Sigma Healthcare beats EBOS to $3b supply contract with Chemist Warehouse
Independent pharmacy network owner Sigma Healthcare (ASX: SIG) has signed a five-year deal to supply Pharmaceutical Benefits Scheme (PBS) medicines and fast-moving consumer goods (FMCG) to retail giant Chemist Warehouse, starting next month.
The deal replaces a current supply contract between Chemist Warehouse and Sigma rival EBOS Group (ASX: EBO), which will not be renewed once it expires next year.
Sigma is the current supplier of FMCG products to Chemist Warehouse’s network of more than 450 stores nationwide, representing approximately 29% of the group’s net sales revenue.
It is estimated that total sales of products to Chemist Warehouse under the new contract will generate a minimum of $3 billion in revenue for Sigma in the first full year.
Stronger company
Sigma chief executive officer Vikesh Ramsunder welcomed the supply agreement.
“We have worked tirelessly over the past 12 months to build a stronger company and to significantly improve our operational performance for the benefit of all customers,” he said.
“Securing this Chemist Warehouse contract means we will now have real scale and momentum moving into the future.”
Sigma owns some of Australia’s best-known pharmacy brands including Amcal, Guardian, PharmaSave and Discount Drug Stores.
Share placement
Under the terms of the new contract, Sigma will issue shares to Chemist Warehouse with a value of $0.64 each for a total stake of approximately 10.7%.
The placement is designed to help align the long-term strategic interests of both companies.
Chemist Warehouse will also retain the right to acquire certain non-core assets from Sigma, which have been valued at $24.5 million.
Alternatively, it can opt to accept a net cash payment to the same value.
The terms of the supply contract are expected to support Sigma’s medium-term earnings before interest and taxation (EBIT) margin guidance of 1.5% to 2.5%.
A current agreement which expires in June 2024 will have no impact on Sigma’s EBIT guidance of $26 million to $31 million for that financial year.
EBOS-Chemist Warehouse contract
EBOS Group has announced it will pursue alternative wholesale supply arrangements for its Australian stores following confirmation that its contract with Chemist Warehouse will not be renewed beyond its June 2024 expiry.
The group originally won the contract from Sigma in 2019 and it is believed to generate approximately $1.9 billion in annual revenue.
This figure represents around 18% of EBOS’ $10.7 billion annual revenue.
Chief executive officer John Cullity said the group accepted the contract outcome.
“We have always recognised that the contract renewal was a risk to our business and we have been developing strategies to minimise the earnings impact and create alternative opportunities for growth,” he said.
“We are confident in the growth strategies we have for our healthcare and animal care sectors and in the overall diversity of our group earnings.”
Large and diversified
EBOS Group is Australasia’s largest and most diversified marketer, wholesaler and distributor of healthcare, medical and pharmaceutical products, consumer products and animal care brands.
In 2018, the group moved to full ownership of Terry White Group when it acquired the remaining 50% of shares not already owned by its subsidiary EBOS PH Pty Ltd.
In May 2022, EBOS completed the $1.16 billion acquisition of LifeHealthcare, which is one of the largest distributors of medical devices in Australia, New Zealand and south-east Asia.