Anticipated acquisition by AAH Pharmaceuticals Limited of East Anglian Pharmaceuticals Limited

Affected market: Supply of pharmaceuticals

No. ME/1455/03

Please note that the full text of the decision can be downloaded by using the link on the right . What follows are extracts regarding the parties, the transaction, jurisdiction, assessment, undertakings in lieu of reference and the decision.

The OFT's decision on reference under section 33 given on 3 December 2003

PARTIES

AAH Pharmaceuticals Limited (AAH) is part of the Celesio Group, which is active in pharmaceutical wholesaling and retailing throughout Europe.  In the UK, AAH  has two business divisions, pharmaceutical wholesaling and retail pharmacy.  The pharmaceutical wholesaling division operates through AAH.  AAH is a pharmaceutical wholesaler to retail pharmacies, dispensing doctors and hospitals in the UK.  It operates its business through a network of distribution depots located throughout the UK.  The retail pharmacy division is operated mainly through Lloyds Pharmacy plc  (Lloyds).  In the financial year to 31 December 2002, AAH's turnover was £2,762 million.  In the same period, Lloyds had turnover of £1,078 million.

East Anglian Pharmaceuticals Limited (EAP) is owned by Jonathan and Gregory Briggs. The company's principal activity is the wholesale supply of pharmaceuticals to retail pharmacies, dispensing doctors and hospitals through a single distribution depot in Norwich.  EAP is not active in retail pharmacy.  In the twelve months to 28 February 2003, EAP's total UK turnover was £100.4 million.

TRANSACTION

AAH proposes to acquire the issued share capital of Briggs Family Holdings Limited, which is the principal holding company of EAP, for [see note 3] .  The transaction is conditional upon receiving confirmation from the OFT that the proposed merger will not be referred to the Competition Commission.

The transaction was notified by AAH on 10 October 2003 and the 40 working day administrative deadline expires on 4 December 2003.

JURISDICTION

As a result of this transaction AAH and EAP will cease to be distinct.  The UK turnover of EAP exceeds £70 million and so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied.  The OFT believes, therefore, that it is or may be the case that a relevant merger situation has been created for the purposes of section 33(1)(a) of the Act.

ASSESSMENT

The merged entity will be the largest Full-line supplier of Ethicals to dispensing doctors, retail pharmacies and hospitals in East Anglia extending to parts of the East Midlands and the South East of England (the Relevant Area).  However, share data is not considered, of itself, to be an accurate indicator to actual or potential competition in this case.

In the supply of Ethicals to dispensing doctors and retail pharmacies, it might be the case that in limited circumstances, Short-liners will be able to provide some constraint on the parties.  The evidence suggests, however, that the most likely source of competition to the parties is expected to come from other Full-liners.  These may, however, be limited in their ability to provide effective competition given the location of their depots and the ability to serve customers located some distance from those depots. Third party comments tended to suggest this was a limiting factor in certain parts of East Anglia. Further detailed investigation is required to determine how effective such competition is likely to be in constraining the behaviour of the merged business.

In the supply of Ethicals to hospitals, direct supply by manufacturers may operate as a constraint on the parties in respect of a limited product range.  The evidence, however, indicates that the most likely source of constraint may be expected to come from other Full-liners.  It appears that the merger may create a duopoly among Full-liners in some parts of the Relevant Area and lead to a reduction in potential suppliers from four to three in other parts.  Hospitals expressed particular concerns about this reduction in choice and potential adverse impact upon service levels.

In these circumstances, the OFT believes that it is or may be the case that the creation of the relevant merger situation may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services, namely the supply of Pharmaceuticals to retail pharmacies, dispensing doctors and hospitals in the East Anglia region, extending to parts of the East Midlands and the South East of England.  The likely adverse effects might be expected to be: a reduction in the level of discounts paid to customers; and/or other less favourable terms of supply; and/or a general reduction in service levels.

UNDERTAKINGS IN LIEU OF REFERENCE

The OFT therefore considers that it is under a duty to make a reference under section 33(1) of the Act.  Pursuant to section 73(2) of the Act, the OFT may, instead of making such a reference, accept undertakings for the purposes of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which may be expected to result from it.  Having reached a reference conclusion, the OFT has considered whether there might be undertakings in lieu of reference which would address the concerns outlined above. Given that this transaction concerns the acquisition of a single depot, the OFT does not believe that divestment undertakings would be appropriate.  The concerns identified above relate largely to service levels and it is not considered that behavioural undertakings would adequately remedy such concerns.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

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