The ACCC’s bitter pill to Chemist Warehouse’s $8.8b pharmacy merger

You could almost hear the squeals of delight from the thousands of independently owned pharmacies on Thursday as the competition regulator delivered an amber light to the proposed merger of industry big beasts Chemist Warehouse and Sigma.

But investors hungry for a new healthcare group to be born from the union will be sorely disappointed. This $8.8 billion deal always had the potential to fall victim to regulators, who must protect consumers on the one hand while paying mind to the healthy disruption of a sector that has been something of a protected species thanks to the powerful Pharmacy Guild lobby.

The ACCC has raised issues over Chemist Warehouse and Sigma Healthcare’s proposed merger in its current form.Credit: Dominic Lorrimer

Decades ago, the sector was entirely the domain of small-business community pharmacies that serviced and advised their local customers.

The rise of the corporate pharmacy healthcare sector, with its vertically integrated model spanning supply, distribution and large-scale franchise outlets, is still relatively recent by historical standards.

It’s tricky for the competition regulator, as it well understands that the rise of the corporate pharmacy and the scale and efficiency that this has created has brought discounts for consumers, many of whom are avid fans of these big-ish box retailers.

Putting aside the strength of the arguments from the parties and the regulator, the facts are that an ACCC amber light more often turns to red than to green

The Australian Competition and Consumer Commission’s first-pass deliberation on the impact of the merger didn’t produce a red light, but its “statement of issues” was comprehensive enough to leave most wondering whether the deal in its current form will make it through the gate.

Putting aside the strength of the arguments from the parties and the regulator, the facts are that an ACCC amber light more often turns to red than to green.

The near 6 per cent fall in Sigma’s share price on Thursday reflected the uncertainty over whether this deal will pass the regulatory grind.

It is a particularly complicated merger from a competition regulator’s perspective.

Both Chemist Warehouse and Sigma operate a franchise model – the former under the Chemist Warehouse and MyChemist brands, the latter providing brand and support services to almost 400 community pharmacies operating as franchisees under Sigma banners, Amcal and Discount Drug Stores.

But they also supply chemists with services and products.

Chemist Warehouse provides private label and exclusive brands to its franchisee pharmacies, and services such as marketing and media.

Sigma is a wholesaler and distributor of prescription medicines, over-the-counter products, and front-of-store products to more than 4000 community pharmacies nationwide.

So the issues the ACCC needs to address are many and complex.

Getting this deal over the line isn’t just about how many retail pharmacies the merged group would account for – that would be easier for the parties to remedy by reducing the retail footprint.

The bigger issue kicks in further up the vertical ladder.

“The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products,” the competition watchdog said on Thursday.

The particular issues on the ACCC’s laundry list include that the deal may disadvantage the pharmacies that Sigma currently supplies and thereby reduce competition in pharmacy retailing.

The regulator believes that while currently Sigma is incentivised to maximise wholesale sales, after the transaction the independent pharmacies it supplies will also be competitors to Chemist Warehouse.

“In particular, 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,” ACCC commissioner Stephen Ridgeway said.

For its part, Sigma acknowledged on Thursday that competition approval was never going to be a walk in the park, but said it would press on.

The deal still has a pulse, weak as it might be, which could be revived if the merging parties come up with a list of remedies that can satisfy the ACCC – for example, that all pharmacies supplied by the merged group will have a level playing field and that those outside the Sigma-Chemist Warehouse tent will receive the same wholesale price, range and services terms.

Credit: Matt Golding

That said, the ACCC has never been a big fan of accepting behavioural remedies, given that policing them creates another level of work and complexity.

In September, the regulator will deliver its final judgement – one that the Sigma and Chemist Warehouse team can appeal to the Federal Court if it can’t stomach the bitter pill.

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