THANKS to a flashy financial structure conjured up in the halcyon days of the Allco Finance boys, some 600 Australian chemists are staring down a bill for $1 million apiece.

These are the rough numbers, mind you.

The drug wholesaling market in this country is controlled by three players – Sigma, Australian Pharmaceutical Industries (API) and the unlisted Symbion – that are paid by the likes of Pfizer and Merck to warehouse drugs and truck them to chemists.

It’s an ultra-high-volume, low-margin game. If a customer faithfully pays you for 50 months on the trot but defaults on 30 days of credit, you have busted; even on 2 per cent margins. In the world of the wholesaler, payment terms are paramount.

Sigma, though, with the help of the wizards from Allco, managed to extend the usual 30-day terms to

90 days. Allco simply securitised the receivables from the chemists – bundled them up, in other words.

The drug giants were happy – they got paid on the spot. The chemists were happy – they got free credit. And Sigma, under its former, cavalier management, was happy to go on a spending spree while this swelling liability to Allco lay hiding off the balance sheet.

Here was a business that ought to have grown at roughly the rate of the Pharmaceutical Benefit Scheme (PBS), say 6 to 7 per cent, behaving like a growth stock, stalking big acquisitions and talking big growth.

It all came to a head, as unsustainable business models reliably do. With chief executive Elmo de Alwis gone and Sigma’s board and top management routed, supplier terms maxed out in July 2009. Recoiling from the precipice of insolvency, incoming chief Mark Hooper began to wind back trade receivables.

First item on the agenda: survival. Hooper put the one big saleable asset on the block. Sigma’s pharmaceutical division was sold to Aspen Pharmacare Holdings for $900 million. It was a good price. Sigma’s market cap was $500 million, so Hooper and his also new chief financial officer, Jeff Sells, were left with a solvent company, some cash and a distribution business, and are now negotiating to pay out the $600 million Allco receivable with ANZ. With some $94 million in excess franking credits, they could even part with $200 million via a special dividend.

Just before Christmas, though, things turned a tad ugly again. One of the big drug company customers, Pfizer, walked. Pfizer – facing issues this year with patent expiries – opted to conduct its own distribution directly to the chemists. It was a 10 to 15 per cent hit to sales. And the move also hit API, Sigma’s arch-rival, which was also in the process of winding back its trade credit in the wake of – you guessed it – an Allco securitisation deal. All three drug wholesalers will be desperately hoping the other biggies such as Ely Lily and Merck don’t take their logistics in-house.

In fairness to the wholesalers, and even to Allco, this securitised debt structure was a logical way to fund the business – even if it was, in true Allco fashion, taken too far. In the case of Sigma at least, Allco sat in the structure with the high-yielding equity portion while the banks held more security (Symbion has refinanced with NAB, while Sigma is still negotiating with ANZ).

The heat, however, is now on the chemists, too. For its part, API is said to have already wound back its terms to 40 days. Sigma and its clients are in more of a bind. Sources told the Herald that the $600 million receivable represented roughly 600 pharmacies, of which one group, My Chemist, accounted for some $200 million (across 200 shops). Sigma had effectively sponsored the roll-out of My Chemist and another chain, Chemist Warehouse.

How other family-run operations, on average, can comfortably stump up their $1 million is anyone’s guess. It is a fair call chemists, on the whole, will be doing it a lot tougher now that Sigma’s leveraged sprint for market against API and Symbion, now owned by Swiss giant Zuellig, is over.

Their entire balance sheets are tied up in loans to pharmacies. And these customers are in the business of flogging expensive drugs – subsidised by government – on thin margins.

The drug that retails to you for $25 probably has a stock price – the amount Big Pharma receives, that is – of $225. The taxpayer-funded PBS pays the balance on 14-day terms. Those 90-day terms, then, are a mighty loan indeed. Can Sigma now collect? Can the chemists pay?

Penning this column has been a wistful experience. It is now clear that this writer had, in the years of the sharemarket boom, developed a sort of reverse Stockholm syndrome. Akin to captives falling in love with their terrorists, I had developed a perverse fondness for the spivs of financial engineering. In short, I miss terrorising them.

The Babcocks, the Allcos, MFS, Rubicon … all are but distant memories now as markets march into their post-crisis era.

Nary a conviction by the regulator yet, nor even a civil prosecution. Nary an investigation, in fact, or anything to have caused a ripple of consternation as the protagonists kick back on sabbatical in their London pads and Sydney harbour-front mansions.

Even the great pioneers, the survivors, the peerless origami masters of Macquarie Bank, are but a shadow of their former highly accretive selves.

As the paltry news flow now ekes out from the insolvencies of Allco and Babcock, it seems that you can blow up billions and shrug it off; it seems that you can predict a $700 million profit in the year your shareholders bite the dust, a la Babcock, with impunity.

And so they will be back, in the next cycle, as they tire of their idle wealth and hanker once again for the sport of hoodwinking people, or preferably funds managers, out of their savings. And their numbers will multiply.