Chemist Warehouse’s back door listing is starting to look hard, and judging by Sigma’s share price, its investors may be starting to think that way as well.
But not all may be wasted for the pharmacy giant, as after educating investors on its business over the past six months, it’s all set to push the button on an initial public offering if it wants to.
This is seen as the logical Plan B, and it could move swiftly on the float plans.
Investors now know the business better than they ever have after reading up on the company through presentations from Sigma about what it would look like once Chemist Warehouse was brought in through the back door.
While the Australian Competition and Consumer Commission is yet to give a formal decision, its statement of issues surrounding its position on the back door listing of Chemist Warehouse into Sigma released on Thursday shows it has strong concerns about the tie-up between the pharmacy retailer with wholesaler and retailer Sigma.
Some of the key concerns are that the deal creates a “major structural change for the pharmacy sector”, the possibility of weakening competition in pharmacy product supply and access and use of commercially sensitive data relating to pharmacies supplied by Sigma in a way that damages competition.
The competition watchdog says obtaining data could be used to target pharmacies that rival Chemist Warehouse or pre-empt and undermine them.
But what particularly stood out to some was that the ACCC highlighted in its statement of issues that Chemist Warehouse executives have direct ownership interests in a large number of Chemist Warehouse stores – something that some think would not normally be of relevance for its investigations, which some have interpreted as the ACCC frowning on the way that the business is structured from the outset.
When the back door listing was announced late last year, some industry insiders took the view that the greatest area of concern would be the buying power for prescription drugs that would enable Chemist Warehouse with Sigma to pass on medicines to the customer at a discount.
Pricing in the wholesale space for pharmaceuticals is regulated, where the industry makes a profit of about 1 per cent on prescription pharmacy drug sales in the low margin business, but there are deals for those that can buy at scale.
Chemist Warehouse passes on the full $1 discount on Pharmaceutical Benefits Scheme-subsidised scrips where other rivals may not be able to afford to.
And better buying power may place it in an even more advantageous position to cut prices to customers, taking competition out of the market, where prices could then be increased once it is what would effectively be a monopoly player.
In New Zealand, when the former government introduced a co-payment for pharmacists, Chemist Warehouse offered prescriptions without passing on the co-payment charge, placing pressure on its rivals that needed to for their own viability.
That co-payment has since been shelved, but is set to be reintroduced by the new government.
Some believe this could be used in a case before the ACCC as an example of Chemist Warehouse’s already anti-competitive behaviour offshore and evidence for why it should not become more powerful.
There are seen to be three scenarios that will possibly play out from here:
Firstly, the parties come up with a workable solution with the ACCC and the deal goes ahead, subject to major asset sales; the ACCC blocks the transaction; or Chemist Warehouse walks away as the process drags on for over a year, with lawyers involved.
In the last two cases, the IPO – on the cards for years – is being seen around the market as the likely possibility.
The understanding is that some of the largest 30 to 40 shareholders are looking for liquidity and have been for a number of years, so Chemist Warehouse is under pressure to do something.
It may revisit a merger at a later stage, but it may not need to, instead gaining commercial benefits through contracts with Sigma.
One view is that if Chemist Warehouse was allowed to merge with Sigma, there should be reform to the entire industry, where supermarkets are allowed to sell prescription drugs, providing competition for the enlarged Chemist Warehouse.
As part of the announced deal last year, Chemist Warehouse shareholders would hold 85.75 per cent of a merged entity with Sigma, a pharmacy retailer (operating under the Amcal brand) and wholesaler, that would be worth $8.8bn.
The merger valued Chemist Warehouse at about 13.6 times earnings before interest, tax, depreciation and amortisation.
Wesfarmers bought Priceline owner, pharmacy retailer and wholesaling heavyweight API during the pandemic in 2022 for about 10 times EBITDA.
Chemist Warehouse founders Jack Gance and Mario Verrocchi were always going to want top dollar for their highly profitable business and, with the IPO market virtually shut for new listings, this was a better way to achieve this.
But now a listing could be the next best thing for the 600-odd store industry behemoth.
Sigma shares closed down 3.7 per cent at $1.16 on Thursday.
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