Fresenius AG and Caremark Limited: A report on the proposed merger

Summary of report (html format)
Full text (pdf format)

Adobe Acrobat Reader can be downloaded from http://www.adobe.com

Summary

This inquiry concerns the proposed acquisition of Caremark Limited (Caremark) by Fresenius AG. Our terms of reference are set out in Appendix 1.1.

Caremark provides services to patients who suffer from serious medical conditions but are treated for them at home. The services include the delivery of drugs or artificial feeds and the equipment required to administer them-often by intravenous (IV) infusion-and a range of related services which vary according to the individual case. Caremark's draft accounts for the year to 31 December 1997 show an operating profit of £1.2 million on sales of £29.9 million.

Fresenius AG is a large and fast-growing German healthcare company. It is one of the world's leading suppliers of products and services for kidney dialysis. Its Pharma division, which is of more relevance to our inquiry, includes infusion therapy, enteral nutrition (EN-nutrition administered direct to the gut) and related homecare services. In the year to 31 December 1996 Fresenius AG's group sales were £1.25 billion and its net income £45 million. Fresenius AG has already acquired three of the Caremark group of companies (those in Canada, Germany and the Netherlands) from the US company MedPartners Inc (MedPartners), and wishes to acquire the UK company under the same purchase agreement.

For ten treatments or conditions which provide the great majority of Caremark's business, the National Health Service (NHS) is virtually the sole purchaser of homecare services in the UK. Services for five of these treatments in England and Wales, and all ten in Scotland, are provided in response to GP prescriptions, with the cost of the equipment and services required being included in the price of the drugs or feeds. For the other five treat-ments in England and Wales an instruction by the NHS Executive in 1995 stated that the cost of equipment and services would no longer be reimbursed against pre-scriptions. Instead Health Authorities (HAs) should enter into con-tracts for the provision of the services either with private sector providers or with hospital Trusts. One of the aims of the change was to achieve better value for money by the encouragement of competition among potential suppliers.

The five services now bought through contracts (contracted services) can usefully be analysed as a single market, but there are also differences between the services which mean that separate scru-tiny is warranted for some of them. In principle the services still bought through prescriptions (prescribed services) could also be in the same market because of simi-larities in the services themselves and in the assets and skills required to provide them, but in practice this method of funding ensures that suppliers of drugs and feeds effectively deter-mine who will supply the services associated with each treatment. Each therefore has to be considered separately.

In contracted services Caremark has 58 per cent of private sector supply measured by the number of patient-days for which service was provided in 1997 and 69 per cent measured by sales revenue. Fresenius's shares on these measures were 5 and 6 per cent respectively. In the supply of services for patients on parenteral nutrition (PN-nutrition administered other than to the gut, normally by IV infusion), which is the main area of overlap between them, Caremark's share was around 75 per cent and Fresenius's 8 per cent on both measures. NHS Trusts often provide homecare services to their own patients but while this is a com-petitive factor in the market it is not directly comparable with private sector supply. Among prescribed services Caremark has had a substantial share in EN, providing homecare services for Nutricia Ltd (Nutricia). Nutricia's decision to set up an in-house service operation has resulted in a sharp decline in Caremark's sales of EN services and these are likely to disappear by July 1998. Caremark has about a one-third share of services for patients on immunoglobulin treatment (IG) and effectively 100 per cent of the other three prescribed services.

In contracted services Fresenius is one of only three private sector suppliers, other than Caremark, with a significant share of the market. In particular it is an important com-petitor in the supply of PN services and in the absence of the merger is likely to become more active in the other contracted services. There is therefore a clear loss of competition from the merger. Barriers to entry (primarily reputational) are significant and we do not expect com-petitive pressures from new entrants to build up sufficiently quickly to offset this loss of competition. NHS provision is not a major factor in the supply of PN services and, whilst it is more important in relation to the other contracted services, we do not consider it satisfactory that the NHS should have to rely on own-provision in order to offset weakness in private sector competition caused by the merger. NHS purchasing practice is evolving in ways which, in due course, might enable the NHS to safeguard its position, but in the short to medium term we do not expect developments which would offset the effect of a significant reduction in competition. In our view the merger would make it harder for the NHS to obtain value for money in purchasing PN services and in some instances value for money would in fact deteriorate. We believe the merger would also lead to a significant reduction in competi-tion for the supply of other contracted services, compared with the situation which would otherwise exist.

Among prescribed services there are possible ways in which, in the absence of the merger, Caremark could find a new role in supplying homecare services for EN patients, but these are too uncertain to influence our conclusions. There is competition from several drug suppliers in the supply of IG services and we do not expect the merger to have a significant impact in that area. In the other three pre-scribed areas the drug suppliers are the key players. Fresenius is a potential competitor to Caremark as a service provider for them, but we con-sider it unlikely that the merger would result in any increase in the price of drugs to the NHS.

Besides its effects on competition, the merger entails an element of vertical integra-tion. We believe Fresenius would seek to use the acquisition of Caremark to increase sales of its products and we expect that in the contracted services market, as a result, the merger would reduce purchasers' free-dom to choose the products and services which they judge best suited to their needs.

We did not identify any benefits which might offset the adverse effects, and we conclude that the proposed merger is against the public interest because prices for the supply of contracted ser-vices, particularly for PN patients, may be expected to be higher, quality of service lower and choice of products and service supplier for the NHS reduced compared with the situation which would exist in the absence of the merger.

We have considered various possible remedies for the adverse effects but in our view there are no behavioural or structural remedies, short of prohibiting the merger, which would be practicable and effective. We believe that there would be other bidders for Caremark, some of which would not give rise to the same objections as apply to the present merger. The question whether prohibition of the merger would be disproportionate to the adverse effects is, however, a cause for concern. The NHS could in principle counter the adverse effects by deploying its purchasing power and expertise in a more active and co-ordinated way. There are encouraging signs that NHS purchasing is developing along the lines that would be necessary but the desirabil-ity and cost of such changes are issues which go well beyond consideration of this merger. The Secretary of State for Trade and Industry may be able to form a clearer picture of the possibilities for further reform of NHS purchas-ing by consulting the Secretaries of State responsible for health, and it cannot be ruled out that this might lead to fresh initiatives being taken. In the absence of such initiatives, how-ever, we recommend that the merger be prohibited.

Full text

Back to the top