ACCC gives green light for $8.8 billion merger between Chemist Warehouse and Amcal owner Sigma

Australia's competition watchdog has set aside earlier concerns about the $8.8 billion merger between Chemist Warehouse and prescription medicine wholesaler Sigma Healthcare (ASX: SIG), after accepting a court enforceable undertaking from Sigma that it won't make it costly for pharmacy partners to switch providers.

The Australian Competition and Consumer Commission (ACCC) had previously flagged the possibility that under the deal, which will see one of Australia's largest consumer-facing retail brands listed on the ASX, smaller rivals could be prevented from expanding in the market.

Chemist Warehouse is Australia's largest pharmacy chain by revenue, while Sigma supplies prescription medicines, over-the-counter and front-of-store products to thousands of independent pharmacies around the country, in addition to its business as a franchisor of Amcal and Discount Drug Store pharmacies.

Meanwhile, Chemist Warehouse not only has its eponymous brand but also MyChemist, Ultra Beauty, My Beauty Spot and Optometrist Warehouse retail stores.

Related story: The Chemist Warehouse deal is a sideshow: pharmacies are ripe for bigger disruption

The ACCC's concerns about the impacts on competition have been alleviated by Sigma's court enforceable undertaking, which ensures pharmacies currently engaged in longer term contracts with Sigma will be able to readily switch wholesalers if they wish, while the company will also have to safeguard and delete the data of partners that exit deals.

"The ACCC found that, with the undertaking, the proposed merger is unlikely to substantially lessen competition. There is and will continue to be effective competition at all levels of the pharmacy supply chain, capable of constraining a combined Sigma Chemist Warehouse," says the regulator's chair Gina Cass-Gottlieb."

"The ACCC’s analysis found that the proposed merger is unlikely to substantially lessen competition nationally or locally because other pharmacies and non-pharmacy retailers will continue to compete to the same extent they compete now."

Cass-Gottlieb says consumers value different aspects of Sigma’s and Chemist Warehouse’s banner pharmacies’ offerings.

"Importantly, consumers will continue to have choice between smaller format stores offering personalised services to consumers and the Chemist Warehouse offering, focussed on larger format discount stores and front-of-store offerings," she says.

The ACCC also found that due to reasons including changes to the pharmacy regulatory environment, a combined Sigma-Chemist Warehouse is unlikely able to influence Sigma banner pharmacies to the same extent Chemist Warehouse influences its current franchisees.

Sigma franchisees are expected to continue to make their own individual commercial decisions.

"Critical to our conclusion that a substantial lessening of competition is unlikely is the competitive constraint provided by competing wholesalers including API, EBOS, and CH2," says Cass-Gottlieb.

API (Australian Pharmaceutical Industries) is owned by Wesfarmers (ASX: WES) and owns the Priceline brand of pharmacies. In addition, it is a large national wholesaler supplying full product lines, just like EBOS Healthcare which supplies numerous global pharmacy brand products including the likes of Johnson & Johnson, Ansell, Sanofi and Nestlé.

CH2 is a smaller wholesaler that supplies both community pharmacies and the hospital sector.

The regulator notes that each of these wholesalers has agreements with the Commonwealth Government to distribute Pharmaceutical Benefits Scheme (PBS) medicines, as well as spare capacity to supply new retail pharmacy customers.

The ACCC’s investigation found that these wholesalers have actively competed for new pharmacy customers and retail pharmacies have switched between wholesalers.

The watchdog concluded that a combined Sigma Chemist Warehouse will be unable to foreclose downstream pharmacies that compete with Chemist Warehouse franchisees.

"We also gave careful focus to the question of overall competition in pharmacy retailing and concluded that the transaction is unlikely to result in a substantial lessening of competition in any market," says Cass-Gottlieb.

"There are numerous pharmacy retailers that will continue to provide meaningful and ongoing competition to Chemist Warehouse and Sigma’s banner pharmacies as well as nonpharmacy retailers that sell front-of-store products and some over-the-counter products.

"The leading supermarkets are key providers of such products and will continue to provide strong competition."

The ACCC also investigated whether the acquisition would impact the supply of pharmacy retail products, including generic medicines. It found that there were multiple channels available to suppliers and manufacturers of these products to reach consumers, including through alternative wholesalers and direct-to-pharmacy arrangements.

For products other than PBS medicines, non-pharmacy retailers were also key alternatives.

“We received many submissions from pharmacists and other market participants expressing concerns about this transaction,” Cass-Gottlieb said.

“We reviewed the transaction very closely to test these concerns and conducted detailed analysis of Chemist Warehouse and Sigma’s internal documents.”

“The evidence gathered, augmented by the undertaking given by Sigma, led us to conclude that a substantial lessening of competition is unlikely."

A spokesperson for the Pharmacy Guild of Australia provided a circumspect response to the decision, claiming that "many unanswered questions remain".

"The ACCC will need to carefully monitor the merger and its impact on patients and the diversity of the community pharmacy landscape over the coming years," the guild spokesperson says.

"A reduction in wholesaling choices for community pharmacy is a substantial reduction which will lessen competition.

"Reduced competition ultimately leads to higher prices for patients and lower service standards. It’s disappointing the ACCC accepted limited behavioural undertakings and did not explore structural undertakings."

The spokesperson says that market consolidation in health services like oncology, general practice, pathology and now community pharmacy, is not in the best interests of patients.

"It leads to non-competitive duopolies, an unequal distribution of doctors and a reduction in smaller businesses better equipped to provide local and personalised health services to their communities."

Trading in SIG shares closed more than 25 per cent higher today at $2.44 - the highest they've been since 2006.