Does Aspen have cure for a sick Sigma?

VICTORIA, Australia—Sigma Pharmaceuticals Ltd. has seen alot of activity lately, and not much of it pleasant. Even the seemingly welcomeannouncement that South Africa-based Aspen Pharmacare might acquire thetroubled company was tempered recently by news of a possible class-actionlawsuit that might hurt the chances of that deal going through.

In late May and early June, the big news with Sigma andAspen was that the latter was considering the acquisition of "all of the issuedshare capital of Sigma for an indicative price of 60 cents per share under ascheme of arrangement or other whole of business transaction," according toSigma. That all started publicly on May 21, when Aspen advised its shareholdersthat it had submitted an indicative non-binding proposal to acquire, eitherdirectly or through a wholly owned subsidiary, Sigma Pharmaceuticals, to thetune of about $707 million.

Sigma acknowledged it received a bid that same day, but itwasn't until May 24 that the company confirmed it was Aspen that had made theoverture. A week later, Sigma announced that it had opened its books for thesuitor, saying, "Sigma and Aspen have now entered into a confidentialityagreement pursuant to which Aspen will be provided with due diligenceinformation on Sigma."

As part of that agreement, Aspen was granted limitedexclusivity by Sigma for the following four weeks, during which period Sigmawas not to solicit rival bids nor enter into contracts in relation to assetsales.

The potential merger deal was big news, as Sigma, based inMelbourne, is Australia's biggest drug distributor by market share and itsacquisition would give Aspen 12 percent of the Australian market—a bigger sharethan Big Pharma names like sanofi-aventis and Pfizer. But there was already abit of wilting even as the acquisition talks bloomed, as market watchers andanalysts pointed out the pitfalls of a Sigma acquisition and speculated whetherany other bidders would want to take a chance on the company.

Why? Well, Sigma lost more than half its value afterreporting 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 hisresignation, and that was followed by the resignation of Mark Smith, the company'sCFO, on May 13. Then Sigma's board chairman, John Stocker, said he planned tostep down.

Still, there was tentatively upbeat talk about the deal. AsGrant Lowton, an analyst at Kagiso Securities in Johannesburg, noted: "There isa definitely potential for growth in Australia's generic market. Even thoughSigma is a troubled company, it's probably a case of Aspen management believingthey can implement some sort of turnaround strategy."

Where things have started to sour a bit has been in theweeks since the April 22 announcement that Sigma may face a damages claim ofmore than $200 million from shareholders over its tremendous full-year loss andalleged breach of continuous disclosure obligations. An amount like that wouldbe nearly half of Sigma's market capitalization of $572 million or almost threetimes its 2009 full-year profit.

The most recent hit for Sigma in navigating the potentialacquisition deal came in late June, when the Australian Financial Review, citing unnamed sources, reported that Aspen mayalter—or perhaps even withdraw—its offer for Sigma because of the potentialclass-action lawsuit. The publication reported that Aspen, in conducting duediligence on Sigma, is "uneasy" about bearing the risk of the lawsuit beforeformalizing its bid.

Although law firm Slater & Gordon Ltd. has reportedlybeen working on an out-of-court settlement to forestall a lawsuit, they haven'tcommented publicly on recent developments, and Sigma's only response about themost recent speculation has come from Ian Smith, a spokesman for Sigma, whotold 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 ofis obviously difficult."

In somewhat more upbeat news amid all the other brouhaha,Sigma announced June 16 the appointment of Mark Hooper as its new managingdirector and CEO, with an expected start date in September. Hooper was thechief financial officer of Sigma from 2001 to 2006, a period during which Sigmagrew in revenue, profits and market capitalization.

"This is excellent news for Sigma. We have recruited a CEOwho will hit the ground running, with a deep knowledge of the company and theindustry," says Stocker, Sigma's outgoing board chairman. "Mark will be acritical element in Sigma's next phase of development in conjunction with theboard headed by the new chairman, Brian Jamieson, who takes over at theforthcoming annual general meeting."