Anticipated acquisition by Lloyds Pharmacy Limited of Independent Pharmacy Care Centres plc

Affected market: Pharmacy retail

No. ME/3007/07

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, third party views, assessment and decision.

The OFT's decision on reference under section 33 given on 8 June 2007. Full text of decision published 22 June 2007.

PARTIES

Admenta Holdings Limited is the immediate holding company of Lloyds Pharmacy Limited (Lloyds), and a subsidiary of the German company Celesio AG. The pharmaceutical wholesaler AAH is also a subsidiary of Celesio AG. Lloyds' UK turnover for the year ending 31 December 2006 was approximately £1.5 billion.

Independent Pharmacy Care Centres plc (IPCC) comprises 34 retail pharmacies and one drug store, which, unlike a pharmacy, does not have an NHS prescription contract. Its retail pharmacies trade under various names and are principally concentrated in Greater Manchester, Lincolnshire, Cheshire, Derbyshire and the West Midlands. IPCC's turnover for the year ending 31 March 2006 was approximately £19 million.

TRANSACTION

The Merger Notice was received on 25 April 2007. The extended 30 working day statutory deadline therefore expires on 8 June 2007.

JURISDICTION

As a result of this transaction Lloyds and IPCC will cease to be distinct. The parties submit that the share of supply test is met in respect of the supply of pharmacy services within five individual Primary Care Trusts (PCTs) in which the parties' joint shares range between 25 and 34.3 per cent [see note 1].  

The parties submit that the five PCTs can be considered in aggregate as a suitable proxy for a 'substantial part of the UK'. There are approximately150 PCT areas in England in which each PCT is ultimately responsible for thee delivery of primary care to the population in its geographic area. Information from the parties confirms that the population of the five PCTs accounts for 2 per cent of the UK population and 2.5 per cent of the population in England respectively. The total area covered by the PCTs accounts for about 1 per cent of England's total area. Within each of the PCTs, health services are offered to the population by between 35 and 75 GP surgeries respectively; in four out of the five PCTs there is also a hospital.

The OFT has no reason to insist upon a principle of geographic contiguity in respect of the five PCT areas in question for purposes of the share of supply test. It agrees with the Competition Commission (CC) which, in the context of Archant/INM [see note 2] discussed the interpretation of what constitutes a 'part' of the UK for the purposes of Section 23 (3) of the Enterprise Act (the Act), concluding that '… in the context of the Act, no useful purpose would be served by restricting the meaning of 'part' to an undivided geographical area' [see note 3]. Accordingly, the OFT considers that the five PCTs areas, in aggregate, qualify as a substantial part of the UK within the meaning of Section 23 (3) of the Act.

The share of supply test in section 23 of the Enterprise Act 2002 is therefore met. 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.

THIRD PARTY VIEWS

A number of third party retail pharmacy operators expressed concerns about the merger. Some were general comments related to Lloyds strengthening its overall position by adding further stores to its national pharmacy network. Others were focussed on specific local consequences relating to reduced fascia count (and choice), or to Lloyds' post-merger share of local pharmacy numbers. Local concerns were not all restricted to the three to two (or four to three) fascia reduction areas.

One PCT expressed concern that an increase in the high number of Lloyds pharmacies in its area would limit choice. Others mentioned experience of Lloyds struggling to maintain a continuous service due to lack of pharmacist availability.

ASSESSMENT

The parties overlap in the provision of retail pharmacy services. The share of supply test for the supply of pharmacy services in a substantial part of the UK is met in relation to five PCT areas. In light of the limited scope of this transaction involving only 34 pharmacies, no national, regional or vertical competition concerns are considered to arise.

Both parties operate a traditional community pharmacy model, and therefore this case is distinguishable from Boots/Alliance UniChem in this respect. At the local level on the basis of a one mile radius there are five areas where the merger would result in a three to two reduction in the number of competing pharmacies. Due to this relatively small number overlapping areas, the OFT was able to carry out an individual assessment. On evidence available to the OFT, including the persistence of regulation as a barrier to entry, in four of the five 3 to 2 areas the OFT believes there is a realistic prospect of a substantial lessening of competition post-merger.

Consequently, the OFT believes 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.

UNDERTAKINGS IN LIEU

Where the duty to make a reference under section 33(1) of the Act applies, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it, accept from such of the parties concerned undertakings as it considers appropriate.

The OFT has therefore considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above. The OFT's Mergers Substantive Assessment Guidance states that, 'undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are capable of ready implementation.' (para 8.3).

Lloyds has offered undertakings with a view to remedying the realistic prospect of a substantial lessening of competition identified as a result of the merger in the reduction of fascia from three to two within the relevant one mile catchment areas for the supply of pharmacy services. In order to solve competition concerns in these areas, Lloyds has offered to divest either one of the acquirer's or a target store in the five local areas discussed above.

The OFT believes that the undertaking offered is capable of clearly addressing the competition concerns arising in the local areas identified above, as it would restore pre-merger competition and three fascia to the relevant 3 to 2 areas.

Accordingly, on the information currently available, the OFT has decided to exercise its discretion under section 73(2) of the Act to negotiate undertakings in lieu of reference.

DECISION

The OFT has therefore decided to refer the anticipated acquisition by Lloyds of IPCC to the Competition Commission pursuant to section 33 of the Act. However the OFT's duty to refer is suspended because the OFT is considering whether to accept undertakings in lieu of reference from Lloyds pursuant to section 73 of the Act.

NOTES

1.These are: (1) Sandwell, (2) South Birmingham, (3) Heywood, Middleton & Rochdale, (4) North East Lincolnshire and (5) North Lincolnshire.
2. Competition Commission, Archant Limited and the London newspapers of Independent News and Media Limited: A report on the acquisition by Archant Limited of the London newspapers of Independent News and Media Limited, Appendix C, 22.09.2004.
3. Ibid., Appendix C, at paragraph 27.

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