AUSTRALIA | The ACCC will not oppose the Sigma Healthcare Limited (ASX: SIG) and CW Group Holdings Limited (Chemist Warehouse) merger after accepting a court-enforceable undertaking from Sigma.
Sigma is a pharmacy wholesaler of prescription medicines, over the counter and front of store products. Sigma is also a franchisor of pharmacies under banners including ‘Amcal +’ and ‘Discount Drug Store’.
Chemist Warehouse is a pharmacy franchisor and distributor to its own pharmacies and retail stores under the brands ‘Chemist Warehouse’, ‘MyChemist’, ‘Ultra Beauty’, ‘My Beauty Spot’ and ‘Optometrist Warehouse’.
“The ACCC found that, with the undertaking, the proposed merger is unlikely to substantially lessen competition. There is and will continue to be effective competition at all levels of the pharmacy supply chain, capable of constraining a combined Sigma Chemist Warehouse,” said ACCC Chair Gina Cass-Gottlieb.
“The ACCC’s analysis found that the proposed merger is unlikely to substantially lessen competition nationally or locally because other pharmacies and non-pharmacy retailers will continue to compete to the same extent they compete now.”
“Consumers value different aspects of Sigma’s and Chemist Warehouse’s banner pharmacies’ offerings. Importantly, consumers will continue to have choice between smaller format stores offering personalised services to consumers and the Chemist Warehouse offering, focussed on larger format discount stores and front-of-store offerings,” she said.
For reasons including changes to the pharmacy regulatory environment, the ACCC also found that a combined Sigma Chemist Warehouse is unlikely able to influence Sigma banner pharmacies to the same extent Chemist Warehouse influences its current franchisees. Sigma franchisees are expected to continue to make their own individual commercial decisions.
“Critical to our conclusion that a substantial lessening of competition is unlikely is the competitive constraint provided by competing wholesalers including API, EBOS, and CH2,” said Cass-Gottlieb.
EBOS and API are large national wholesalers supplying full product lines, and CH2 is a smaller wholesaler that supplies both community pharmacies and the hospital sector. Each of these wholesalers has agreements with the Commonwealth Government to distribute PBS medicines as well as spare capacity to supply new retail pharmacy customers.
The ACCC’s investigation found that these wholesalers have actively competed for new pharmacy customers and retail pharmacies have switched between wholesalers. The undertaking given by Sigma will ensure that pharmacies currently engaged in longer term contracts with Sigma will also be able to readily switch wholesalers should they choose to do so, strengthening the competitive constraint of these alternative wholesale supply options.
The ACCC therefore formed the view that a combined Sigma Chemist Warehouse will be unable to foreclose downstream pharmacies that compete with Chemist Warehouse franchisees.
“We also gave careful focus to the question of overall competition in pharmacy retailing and concluded that the transaction is unlikely to result in a substantial lessening of competition in any market,” added Cass-Gottlieb.
“There are numerous pharmacy retailers that will continue to provide meaningful and ongoing competition to Chemist Warehouse and Sigma’s banner pharmacies as well as non-pharmacy retailers that sell front-of-store products and some over-the-counter products. The leading supermarkets are key providers of such products and will continue to provide strong competition.”
For prescription medicines, pricing will also continue to be regulated by the Australian Government’s Pharmaceutical Benefits Scheme.
As part of its review, the ACCC also considered whether the acquisition would impact the supply of pharmacy retail products, including generic medicines.
The ACCC found that there were multiple channels available to suppliers and manufacturers of these products to reach consumers, including through alternative wholesalers and direct to pharmacy arrangements. For products other than PBS medicines, non-pharmacy retailers were also key alternatives.
“We received many submissions from pharmacists and other market participants expressing concerns about this transaction,” said Cass-Gottlieb.
“We reviewed the transaction very closely to test these concerns and conducted detailed analysis of Chemist Warehouse and Sigma’s internal documents.”
“The evidence gathered, augmented by the undertaking given by Sigma, led us to conclude that a substantial lessening of competition is unlikely,” she said.
Evidence shows that retail pharmacies do not face significant barriers to switching and pharmacy customers do switch wholesalers, although concerns remained for pharmacy customers in longer term wholesale and/or franchise agreements with Sigma.
“To help ensure those pharmacies in longer term contracts are able to switch easily to a new wholesaler or banner group, we accepted an undertaking that requires Sigma not to enforce contractual restrictions on exit and ensures payments under contracts do not make it costly for a pharmacy to switch,” advised Cass-Gottlieb.
The enforceable undertaking also requires Sigma to safeguard and delete the data of those pharmacies that choose to switch and to require the merged Sigma Chemist Warehouse to continue as a pharmaceutical wholesaler under the Commonwealth Government’s Community Service Obligation (CSO) arrangements for five years.
“The ability of pharmacies to readily exit their existing agreements with Sigma will maintain and enhance the ability of alternative wholesalers to constrain the merged entity,” Cass-Gottlieb explained.
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