Sigma’s antidote to Amazon: co-operation

Sigma Healthcare CEO Mark Hooper is preparing to engage with Amazon as it flags an entry into Australia’s pharmacy market.

Mark Hooper, CEO of Sigma Pharmaceuticals. Picture: Stuart McEvoy.

Sigma Healthcare chief executive Mark Hooper is preparing to engage with Amazon as the US company flags its entry into Australia’s $16bn pharmacy market, saying it would be foolish to assume the e-commerce giant will not shake things up.

Mr Hooper told The Australian that Sigma’s pharmaceutical wholesale network would be ideal for Amazon, which has filed the trademark term “Amazon Pharmacy”, signalling its intent to sell pharmaceutical drugs outside the US. Amazon also filed similar trademarks in Britain and Canada.

“In any industry where you have disrupters coming in, you ignore them at your own peril. We would rather engage with people like Amazon than assume that they won’t have an impact,” Mr Hooper told The Australian.

“We would always look to engage with them to see if there are opportunities to partner with them rather than ignore them, because our infrastructure is perfectly set up to support someone like Amazon. You’re better to see whether the areas of co-operation are, rather than take them on.”  

But Mr Hooper said such a move was likely to have limited success for Amazon, given Australia’s highly regulated pharmacy industry.

Indeed, Amazon has struggled to gain traction since it launched in Australia in late 2017, losing $5.3m after tax on $260m in revenue in its first full year of operation. Then there is the red tape, including the set price of pharmaceutical medicine in Australia and laws requiring pharmacies to be owned by pharmacists.

“They’ve obviously got a larger presence in markets like the US where you have corporate ownership of pharmacies and the funding of medicines really comes from employers and insurance companies,” Mr Hooper said.

“If you look at where Amazon traditionally dominates, it’s where price is really the only consideration to the purchase. As soon as you need a piece of advice that’s not where they have got a strong presence. In that sense healthcare is slightly protected from significant market share loss. But as I said, you ignore them at your own peril.”

Mr Hooper’s comments come after a challenging 18 months for Sigma. The company - which owns five pharmacy brands including Amcal, Guardian, Chemist King, Discount Drug Stores and PharmaSave banners in addition to its pharmaceutical wholesale business - lost a third of its revenue in 2018 after it ­walked from its exclusive pharmaceutical distribution deal with Chemist Warehouse.

As a result, Sigma’s profit dived 80 per cent to $2.52m in the six months to July 31, 2019. But Mr Hooper said he has no regrets, saying the terms Chemist Warehouse presented in 2018 were not profitable and Sigma has emerged stronger as a result. So much so, that Chemist Warehouse approached Sigma late last year to reinstate about half of their previous contract, believed to be worth more than $800m.

“It’s funny looking back on it. Maybe the easier and not economically correct decision would have been to try and get a bit more money and pretend like it was all OK. But I thought long and hard about it and given we weren’t making an economic return out of it, the better option was to try and reshape our business without that.

“Having a third of our revenue on unprofitable terms just didn’t make any sense. I don’t think there have been any regrets on that front.”

Mr Hooper said he was grateful for the support of Sigma’s board, which backed his decision to call it quits with Chemist Warehouse in 2018 and embark on a $300m spending spree to upgrade the company’s warehouse network.

“A few people thought ‘you’ve just lost a third of your business, why would you invest in new infrastructure?’. The simple answer is, this is a game where you need to be really efficient at what you do.

“We had relatively old warehouses and we thought for the longer-term sustainability of the business we needed to continue to invest. It’s really about having that growth mindset — that I need to invest to create the platform to grow the business.”

The investment meant when Chemist Warehouse returned they had enough capacity to deliver on the contract. It also meant it could grow the non-Chemist Warehouse parts of Sigma’s business.

So far, Mr Hooper said, it has paid off. In the six months to July 2019, sales were growing at about 7 per cent, which is more than double the industry average. Mr Hooper said that trend was continuing into the second half of the year.

“We are actually slightly stronger than that as we head into the second half. Industry growth would be low single digits, around 1-2-3 per cent. We are growing well above market at the moment, so it has been a great effort by the team. We own five different pharmacy brands, so being able to offer pharmacists a choice about how they want to go to market has been quite powerful. We’ve been winning quite a bit of business over the past 12 months.”