Ebos loses $2b Chemist Warehouse contract in Australia to rival Sigma Healthcare

Sep 24, 2023

Ebos Group has lost its contract to supply prescription drugs to Chemist Warehouse stores in Australia, worth about A$1.9 billion (NZ$2b) in revenue a year.

Ebos shares were the biggest decliner on the NZX in late afternoon trading on Tuesday, slumping 10% to $37.33, after the healthcare products distributor confirmed its five-year contract with Chemist Warehouse in Australia would not be renewed when it expires at the end of June next year. The shares earlier touched $35.05, their lowest in more than a year.

The shares were in a trading halt on Tuesday morning as the company said it needed to consider information regarding the contract, having only received the news late Monday night.

Its smaller rival Sigma Healthcare told the ASX it had won the new five-year contract, starting from July next year. The new contract, including both prescription drugs and fast moving consumer goods, was worth about A$3b a year.

Ebos has held the contact with Chemist Warehouse Group for the exclusive wholesale distribution of pharmaceutical products to the group's more than 450 stores in Australia since 2019, having won it from Sigma. The contract represents about 18% of Ebos’ A$10.7b in annual revenue.

"We have always recognised that the contract renewal was a risk to our business and therefore we have been developing strategies to minimise the earnings impact from this potential outcome and create alternative opportunities for growth," said Ebos chief executive John Cullity.

"Had we been successful in retaining the contract, it would not have been on the same terms and margins as what we've got in the current contract."

The decision on the successful bidder for the contract appeared finely balanced, said Peter McIntyre, an investment adviser at Craigs Investment Partners.

"The share price has tumbled on the back of that, as it's a significant contract for Ebos as far as revenues are concerned. So obviously, the market hasn't taken that well."

Still, he said the reaction was to be expected as such a large contract would be hard to replace.

Ebos has expanded rapidly to become the largest distributor and wholesaler of healthcare products in New Zealand and Australia. It also has a substantial animal care business and has been expanding into medical devices with its recent acquisitions of LMT/National Surgical Group and LifeHealthcare.

"We are confident in the growth strategies we have for both our healthcare and animal care sectors and in the overall diversity of the group's earnings," Cullity said.

He said the company had multiple growth drivers across the group, including in its community pharmacy, institutional healthcare, contract logistics and animal care businesses.

Ebos also holds a separate contract with Chemist Warehouse in New Zealand which runs through to 2026 and is not considered material to its business.