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Does Aspen have cure for a sick Sigma?
July 2010
by Jeffrey Bouley  |  Email the author


VICTORIA, Australia—Sigma Pharmaceuticals Ltd. has seen a lot of activity lately, and not much of it pleasant. Even the seemingly welcome announcement that South Africa-based Aspen Pharmacare might acquire the troubled company was tempered recently by news of a possible class-action lawsuit that might hurt the chances of that deal going through.  
In late May and early June, the big news with Sigma and Aspen was that the latter was considering the acquisition of "all of the issued share capital of Sigma for an indicative price of 60 cents per share under a scheme of arrangement or other whole of business transaction," according to Sigma. That all started publicly on May 21, when Aspen advised its shareholders that it had submitted an indicative non-binding proposal to acquire, either directly or through a wholly owned subsidiary, Sigma Pharmaceuticals, to the tune of about $707 million.  
Sigma acknowledged it received a bid that same day, but it wasn't until May 24 that the company confirmed it was Aspen that had made the overture. A week later, Sigma announced that it had opened its books for the suitor, saying, "Sigma and Aspen have now entered into a confidentiality agreement pursuant to which Aspen will be provided with due diligence information on Sigma."  
As part of that agreement, Aspen was granted limited exclusivity by Sigma for the following four weeks, during which period Sigma was not to solicit rival bids nor enter into contracts in relation to asset sales.  
The potential merger deal was big news, as Sigma, based in Melbourne, is Australia's biggest drug distributor by market share and its acquisition would give Aspen 12 percent of the Australian market—a bigger share than Big Pharma names like sanofi-aventis and Pfizer. But there was already a bit of wilting even as the acquisition talks bloomed, as market watchers and analysts pointed out the pitfalls of a Sigma acquisition and speculated whether any other bidders would want to take a chance on the company.  
Why? Well, Sigma lost more than half its value after reporting on March 31 a full-year loss of $389 million (in Australian dollars) because of goodwill writedowns related to its generic pharmaceuticals business. Then, two weeks after that, Elmo de Alwis, Sigma's CEO, announced his resignation, and that was followed by the resignation of Mark Smith, the company's CFO, on May 13. Then Sigma's board chairman, John Stocker, said he planned to step down.
Still, there was tentatively upbeat talk about the deal. As Grant Lowton, an analyst at Kagiso Securities in Johannesburg, noted: "There is a definitely potential for growth in Australia's generic market. Even though Sigma is a troubled company, it's probably a case of Aspen management believing they can implement some sort of turnaround strategy."  
Where things have started to sour a bit has been in the weeks since the April 22 announcement that Sigma may face a damages claim of more than $200 million from shareholders over its tremendous full-year loss and alleged breach of continuous disclosure obligations. An amount like that would be nearly half of Sigma's market capitalization of $572 million or almost three times its 2009 full-year profit.  
The most recent hit for Sigma in navigating the potential acquisition deal came in late June, when the Australian Financial Review, citing unnamed sources, reported that Aspen may alter—or perhaps even withdraw—its offer for Sigma because of the potential class-action lawsuit. The publication reported that Aspen, in conducting due diligence on Sigma, is "uneasy" about bearing the risk of the lawsuit before formalizing its bid.  
Although law firm Slater & Gordon Ltd. has reportedly been working on an out-of-court settlement to forestall a lawsuit, they haven't commented publicly on recent developments, and Sigma's only response about the most recent speculation has come from Ian Smith, a spokesman for Sigma, who told the Bloomberg news service on June 24: "There has been no correspondence. To comment on something that we read in the newspaper and have no knowledge of is obviously difficult."
In somewhat more upbeat news amid all the other brouhaha, Sigma announced June 16 the appointment of Mark Hooper as its new managing director and CEO, with an expected start date in September. Hooper was the chief financial officer of Sigma from 2001 to 2006, a period during which Sigma grew in revenue, profits and market capitalization.  
"This is excellent news for Sigma. We have recruited a CEO who will hit the ground running, with a deep knowledge of the company and the industry," says Stocker, Sigma's outgoing board chairman. "Mark will be a critical element in Sigma's next phase of development in conjunction with the board headed by the new chairman, Brian Jamieson, who takes over at the forthcoming annual general meeting."
Code: E071004



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