Sigma Healthcare Ltd has moved to allay fears that its proposed merger with Chemist Warehouse would stifle competition.
The comments from the wholesaler and distribution giant come as Chemist Warehouse has posted a spike in half-year profits. Figures for the first half of fiscal 2024, include a 28.6% lift in statutory profits before tax and a 13.5% jump in total network sales to $4.56 billion.
Sigma revenue for the 2023 financial year dropped 9.2% to $3.3 billion, however, this was offset by statutory earnings up 20.4% to $23.2 million and a doubling of net profit to $4.5 million after. Operating costs declined 10.7%.
Through the merger Sigma hopes to create an $8.8 billion business.
The merger is dependent on regulatory approval. The Australian Competition and Consumer Commission began consultation in March and is seeking submissions from the public on whether the merger will impact competition. The merger is being opposed by The Pharmacy Guild.
A final decision is expected in July.
Sigma CEO hoses down fears
Sigma Healthcare CEO Vikesh Ramsunder has assured that the proposed merger with Chemist Warehouse will not disadvantage its extensive customer base.
Sigma currently serves over 1,200 pharmacies, including 400 under the Amcal, Discount Drug Store, Guardian, and PharmaSave brands, and Ramsunder emphasised the company's commitment to maintaining robust relationships with these clients post-merger.
“What we’ve managed to do for the bulk of our customers is convince them not to panic and make a decision without letting reality unfold. We are very clear that we will service all our customers in an equitable manner,” Ramsunder said.
Some Sigma customers have cut ties since the merger was announced, however, the company has signed new customers to balance the loss.
“We’ve treated this as business as usual. And obviously a healthiest, strongest Sigma is better for all our customers. We have greater availability of stock that’s there for them, scale gives us efficiency. So, in fact, this helps our customer service levels into the future.
“If you look at the facts, even when you merge with Chemist Warehouse, if the regulators approve that, it doesn’t change the way you operate as a wholesaler,” he added.
Should the merger be approved, Chemist Warehouse shareholders will own 85.75% of the group.
Shares soar on financial update
Investors reacted positively to Sigma Healthcare's numbers, with the company’s share price rising by 3.3% in afternoon trading on 21 March. During a call with investors, Ramsunder acknowledged the competitive landscape, highlighting the challenge from Wesfarmers-owned Australian Pharmaceutical Industries (ASX:API), which operates well-known pharmacy brands such as Priceline and Soul Pattinson chemists.
“The competition comes in price … on the discount you’re willing to provide to win that business,” Ramsunder said. “We’ve probably got fewer customers, but our earnings are improving because we’re not providing as high a discount as we used to previously.”
Chemist Warehouse has demonstrated robust sales growth at 9%, outpacing Sigma Healthcare's 4.3%, and both exceed the industry average of 3%. This performance underscores the strength of both entities in the retail pharmacy sector. Independent of the Australian Competition and Consumer Commission's (ACCC) ruling on their proposed merger, Sigma and Chemist Warehouse will maintain a close partnership, solidified by a five-year supply agreement starting July 1.
Post-merger, Chemist Warehouse founders Jack Gance and Mario Verrocchi are set to own 49% of the combined entity and will join Sigma's board. Michael Sammells will continue as chairman, and Ramsunder will remain as chief executive, ensuring leadership continuity in the newly formed group.