For decades, Amcal was the biggest and most recognised pharmacy brand in Australia, but it has been overtaken by Chemist Warehouse, Terry White Chemmart and Priceline Pharmacy.

Sigma Healthcare has struggled to regain momentum after a scandal involving manipulation of its accounts and massive losses dating back to 2010.

The announcement last year that industry goliath Chemist Warehouse was switching its supply contract to the EBOS Group looms as a major setback for Sigma in the competitive pharmacy sector.

A merger of the two publicly listed pharmacy wholesalers, API and Sigma, has been on the cards for almost two decades and this time around had a good chance of securing the approval of the Australian Competition and Consumer Commission.

The two pharmacy wholesalers have similar annual sales turnover of around $4 billion currently, although Sigma’s revenue will drop with the exit of the Chemist Warehouse business.

API has a market capitalisation of $746 million, while Sigma’s is currently around $556 million, with their respective share prices hovering around $1.51 and just 53¢.

API’s merger proposal rather generously valued Sigma at $700 million.

API, which acquired a 12.95 per cent shareholding in Sigma in December 2008 following its October merger proposal, identified $60 million a year in synergy benefits were the two wholesalers to combine.

The benefits may well have been much higher, with Sigma identifying $100 million in efficiency gains as part of its “project pivot” business transformation program.

Around half of the “efficiency gains” are related to discontinued services supporting the Chemist Warehouse Group.

Sigma’s standalone decision is not without pain, as 500 jobs will be cut and three regional distribution centres closed as the company prepares for life after Chemist Warehouse.

Sigma is the wholesaler for five key brands, Amcal, Guardian, Chemist King, Discount Drug Stores and PharmaSave, and will have a market share of around 19 per cent when the Chemist Warehouse supply contract ends in June.

API was surprised by the rebuff from Sigma to the merger proposal, but has other growth options with the ongoing rollout of the Priceline Pharmacy brand and the ClearSkincare Clinics business it acquired last year.

Flexibility is the way forward

Sigma also believes it can grow its business after digesting the initial costs and operational restructuring, contending the Chemist Warehouse departure will provide flexibility and new options for capital investment.

Sigma’s sales for FY19 ended January 31 fell by 2.9 per cent to $3.98 billion but face a black hole in FY20 of around $1.2 billion attributable to the Chemist Warehouse departure.

Earnings for FY19 fell by a third to $37 million, with $9 million cut from the bottom line in restructuring costs.

Sigma’s statutory EBITDA was down 17 per cent to $76 million, while the company indicated the underlying figure without extraordinary items was $90 million.

Despite the expected operational cost savings identified in the business review, Sigma forecasts EBITDA for FY20 will be between $55 million and $60 million, a third or more down on the claimed underlying figure for FY19.

The Sigma decision to abruptly end talks with API on the benefits of a merger was surprising to investors and the pharmacy sector, but no doubt pleased the Chemist Warehouse Group and TerryWhite Chemmart.

Sigma now has a considerable amount of work to do to vindicate what appears to be a brave call on the future of the pharmacy and its prospects for growth in the fiercely competitive sector.