UniChem PLC/Macarthy PLC and Lloyds Chemists plc/Macarthy PLC: A report on the proposed mergers

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In July 1991 UniChem PLC (UniChem), one of the two largest United Kingdom wholesalers of pharmaceutical products and the owner of a chain of retail pharmacies, made an offer for Macarthy PLC (Macarthy). Macarthy owns the fourth largest chain of retail pharmacies in the United Kingdom, Savory & Moore Ltd (Savory & Moore), as well as a number of other enterprises including Farillon Ltd (Farillon), the United Kingdom's largest exclusive distribution agency for pharmaceuticals, and a chain of health food stores. In August 1991 Lloyds Chemists plc (Lloyds), which owns the second largest United Kingdom chain of retail pharmacies and the largest chain of health food stores, also made an offer for Macarthy. In two references dated 5 September and 8 October respectively (as set out in Appendix 1.1), the Secretary of State for Trade and Industry asked the MMC to investigate and report whether, in each case, a merger situation qualifying for investigation existed and if so, whether such a situation operated or might be expected to operate against the public interest.

The United Kingdom pharmaceutical market is worth almost £3,800 million a year. Pharmaceuticals include both products supplied under a doctor's or dentist's prescription (known as ethicals) and over-the-counter (OTC) medicines. Most are dispensed by retail pharmacies, the rest by hospitals or doctors. There are just under 12,000 retail pharmacies in the United Kingdom with contracts to dispense National Health Service (NHS) prescriptions. They typically also sell a range of other products including OTC medicines, toiletries, baby foods and health foods. The largest retail pharmacy chain is Boots The Chemists Ltd (Boots), with a share of retail ethical sales of 11 per cent. Lloyds has 6 per cent, Macarthy under 2 per cent and UniChem 1 per cent.

Retail pharmacies are supplied both by wholesalers and direct by manufacturers. The two largest United Kingdom wholesalers are UniChem and AAH Holdings plc (AAH), each of which has a market share of the wholesale market for pharmaceuticals of about 30 per cent. The third largest wholesaler in 1990 was Medicopharma NV (Medicopharma), accounting for about 8 per cent of sales by wholesalers. In November 1991, however, Medicopharma withdrew from the market. The rest of the wholesale market is supplied by just under 30 full-line regional wholesalers and a large number of short-line wholesalers.

The pharmaceutical market is subject to a considerable degree of regulation. Demand for ethicals is dependent on what the doctor prescribes rather than on price. Resale price maintenance (RPM) on OTC medicines is permitted and, we understand, generally enforced. The profits of manufacturers of branded ethical pharmaceuticals are controlled by a voluntary scheme agreed with the Department of Health (DH); this in turn affects the discounts provided by manufacturers to wholesalers and retailers. Entry into both pharmaceutical wholesaling and retailing is subject to control, although the evidence we received suggested that it was only in the case of retailing that the controls on entry had in practice acted as an inhibition. The DH also determines the payment to pharmacies for dispensing NHS prescriptions. In short, normal competitive pressures in many respects do not apply.

We noted that the wholesale pharmaceutical market has become more concentrated, and that the position of some of the regional wholesalers is not strong and may weaken further. There is also an increasing degree of vertical integration between wholesalers and retailers. We share some of the concerns expressed to us about these trends; we consider that in part they may well reflect the impact of the regulatory system and, in particular, the entry restrictions on the retail market. We feel that the DH should give weight to the possible effects on competition of the various regulations in reviewing their impact and that the Director General of Fair Trading should scrutinise carefully any developments in the market which might reduce competition.

UniChem/Macarthy

It is against this background that we considered the possible impact of a UniChem/ Macarthy merger on the wholesale market. We found that of itself the merger was not likely materially to weaken the competitiveness of the wholesale market. We noted that the Savory & Moore chain only accounted for 1.5 per cent by value of retail sales of pharmaceuticals. It had for a long period been supplied by one major source covering the whole chain (at present UniChem), and it was therefore doubtful that a regional wholesaler would gain this custom even if the chain remained independent. Nor did we think that adverse effects were likely to arise from any effect on UniChem's buying power for OTC products or generics. We also looked at whether there was a conflict of interest between UniChem's role as a wholesaler and as a retailer, but we decided that this was unlikely to cause adverse effects for the public interest.

As regards the retail level UniChem had been acquiring retail pharmacies, but its combined national market share if the merger were to proceed would be only 2.5 per cent. We noted that the nature of competition between retail pharmacies was to a large extent local. The UniChem and Macarthy chains were generally not located in the same areas. In the six locations where there was both a UniChem and a Macarthy outlet, there were at least two other pharmacies. We thus found no reason for concern regarding effects on retail competition. Nor did we see any adverse effects arising from UniChem's acquisition of the health food interests of Macarthy.

We examined whether UniChem's acquisition of Farillon, the largest United Kingdom exclusive distribution agency for pharmaceutical products, would have adverse effects, but on balance concluded that it would not.

We therefore concluded that the merger should be allowed to proceed.

Lloyds/Macarthy

In this case we also looked first at effects on the wholesale market. As Lloyds purchases most of its pharmaceutical requirements direct from manufacturers, whereas the Savory & Moore shops are supplied by wholesalers, the merger would reduce the market open to wholesalers. It seemed to us doubtful, however, whether regional wholesalers would gain this custom even if the chain remained independent for the reasons given in paragraph 1.6. Moreover Savory & Moore only accounted for 1.5 per cent of the retail market. We therefore did not think that the competitiveness of the wholesale market would be materially weakened by the merger.

The merger would give Lloyds a retail market share (by NHS sales) of about 7 per cent, behind that of Boots at 11 per cent. Three-quarters of pharmacies are still single outlets or in chains of fewer than six outlets. Although concerns were expressed to us about possible adverse consequences for independent pharmacies through an effect on the DH reimbursement system for pharmacies, or through the increase in purchasing power of Lloyds with respect to generics or OTC products, we did not consider that adverse effects for the public interest would arise. Various allegations were made to us concerning the levels of service in Lloyds pharmacies, but the evidence we received did not substantiate these.

We also looked at possible effects in individual areas, bearing in mind that competition between retail pharmacies is to a large extent local. Generally there is not a great deal of geographical overlap between the two chains, but in two places there is both a Savory & Moore and a Lloyds pharmacy and no other pharmacy. We therefore considered whether consumers would be adversely affected by the apparent lack of competition. Taking into account the particular features of the localities, including the distance to other pharmacies, competition for supply of OTC products from non-pharmacy outlets, and the fact that the controls relating to the dispensing of medicines and the existence of complaint procedures afford some protection to consumers, we concluded that adverse effects would not arise.

We also looked at possible consequences for the health food market, as the merger would bring together the two largest chains of health food stores and also some health food wholesaling interests. Together these accounted for some 20 per cent of sales by specialist health food stores. However, there are no significant barriers to entry into health food retailing. Some health foods are also sold in a range of other outlets. We therefore concluded that adverse effects would not arise.

We saw no reason to conclude that adverse effects for competition would occur as a result of Lloyds acquiring Farillon.

We thus concluded that this merger should be allowed to proceed.

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