of Aspen’s business in the Asia-Pacific region,” it said in a statement.

Aspen is paying the equivalent of 63 percent of Sigma’s enterprise value -- the sum of market capitalization, preferred equity and debt less cash -- for a division that accounts for about 61 percent of overall earnings before interest and taxes, said Andrew Goodsall, a health-care analyst at UBS AG.

Sigma said it expects EBIT of A$75 million from the unit in the year ending Jan. 31. The company reported a full-year loss before interest and taxes of A$124.6 million in March after writing down the value of goodwill on its balance sheet. Excluding the charge, EBIT fell 24 percent to A$105 million.

‘Fundamentally Encumbered’

The board of Sigma “probably formed a view that the generic business was fundamentally encumbered,” Goodsall said in a telephone interview from Sydney. “Globally, the trend in generics is to move the cost toward the lower-cost producer. My understanding is Aspen can make things cheaper.”

In the past five months, Sigma has replaced top managers including its chief executive officer and chief financial officer, and renegotiated terms on its debt after breaching conditions. The company has debt of about A$842 million, according to Goodsall.

Aspen indicated in May it would buy Sigma for A$0.60 a share, or about A$707 million, and assume net debt of A$785 million. The African drugmaker then made an offer of A$0.55 a share for the entire company on July 7.

Wholesale Business

Failure to reach an agreement on the value of Sigma’s wholesale business led Aspen to make an offer for the part of the company it will be able to extract synergies from the fastest, with the introduction of its existing products in Latin America and Africa, Saad said.

“Instead of having lots of arguments and debates we ended up paying for the pharmaceutical division, and we are happy with that, that is where we will get the most synergies,” he said.

The division to be sold includes the Herron brand of painkillers, over-the counter medicines and consumer products. Sigma agreed not to compete with the pharmaceutical unit for two years, and will deal exclusively with Aspen until Oct. 15 for the transaction, which is subject to shareholder and regulatory approval.

Sigma said its directors will recommend voting in favor of the deal. If the sale doesn’t proceed for reasons relating to Sigma, Aspen will be entitled to a break fee of 0.5 percent of the purchase price, the Australian company said in a statement.

Sigma said Lazard Ltd. and Minter Ellison are its advisers. Investec Plc is advising Aspen.

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