An $8.8 billion mega merger between pharmacy giants Chemist Warehouse and Sigma has been thrown up in the air after the competition watchdog revealed serious concerns with the deal.

Australia’s largest pharmacy chain revealed late last year it wanted to merge with its biggest rival to create a corporate behemoth that experts said would have “extraordinary muscle”.

The deal would combine the businesses behind brands such as Chemist Warehouse, Amcal, Guardian, MyChemist and PharmaSave – and also merge suppliers for other independents.

Executives for both firms have claimed the merger will benefit the whole industry, which historically has been tightly regulated as an essential supplier of medicines to families.

But the Australian Competition and Consumer Commission (ACCC) commissioner Stephen Ridgeway threw a spanner in the works on Thursday, saying the tie-up could raise retail prices.

“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse,” he said in a statement.

Merger may foster ‘anti-competitive’ practices

The ACCC raising concerns with the tie-up does not affect consumers trying to get their prescriptions filled immediately, but it does throw a grey cloud over the proposed deal.

Ultimately the ACCC will decide after further consultation whether to reject the merger, but if it does the companies could challenge its ruling, sparking an extended legal battle.

Either way the stakes are high for families, with RMIT University associate professor Angel Zhong saying more than a quarter of the wholesale market could be controlled by one firm.

“By combining competitors and merging a major supplier with a key customer, this merger could foster anti-competitive practices,” Zhong said.

“It may lead to the merged entity giving preferential treatment to its products and services, disadvantaging other players and creating substantial entry barriers for new competitors.”

Potential for higher prices

The scale of the deal and the influence that Chemist Warehouse and Sigma already have over the market appears to be one of the key issues causing concerns within the ACCC.

Ridgeway said the combined entity would command power over the pharmaceutical supply chain and also the retail market, making it harder for competitors to survive.

For example, the ACCC said Sigma is encouraged to maximise its wholesale arm, including by selling goods to pharmacies that directly compete with Chemist Warehouse.

A merger could change that, hurting independents at the ultimate expense of consumers because Sigma would instead have a huge incentive to preference Chemist Warehouse.

“We are focused on how the newly merged company may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive,” Ridgeway said.

Another major problem the ACCC has is that competition between Sigma pharmacies and Chemist Warehouse would be lessened at the retail level if a merger does proceed.

That includes medicines and the variety of other retail goods each chain sells.

“This lessening of competition may lead to reduced service quality for goods and services provided in pharmacies as well as higher prices for consumers,” Ridgeway said.

There is particular concern about the supply of prescription medicines, which can only be sold by pharmacies and not other retailers such as the big supermarkets and variety stores.

Federal government regulations and medicine subsidies under the Pharmaceutical Benefits Scheme (PBS) play a role in setting prices in these markets, but competition between chains does drive discounting that benefits consumers who shop around for scripts.