Sigma Healthcare’s [ASX:SIG] share price plummeted over 40% yesterday, after announcing the loss of its biggest contract with Chemist Warehouse.
Sigma’s shares are currently trading at 48.5 cents, down from 81 cents on Friday, 29 June.
The pharmaceutical supplier revealed in a trading update that it had lost its contract to Chemist Warehouse — Australia’s largest pharmacy retailer — which led to a huge downgrade in earnings guidance for 2019.
Why did the deal between Sigma and Chemist Warehouse fall through?
It’s no surprise losing a client like Chemist Warehouse would reflect negatively on the company’s profit. As a result, Sigma have had to revise their 2019 earnings before interest and tax from $90 million to $75 million, and for 2020 to between $40 million and $50 million.
The current contract between Sigma and Chemist Warehouse ran through to June 2019, however the pair we’re unable to come to an agreement on the terms for extending the contract.
Mark Hooper, Sigma’s Managing Director implied that the proposed deal didn’t provide enough return on investment.
‘We made it clear at the start of the negotiations that we would only enter into a new contract if it made commercial sense and provided an adequate return on invested capital. We are not prepared to risk significant shareholder funds without adequate and sustainable returns.’
The loss of the contract has freed up $300 million for Sigma. Mr Hooper said this will be used to diversify and strengthen the business:
‘It may be a step back in our short term financial results, but it improves the risk profile of our earnings and also releases significant capacity to better leverage our infrastructure and resources in areas that can provide long term sustainable growth.’
As for Chemist Warehouse, they have instead signed a five year contract with EBOS Group, a New-Zealand based pharmaceuticals distributor, effective as of July 2019.
What can we expect to see from Sigma Healthcare?
Despite the step back, Sigma seems positive about their decision, describing the loss as ‘an important pivot point for Sigma’.
Mr Hooper has said that the company will look for new investments:
‘It gives us a very powerful war chest to go and invest with…that same discipline that applied to this particular decision will apply to anything we look at – it needs to deliver the right level of return’, as reported by The Sydney Morning Herald.
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