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A proposed merger between discount pharmacy giant Chemist Warehouse and Sigma Healthcare risks reducing competition in Australia's pharmacy sector and could result in consumers paying higher prices, the Australian Competition and Consumer Commission has warned.
The competition watchdog has released its preliminary statement of issues into the $8.8 billion deal, outlining a number of "competition concerns" that would deliver substantial changes for the pharmaceutical industry.
"This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse," ACCC Commissioner Stephen Ridgeway said in a statement.
The ACCC said the deal would create a "new business model for the pharmacy sector" that "could raise barriers to rivals expanding or entering, which may lessen competition".
"This lessening of competition may lead to reduced service quality for goods and services provided in pharmacies as well as higher prices for consumers," Mr Ridgeway said.
"The transaction may also weaken the competitiveness of the different product and services offered by Sigma's banner pharmacies."
The proposed merger would see the company have end-to-end control of the pharmaceutical supply chain, from product creation, distribution, wholesale and retail sales — which the ACCC said it was particularly concerned by.
"We are focused on how the newly merged company may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive," Mr Ridgeway said.
"The ACCC has heard many concerns about the impact Chemist Warehouse has had on the pharmacy sector. However, the ACCC is focused only on the impacts of the acquisition on competition, rather than the pros or cons of different business models.
"The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products."
Chemist Warehouse and Sigma Healthcare entered into a merger deal in December last year that would see the companies become the largest pharmaceutical retailer in the country, with a total value in excess of $8.8 billion.
Sigma Healthcare owns and operates around 400 pharmacies around Australia under the retail brands of Amcal, Discount Drug Stores, Guardian and PharmaSave, and operates nine distribution centres.
Should the merger be approved, the company would boast more than 1,000 retail stores and 16 distribution centres in Australia and New Zealand.
In a statement, Sigma said the ACCC's announcement was "not unexpected", given the size and complexity of the proposed merger.
"We are co-operating closely with the ACCC and look forward to continuing to do so in the next phase of the merger review," said Sigma CEO Vikesh Ramsunder.
"The proposed transaction will ensure that Sigma, consistent with its regulatory obligations, can continue to serve franchisee and independent pharmacies alike with a competitive offering, whilst delivering a transformational change for all Sigma stakeholders."
A spokesperson for Chemist Warehouse said the business would continue to work with the competition watchdog as it reviews the proposal.
"Chemist Warehouse Group is committed to fully co-operating with the ACCC and will continue to engage in the process to ensure the commission has all the information required to complete their assessment," they said in a statement.
Should the deal be approved, the merger would see Chemist Warehouse — currently a privately held company — be listed on the Australian Securities Exchange (ASX), with the ACCC describing the proposed deal as a "reverse acquisition".
The deal states that the publicly-listed Sigma would buy all of Chemist Warehouse's shares, in exchange for all of Sigma's shares and $700 million in cash.
That proposal would result in Chemist Warehouse shareholders holding 85.75 per cent of the merged company on the ASX, with Sigma shareholders owning the remaining 14.25 per cent — and Chemist Warehouse becoming a publicly listed company.
Sigma's share price fell by more than 6 per cent during trade on Thursday morning after the ACCC's announcement.
The ACCC expects to make its final decision about the proposed deal on September 5.