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

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
Overview
• Product market
• Geographic market
• Simple screens for competitive effects analysis
• Complications with simple screens
• Brief introduction to input foreclosure
• Concluding remarks

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
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
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
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
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
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
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
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
Input Foreclosure

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
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
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