Sigma Healthcare shares are tanking after losing its Chemist Warehouse contract

Photo: Joe Raedle/ Getty Images.
  • Sigma Healthcare announced it had lost its contract to supply Chemist Warehouse.
  • The pharmacy supplier downgraded profit forecasts for the 2020 financial year.
  • Wholesaler EBOS Group announced it had won the tender to act as the exclusive third party distributor to Chemist Warehouse.

Shares in Sigma Healthcare slumped after the pharmacy supplier downgraded profit forecasts, saying it couldn’t ink a new deal with major customer Chemist Warehouse.

A short time ago, they were down 37% to $0.505.

The current contract with My Chemist/Chemist Warehouse Group, a discount pharmacy chain, runs to June next year.

Legal proceedings started in May last year after the privately-owned Chemist Warehouse, said to have national sales of about $2.7 billion, indicated it was going to source products from another wholesaler.

However, legal action was then dropped and the two then went into private negotiations.

Sigma, which owns the Amcal and Guardian brands, expects earnings of $75 million this year, dropping to between $40 million and $50 million in the 20202 financial year.

“We made it clear at the start of the negotiations that we would only enter into a new contract if it made commercial sense and provided an adequate return on invested capital,” says Mark Hooper, Sigma managing director and CEO.

“We are not prepared to risk significant shareholder funds without adequate and sustainable returns.”

He says more than $300 million cash will be freed up at the end of the Chemist Warehouse contract, enabling the company to diversify and strengthen.

However, Hooper says trading in May and June has been particularly weak.

“We are currently implementing initiatives to reduce our operating costs, which will provide some benefit in the second half of FY19 and will also benefit FY20 and beyond but these are not sufficient to offset the shortfall in sales in FY19,” he says.

Shares in wholesaler EBOS Group were up almost 5% to $17.70 after the company announced it had won the tender to act as the exclusive third party distributor to more than 400 Chemist Warehouse and My Chemist stores.

The initial agreement will last for five years with the potential for a three-year extension.

“To be selected as a trusted partner by Chemist Warehouse Group reinforces our capital investment strategy and reflects the efficiencies we have made over a number of years to our operations,” says CEO John Cullity.

“It’s a great endorsement of EBOS’s wholesale pharmacy business, and reflects the high level of expertise and service standards that we offer the industry more broadly.”

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