Both Wesfarmers Ltd (ASX: WES) shares and Sigma Healthcare Ltd (ASX: SIG) shares offer investors exposure to the pharmacy sector.
Wesfarmers may be best known for its divisions like Bunnings, Kmart, and Officeworks, but it also owns Australian Pharmaceutical Industries (API).
API owns several brands, including Priceline, Soul Pattinson Chemist, Pharmacist Advice, SILK Laser, and Clear Skincare. Soul Pattinson Chemist and Pharmacist Advice are operated by independent pharmacies, while over 400 Priceline Pharmacy locations are franchise stores.
Sigma Healthcare currently provides wholesale and distribution services to pharmacies. It also owns retail pharmacy brands Amcal and Discount Drug Stores, as well as an independent offering called PriceSave.
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What's the appeal of Wesfarmers shares with healthcare?
Wesfarmers only entered the healthcare space in the last few years, acquiring the previously-listed Australian Pharmaceutical Industries. The company believed it could bring its scale and expertise to the pharmacy sector.
In the FY24 result, the Wesfarmers health division delivered a solid result, with 5.9% revenue growth to $5.6 billion, 7.3% operating profit (EBITDA) growth to $133 million, 10% earnings before interest and tax (EBIT) growth to $55 million and 11.1% earnings before tax (EBT) growth to $50 million.
Priceline delivered strong sales growth thanks to store network expansion, promotional activity and online sales growth. In the second half of FY24, it reduced prices on a range of commonly purchased products. The pharmaceutical wholesale division delivered "positive sales growth" through net customer wins and improved service levels.
Wesfarmers said its digital health had a pleasing year after acquiring InstantScripts, which delivered "strong revenue growth".
Wesfarmers says it's well-positioned to deliver improved financial performance and grow sales while investing in its businesses to accelerate growth and improve returns. It aims to capitalise on long-term sector tailwinds.
It's looking to expand the franchise Priceline store network, improve its digital and e-commerce offerings, improve the wholesale proposition and optimise its supply chain.
Why are Sigma Healthcare shares appealing?
The key reason the market is very excited about Sigma is its impending merger with Chemist Warehouse, now approved by the ACCC, to create a strong player in the space.
Sigma's recent FY25 half-year result was solid, with 17% net revenue growth to $1.84 billion and 20.6% growth of EBIT to $18 million. It's clear the Wesfarmers' healthcare division is larger than Sigma.
However, Sigma Healthcare will become a much more profitable business once combined with Chemist Warehouse, which recently reported its own FY24 result, which showed $3.3 billion in revenue and, most importantly, $540 million in net profit.
The combination of the two businesses is expected to unlock "significant efficiencies", with cost synergies estimated at an initial $60 million per annum.
Not only is Chemist Warehouse already very profitable, but it's also expanding its store network internationally in places like China, New Zealand, and Ireland. It also recently launched Optometrist Warehouse, giving it another growth runway in Australia.
My choice for pharmacy exposure
I think Sigma Healthcare shares are the clear winner, with the compelling merger benefits that could come. Plus, Chemist Warehouse has an appealing growth runway that isn't just Australian-based.
API has a commendable outlook, but it only contributed $50 million to Wesfarmers' earnings in FY24. Bunnings made $2.25 billion, and Kmart Group made $958 million. In other words, API is a very small piece of Wesfarmers' profit and not integral to Wesfarmers shares.
It will be many months before Sigma's merger is finalised with Chemist Warehouse, but the outlook is compelling.
