Affected market: Retail pharmacy
The OFT's decision on reference under section 33(1) given on 29 November 2005. Full text of decision published 7 December 2005.
Lloyds Pharmacy Limited (Lloyds) is a national retail pharmacy chain operating 1,414 outlets in the UK. It is a wholly owned subsidiary of Admenta UK Plc (Admenta) which is in turn wholly owned by Celesio AG (Celesio). Its sister company, the pharmaceutical wholesaler AAH, is also a wholly owned subsidiary of Admenta.
Primelight Limited and Levelcrown Limited and their respective subsidiaries (trading under the names Scholes Chemist and Cohens Chemist) is a regional pharmacy chain comprising retail pharmacies in England and Wales, the majority of which are in Merseyside, Lancashire, Greater Manchester and Yorkshire, 110 of which are subject to the anticipated transaction. The UK turnover of the businesses to be acquired for the year ended 31 August 2005 was around £80 million.
Lloyds intends to acquire 110 Scholes and Cohens stores with the original owners retaining 30 pharmacies. This transaction was pre-notified on 18 October 2005 and the statutory deadline is therefore 29 November 2005.
As a result of this transaction Lloyds and 110 Scholes and Cohens pharmacy stores will cease to be distinct. The UK turnover of the target exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
The parties overlap in the operation of retail pharmacies. In 'Unichem/GEHE AG/Lloyds' (see [note 1]), the MMC considered as distinct the supply of three different product categories offered by pharmacies: ethicals, 'pharmacy only' medicines (P medicines) and general sales list (GSL) medicines. In addition, pharmacies also stock non-pharmaceutical products such as toiletries, baby food and health food.
Ethicals are prescription only medicines. In the significant majority of cases, there is no demand side substitution either within ethicals or between prescription and non-prescription (over the counter (OTC)) medicines. From the supply side, a pharmacist requires a pharmacy contract with a primary care trust (PCT) in order to be able to dispense prescriptions.
P medicines do not require a prescription but can only be dispensed by a pharmacist. While pharmacists supplying P medicines do not require a PCT contract, in practice, however, only about one per cent of pharmacies dispense without a PCT contract.
GSL medicines do not have to be sold in pharmacies and are therefore also available in supermarkets, convenience stores, petrol stations etc. Due to the many alternatives sources for these products they are not considered further in the assessment of this transaction.
In addition to the PCT contract requirement a key distinction between the provision of P medicines and ethicals is pricing. Prices for ethicals are fixed and pharmacies are remunerated and reimbursed for the costs of the drugs dispensed by the NHS. By contrast, pharmacists are free to set their own prices for P medicines.
The lack of competition concerns outlined below in relation to the provision of retail pharmacy services means that there is no requirement to conclude on the appropriate product scope in this assessment.
While there may be an element of national competition between the national pharmacy chains with regard to pricing, product choice and service levels, demand for retail pharmacies appears to be predominantly local. The OFT pharmacy report (at paragraph 5.13) (see [note 2]) found that 78 per cent of consumers travel less than one mile to a chemist, and 96 per cent travel less than three miles. This is in line with the MMC report in 'Unichem/ GEHE/ Lloyds', which suggested that 'the geographic reference market is a small area with a radius of at most one or two miles'.
A one mile radius from each pharmacy has been taken as the relevant geographic frame of reference for the assessment of competition in P medicines and ethicals in this case. However, within particular local areas, and for particular types of service competition, the exact scope of geographic competition may vary (see [note 3]). Due to the absence of competition concerns on a local level as detailed below it has not been necessary to conclude on this issue in this particular case.
National shares of supply
The parties have submitted that Lloyds pre-merger has 1,414 pharmacies out of approximately 12,500 pharmacies in the UK, amounting to around 11.3 per cent of all outlets. The acquired pharmacies account for around 0.8 per cent of all outlets. The OFT therefore does not consider the merger creates competition concerns at the national level.
Local shares of supply
There are 22 locations where there are a Lloyds and an acquired pharmacy within one mile of each other. In each of these local areas there are at least three other pharmacy fascias present. No third parties raised any competition concerns in respect of the pharmacies to be acquired. This lack of concern at the local level is consistent with the MMC's analysis in 'Unichem/ GEHE/ Lloyds' which only examined two-to-one overlaps. In relation to this case, the OFT therefore does not consider that a reduction in pharmacy numbers (by fascia) from five to four within a one mile radius creates competition concerns.
Lloyds is part of the Celesio AG group along with the pharmaceutical wholesaler AAH. Post-merger, the expectation is that the target stores would switch their full-line wholesaler from their current supplier to AAH. However, given the relatively small number of pharmacies involved, the OFT does not consider that the removal of the Cohens and Scholes pharmacies from the contestable market would create competition concerns stemming from this vertical integration.
THIRD PARTY VIEWS
No competition concerns were raised by third parties in respect of this transaction.
The parties are active in the pharmacy sector. At the national level the parties' shares of supply are low and no competition concerns arise. The transaction will create a limited number of local overlaps. In each of these local areas the OFT considers that sufficient competition will remain post merger. No substantial vertical issues arise. Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- Monopolies and Mergers Commission, Unichem PLC/Lloyds Chemists plc and GEHE AG/Lloyds Chemists plc, A report on the proposed merger, July 1996, Cm 3344.
- The control of entry regulations and retail pharmacy services in the UK – A report of an OFT market investigation (January 2003) – OFT 609 (pdf 415 kb).
- For example, in order to encapsulate entire villages or to take account of delivery services from particular pharmacies.