No. ME/00270
Report under section 125(4) of The Fair Trading Act 1973 of the Director General's advice, dated 21 December 2001, to the Secretary of State for Trade and Industry under section 76 of the Act
Coloplast A/S (Coloplast) is a Danish company, which develops manufactures and markets medical disposable products, including continence care products. Coloplast has a wholly owned UK subsidiary Coloplast Limited. In the financial year to September 2000, Coloplast turnover was DKK 3,601 million (approximately £300 million) with profit after tax of around £25 million.
SSL International (SSL) manufactures and markets consumer healthcare products including family planning (notably Durex condoms), footcare (notably Scholl products), OTC drugs, surgical, household and industrial gloves, wound management and continence care products. It has subsidiary operations in 35 countries worldwide and manufacturing operations in the USA, Argentina, the UK, Spain, Portugal, Thailand, Malaysia, China and India. In the year ending 31 March 2000, SSL's group turnover was £649.3 million. The turnover of the incontinence division was £29 million.
Prior to the transaction, SSL was the exclusive UK distributor for Mentor Corporation (Mentor), a major US manufacturer of continence care products. This distribution agreement has been novated (i.e. transferred) in favour of Coloplast. In our view the transfer of the distribution agreement formed an integral part of the merger, and the benefits were included in the purchase price.
Coloplast paid £80 million for the continence care business of SSL. This included the inventory, goodwill, patents and trademarks attached to the business, as well as the catheter manufacturing equipment of SSL's Oldham site. It also included the six ThackrayCare dispensing centres, and ThackrayCare Nursing Services, a team of specialist urology nurses, providing a dispensing and advice service for continence products in the patient's home environment. The gross assets are said to have been (see note 1) with the remainder of the consideration attributable to goodwill.
The transaction qualifies for investigation under the share of supply test in section 64(1)(a) and (2) of the Act in relation to the supply of either "leg, night urobags" or of penile sheaths within the United Kingdom. The ECMR does not apply.
This merger primarily concerns the supply of penile sheaths, intermittent catheters and "leg, night urobags". On the supply side these require different materials and different production processes such that the products are unlikely to be readily substitutable. On the demand side it is possible that some patients may switch between catheters and sheaths, although the limited evidence available suggests that switching is uncommon. Switching is unlikely to act as a constraint on prices. It therefore seems likely that each product constitutes a separate market.
There is conflicting evidence on geographic markets. On the supply side, manufacturing is clearly international and transport costs are low relative to the price of the products. On the demand side, CE marking ensures the quality and consistency of products but demand is likely to be local or regional. This, together with evidence that the price of the product varies significantly country by country, indicates a national market.
The table below sets out Coloplast's estimates of UK market shares as at December 2000 (see note 2). They have also estimated that if the relevant geographic market were the EU they would have a combined share of 34-54% in the supply of incontinence sheaths.
Table 1 - Estimated market shares in particular product areas
Source: the parties (see note 3).
Third parties have claimed that Coloplast's shares of supply of intermittent catheters and of leg, night urobags were higher at the time of the merger. We have reviewed sales figures for the parties, which support a view that their sales have risen. Although we cannot quantify the amount by which the parties' market share may have risen beyond that shown in the table, It is clear that Coloplast is likely to have significant market power in the supply of sheaths and leg, night urobags.
The Department of Health provided data on the supply of continence products under the Drug Tariff. This supported Coloplast's view that its share of supply of incontinence sheaths was above (see note 4) 75% post-merger. The supply of all major brands of sheaths by one company post-merger would appear to be problematic (see note 5). It is also notable that end-consumers are not price sensitive, because supplies are funded through the prescription system. While the NHS funds these prescriptions, it does not exercise a purchasing role that constrains prices competitively.
Conflicting views were received on leg, night urobags, which are used in conjunction with sheaths and catheters. Third parties have indicated that the share of supply might be as high as 50% post-merger. While there appear to be several players in the UK market, competition in this product area, and its relation to the supply of sheaths, would benefit from further investigation.
It appears unlikely that the increment in Coloplast's share of supply of intermittent catheters, gives rise to competition issues. Indeed, the strengthening of Coloplast's position in catheters might even be pro-competitive if markets were functioning normally.
It has been alleged to us that Coloplast has sought to direct its Thackray nurses to favour Coloplast products. These nurses have an important role in advising GPs, and thereby influence prescribing behaviour, and thereby product sales. If Coloplast were to exercise direction over the nurses it would raise competition concerns. Coloplast have said that they do not exert any influence over the recommendations made by nurses. They believe that any investigation would demonstrate that they were acting independently and professionally.
Coloplast has an existing mail order business whereby it fulfils prescriptions for continence care products. In doing so, it supplies competitors' products where necessary. It is conceivable that Coloplast could make use of the names and addresses of customers for direct mailing purposes, subject to compliance with the Data Protection Act. This acquisition, in providing Coloplast with a wider product range, appears to increase the incentive to use the information in this way.
The transaction gives Coloplast a significant market share across the range of solutions for urinary incontinence. This, taken together with Coloplast's significant position in products for faecal incontinence (where there are also specialist nurses sponsored by Coloplast) may give rise to portfolio effects. (I might add that the consequences for competition of portfolio effects always need to be analysed with care.)
The EU Medical Devices Directive has the effect that an approval in one member state enables a manufacturer to secure medical acceptance throughout the EU and was intended to lower barriers to entry. However, in order to be prescribable within the UK it is also necessary to be listed on the Drug Tariff, which generally requires the agreement of a cost below that of competing products. We have been told that this can be a financial disincentive to entry in some continence care products.
There are further barriers to entry in the form of conservative prescribing patterns by GPs and an alleged reluctance of patients to switch once they have found a product that works for them. These patterns may be reinforced by strong brands, which are supported by regular marketing and the distribution of free samples to the continence care nurses who make the initial recommendation to GPs in most cases. Overall, therefore, barriers appear substantial.
Individual patients, and those who recommend products to them, are unlikely to be guided by price considerations because most of the products are provided on prescription. Likewise the NHS, which ultimately pays these charges on behalf taxpayers, does not necessarily exercise buyer power on behalf of the many wholesalers and pharmacists involved in the supply chain.
Individual hospitals may be able to exercise some buyer power when purchasing bulk supplies, but these do not appear to constitute a large proportion of the market. In any event, buyer power needs rival sellers.
Third parties were generally concerned about the merger. They considered it would result in a reduction in choice and had created a 'dominant position'.
Coloplast's representatives wrote to my Director of Mergers recently. They indicated that the company "regards the concept of remedial undertakings as being unnecessary in this case" but "would ultimately be prepared to discuss" (see note 6).
As discussed above, competition issues are raised in two distinct product areas. There are strong concerns raised in the market for incontinence sheaths. Issues are also raised in the market for leg, night urobags but it is difficult to evaluate these for lack of information. It has likewise been impossible to make a full assessment of the vertical issues raised, but the allegations raise significant questions. In these circumstances it is therefore not possible to identify any undertakings, short of complete divestment, which would fully address the competition issues raised. It would also be practically very difficult to complete the necessary negotiations and consultation processes before expiry of the statutory deadline.
This completed merger has led to Coloplast controlling the distribution of all of the major brands of incontinence sheaths within the UK. It has also gained a significant market share in the provision of leg, night urobags.
I am concerned at the loss of competition this merger has produced within the UK. The Drug Tariff does not protect customers against the possibility of price increases, which are ultimately funded by taxpayers. While my officials have not been able to investigate fully the issues within the timescale available, there are clear concerns about how UK markets might develop post-merger.
I therefore recommend that you should refer this transaction to the Competition Commission for further investigation.
NOTES
1. This figure has been excised at the request of Coloplast
2. More recent figures were not available, but see text for views of third parties.
3. Ranges have been inserted at the request of Coloplast. The original table contained integral values.
4. The value quoted in this sentence has been adjusted to reflect the ranges now quoted in the table.
5. A sentence has been excised at this point at the request of DH.
6. The end of this sentence has been excised at the request of Coloplast
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