‘Extraordinary muscle’: $8.8b Chemist Warehouse merger would shake up pharmacies

Inside Chemist Warehouse's 'back-door merger'

Australia’s pharmacy landscape could be drastically changed under a proposed $8.8 billion merger between Chemist Warehouse and Sigma Pharmaceuticals.

Announced on Monday, the deal would bring hundreds of Chemist Warehouse stores nationwide under the control of distribution giant Sigma, which already runs the Amcal chemists chain.

Executives behind the deal say the tie-up would be more cost effective to run for shareholders, but the effect on shoppers is much less clear as the competition regulator prepares to run its eye over the proposal.

Retail expert Brian Walker said Chemist Warehouse’s 30 per cent market share in retail would be of huge benefit to Sigma, which would be able to better leverage its massive wholesaling arm.

That would improve product margins and give the combined group more pricing power, he said.

“This gives them scale and vertical integration,” Walker said.

“Seventy per cent of Chemist Warehouse’s business is in retail products – there’s extraordinary muscle there.”

Pharmacies consolidate

The proposed deal would be the latest in a trend of consolidation across the pharmacy market since COVID-19, following on the heels of Wesfarmers’ bid to outmanoeuvre Sigma to buy Priceline.

Walker said the presence of a larger competitor – not to mention the rising role of Amazon in Australia – meant Chemist Warehouse and Sigma were looking to upscale their businesses.

And because Chemist Warehouse will be exposed to public markets after the deal, it’s possible a merger could turbocharge the global expansion of a business born in Melbourne back in 2000.

“Australia is an entree for the rest of the world,” Walker said.

“This creates a very potent integrated supply chain model.”

A Chemist Warehouse merger would also run rivers of gold for the families of its founders Jack Gance and Mario Verrocchi, who stand to receive about $700 million in cash under the deal.

They will also retain 49 per cent of the combined group, valued at more than $2 billion each.

‘Significant questions and risks’: Guild

But the Australian Competition and Consumer Commission may still rain on their parade – its approval is required before the merger can go ahead.

It’s already shaping up as a contentious process, with lobby group the Pharmacy Guild having already come out with concerns.

The guild said in a recent statement the proposal had “significant questions and risks” relating to patient care, competition and the future of government medicines wholesaling.

It has lamented the threat to Australia’s “community pharmacy model”, which limits how many stores one group can own and has been the thorn in the side of Chemist Warehouse for decades.

“Regulators must … be wary of increased corporatisation in the community pharmacy sector, and carefully scrutinise complex business models for compliance with community pharmacy ownership laws – laws designed to ensure that only pharmacists own, operate and control community pharmacies are in the best interest of patients,” it said.

Sigma chair Michael Sammells told investors on Monday that the companies would work co-operatively with the ACCC to address any competition concerns.

“We are excited by the efficiencies, synergies and growth opportunities that we anticipate being unlocked through the merger,” he said.

“The combined group will have extensive capabilities and expertise to benefit franchisees and customers, including through more brand choice, products and services and expanded marketing capabilities.”

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