Mergers and acquisitions (M&A) have reshaped various industries worldwide, and Australia’s pharmacy sector is no exception. A high-profile merger between two giants, Sigma Healthcare and Chemist Warehouse, has attracted considerable interest due to its potential to change the landscape of the pharmacy market in Australia.
With Chemist Warehouse’s extensive network of stores and Sigma Healthcare’s strong distribution channels, the merger aims to drive growth and efficiencies in a competitive market. However, this consolidation brings regulatory and market share challenges that call for a closer look.
The Market Dynamics in Australia’s Pharmacy Sector
The Australian pharmacy sector is heavily regulated and characterised by fierce competition. Pharmacies serve as essential points of contact for healthcare, making them integral to public health. The market has a few dominant players, with Chemist Warehouse leading in terms of retail presence and Sigma Healthcare excelling in wholesale distribution.
The Role of the ACCC
The Australian Competition and Consumer Commission (ACCC) has a significant role in scrutinising mergers and acquisitions, especially in sectors as critical as healthcare. Mergers between dominant players, like Chemist Warehouse and Sigma Healthcare, must demonstrate that they will not create monopolistic conditions or harm consumer interests. The ACCC reviews these deals carefully to ensure that:
Market Competition Remains Fair
A merger should not result in an unfair monopoly, and the ACCC would need to ensure there remains enough competition to prevent price hikes or diminished services.
Consumer Choice Is Preserved
The ACCC is also concerned about consumer choice. If one company dominates the market, consumers might face limited options and potentially higher prices for pharmaceutical products.
Small Pharmacies Are Protected
In Australia, small independent pharmacies rely on fair market practices to compete. A merger that gives Chemist Warehouse and Sigma Healthcare significant leverage could adversely affect smaller players.
What They Offer
The merger of Sigma and Chemist Warehouse also bears looking into what they separately offer.
Chemist Warehouse runs over 600 branches across Australia, New Zealand, China, and Ireland, plus 21 outlets under the My Chemist brand name. Seventeen branches of another CW Group brand, Ultra Beauty, also have space inside specific Chemist Warehouse outlets. The company even partly owns makers of products sold at its branches.
A significant player in the ASX, Sigma offers wholesale and distributor services for prescription medicines including those listed under the PBS. It boasts a national network of 4,000 community pharmacies, which are either independent outlets or franchisees. Another 400 Sigma-owned stores operate under trade names of Amcal, Discount Drug Stores, Guardian, and PharmaSave.
The Bid
Chemist Warehouse’s parent company, CW Group Holdings, announced in December 2023 that it will merge with Sigma Healthcare. The object is to fuse them into one outfit that has a comprehensive pharma network, from product development to distribution.
Under the terms of the deal slated to be closed in 2025, Sigma will buy all Chemist Warehouse shares for $700m in cash plus a chance for Chemist Warehouse investors to buy Sigma stock on the ASX. The final shareholder composition of this new company will be 85.75 per cent for Chemist Warehouse shareholders while Sigma shareholders get the remaining 14.25 per cent. The expected market value of the new entity is $8.8 billion. Chemist Warehouse founders Jack Gance and Mario Verrocchi will also join Sigma Healthcare’s board of directors.
The move followed Sigma’s signing of a five-year agreement where it will provide FMCG products and PBS-listed medicines for sale at Chemist Warehouse outlets, effective 1 July 2024. At the time, speculation was rife on whether Chemist Warehouse would go public or undergo a trade sale to help it list on the ASX.
However, the threat of a market cornering from the merger forced an ACCC review, as the proposed company may eclipse the share of top industry leader EBOS, which trades as TerryWhite Chemmart, HealthSAVE, and Good Price Pharmacy Warehouse. The watchdog was also concerned that the merger may probably force Sigma to stop carrying PBS-listed medicines and wrap its Community Service Obligations (CSO) to the government in the process. The Pharmacy Guild of Australia warned in June 2024 that the merger might be a stranglehold to other community pharmacies.
The Union is Finalised
On 7 November 2024, the ACCC formally approved the Sigma-Chemist Warehouse merger. Commissioners stated that the proposed company will not lessen competition between Sigma and Chemist Warehouse outlets and against other companies such as EBOS and API. They also found that the various brands under those companies will have their own market distinctions. For example, Chemist Warehouse focuses on wholesale, Discount Drug Stores is on budget for consumers in need of medicines, and Amcal and My Chemist offer comprehensive solutions.
The ACCC also cleared Sigma’s proposal for a court-enforced undertaking to address market concerns:
For the next three years, Sigma It will not stop or hinder franchisees who joined the network before 1 January 2024 from terminating their franchise agreements. If the franchisees do end their partnership, Sigma waives its recovery rights to contributions it made into the deal plus future fees – and must also delete data from all former franchisees to prevent disclosure on Chemist Warehouse’s end.
Sigma will also keep up its wholesale commitments to the CSO for at least five years.
Regulatory and Ethical Considerations
ABC’s Kate Ainsworth stated that aside from ACCC approval, there are other parties that must stamp on the merger – Chemist Warehouse and Sigma’s shareholders, the Federal Court of Australia to determine compliance with the Corporations Act 2001, and the NZ Overseas Investment Office. The latter is vital as 42 of the 600-plus Chemist Warehouse stores are in NZ.
Even then, Chemist Warehouse and Sigma Healthcare must consider not only ACCC regulations but also the ethical implications of their consolidation.
Given the pharmacy sector’s public health responsibility, the merged entity will need to:
Commit to Fair Pricing
Pricing transparency will be crucial to avoid backlash. Both companies have reputations to uphold and must ensure that any savings from operational efficiencies benefit consumers.
Support Small Pharmacies
Recognising the value of a diverse market, the new entity should consider programs to assist smaller pharmacies. By prioritising fair access to wholesale products, they can mitigate some of the negative effects on smaller competitors.
Maintain Service Standards
As the merged company expands its reach, it will be essential to sustain high service standards, particularly in rural and remote areas that heavily rely on pharmacy services.
The Future of M&A in Australia’s Pharmacy Sector
The Chemist Warehouse and Sigma Healthcare case has highlighted both the potential and the challenges of M&A in the pharmacy sector. For companies, mergers offer the allure of greater market power, resource consolidation, and competitive advantage. However, for consumers and small businesses, these benefits are not always immediately apparent and may, in some cases, be overshadowed by concerns over market domination and consumer impact.
Moving forward, the Australian pharmacy sector may see further consolidation, particularly as companies seek resilience against rising operational costs and supply chain pressures. However, any M&A activity will need to balance the pursuit of growth with regulatory and ethical responsibility to ensure that the market remains fair, competitive, and beneficial to consumers.
Conclusion
The merger between Chemist Warehouse and Sigma Healthcare could redefine the Australian pharmacy landscape. As Australia’s pharmacy sector continues to evolve, it’s crucial that mergers like this consider not only the commercial gains but also their responsibility to uphold the integrity and accessibility of healthcare for all Australians.
DISCLAIMER: This article is for informational purposes only and reflects the latest information available at the time of writing. AVANTE PARTNERS has no financial interests with any Australian pharmacy conglomerate or partnerships with any industry watchdog or government office.
