AAH Holdings plc and Medicopharma NV: A report on the merger situation

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On 3 November 1991 Medicopharma Ltd and Medicopharma (UK) (BV), which are (unless the context otherwise requires) jointly referred to as Medicopharma UK, resolved to cease trading. They were subsidiaries of Medicopharma NV, a Dutch pharmaceutical company, now in bankruptcy. On the same day all the stock of Medicopharma UK together with the leases on its three largest depots and certain assets were sold to AAH Subsidiaries Ltd (AAH Subsidiaries), a subsidiary of AAH Holdings plc (AAH). Under a reference dated 21 November 1991 (as set out in Appendix 1.1) the Secretary of State for Trade and Industry asked the MMC to investigate and report whether a merger situation qualifying for investigation had been created and, if so, whether the creation of that 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 are supplied both by wholesalers and direct by manufacturers to retail pharmacies, hospitals and doctors. The two largest United Kingdom wholesalers are UniChem PLC (UniChem) and 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 UK, with an 8 per cent market share. 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, affecting the profits of manufacturers, the discounts provided by manufacturers to wholesalers and retailers, entry into pharmaceutical wholesaling and, in particular, retailing, and the dispensing of pharmaceuticals.

AAH argued strongly that only `bare assets' passed to it as a result of the 3 November transaction and that there had been no merger within the terms of the Act. We found that what AAH acquired under the arrangements amounted to at least a significant part of the activities of the business carried on by Medicopharma UK at its three depots at Harold Hill, near Romford, Weedon in Northamptonshire and in Aberdeen, depots which accounted for some two-thirds of Medicopharma UK's sales. We found that the market share test set out in the Fair Trading Act 1973 (the Act) was met and we concluded that a merger situation had been created.

In considering the public interest, we took account of the fact that the evidence suggested that, had the arrangements not been made, Medicopharma UK would have been placed in receivership. In the circumstances of this case we considered it unlikely that a receiver would have carried on the business as a going concern, but we regarded it as probable that some at least of the depots would have been sold and could have been reopened and brought into operation again quite quickly.

AAH's national share of sales of ethicals to retail pharmacies and dispensing doctors increased, we estimated, by about four percentage points after 4 November, with AAH acquiring about half of Medicopharma UK's former sales. Had Medicopharma UK been placed in receivership, AAH would, we considered, have increased its sales but not to the same extent. As a result of the merger situation AAH may have improved its national market share by two percentage points or a little more above what would otherwise have occurred. We did not consider that this increase, even if sustained, was likely in itself to have any material effect on competition at the national level. Nor did we think it would affect materially AAH's purchasing power.

We did, however, consider that the merger situation had led to a reduction in competition in the Grampian and Highland region significantly greater than would have occurred had Medicopharma UK been placed in receivership. We noted that AAH and Medicopharma UK were the only wholesalers with a depot in the region and that each accounted for about 40 per cent of sales. UniChem was the only other significant supplier, delivering from its depot in the central belt of Scotland. The evidence suggested that, following its acquisition of Medicopharma UK's Aberdeen depot, AAH took over most of Medicopharma UK's sales in the Grampian and Highland region. We expected that as a result of the merger situation, prices to retail pharmacies and dispensing doctors in the Grampian and Highland region would, over time, be higher and service of a lower standard than would otherwise have been the case.

We also looked at effects on competition in the South-East of England, the Midlands and the South-West, and on supply to hospitals, where AAH was by far the largest wholesaler. In each case we found that had Medicopharma UK been placed in receivership, there would have been some effect on competition and, on balance, we believed that the additional effect as a result of the merger situation was not likely to be large.

We identified no significant public interest benefits as likely to arise from the merger situation, and in the light of its adverse effects in the Grampian and Highland region we concluded that the merger might be expected to operate against the public interest.

We recommended that, to remedy the adverse effects we had identified, AAH should divest a business approximating as closely as practicable to the business carried on just before the arrangements by Medicopharma UK from its Aberdeen depot.

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