46/06    7 March 2006

The OFT has raised new concerns about the supply and distribution of opium derivatives within the UK in a review of undertakings given by pharmaceutical supplier MacFarlan Smith Ltd (MSL).

Download Opium derivatives (pdf 195 kb).

In the report published today, the OFT recommends that the Government reconsiders the way that it licenses opium derivatives, and says that it cannot rule out a market investigation reference to the Competition Commission if the restriction to competition remain unchecked.   

Opium derivatives are used in the manufacture of a wide range of medicines including over-the-counter painkillers and cough medicines. There has been a substantial growth in both the use and production of these products over the past few years, and the current value of the UK market for the sales of opium derivatives is just over £31m a year. The OFT estimates that the detriment to consumers arising from present licensing policy is approximately £3m a year. 

MSL is the principal supplier of opium derivatives in the UK, and the OFT has found that the limited competition that the company faces  for the supply of derivatives has enabled it to discriminate on price and earn high levels of profit.
 
The report also finds that British pharmaceutical companies are disadvantaged compared to foreign based companies which can source cheaper opium derivatives from abroad. In addition to this, end users such as the NHS and medical research institutions are likely to face higher costs than would be the case in a more competitive market.
 
The OFT has made the Government aware of its concerns and has offered advice in devising a licensing policy which reflects the benefits of competition. MSL has responded to the OFT by agreeing to improve its compliance with the undertakings, which will remain in place, and ensure that the price list is provided to all bulk customers on an annual basis. This will bring more transparency to the prices charged by the company and provide customers with the information they need to negotiate prices. The OFT will actively monitor this commitment and also consider the Government's response to their recommendations.
 
John Fingleton, OFT Chief Executive, said:
 
'The current licensing system for the importation of opium derivatives restricts competition to the detriment of British pharmaceutical companies. This drives up costs for organisations such as the NHS, and we want the Government to reconsider its policy in the light of our findings so that consumers and businesses get the best deal.'

NOTES

1. Healthcare and the interaction between government and markets are two of the OFT's priority areas.

2. The OFT has a duty under the Fair Trading Act to keep undertakings under review. The review of undertakings in the opium derivatives market was conducted pursuant to that duty.

3. The Monopolies and Mergers Commission reported on the supply of opium derivatives in the United Kingdom in 1989 (Cm 630). It concluded that MSL had exploited its monopoly position by engaging in price discrimination and charged high prices in the UK market, leading to very high levels of profits. The MMC also identified that it was of prime importance to increase competition by the Government working towards the creation of a single EC market in opium derivatives.

4. Following the MMC report MSL gave an undertaking to publish and make generally available a maximum price list to constrain price discrimination against its smaller customers.

5. Further to the Government's commitment to respond to OFT recommendations in relation to the impact of regulations on competition, the OFT expects a formal government response within 90 calendar days.