OFFICE OF FAIR TRADING
a~

Anticipated acquisition by AAH Pharmaceuticals Limited of East
Anglian Pharmaceuticals Limited

The OFT’s decision on reference under section 33 given on 3 December 2003

PARTIES

AAH Pharmaceuticals Limited (AAH) is part of the Celesio Group, which is active
in pharmaceutical wholesaling and retailing throughout Europe. In the UK, AAH'
has two business divisions, pharmaceutical wholesaling and retail pharmacy. The
pharmaceutical wholesaling division operates through AAH. AAH is a
pharmaceutical wholesaler to retail pharmacies, dispensing doctors and hospitals
in the UK. It operates its business through a network of distribution depots
located throughout the UK. The retail pharmacy division is operated mainly
through Lloyds Pharmacy plc? (Lloyds). In the financial year to 31 December
2002, AAH’s turnover was £2,762 million. In the same period, Lloyds had
turnover of £1,078 million.

East Anglian Pharmaceuticals Limited (EAP) is owned by Jonathan and Gregory
Briggs. The company’s principal activity is the wholesale supply of
pharmaceuticals to retail pharmacies, dispensing doctors and hospitals through a
single distribution depot in Norwich. EAP is not active in retail pharmacy. In the
twelve months to 28 February 2003, EAP’s total UK turnover was £100.4 million.

TRANSACTION

3.

AAH proposes to acquire the issued share capital of Briggs Family Holdings
Limited, which is the principal holding company of EAP, for [see note 3]*. The
transaction is conditional upon receiving confirmation from the OFT that the
proposed merger will not be referred to the Competition Commission.

The transaction was notified by AAH on 10 October 2003 and the 40 working
day administrative deadline expires on 4 December 2003.

JURISDICTION

' Information taken from the parties' written submission. AAH now states that this should be
Celesio.

? Information taken from the parties' written submission. AAH now states that this should be
Lloyds Pharmacy Limited.

3 Information excised at parties’ request.

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5. As a result of this transaction AAH and EAP will cease to be distinct. The UK
turnover of EAP exceeds £70 million and so the turnover test in section 23(1)(b)
of the Enterprise Act 2002 (the Act) is satisfied. The OFT believes, therefore,
that it is or may be the case that a relevant merger situation has been created for
the purposes of section 33(1)(a) of the Act.

RELEVANT MARKET
Product market

6. The parties overlap in the wholesale supply of pharmaceutical products
(Pharmaceuticals). Pharmaceuticals is a broad term used to refer to ethical
pharmaceuticals (Ethicals); over the counter (OTC) medicines; and other OTC
products. Ethicals are prescription-only medicines (POMs) and pharmaceutical
products that are prescribed to patients under prescription by a doctor or dentist
and which can only be dispensed by a dispensing doctor, retail pharmacy or
hospital. OTC medicines refer to pharmacy-only medicines (P medicines), which
can only be dispensed under the supervision of a qualified pharmacist, and also to
general sales list medicines (GSL medicines), which do not have to be dispensed
by a pharmacist and are available in any retail outlet. Other OTC products include
general hygiene and household products that are also readily available in retail
outlets.

7. Within the supply chain, the immediate customers of Pharmaceuticals suppliers
such as the parties are dispensing doctors, retail pharmacies, and hospitals. Retail
pharmacies can be further categorised into single independent retail pharmacies,
and national or regional chains consisting of five or more independent or vertically
integrated retail pharmacies*. The parties estimate that, nationally, retail
pharmacies account for 74 per cent of Pharmaceuticals sales with hospitals
representing 21 per cent of sales and dispensing doctors accounting for 5 per
cent of sales.

8. Customers can obtain their Pharmaceuticals from a range of suppliers. Vertically
integrated retail pharmacies are an exception to this as they are self-supplied’.
Independent customers, however, can source from a variety of suppliers. They
include independent or vertically integrated full-line wholesalers® (Full-liners), so
called because they stock the complete range of Pharmaceuticals; short-line

* Vertically integrated retail pharmacies are retail pharmacies which belong to the same group of
companies as their Pharmaceuticals supplier so that they effectively self supply. Examples of
vertically integrated retail pharmacies are Lloyds pharmacies which are self supplied by AAH;
Moss pharmacies which are self-supplied by Alliance Unichem; and Rowland Pharmacies which
are self supplied by Phoenix.

5 See note 4 above.

° Vertically integrated full-line wholesalers such as AAH, Alliance Unichem and Phoenix each
supply to independent retail pharmacies as well as supplying their own chains of retail
pharmacies. The exception to this is Boots which supplies only its own retail chain of
pharmacies. EAP is an example of an independent Full-liner, as it is not active in the retail
sector.

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wholesalers (Short-liners), who supply a more limited range of products; and some
Pharmaceuticals manufacturers that supply directly to customers.

9. The parties contend, and our enquiries confirm, that most customers tend to
source their Pharmaceuticals from a combination of these different types of
suppliers, in order to meet their product requirements’. This is largely because the
range of available products, prices, levels of service, and frequency of deliveries
tend to vary between the different supplier types. On the whole, the OFT’s
investigation suggests that dispensing doctors and retail pharmacies source
predominantly from Full-liners and Short-liners; whereas hospitals tend to source
mostly from Full-liners and direct from manufacturers. This is considered in
greater detail below.

10. For purposes of the competition assessment, we begin by focussing on the supply
of Pharmaceuticals to retail pharmacies, dispensing doctors and hospitals in order
to identify the most immediate competitive constraints likely to operate on the
parties’ behaviour post merger.

Geographic market

11. EAP has only one distribution depot which is based in Norwich, in the East Anglia
region. AAH has 19 depots nationwide of which the nearest depots to EAP are
situated in Romford, Essex, and Weedon, Northamptonshire.

12. The parties consider that the relevant geographic frame of reference for the
wholesale supply of Pharmaceuticals is national. Our enquiries confirm that some
customers, such as national pharmacy chains, only source from national
wholesalers as this is the most cost effective way of supplying their network.
Similarly, hospitals seek their supplies through a tendering process that might be
regional or sub-regional in effect. In contrast, most independent retail pharmacies
and dispensing doctors appear to favour wholesale suppliers that are reasonably
close, particularly given the need for most retail pharmacies to be able to receive
twice daily deliveries.

13. As noted above most customers obtain their Pharmaceuticals from a combination
of different suppliers. The distance over which suppliers can deliver these
products varies, in part, according to their method of delivery. For example, Full-
liners have indicated that they tend to be able to supply dispensing doctors and
non-vertically integrated retail pharmacies up to two hours’ drive away from their
depots®. For supply to hospitals, the volumes will be larger and so the drive time
appears to be longer. Information provided by the parties indicates that they both
supply to hospitals based as far away as London. The delivery distance that the
drive time covers depends largely on the features of the particular road network

? As noted above, vertically integrated retail pharmacies are self-supplied. In addition, national
pharmacy chains, such as supermarkets with in-store pharmacies, tend to source only from Full-
liners with 'national' coverage.

8 Delivery distances are not the same for all Full-liners. For example, Phoenix suggests that
most deliveries are within [Information excised at OFT's discretion] ; AAH considers [see note 3]
to be an average drive time. Unichem considers its deliveries will be [see note 17] and EAP's
average drive time is [information excised at OFT's discretion].

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