Retail pharmacy supplier Sigma Healthcare (ASX: SIG) – the Company behind Amcal and Discount Drug Stores – has struck a deal with pharmacy giant Chemist Warehouse. The deal encompasses the supply of Pharmaceutical Benefits Scheme (PBS) medicines and healthcare products for five years, set to kick off on July 1, 2024.

Sigma currently serves as the binding supplier for FMCG products, which presently contribute around 29% of the Company’s net sales revenue within the Sigma Group. As per the terms of the new supply agreement, the existing FMCG contract will be renewed, while Sigma will also secure the additional supply of PBS medicines to Chemist Warehouse. The Company estimates that this collaboration will generate a minimum of $3 billion in revenue during the first full year of the contract.

Sigma CEO, Vikesh Ramsunder, commented, “The decision by Chemist Warehouse to award Sigma this supply contract is wonderful news for our company and our shareholders. The contract allows us to leverage our highly automated distribution centres and latent spare capacity after multiple years of investment. We thank Chemist Warehouse for their confidence in our service capability and awarding of the contract.”

This contract comes as a big win for Sigma Healthcare considering their modest market capitalisation of approximately $700 million and the earnings clocked in FY23, which amounted to a mere $19.3 million across all their assets. Notably, the net profit after tax (NPAT) stood at $1.8 million, following a considerable net loss of $7.2 million in the preceding year. And this profit is because of the Company divesting non-core assets and absorbing costs relating to inventory write downs. 

To secure the supply agreement, Sigma will offer some considerations, including the issuance of Sigma shares to Chemist Warehouse. The shares to be issued will represent approximately 10.7% of Sigma’s issued share capital (post-issuance) and will have a value of $0.642 per share. This share placement aims to align the long-term strategic interests of both companies. 

Additionally, Chemist Warehouse can also choose to acquire certain non-core assets from Sigma, valued at $24.5 million. If Chemist Warehouse chooses not to acquire these assets, Sigma will make a net cash payment of $24.5 million to Chemist Warehouse.

Once the terms of the supply contract are fully implemented, Sigma anticipates that it will support the Company’s medium-term EBIT margin guidance of 1.5% to 2.5%. The current agreement will continue until June 2024, with no impact on Sigma’s existing FY24 EBIT guidance of $26 million to $31 million.

Ramsunder added, “Sigma has worked tirelessly the past 12 months to build a stronger company and to significantly improve our operational performance for the benefit of all customers. Securing this Chemist Warehouse contract means we will now have real scale and momentum moving into the future.”

Sigma Healthcare and Chemist Warehouse are now working together to iron out the details and have everything officially settled by June 30, 2023.