Why did the ACCC approve the Chemist Warehouse merger with Sigma Healthcare?

Australia’s pharmacy sector is set to experience its largest shake-up in decades, with Chemist Warehouse joining forces with Sigma Healthcare to create a multi-billion-dollar pharmaceutical company.

The final decision has been almost a year in the making and has involved months of deliberations between the two companies and Australia’s competition regulator.

Now the ACCC has given the merger the green light — along with assurances that it won’t harm competition and protections in place to prevent it from exploiting its market power — the deal to create Australia’s largest pharmacy group is one step closer to being finalised.

Here’s what it means for the businesses, Australia’s pharmacy sector, and why the ACCC believes the deal won’t leave consumers worse off.

Who is Chemist Warehouse merging with?

Chemist Warehouse will be combining with Sigma Healthcare — but if you don’t know the company name, chances are you know the brands it owns.

Sigma owns the retail pharmacy brands of Amcal, Guardian, PharmaSave and Discount Drug Stores, and has 400 of those stores dotted around the country.

That’s not all Sigma does, though — they have a big focus on the wholesale and distribution of prescription medication, over-the-counter products and private-label products under the brands Amcal Plus, Beauty Theory and Pharmacy Care.

Those products include paracetamol, vitamins, cold and flu tablets, hair brushes and even devices like blood pressure monitors.

All up, Sigma supplies prescription medication, over-the-counter and front-of-store products to over 4,000 pharmacies around the country.

Given how many pharmacies it supplies, distribution is a big part of Sigma’s business and operates nine distribution centres across the country.

Put simply, Sigma creates its own products, supplies those products for other pharmacies to sell, and also sells those products at its own pharmacies.

How big will the company be?

Very — and not just on a financial level. Before the ACCC’s approval, the deal was worth $8.8 billion, but that’s since skyrocketed. (More on that later.)

To understand just how big, we need to get an idea of what the retail pharmacy space looks like in Australia.

According to the ACCC, there are over 6,000 pharmacies in the country — and around 40 per cent of them are independent stores.

Another 15 to 20 per cent of those stores are small-to-medium brands (like Chempro Chemist, Blooms The Chemist and Ramsay Pharmacy), while the remaining 40 to 45 per cent of stores belong to the largest five groups.

By combining Chemist Warehouse and Sigma, the two will have around 950 stores or roughly 16 per cent of the total number of pharmacies in the country.

However, that’s only counting the number of pharmacies — and Chemist Warehouse has other retail brands under its roof, in the form of Optometrist Warehouse, Ultra Beauty and My Beauty Spot.

Including those, it gives the merged company around 1,000 stores all up.

Will this affect all pharmacies?

Whether you shop at a Chemist Warehouse or an Amcal, it’ll be business as usual from a customer’s perspective.

But there will be some changes behind the scenes — and that may affect the pharmacy you visit, even if it doesn’t come under the list of store brands owned by the merged company.

That’s because Sigma supplies a lot of pharmaceutical products to a lot of other pharmacies, and was a big concern of the ACCC’s when it was looking at the merger.

Specifically, the ACCC was worried that Sigma would jack up the wholesale prices of its products that it supplies to other pharmacies and force them to pay the higher prices because they have long-term contracts.

Sigma also supplies a bunch of medications that are listed on the Pharmaceutical Benefits Scheme (PBS), and the ACCC was concerned that the company would back out of its agreement with the federal government to be a wholesale supplier of these products to other pharmacies.

To get the deal over the line with the ACCC, Sigma came to the table saying it would let suppliers get out of their contracts if they wanted without penalty, and guaranteed it would stick to its supply agreement with the federal government for five years.

Sigma also said it would keep its confidential customer data separate from the merged company, which the ACCC approved — provided they have an independent auditor to ensure they comply with the obligations.

Should it not meet those, the company could be staring down a court appearance and fine.

“Any naughty behaviour is in each of a court-enforceable undertaking, and is therefore in contempt of court,” ACCC boss Gina Cass-Gottlieb said.

“The ACCC takes any breach of such undertakings extremely seriously. We will go to court and get orders that will stop it, and that will also compensate for damage that has arisen from it.”

Another factor that worked in the merger’s favour was the presence of competing pharmaceutical wholesalers, including EBOS, API and CH2 — all of which have their own agreements with the federal government to distribute PBS medications and extra capacity to supply other retail pharmacies.

Isn’t this bad for competition?

That was certainly a concern for the ACCC, and that was reflected in some of the submissions it received from various stakeholders and members of the public as it was weighing up its decision.

But in the eyes of the ACCC, the court-enforceable undertaking and the broader pharmacy sector — from wholesalers to retailers — meant the merger wasn’t likely to substantially lessen competition.

ACCC boss Gina Cass-Gottlieb stressed that “goalposts haven’t changed”.

“The most important reason for that is that we can see at each level of the supply chain, leading to the supply of pharmaceutical products to consumers, that there will continue to be, with the benefit of the undertaking as well, vigorous and effective competition,” she said.

“It’s important to remember … that 950 stores is only 16 per cent of the pharmacy retailers, so there is a broad set of other pharmacists.”

She also noted that a number of pharmaceutical products were being sold in supermarkets, including Coles and Woolworths.

Still, not everyone is convinced.

Even after the deal was approved, the Pharmacy Guild of Australia — the peak body for pharmacy owners — said it was concerned the decision wasn’t in the best interest of patients.

“Reduced competition ultimately leads to higher prices for patients and lower service standards,” a spokesperson said.

“It’s disappointing the ACCC accepted limited behavioural undertakings and did not explore structural undertakings.”

For Rob Nicholls, a senior researcher at the University of Sydney, the ACCC has got the balance “about right”.

“The deal as it was proposed would have led to a substantial lessening of competition,” he said.

“The changes that have been offered in the undertaking get rid of some of those problems.

“Yes, there’s an issue, competition is going to be reduced, that’s bad for consumers generally. On the other hand, it’s a much better outcome than the deal that had been proposed in the first place.”

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Can I buy Chemist Warehouse shares?

Not yet — but the ACCC’s approval makes that a step closer to happening.

For now, though, eager investors have been rushing to buy shares in Sigma, evidenced by its share price surging by 25 per cent at the close of trade on Wednesday to $2.44. It’s the highest closing price for Sigma’s shares since early 2007.

Sigma’s share price has been steadily rising since the merger was announced in December last year, jumping above $1 for the first time since mid-2017.

Why is that important? Because it directly impacts how much the deal is worth.

A year ago, the nature of the deal was estimated to be worth $8.8 billion based on Sigma’s share price of $0.76 and the merged company having 11.6 billion shares in total.

Based on its closing share price on Wednesday, the deal is now worth $28.3 billion.

(For context, Coles has a market capitalisation of $23.5 billion, while Woolworths has around $36 billion.)

The deal still needs to be approved by Sigma’s shareholders on the ASX, Chemist Warehouse’s private shareholders and the Federal Court.

Once that occurs, the two companies will merge, and the nature of the deal will ultimately see Chemist Warehouse take over Sigma and be listed on the ASX.

It’s expected the process will be finalised by mid-2025.