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Woolworths lodges a script for growth

While investors have been speculating for years that supermarket giants Woolworths (ASX: WOW) and Coles, owned by Wesfarmers (ASX: WES), would at some point try and enter the pharmaceutical market, it has rarely been considered too seriously by investors. This is due to the Federal Government’s legislation which states that pharmacies must be owned by pharmacists.

According to a report in the Australian Financial Review, an application was recently lodged by Woolworths, to register the trademark ‘Pharmacy-in-Supermarket’ which amongst other classes would cover the sale of pharmaceutical and medical products provided by pharmacists. The recent trademark application comes as the June 2015 deadline approaches, at which time the current rules which prohibit co-location of pharmacies within supermarkets expires.

There appears to be little appetite amongst politicians to fiddle with the status quo and most expect the Federal Government will extend the current rules. Australia’s two listed pharmacy wholesalers and banner-owners, Australian Pharmaceutical Industries (ASX: API) and Sigma Pharmaceuticals (ASX: SIP), are no doubt watching Woolworths’ move closely. API recently reported a 9.6% boost to its underlying net profit after tax, to $24.3 million for the 2013 financial year on the back of $3.19 billion in sales. This equates to a profit margin of just 0.7%. Meanwhile Sigma which in September reported its half year results ending 31 July 2013, recorded sales of $1.46 billion and net profit after tax from continuing operations of $16.3 million. Sigma’s results equate to a profit margin of 1.1% for the half year.

Foolish takeaway

With such incredibly slender profit margins, an increase in competition from either Woolies or Coles would appear to be a highly unfavourable proposition for both API and Sigma. From the supermarket operators’ point of view, it’s appealing to consider entering a pharmacy market size estimated at $16 billion, with API and Sigma having combined revenues of roughly $6.2 billion.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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