Chemist Warehouse is a potential stock market darling, but a much anticipated public float may yet be trumped by a trade sale. One of the biggest privately owned enterprises, the retail pharmacy has been steadily working towards an initial public offering stretching back past 2018, but is yet to confirm a listing on the Australian Securities Exchange. My Chemist Retail Group, which runs Chemist Warehouse and My Chemist, has an estimated 21.1 per cent share of Australia’s $21.8 billion-a-year p
year pharmacies market and close to $5 billion in annual revenue, according to the economic consultancy IBIS World. The company was founded by entrepreneurial pharmacists Jack Gance and Mario Verrocchi, who have built the business from five pharmacies to about 400 Chemist Warehouse and My Chemist stores today. The business has a complex structure, which was crucial to its expansion under the highly regulated pharmacy ownership laws across the various states. However, the owners had to restructure its corporate model to prepare for an ASX listing or a potential trade sale, mirroring a similar revamp to The Good Guys franchise system that contemplated an IPO before accepting JB Hi-Fi’s takeover bid. The Chemist Warehouse restructure is understood to have triggered substantial potential capital gains tax exposure, which, along with market uncertainty associated with Covid-19, prompted the 2020 ASX listing to be deferred to this year. Covid-19 and government economic responses to the pandemic continue to generate uncertainty that could impact ASX trading and the initial stock performance in an IPO, but it has also prompted rethinking on health policy. Chemist Warehouse has long had a tense relationship with the Pharmacy Guild because of the ownership structure it created to circumnavigate government-imposed restrictions the pharmacy sector has relied on to keep supermarkets and other corporates out of the market. Reports of Wesfarmers’ interest in Chemist Warehouse last July stirred the pot with the Pharmacy Guild and has encouraged state regulatory bodies to review compliance with pharmacy ownership laws. Wesfarmers has indicated it is on the lookout for acquisitions with good growth potential after demerging the Coles food and liquor business. However, Chemist Warehouse and its rich consumer health data would seem to be a better fit and more valuable to one of the supermarket chains. Apart from the potential competition concerns of a corporate acquisition, the increased scrutiny by regulators of the franchise and ownership structures in the pharmacy sector looms as a crucial test for a trade sale. A compliance crackdown on pharmacy ownership could also negatively impact the planned Chemist Warehouse IPO, which is expected to have an enterprise value of about $5 billion. While the Pharmaceutical Society and Pharmacy Guild defend the existing restrictions on pharmacy ownership, other health sector voices, including the Royal Australian College of General Practitioners, argue they should be abandoned. Chemist Warehouse has openly argued for deregulation and a more competitive retail pharmacy sector, consistent with the findings of the Federal Government’s Harper Review of competition laws in 2015. Any easing of ownership restrictions would remove some of the uncertainty around the Chemist Warehouse business model and growth opportunities, potentially boosting the pharmacy retailer’s value in a trade sale or ASX float. A public float this calendar year remains the most likely outcome for Chemist Warehouse, but the timeframe could yet be subject to the resolution of tax issues and clarity around compliance with pharmacy ownership laws. Chemist Warehouse, which has Rothschild as a financial advisor, was reportedly planning to invite proposals from banks by the end of this month, including views on the structure of the planned IPO. However, it is now understood that Chemist Warehouse is no hurry to pursue the listing on the sharemarket, with speculation that an IPO may not eventuate until the second half of this year or even 2022. Chemist Warehouse owners are clearly keen to eliminate some of the uncertainties that could discount the value of the business before pressing the button on an IPO or, for that matter, entertaining a trade sale suitor.