Chemist Warehouse allowed to merge with Sigma Healthcare after ...

Discount pharmacy retailer Chemist Warehouse will be allowed to merge with Sigma Healthcare to create an $8.8 billion pharmaceutical giant after being approved by Australia's competition regulator.

In a statement, the ACCC said the deal would not substantially reduce competition in the pharmaceutical sector.

"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," ACCC chair Gina Cass-Gottlieb said.

"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."

Chemist Warehouse and Sigma Healthcare — which owns the Amcal, Guardian, PharmaSave and Discount Drug Store pharmacy brands — entered into a merger deal in December.

The merger will give the company around 1,000 retail stores and 16 distribution centres in Australia and New Zealand, as well as end-to-end oversight of the entire pharmaceutical process, from product creation to retail sales.

It would also see the company become the largest pharmacy group in Australia — a title currently held by EBOS, the owner of TerryWhite Chemmart — and become one of the country's biggest retailers.

Sigma Healthcare is a major pharmaceutical wholesaler and distributor. (Facebook: Sigma Healthcare)

As well as its retail presence, Sigma Healthcare is one of the largest wholesalers and distributors of prescription medicines, over-the-counter and front of store products in Australia.

In its interim review in June, the ACCC said it was concerned about the merger weakening the supply of pharmaceutical products and the potential for the company to exploit its market power to charge higher wholesale prices for its products.

It also feared that Sigma may withdraw from its Community Service Obligation (CSO) agreement with the federal government that sees it distribute medicines listed on the Pharmaceutical Benefits Scheme (PBS) as a pharmaceutical wholesaler.

At the time, the competition watchdog noted the company could instead opt to only supply pharmacy products to its franchisees — and therefore lowering the number of CSO wholesale options for pharmacies around the country and reducing competition.

Sigma proposed a set of court-enforceable obligations as part of its efforts to gain the ACCC's approval for the deal in October, including:

Allowing Sigma franchisees and wholesale customers to terminate their agreements with the company without penalty for three yearsRing-fencing confidential data of Sigma's customers and deleting the information of customers if they terminate their contractsRemaining a pharmaceutical wholesaler under the federal government's CSO arrangements for five yearsAppointing an independent auditor to ensure its compliance.

Ms Cass-Gottlieb said those concessions ultimately gave the ACCC confidence to approve the merger.

"The evidence gathered, augmented by the undertaking given by Sigma, led us to conclude that a substantial lessening of competition is unlikely," she said.

The presence of other pharmaceutical wholesalers in the sector also reassured the ACCC, she said.

"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," Ms Cass-Gottlieb said.

ACCC chair Gina Cass-Gottlieb says the deal won't reduce competition in the pharmacy sector. (ABC News: John Gunn)

Approval a 'critical milestone' for companies

In a statement, Chemist Warehouse CEO Mario Verrocchi said the decision built on his company's history of revolutionising Australia's pharmacy industry to be "more competitive and dynamic".

"We believe that the combined group will continue to drive competition within the industry," Mr Verrocchi said.

"By bringing together Sigma's advanced distribution and logistics capabilities with Chemist Warehouse's strengths in retail and marketing, we are creating an opportunity that will benefit both companies' shareholders and customers.

"The proposed merger sets the stage for a new chapter of growth for both Chemist Warehouse and Sigma, aimed at delivering greater value to our customers, employees, franchisees, and shareholders."

Sigma Healthcare CEO Vikesh Ramsunder described the ACCC's decision as a "critical milestone" for the company.

"The proposed transaction has the potential to create a leading ASX listed healthcare company through the combination of the complementary strengths of Sigma's state-of-the-art pharmaceutical distribution infrastructure with Chemist Warehouse Group's retailing know-how," he said in a statement.

"We believe the proposed merger will create a stronger business and accelerate our long-term growth ambitions, for the benefit of our stakeholders."

The details of the merger will also pave the way for Chemist Warehouse to be publicly listed on the Australian Securities Exchange (ASX), through a process the ACCC described as a "reserve acquisition".

Under the deal, Sigma would acquire all of Chemist Warehouse's shares, in exchange for all of Sigma's shares and $700 million — resulting in Chemist Warehouse shareholders holding 85.75 per cent of the merged company on the ASX and Sigma's holding the remaining 14.25 per cent.

The deal still needs to be approved by Sigma Healthcare and Chemist Warehouse's respective shareholders before being finalised.

Sigma's share price surged by more than 27 per cent during trade on Wednesday morning after the ACCC's announcement.