Chemist Warehouse sweats on courtroom pharmacy brawl

Legal circles reckon this could have wide-ranging implications for Chemist Warehouse and how it deals with pharmacists and franchisees.

In February, the Pharmacy Council rejected an application from Tran Pharmacy to register a business in Sydney’s Sutherland Shire trading as Blooms The Chemist Cronulla South. The Pharmacy Council approves where pharmacies can be located in NSW and who can have a financial interest.

The Pharmacy Council ruled Blooms would have a financial interest under the new ownership due to a service and licensing agreement dictating certain terms between it and Tran Pharmacy. Blooms loaned Tran Pharmacy money so it could acquire its interest in the Cronulla chemist. The parties also signed a deal locking Tran Pharmacy into certain goods and services.

The Pharmacy Council argues that the agreements gave Blooms the ability to partly control some of Tran Pharmacy’s purchasing, including Blooms branded products as well as generate revenue from that chemist’s operation outside a normal contract for goods and services.

Funding the appeal

Chemist Warehouse has thrived on this exact type of high-volume, low-cost business model. Its scale allows it to play the gorilla in wholesale markets and get by on low margins. Last year, the group had revenue of $3 billion and paid a staggering $365 million dividend – Gance, Verrocchi and their families taking $264 million of that. Not bad.

The business has more than 500 pharmacies through these types of direct ownership and franchisee partnerships, which hire 17,000 employees across Australia.

And here things get stickier. Blooms says it has many agreements which have already been approved and has largely the same one struck with Tran Pharmacy. It claims it does not contravene the law and Blooms does not have a financial interest. It says the loan does not give it a share of profits, or a financial interest.

Blooms is so worried that it’s funding the appeal at the NSW Civil and Administrative Tribunal without being a party to it and tapping its own lawyers – Ashurst – to work on Tran Pharmacy’s behalf.

Blooms even cheekily tried to go over the head of the Pharmacy Council to the NSW Supreme Court, all while its franchisee was still appealing in the tribunal.

Already, Blooms has modified its contracts with new pharmacies with licence fees of $40,000, loans at 13 per cent, and the unbundling of fees within service agreements. Blooms’ legal team claims those new pharmacies want to move to agreements similar to the one being appealed by Tran Pharmacy.

So, what happens if the review of the Pharmacy Council decision goes against Tran Pharmacy? Blooms wouldn’t be paying for the appeal if the new agreements were more profitable than the one being challenged.

Then there is the question of what happens to the historic approvals Blooms already has in place with other pharmacies, which it says are largely similar to the Tran Pharmacy deal.

The Pharmacy Guild will undoubtedly be keen to see a ruling that could have wider implications.

But Chemist Warehouse and its bankers – looking to secure a $5 billion-plus valuation – will be putting on the Lucas Papaw and quietly cheering in Blooms’ corner.