Sigma signs a $2bn pharmaceutical supply and equity deal with Chemist Warehouse

Sigma has signed a $2bn pharmaceutical supply deal with Chemist Warehouse that hands the chemist chain a stake in Sigma.

Sigma chief executive Vikesh Ramsunder.

Sigma Healthcare has reached a $2bn pharmaceutical drugs deal with retail giant Chemist Warehouse although the new supply contract comes with strings attached.

The deal hands a 10.7 per cent stake in Sigma to Chemist Warehouse that will bind the wholesaler and retailer.

Under the deal, Chemist Warehouse, chaired and partly owned by The Australian 250 Rich List member Jack Gance, will have the right to purchase certain non-core assets from Sigma which have a value of $24.5m. The nature and classification of those assets is not being disclosed at this time.

On Tuesday, Sigma announced it had signed a binding term sheet with Chemist Warehouse for the supply of both Pharmaceutical Benefits Scheme (PBS) medicines and fast-moving consumer goods (FMCG) products for a period of five years commencing on July 1, 2024.

Sigma already supplies these consumer goods to Chemist Warehouse to the value of around $1bn a year and the new drugs deal will result in its revenue generated by the nation’s largest pharmacy chain rise to $3bn a year.

Sigma won the drugs supply deal from rival pharmaceutical wholesaler, EBOS. Not surprisingly, shares in Sigma rallied 30 per cent on the contract victory while shares in EBOS slumped as much as 13 per cent.

“The decision by Chemist Warehouse to award Sigma this supply contract is wonderful news for our company and our shareholders. The contract allows us to leverage our highly automated distribution centres and latent spare capacity after multiple years of investment,” Sigma chief executive Vikesh Ramsunder said.

But the deal has more layers than a traditional wholesaler/retailer supply arrangement. Sigma has agreed to issue shares to Chemist Warehouse at the start of the supply contract.

The shares to be issued to Chemist Warehouse will represent approximately 10.7 per cent (post issuance) of Sigma’s issued share capital and will be issued with a value of 64.2c per share.

This type of supply and equity deal was first flagged by The Australian’s DataRoom column in March. It suggested at the time that former UBS investment banker-turned real estate company boss David Di Pilla could leverage his relationships with the management at Chemist Warehouse to help Sigma win back the valuable PBS contract. Mr Di Pilla is the managing director of HMC Capital, formerly known as Home Consortium, that has amassed a stake of more than 19 per cent in Sigma.

Mr Ramsunder told The Australian on Tuesday the equity component of the supply contract made good business sense, especially as the day came when the contract needed to be renewed.

“I think there’s always risk on a contract that comes up every five years. So the more opportunity you have to have shared value between both parties it aligns your interests quite frankly, so that when your contract does come up to an end after five years, divorce becomes a little bit harder,” he said.

“So I do think, we are taking a long-term view. I think it makes sense for an equity stake effectively so we both end up in a win-win situation moving forward.”

Shares in Sigma closed up 14c, or 22 per cent, at 77.5c. EBOS ended down $4.66, or 12.3 per cent, at $33.21.