OECD Roundtable on Competition Issues in the
Distribution of Pharmaceuticals: A UK Retail Perspective
Adrian.Majumdar@rbbe...
2
Overview
• Product market
• Geographic market
• Simple screens for competitive effects analysis
• Complications with sim...
3
Retail Pharmacies – Relevant Product Market
OFT has identified three types of products requiring separate analysis:*
 P...
4
Horizontal Concerns: Prescription-only Medicines
OFT historically has identified limited pre-merger competition and henc...
5
Horizontal Concerns: Pharmacy-only Medicines
OFT found possibility for mergers to harm competition in relation to P-only...
6
Geographic Markets / Screening rule
National level
• Relevant markets are local in nature
• However, OFT considered poss...
7
Identifying Areas of Reduced Competition: Fascia Screening
“4 to 3”: pre-merger, there are 4
fascia, post-merger there a...
8
Complications with the Screening Approach (I)
Geographic closeness of competition:
In terms of structure, it is a 4 to 3...
9
Complications with the Screening Approach (II)
Demand centring: On a supply-centred approach (centred on the red triangl...
10
Complications with the Screening Approach (III)
High fascia but high concentration: This is a 4 to 3 and so would “pass...
11
Input Foreclosure
12
2. Upco’s rivals
gain market
power
Upco
Upco’s
rivals
Downco’s
rivals
Downco
1. Upco
competes less
aggressively
4. Upco...
13
Concluding Remarks – Retail Pharmacy Mergers
• In standard retail scenarios the UK authorities usually are concerned wi...
14
Locations and contact
London
The Connection
198 High Holborn
London WC1V 7BD
United Kingdom
T +44 20 7421 2410
E london...
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Competition and Pharmaceuticals - Adrian Majumdar - 2014 OECD Global Forum on Competition

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This presentation by Adrian Majumdar was made at the 2014 Global Forum on Competition (27-28 February) at the session on competition issues in the distribution of pharmaceuticals. Find out more at http://www.oecd.org/competition/globalforum

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Competition and Pharmaceuticals - Adrian Majumdar - 2014 OECD Global Forum on Competition

  1. 1. OECD Roundtable on Competition Issues in the Distribution of Pharmaceuticals: A UK Retail Perspective Adrian.Majumdar@rbbecon.com Adrian Majumdar Paris, 28 February, 2014
  2. 2. 2 Overview • Product market • Geographic market • Simple screens for competitive effects analysis • Complications with simple screens • Brief introduction to input foreclosure • Concluding remarks
  3. 3. 3 Retail Pharmacies – Relevant Product Market OFT has identified three types of products requiring separate analysis:*  Prescription only medication (POM): heavily regulated by National Health Service (NHS) can be purchased only with a prescription from a doctor  Pharmacy only medicines (P-only): must be sold in the presence of a pharmacist but do not require prescription  General sales list (GSL) medicines: sold in pharmacies as well as supermarkets, convenience stores and gas stations, and are milder versions of pharmacy-only medicines  Mergers unlikely to reduce competition for GSL sold in pharmacies due to sufficient competition from GSL items sold in other channels * UniChem PLC/ GEHE AG/ Lloyds Chemists PLC
  4. 4. 4 Horizontal Concerns: Prescription-only Medicines OFT historically has identified limited pre-merger competition and hence no material scope for harmful effects caused by a merger in relation to POMs (see Boots/ Alliance UniChem): • No price competition: • prices charged for POMs are strictly regulated by NHS • P-only and GSL are not substitutes for prescription medicines • Limited non-price competition: location, range, opening hours, quality of service. • Non-price factors strictly regulated by NHS, and subject to highly incentivised financial reward schemes (e.g. for number of prescriptions served) • NHS minimum standards for service and required opening times
  5. 5. 5 Horizontal Concerns: Pharmacy-only Medicines OFT found possibility for mergers to harm competition in relation to P-only medicines (see Boots/ Alliance UniChem). • Price competition: • Some scope for price competition exists • Non-price competition: • Non-price aspects are strictly regulated • Limited scope for competition effects of a merger on non-price factors • Interaction with GSL: • Some competitive pressure from GSL, as many P-only medicines are stronger variants of general medicines. • Regulation and GSL constraint implies limited scope for lost competition and hence relatively “generous” screens regarding fascia counts
  6. 6. 6 Geographic Markets / Screening rule National level • Relevant markets are local in nature • However, OFT considered possible adverse competitive effects nationally might occur if the merger reduced the number of national pharmacy chains from three to two Local Competition • OFT adopted a one mile radius • OFT found that over 75% of consumers travel less than one mile to go to a pharmacy; over 90% travel less than three miles Screening rule • Reduction of fascia from “3 to 2” found by OFT to be problematic • Comments: • Reduction of fascia from “4 to 3” could be problematic if looks similar to a “3 to 2” (i.e. one rival is weak) • In practice, “4 to 3” areas may be assessed – though not presumed problematic – given potential for screens to fail to capture important local level complexities...
  7. 7. 7 Identifying Areas of Reduced Competition: Fascia Screening “4 to 3”: pre-merger, there are 4 fascia, post-merger there are 3 fascia. The OFT would have viewed this structure to be okay. Merging party’s pharmacy 1 mile / 1.6 km Other merging party’s pharmacy Competing pharmacies
  8. 8. 8 Complications with the Screening Approach (I) Geographic closeness of competition: In terms of structure, it is a 4 to 3 but in practice the merging parties’ pharmacies may compete together closely due to their geographic location.
  9. 9. 9 Complications with the Screening Approach (II) Demand centring: On a supply-centred approach (centred on the red triangle), this is a problematic “3 to 2”. But the source of demand is the doctor’s surgery. From the “demand-centred” perspective, there is no overlap. Example: The brands may be positioned to target different types of area (e.g. “community pharmacy” located in residential area versus “high street pharmacy” located in high footfall areas). Doctor’s Surgery
  10. 10. 10 Complications with the Screening Approach (III) High fascia but high concentration: This is a 4 to 3 and so would “pass” the fascia test. However, the merger would create a high market share in the local area (the merged firm would control 4 of the 6 pharmacies after the merger).
  11. 11. 11 Input Foreclosure
  12. 12. 12 2. Upco’s rivals gain market power Upco Upco’s rivals Downco’s rivals Downco 1. Upco competes less aggressively 4. Upco supplies Downco at cost. Downco gains share from its rivals. 3. Downco’s rivals may face higher input costs 5. Final price determined by relative strengths of efficiency and cost raising effects Input Foreclosure – Brief Introduction to the Theory Integrated Wholesaler Wholesale rivals Rival Pharmacies Integrated Pharmacy 1. Integrated wholesaler may compete less aggressively. (But this will not impact on rivals if the integrated wholesaler has no market power.) 2. Wholesale rivals may gain market power. 3. Rival pharmacies may face higher input costs and therefore pass on higher prices, diverting sales to the integrated pharmacy. (But the integrated firm has no incentive to raise rivals’ costs if pass-through is low or diversion to integrated pharmacy is low.) 4. Integrated wholesaler supplies integrated pharmacy at cost or gains logistical efficiencies which put downward pressure on price. 5. Price effect for end consumers determined by relative strength of efficiency gains for integrated pharmacy versus incentive and ability of integrated wholesaler to raise costs of rival pharmacies.
  13. 13. 13 Concluding Remarks – Retail Pharmacy Mergers • In standard retail scenarios the UK authorities usually are concerned with “4 to 3” or worse fascia reductions. • With pharmacies, due to regulation and GSL constraints, the UK authorities have been concerned (historically) only with “3 to 2” or “2 to 1” cases. • Where pharmacies are vertically integrated with wholesalers, pharmacy chain mergers may give rise to an input foreclosure concern: this is assessed by considering the ability and incentive to engage in foreclosure and the ultimate effect on end customers.
  14. 14. 14 Locations and contact London The Connection 198 High Holborn London WC1V 7BD United Kingdom T +44 20 7421 2410 E london@rbbecon.com Brussels Bastion Tower Place du Champ de Mars 5 1050 Brussels Belgium T +32 2 792 0000 E brussels@rbbecon.com The Hague Lange Houtstraat 37-39 2511 CV The Hague The Netherlands T +31 70 302 3060 E thehague@rbbecon.com Madrid Pinar 5 28006 Madrid Spain T +34 91 745 59 34 E madrid@rbbecon.com Stockholm Östermalmstorg 1 114 42 Stockholm Sweden T +46 8 5025 6680 E stockholm@rbbecon.com Johannesburg Augusta House, Inanda Greens 54 Wierda Road West Sandton, Johannesburg, 2196 South Africa T +27 11 783 1949 E johannesburg@rbbecon.com Melbourne Rialto South Tower, Level 27 525 Collins Street Melbourne VIC 3000 Australia T +61 3 9935 2800 E melbourne@rbbecon.com

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