fighting to fill the gap, $0.80, page-23

I agree my thoughts were extremely simplistic Chartshout, Here are some more simple thoughts.

I have seen all the turbulence over the years and no more so than over the last decade. I really think it is often a worthwhile exercise looking at a wider picture affecting the industry though and as the saying suggests you can miss the Forrest by focussing too much on the Trees.

There are still significant broader issues affecting the future of the pharmacy wholesalers. They probably are of greater importance than losing the Chemist Warehouse business. Fifteen years ago you would have said the major pharmaceutical wholesalers and associated businesses would be virtually blue chip stocks in the environment of the aging population. Then we witnessed the incredible growth of generics fostered by government policy and the ramifications of that are largely responsible for where we are at now.

As generic manufacturers fought for market share, discounting to pharmacists was extreme and resulted in higher profitability and in part funded the discount model of retail pharmacy and the emergence of the My Chemist / Chemist Warehouse business (supported by Sigma's generous trading terms). Of course the huge discounting from the generic manufacturers led to the government questioning their own PBS pricing structures and introduced price disclosure and progressive price reductions for all off patent drugs. These price reductions have affected dollar margins at all levels and in particular hurt more at the distributor level. Add to that the rise of other competitors, direct distribution by non CSO companies, fixed mini-margins on very expensive new therapeutic agents and the emergence of strong discount groups with the ability to pressure wholesalers on margins and you basically have the environment it in the simplistic nutshell.

We still have an aging population, a wonderful (hopefully sustainable) tax payer subsidised PBS and demographics that probably necessitates continuation of the CSO model. So we will see companies the likes of Sigma, API and Symbion having a long term role in the distribution of medicines throughout the continent. If there is a better way, I can't think of one. I believe it is inevitable that there will be rationalisation along the way as a result of the various pressures on the wholesaler segment of the pharmaceutical industry. With Symbion having the might of EBOS behind them and I believe corporate giant DHL is going to be in for the long term, I see it logical that API and Sigma will have to re-examine a merger sooner or later. This will provide the critical alliance that gives great economies scale and provides their banner/franchise groups such as Priceline, Guardian and other aligned groups the competitive grunt to be strong long term competitors against Chemist Warehouse and any future emerging corporate like Ramsey Health or hazard the thought of Coles or Woolworths.

Irrespective of the individual value of Sigma and API, the synergy associated with a merged entity would have to create additional value for shareholders of both companies.