A review initiated after losing My Chemist/Chemist Warehouse supply contract has identified over $100m per year in savings
Sigma Healthcare Limited has announced a “strong outlook” after conducting a review of its operations, which was initiated following the loss of renewal of its supply contract with My Chemist/Chemist Warehouse (MC/CW) announced mid last year.
Its current contract with MC/CW expires in June 2019, with EBOS to take over exclusive wholesale distribution of pharmaceutical products to Chemist Warehouse Group’s more than 450 pharmacies from 1 July 2019, as part of a five-year agreement.
Sigma CEO and managing director Mark Hooper said on Monday that the four-month business review had identified significant cost savings.
“We are very encouraged by the outcomes of the review. As we announced in December, initial conclusions from Accenture suggested a material opportunity could be realised from restructuring the business,” said Mr Hooper in an ASX statement.
“The program of work has now identified cost efficiencies over $100 million per annum, which will be progressively delivered over the next 18-24 months.”
Sigma said the review was “far-reaching and structured” covering all aspects of the business.
It confirmed the underlying EBIT guidance for FY19 of $75 million, and said it expects FY20 to deliver underlying EBITDA of $55-60 million.
“FY20 will have its challenges given the uncertainty of the exact timing for the MC/CW business to fully exit and as we begin to implement the changes identified in the review,” said Mr Hooper.
However he said benefits identified in the review would be seen in the next few years.
There are some potential big changes on the horizon, with Australian Pharmaceutical Industries (API) announcing in December that it had acquired a substantial shareholding in Sigma and had proposed a merger transaction.
If accepted, API shareholders would own approximately 63% of the combined entity with Sigma shareholders owning the remaining 37% following implementation of the scheme.
Sigma has confirmed that high-level due diligence has now commenced in regards to the proposal, with further engagement pending the outcome of another Sigma review.
“We are open to continuing discussions on identifying potential merger opportunities, but this needs to be assessed in the context of what is in the best interests of Sigma shareholders,” said Sigma chairman Brian Jamieson.
“Importantly, independent of API’s proposal, we have a clear vision of where we are heading as a standalone business.”
When the proposed merger was announced, API CEO and Managing Director Richard Vincent told the AJP that this is the second time API and Sigma have tried to merge—the first attempt being in 2006, pre-PBS reforms.
Due to changes over the past decade he said he was “cautiously confident” that the merger will go ahead.
“The ACCC in recent times have been fairly hard on businesses coming together. But every set of circumstances is quite different, I think ours is quite different,” said Mr Vincent.
“[In] our previous forays into a merger, the ACCC had a very strong view back in those days that it wasn’t good for competition to have one less wholesaler. But in those days there were three wholesalers,” adding there are now five players, if CH2 and DHL are included due to their volume.
Additionally, wholesaler discounts available to pharmacists back in 2006 are no longer available.
“With Sigma losing their Chemist Warehouse contract, I don’t see that as a negative, I actually see that as an opportunity,” Mr Vincent told AJP.
“They’ll have latent capacity in their business and it gives us the opportunity to put two big businesses together and unlock some efficiencies and synergies and some cost savings that will come just by eliminating the duplication that exists across our two businesses.
“I think Sigma is a really efficient business and I think we are as well. But when you visit the same suburbs, the same customers every day, if you put the two businesses together there will be costs that drop out of that.
“PBS reforms and other government regulation continues to challenge us to find ways to be more efficient, and one way is putting Sigma and API together.”