Within the retail sector, it’s huge information. Chemist Warehouse is merging with Sigma Healthcare.
Most Australians might be nicely acquainted with the Chemist Warehouse chain, whose garish franchise pharmacies adorn prime positions on many excessive streets and in buying centres. The chain has been including shops quickly; it’s the place many people purchase our cosmetics and toiletries.
The proposed merger will make Chemist Warehouse a retail large, combining round 600 current Chemist Warehouse shops with one other 800 pharmacies owned by Sigma round Australia, together with well-known franchises corresponding to Amcal and Pharmasave. Funding analysts Morningstar estimates the mixed agency will management greater than 50% of the market share in Australian retail pharmacies. The deal additionally offers Chemist Warehouse its personal prescribed drugs wholesaler, permitting the merged entity preferential entry to its wholesale merchandise.
The $8.8 billion merger is revolutionary for all of the mistaken causes. The cleverly structured deal will get Chemist Warehouse onto the ASX by way of Sigma, which is already listed. The brand new entity might be 86% owned by Chemist Warehouse, and offers founders Jack Gance and Mario Verrocchi seats on the board. Sigma additionally has to pony up $700 million in money. It’s nearer to a reverse takeover than a real merger.
Like so many Australian industries, pharma wholesaling is very concentrated. Sigma and its rivals EBOS and API management 90% of the wholesaling market. This deal retains three wholesalers, but it surely offers the brand new entity a stranglehold on the retail pharmacy market. No surprise Clever Investor analyst Graham Witcomb thinks it’s going to “hoist extra pink flags than a communist parade”.
Witcomb’s comment is a reference to seemingly intervention from the competitors regulator, the Australian Competitors and Shopper Fee (ACCC). The merger now looms as an important check of ACCC commissioner Gina Cass-Gottlieb’s dedication to rein within the anti-competitive practices of Australia’s more and more concentrated company sector.
A Josh Frydenberg appointment, Cass-Gottlieb has, maybe surprisingly, proven herself able to suggest a extra lively method beneath a Labor authorities. In a speech to the Nationwide Press Membership final yr, Cass-Gottlieb brazenly campaigned for stronger merger legal guidelines. “The issue of focus is a rising one in Australia,” she argued, citing analysis by Jonathan Hambur in a 2021 working paper for Treasury. “The ACCC must have the instruments vital to have the ability to correctly scrutinise and, if vital, stop these mergers which might be prone to considerably reduce competitors.”
It’s no secret why the ACCC needs harder merger legal guidelines. It retains shedding instances. Federal Courtroom judges have discovered towards ACCC anti-merger motion in a string of distinguished selections, taking pictures down the fee’s instances towards Pacific Nationwide’s acquisition of strategic freight amenities in Acacia Ridge, and waving by means of the TPG-Vodafone merger. The case regulation makes it clear that Australian courts haven’t been satisfied by the ACCC’s arguments about competitors being lessened.
Whereas the courts strike down regulatory motion, the financial proof for market focus in Australia is firming. Cass-Gottlieb’s point out of Hambur’s work is only one of a quantity of related research that present vital focus in a number of key Australian industries. Current analysis by e61’s Dan Andrews, Elyse Dwyer and Adam Triggs discovered that the prime 4 companies management greater than 50% of the market in key industries corresponding to info, manufacturing, utilities, finance and mining quarrying.
In fact, you don’t want an economics diploma to note that Australia has solely 4 huge banks, 4 huge telcos, three power gentailers, three supermarkets and two airways.
Competitors Minister Andrew Leigh is aware of all this; certainly, he did a few of the most attention-grabbing analysis on market focus. In keeping with ABS knowledge he compiled, the highest 4 companies in key Australian industries have a median market share of round 43%. As Leigh identified in a lecture final yr, “Throughout the economic system, from child meals to beer, the highest companies maintain a excessive and rising share of the market.” Leigh can also be conscious of the flip in the direction of harder motion within the US — he’s even been over to meet Federal Commerce Fee chair Lina Khan.
Current historical past within the US offers loads of proof about what’s prone to occur as prescribed drugs consolidate: much less competitors, increased costs and worse care. One tutorial research discovered that the closure of unbiased pharmacies within the US — pushed to the brink by elevated competitors from mass retailers — led to a lower in affected person entry to pharmaceuticals. A 2023 paper by the College of Pennsylvania’s Sarah Schutz discovered that post-merger, web drug costs rose 19%.
European regulators have additionally taken an lively curiosity in pharmaceutical mergers, blocking or inserting strict circumstances on a number of high-profile merger makes an attempt, together with the Teva-Allergan merger (which went forward with divestment circumstances), and the Illumina-GRAIL buy (when biotech agency Illumina ended up being fined a record-breaking €432 million after ignoring the regulators and merging anyway).
Removed from rising effectivity, merger mania results in fewer however bigger companies, much less innovation and better costs. Harvard economist Leemore Dafny has examined the speedy consolidation of US hospitals prior to now 20 years. It has led to increased costs for care. “When rivals merge, costs enhance and there’s scant proof of enhancements within the high quality of care that sufferers obtain,” Dafny informed a seminar final yr.
We’ve seen this present earlier than. The modern economic system is suffering from industries the place companies have merged and bought their technique to market dominance, initially providing cheaper costs and higher entry. However as soon as they seize a commanding place available in the market, costs go up and repair craters. The basic case, as US regulators freely admit, is Amazon. However Australia provides loads of home examples, as these ready on the Qantas baggage carousel can attest.
All of this makes the Chemist Warehouse deal a stern examination of the way forward for Labor’s competitors regime.
From the viewpoint of the broader group curiosity, it’s exhausting to see an upside to permitting one of many dominant gamers in retail pharmacy to swallow a key competitor and provider. It’s no shock {that a} self-interested Pharmacy Guild opposes the merger, however the guild makes a salient level when observing that “medicines usually are not unusual objects of commerce”. Funding analysts are already warning concerning the impact of the merger on the availability of wholesale medication for group pharmacies. The deal is each a horizontal and a vertical integration. It’s going to manifestly enhance the market focus of a key business with a crucial public well being function.
Even when the ACCC acts, any merger block could be weak within the Federal Courtroom. In spite of everything, Chemist Warehouse will be capable of argue that clients will profit: the brand new entity will be capable of supply decrease drug costs by means of deep discounting and supply-chain efficiencies. This could possibly be sufficient to swing a court docket problem in its favour.
If stronger laws doesn’t eventuate, the query then turns into what else a mildly emboldened ACCC can do. There are some additional choices: competitors lawyer Russell Miller factors out that the ACCC has the facility to apply to courts for an order for merged firms to divest their new acquisition within the first three years after a deal. In a 2023 paper, Miller argued that the prevailing ACCC regime has been efficient, and questioned whether or not there may be compelling proof for stronger merger legal guidelines.
The nice and the nice assembled for Treasurer Jim Chalmers’ competitors assessment (together with Kerry Schott and David Gonski) have some attention-grabbing questions to think about. Within the US, stronger competitors coverage has been a cornerstone of what pundits have referred to as Bidenomics. Albonomics, if there may be such a factor, has a good bit of catching as much as do.
