Bitter Pill For Sigma As Chemist Warehouse Walks

By Glenn Dyer | More Articles by Glenn Dyer

Sigma Healthcare shares plunged 44% at one stage yesterday after it confirmed that it would not be continuing as a key supplier to the giant Chemist Warehouse chain in a new deal from July 1, 2019.

The shares were whacked Monday, slumping to a low of 44 cents after the news was released before trading started. They later ended at down 40.1% at 48.5 cents.

Instead of Sigma, Christchurch-based Ebos will become Chemist Warehouse’s exclusive third party distributor.

Ebos operates the Symbion pharmaceutical wholesaling business which it acquired in 2013 for $NZ1.1 billion, and the new five-year agreement will take effect from July 1, 2019.

Ebos estimates the contract will generate about $1 billion in revenue in a year.

In the wake of the Symbion buy Ebos has grown to become a leading marketer and distributor of pharmaceutical products, with a turnover of about $NZ7.5 billion and shares worth $NZ2.7 billion. It is also a major player in the Trans-Tasman pet food industry.

Sigma and Chemists Warehouse have been negotiating this deal for months and it has become increasingly clear that Sigma might walk away. But when it did shareholders panicked and dumped the shares.

Sigma chief executive Mark Hooper said while he had hoped an always-tough negotiation with Chemist Warehouse may have delivered a better outcome, there was no point in Sigma signing a deal on such punishing terms that it would bring little return..

He said ending the agreement will free over $300 million in cash, which it will use to fund a “broader healthcare focus”.That cash (working capital) is more than a third of Sigma’s market value yesterday of $858 million.

Given that it wouldn’t surprise to see the company company under pressure to do a big buyback.

“We made it clear at the start…we would only enter into a new contract if it made commercial sense and provided an adequate return on invested capital," Mr Hooper said.

"We are not prepared to risk significant shareholder funds without adequate and sustained returns."

Sigma will continue to supply the My Chemist/CWH group under the terms of the existing contract, which runs until 30 June 2019.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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