Under the Spotlight AUS: Sigma Healthcare (SIG)

Its bright yellow stores make Chemist Warehouse one of Australia’s most recognisable retail brands – and it’s also one of the most trusted. What may be not as well known is that you can now invest in the discount pharmacy giant after its merger with Sigma Healthcare ($SIG) was finalised this week.

Chemist Warehouse has long been touted as an IPO candidate, but its founders chose a backdoor listing that merges its high street retailing presence – centred on big stores and low prices – with Sigma’s strength in pharmaceutical wholesaling and distribution. The deal was a long time coming: the competition watchdog took almost a year to approve it.

It’s a shot in the arm for the ASX, which has seen a lack of large companies listing on the bourse. It’s also a big payday for Jack and Sam Gance and Mario Verrocchi, who opened the first Chemist Warehouse together in 2000. Sigma Healthcare, which was founded in 1912 as a pharmaceutical manufacturer, paid $700m in cash and a massive number of Sigma shares to get the deal done. 

Investors clearly like the combination, judging by how the stock has climbed. Sigma shares have rallied from $0.76 – when the deal was first announced in December 2023 – to $2.91 this week. This has lifted the value of the merged business in that period from $8.80b to $33b: that’s just slightly smaller than Woolworths’ market cap. Many analysts like the merged business, but have questioned whether the stock may have run a little too hard.  

Growth prescription

The next time you go to the pharmacy, there’s a fair chance you’ll be handing your hard-earned to Sigma Healthcare. The ‘new’ Sigma operates a combined network of 880 Australian stores operating under brands including Chemist Warehouse and My Chemist, as well as the ‘old’ Sigma’s Amcal and Discount Drug Stores stores. The merged group will have a 15% share of pharmacies, followed by EBOS ($EBO) with a 12% share. It also partly owns 50 retail pharmacies in New Zealand, ten in Ireland and two in Dubai. Ten retail stores in China are operated through service agreements with local companies. 

Sigma’s reach goes further. Even if you avoid a Sigma pharmacy, they’re likely clipping the ticket on the products you buy elsewhere. As a full-line wholesaler and distributor, it will supply and deliver prescription products, over-the-counter and front-of-store consumer products to over 3,500 pharmacy customers. The merged group’s wholesale customers include its retail network as well as independent pharmacies, all supported by a national distribution centre network.

Both companies have shown strong momentum in their respective businesses ahead of the merger. ‘Old’ Sigma earlier this month upgraded its full-year EBIT guidance to $64m-$70m (from $50m-$60m) on a new supply agreement with… Chemist Warehouse. Chemist Warehouse reported its first-half earnings in late January: H1 sales rose 13% year-on-year to a record $5.15b and EBIT was $437.9m, up 35% YoY. EBIT margin increased from 18.3% to 22.3%. 

The hook for investors is growth in Chemist Warehouse stores. The footprint has gone from 58 stores 20 years ago to 639 stores. Over the past ten years, they’ve averaged 32 new stores a year. That has translated to revenue growth: sales have climbed from $158m in 2004 to $9b in 2024, with an average growth rate of 13% a year over the past decade. 

As anyone who’s been in a Chemist Warehouse knows, its product offering is different from other pharmacies. Its franchisees derive about 60% of store sales from front-of-store (FOS) sales of cosmetics, vitamins and perfumes. Chemist Warehouse’s access to these products at competitive prices underpins its strategy of convenience and value. Sigma sees synergies of $60m a year by the fourth year after the merger. 

Dr No

It shouldn’t come as a surprise that the pharmacy industry is a regulatory minefield. Government policy is key to prescription drug pricing – through the Pharmaceutical Benefits Scheme – and supply. Pharmacy ownership is also restricted by regulations. 

The recent introduction of 60-day prescribing highlights how policy can affect the industry. People who receive 60 days’ supply pay one co-payment rather than two (as they would under 30-day dispensing), making the medicines more affordable. While a win for consumers, this generated backlash from pharmacies, which generate less revenue from 60-day prescribing compared to two supplies of the same pharmaceutical. However, adjustments to payments to pharmacists agreed under the latest Community Pharmacy Agreement intend to minimise the impact on pharmacies. 

Sigma will need to navigate state regulations as it rolls out new stores. Chemist Warehouse operates a franchise model as regulations prohibit anyone that isn’t a pharmacist or a corporate entity controlled by a pharmacist from owning a pharmacy. In NSW, someone who’s not a pharmacist can’t even have a financial interest in a pharmacy. Commercial counterparties aren’t allowed to have an interest in the revenue or profit of a pharmacy. 

Franchisees are limited to five stores per state in NSW, Victoria and Queensland. NSW offers the most opportunity for Chemist Warehouse to expand, given its low penetration relative to the population, but the state has the strictest rules. This may affect how many new stores can be opened. 

Index huggers

A catalyst for $SIG will be its inclusion in major index benchmarks tracked by fund managers. Inclusion is partly based on a stock’s free float (the proportion of shares that are freely tradeable) and the liquidity of shares. Analysts believe $SIG will be included in the S&P/ASX100 Index and likely in the S&P/ASX50 Index. This will generate buying from fund managers who track these indices. 

Around 85% of Sigma shares will be held by existing Chemist Warehouse shareholders. Importantly, 48% of the merged group’s shares will be held by Mario Verrocchi, Jack Gance and Sam Gance. These have been placed in voluntary escrow. This limits how many of these shares can be sold and the timing of any sales. The free float and liquidity of $SIG shares would increase if the founders sold down, allowing more shares to be traded by fund managers and retail investors. 

The escrow arrangements allow the Chemist Warehouse co-founders to sell 10% of their stake, or just under 5% of all $SIG shares, from either 31 August 2025 or when the company releases its full-year earnings. The co-founders can then sell 90% of their stake (43% of $SIG shares) from 31 August 2026 or when the company releases its FY26 earnings.   

Compound pharmacy

There is now a way to invest in one of Australia’s most well-known retail brands through Sigma Healthcare, which spans all segments of the pharmacy industry.

Chemist Warehouse has delivered double-digit compound growth in store numbers and sales over the past two decades. Its big ambitions to keep expanding have fuelled the massive rally in Sigma shares, but the company will need to keep regulators on side to deliver this growth.   

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.