2012 half year result, page-11

Micky - Your analyst is wet behind the ears and has no real comprehension of the pharmaceutical wholesaling business and needs to look and understand a few things.

The majority of business for the wholesalers in $ terms) involves the turnover of mega huge volumes of PBS medicines (expensive ones included). The government tightly controls the margins on these items. The government is not stupid enough to screw the margins so tight to destroy Sigma, API or Symbion which are in healthy competition. They also are not going to allow super profits either. The wholesalers and the goverment work together to negotiate tight but fair margins (represents more a cash margin per item rather than a percentage margin). So it is more akin to a fee for distribution.

OTC's and other items provide wholeslers better margins but in terms of total turnover dollars I would guess no more than 15 to 20% if that.

So the major wholesalers have been operating their "cash cow" businesses for a very very long time successfully on margins that would scare off investors in other types of businesses that have much lower stock turns.

In terms of debt levels you have to put that into perspective. Consider the huge inventory that API has to hold throught Australia and that would account for the most of the debt. API has managed their inventory and working capital much better in the last few years and I am the first to admit it got out of control in the early part of the last decade along with some other poor business decisions.

To equate debt relative to market capitalisation is a bit of a furphy because market capitalisation is a factor of share price which we all know does not always represent real future business value. Has API's debt position changed in the last two days (No) but the ratio to market capilisation certainly has! Because pharmaceutical wholesalers rapidly turnove their inventories they can easily service their current debt levels....that is the key.

As for the "going concern" statement by the company - that is becoming almost a standard requirement these days in mandatory financial reports. It is certainly not meant to be something that should scare off investors.

As for pharmacist buying more and more from DHL lets wait and see about that. My tip is their Lipitor (and their own generic) sales will plunge by more than 50% by this time next year.....that will be a significant hit. This loss in turnover will make the DHL experiment even more marginal than it is now. I am guessing Pfizer will go back to distribution through the the full line wholesalers within three years. Over the 40 years in the pharmacy industry I have seen direct distribution models come and go several times. Most recently with Glaxo and DHL. If DHL (a huge multinational logistics company) want to get into pharmacy wholesaling in Australia they should have bought Symbion from Mayne when it was up for grabs.