‘Competition concerns’ flagged with Sigma’s proposed Chemist Warehouse takeover

The ACCC has outlined a number of “preliminary competition concerns” regarding the proposed takeover of Chemist Warehouse Group by Sigma Healthcare.

Sigma is one of the largest wholesalers of prescription medicines, over the counter and front of store products, while Chemist Warehouse operates stores under its own name, plus MyChemist, Ultra Beauty, My Beauty Spot, and Optometrist Warehouse.

Under the proposed agreement, Sigma will acquire Chemist Warehouse, in exchange for Sigma shares and a $700 million cash consideration, while the combined company will list on the ASX under Chemist Warehouse’s ticker – “in effect a ‘reverse acquisition’ of Sigma by Chemist Warehouse” as the ACCC explains it.

“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse,” ACCC Commissioner Stephen Ridgeway said in a statement on Thursday.

“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. We want to hear from interested parties, including rival pharmacies as we continue this review.

“The transaction would create a merged company that is uniquely vertically integrated across multiple levels of the pharmacy supply chain. This new business model for the pharmacy sector could raise barriers to rivals expanding or entering, which may lessen competition.”

Ridgeway said the ACCC “has heard many concerns about the impact Chemist Warehouse has had on the pharmacy sector”, but is focused “only on the impacts of the acquisition 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”.

The ACCC is also concerned that the proposed acquisition may harm pharmacies currently supplied by Sigma, “leading to a substantial lessening of competition in pharmacy retailing” given the independent pharmacies it supplies are competitors to Chemist Warehouse.

“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,” Ridgeway said.

“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.

“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.”

In addition, the ACCC is concerned the proposed acquisition may substantially lessen competition in pharmacy retailing, and it could impact upstream markets for the supply of pharmacy retail products that compete with Chemist Warehouse and Sigma’s own-label and private label products.

“This concern is likely to be stronger in respect of products where suppliers have fewer paths to consumers, for example suppliers of prescription medicines and over the counter products that can only be supplied in pharmacies, and not for example, in supermarkets,” Ridgeway said.


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