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The proposed $8.8 billion merger between Sigma Healthcare (ASX: SIG) and Chemist Warehouse has caught the eye of the Australian competition watchdog, which today listed a raft of concerns about the deal including its potential to prevent smaller rivals expanding in the market.
The merger, announced in December last year, effectively comprises a reverse takeover by Chemist Warehouse Group of Sigma Healthcare with CW Group Holdings shareholders securing an 85.75 per cent interest in the merged entity which will bring the Chemist Warehouse and Amcal chemist chains under the same banner.
The Australian Competition and Consumer Commission (ACCC) has today outlined preliminary competition concerns with the deal which it describes as a major structural change for the pharmacy sector.
ACCC Commissioner Stephen Ridgeway says the deal involves “the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse”.
“We have identified a range of preliminary competition concerns, including at the retail level and as a result of the proposed integration of the merged firm across the wholesale and retail level,” says Ridgeway.
“We want to hear from interested parties, including rival pharmacies as we continue this review.”
Sigma, which supports franchisees under several of its brands including Amcal +, Discount Drug Stores, PharmaSave and Guardian, is one of the largest wholesalers of prescription medicines, over the counter and front of store products in Australia.
The Chemist Warehouse group also includes the MyChemist, Ultra Beauty, My Beauty Spot and Optometrist Warehouse brands, while it is also a wholesaler and distributor that provides brand and support services to its franchisee pharmacies.
“The transaction would create a merged company that is uniquely vertically integrated across multiple levels of the pharmacy supply chain,” says Ridgeway.
“This new business model for the pharmacy sector could raise barriers to rivals expanding or entering, which may lessen competition.”
While the ACCC has fielded concerns about the impact Chemist Warehouse has had on the pharmacy sector, the competition regulator is only focused on the acquisition’s impact on competition “rather than the pros or cons of different business models”.
“The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products,” says Ridgeway.
Among its concerns is how the planned merger may harm pharmacies currently supplied by Sigma, which the ACCC says may lead to a substantial lessening of competition in pharmacy retailing.
“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,” says Ridgeway.
The ACCC is also concerned that Chemist Warehouse may be able to access and use commercially sensitive data relating to pharmacies supplied by Sigma in a way that damages competition.
“Following the acquisition, the merged company may be able to use insights from data obtained to target pharmacies that rival Chemist Warehouse or pre-empt and undermine them,” says Ridgeway.
“Currently independent pharmacies have three main choices for wholesale supply, and banner, franchise arrangements, but given the potential data concerns and risk of competitive harm, the effective options for some pharmacies may reduce to two.”
The ACCC says it has yet to reach a decision on the planned merger, with submissions from interested parties being accepted until 27 June 2024.
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