Tim Boreham: Takeovers bitter pill for small pharmacies

The pharmacy industry seems to be heading for consolidation, which may be handing independents a prescription for disaster, says Tim Boreham.

The pharmacy industry seems to be consolidating. Picture: iStock

Supposedly the land of rugged individuals, Australia surprisingly is big on oligopolies.

Think of the banks, the airlines, the media, the supermarkets, the insurers and a

certain green-liveried hardware barn – the closest thing we get to a monopoly.

Are pharmacies next in the great Aussie consolidation caper?

Current restrictive ownership rules require a pharmacy to be owned by a qualified

pharmacist, while a new chemist cannot be set up within 1.5km of an existing one.

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Chemists continue to inhabit otherwise derelict strip shopping centres, although the

shabby look of many of them suggests they are losing the battle against the big

players in the same way small hardwares ceded to Bunnings.

Despite the cottage industry vibe promoted by the Pharmacy Guild, about three-

quarters of Australia’s 5900 pharmacies are owned by the four biggest operators.

This number will become three after the proposed backdoor listing of the private,

red-and-yellow hued Chemist Warehouse via the much smaller Sigma Healthcare

(ASX:SIG).

Sigma operates the Amcal, Guardian and Discount Drug Stores banners.

Last year, Wesfarmers subsumed the then-listed Australian Pharmaceutical

Industries, which owns the pink-hued Priceline chain, beating Woolworths to the

prize.

As with Sigma, API is a full-line drug wholesaler subsidised to distribute drugs under

the Pharmaceutical Benefits Scheme.

There’s been a long history of takeover attempts between Sigma and API, thwarted

by the Australian Competition and Consumer Commission.

Will this time be any different? Morningstar reckons the merged company would

command more than 50 per cent of the market, which means the deal surely would

be rejected without major divestments.

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For investors in the struggling, PBS-dependent Sigma, the proposed deal is exactly

what the doctor ordered, with the shares jumping 45 per cent after trading resumed

this week.

The merger would create a retail force to be reckoned with, generating pro-forma

revenue of $3.1 billion from more than 1000 outlets.

Given that, there’s a case for investors to fill up with Sigma scrip (not to be confused

with doctor’s script).

But this week’s share jump takes care of at least some of the

upside and there’s much to play out, including Sigma’s $400 million capital raising, a

$1 billion debt raising and the all-important regulatory approvals.

An overlooked, ASX-listed alternative is the trans-Tasman EBOS Group

(ASX:EBO), valued at $NZ7 billion.

EBOS owns the Terry White Chemmart chain (about 550 stores in Australia)

and the Symbion drug distribution business (formerly Mayne Pharma).

Via Symbion, EBOS services 4000 pharmacies, including Chemist Warehouse but

this contract ends next July.

Undaunted, EBOS has expanded in the dog food sector, having acquired the

Superior Pet Food Company and having tried to buy the Greencross retail pet care

chain.

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EBOS seems an odd mix of businesses, but it’s a case of strength in diversity: last

financial year the company generated a net profit of $253 million, up 23 per cent

from revenue of $NZ12.2 billion (up 12 per cent). The momentum has continued in

the four months to October.

On a cautionary note, investors might heed the experience of the US drugstore

sector, as the big players close outlets en masse.

Rite Aid, the third-biggest chain, has entered bankruptcy and will shutter 400 to 500 of its 2100 stores.

Thanks to the Pharmacy Guild, Australian chemists should continue to be protected

in the short term but the government is keen to pare the cost of the PBS.

The rise of online scrip portals poses both threats and opportunities.

History may show that the Chemist Warehouse vendors time their partial sell down

perfectly – if they can get the deal over the line.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Find more Tim Boreham wisdom at stockhead.com.au

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