EBOS gain brings Sigma pain in Chemist Warehouse shake-up
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by Simon Evans
Australasian pharmaceutical distributor and pet food company EBOS Group has won a major five-year contract to supply pharmaceutical products to category giant killer Chemist Warehouse in a big blow to rival Sigma Healthcare, which will lose the supply deal from mid-2019.
The contract win is a major filip for new EBOS chief executive John Cullity, who officially took over the top job at EBOS on April 1 after four years as its chief financial officer. "It is a big victory," he told The Australian Financial Review.
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.
But 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.
"I'm not tying up three hundred million bucks to make no return," Mr Hooper told a conference call on Monday morning. He said if Sigma had signed a deal and then told the market that its earnings before interest and tax would halve because of it, investors would have been unimpressed. "I'm not sure there would have been a warm round of applause".
Sigma had been through three separate sets of contract renewal negotiations with Chemist Warehouse over the years, but this time there was no going back.
"Quite often they go to the edge and you still find a way to do a deal," Mr Hooper said. Sigma on Monday downgraded profit expectations for both 2018-19 and 2019-2020.
Mr Cullity said sales to the Chemist Warehouse group, which also includes My Chemist stores, would generate about $1 billion in revenue in the first year of the agreement. "For us it's the pharmaceutical part of the business. It's not all of the front of the shop," he said.
EBOS also has a 50.1 per cent stake in the Terry White Chemmart Group that operates 500 retail pharmacies in Australia. Symbion is already the largest pharmaceutical wholesaler and distributor to pharmacies and hospitals.
Pharmacy represents about 80 per cent of the EBOS business. It also operates an animal healthcare division, with one of its flagship brands being Black Hawk premium pet food.
EBOS has a dual listing on the ASX and the New Zealand Stock Exchange. Mr Cullity said EBOS had invested more than $100 million in highly-automated distribution centres in Sydney, Melbourne and Brisbane to deliver better efficiencies. "The more you can automate the process, the more efficiencies you can drive," Mr Cullity said.
Sigma on Monday revealed that soft trading in May and June had prompted a profit downgrade for 2018-19, while the loss of the contract with Chemist Warehouse meant a substantial cut in projected earnings guidance for 2019-2020. 'Pivot point' for Sigma
Mr Hooper said there would be a comprehensive re-shaping of the business now, with major cost-cutting afoot.
The contract loss meant that more than $300 million in cash would be freed up at the end of the contract in mid-2019.
He labelled the loss of the contract as "an important pivot point for Sigma".
Sigma cut its guidance for 2018-19 to an underlying earnings before interest and tax of around $75 million. "Trading conditions in May and June have been particularly weak," he said.
For 2019-2020, Sigma now expects underlying EBIT of between $40 million and $50 million.
Sigma is one of the largest full line pharmaceutical wholesalers in Australia. It also operates Australia's largest pharmacy-led network, across the Amcal, Chemist King, Discount Drug Stores, Guardian, and PharmaSave brands.
Through its Sigma Hospital Services business, it has been expanding in the hospital pharmacy distribution market, as well as the provision of third-party logistics services through its subsidiary Central Healthcare.
Mr Hooper said Sigma would be eyeing acquisitions to fill the earnings hole.
"There will be some fall out for EBOS from a customer perspective," Mr Hooper said.
MDR Price at posting:
4.9¢ Sentiment: Buy Disclosure: Held
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