Affected market: Pharmaceutical distribution
The OFT's decision on reference under section 33 given on 26 September 2005. Full text of decision published 30 September 2005.
Phoenix Medical Supplies Limited (Phoenix) is a non-trading holding company which holds 100 per cent of the shares in Phoenix Healthcare Distribution Ltd (PHD). PHD is a pharmaceutical wholesaler to retail pharmacies and dispensing doctors in Great Britain. It also operates a small chain of retail pharmacies. Numark plc (Numark) owns 4 pharmacies and provides buying and marketing support to over 1720 independent pharmacies which belong to the Numark scheme. Numark Trading Ltd (NTL) is a joint venture company between Numark and Phoenix. NTL is a pharmaceutical wholesaler, selling over the counter (OTC) (see [note 1]) pharmaceuticals under the Numark own brand and other brands.
It is the OFT's view that the transaction meets the turnover test as the UK turnover of Numark in the year ended 31 December 2004 was £76.8 million.
Phoenix currently owns 14.71 per cent of the share capital in Numark. Phoenix proposes to acquire the remaining share capital in Numark. In doing so, Phoenix will also indirectly acquire the remaining 50 per cent issued share capital in the NTL joint venture. This is a pre-notified merger with a statutory deadline of 28 September 2005.
As a result of this transaction Phoenix, Numark and NTL will cease to be distinct. The UK turnover of Numark exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) 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.
Numark owns 4 pharmacies which creates a horizontal overlap with Phoenix's 372 pharmacies. At a national level, the combined share of supply and increment is minor. At the local level, an overlap only arises within a one and two mile radius in one area where there are a number of other competitors also present. Accordingly, the combined share at local level is not considered significant and is not considered further.
No other overlaps exist between the parties. Although both are pharmaceutical wholesalers, NTL only supplies OTC pharmaceuticals while Phoenix's subsidiary, PHD, supplies only ethicals, prescription-only medicines.
Under the Numark scheme, Numark sources 350 own-brand OTC products from suppliers and these are distributed almost exclusively to over 1720 independent pharmacies which belong to the scheme. These member pharmacies are branded as Numark pharmacies. NTL acts as the wholesale supplier of Numark's own-brand OTC products and delivers them directly to Numark-branded pharmacies and also to other distributors (Sangers (NI), Sangers Maidstone, Unichem, Maltbys, Mawdsley Brooks and PIF) for onward distribution to Numark pharmacies.
Post-merger, Phoenix will control the supply and distribution of Numark's own-brand OTCs. Some third parties have raised the concern that following the acquisition, Phoenix will become the exclusive distributor of Numark's own-brand products, restricting the choice of supplier for Numark-branded pharmacies and reducing competition between wholesalers.
If market power exists or is created in one or more markets along the supply chain, the transaction could change the incentives of the merged entity to renegotiate distribution terms with competing distributors. In addition, the transaction may increase the ability and/or incentive of the merged entity to foreclose the distribution of Numark’s own-brand OTCs to competing distributors, which account for of NTL’s OTC sales.
The evidence gathered during this enquiry shows that at each level of the supply chain Numark does not hold market power. The parties estimate that Numark's own-brand represents less than 2 per cent of OTCs supplied by wholesalers to pharmacies in the UK. One wholesale supplier stated that if Phoenix refuses to supply Numark products for distribution it can source alternative products from other suppliers (indeed NTL also distributes OTC products from other OTC producers). There will remain a number of wholesalers in the UK post-merger and, since the supply of OTCs to pharmacies is not as time critical as the supply of ethicals (there is no need or expectation of a twice daily delivery service for example), the parties have contended that that wholesalers compete at a national level. Certainly, all third parties acknowledge that there are numerous sources for OTCs and switching is easy. Moreover, there is evidence of multi-sourcing.
The parties state that Phoenix does not have an incentive to foreclose because this strategy may cause members to resign from the Numark scheme. If alternative wholesalers were no longer supplying the Numark own brand OTCs, distribution coverage would be harmed. In addition, the parties state members are not obliged to purchase Numark’s own-brand OTCs and are free to source competing products (be they OTCs or ethical pharmaceuticals) from the wholesaler of their choice. If pharmacists require a cooperative buying arrangement they can join alternative buying groups active in the market.
Given the above, the OFT does not consider that Phoenix will have the ability to foreclose in this sector.
THIRD PARTY VIEWS
Other than the potential for foreclosure discussed above, which was raised by a small number of third parties, no concerns were raised.
The limited overlap between the parties at a horizontal level does not raise any competition concerns. The suggestion has been made that post-merger Phoenix may seek to foreclose access to Numark’s own-brand OTCs. However, it is not considered that it has the ability to do so. Its own-brand OTCs represent a very small percentage of OTCs supplied by wholesalers to pharmacies and there will remain a number of competing wholesalers supplying rival products post-merger. Switching is considered to be easy.
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.
- OTCs are medicines that either need to have their sale supervised by a pharmacist or need to be kept in a lockable shop.