Anticipated acquisition by Celesio AG of Healthcare Services Group plc

Affected market: Healthcare logistics services

No. ME/1464/04

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, assessment and decision.

The OFT's decision on reference under section 33 given on 29 March 2005. Full text of decision published 11 April 2005.

Please note that square brackets indicate exact figures replaced by range at parties' request, or details excised at the request of the parties, for reasons of commercial confidentiality.

PARTIES

Celesio AG (Celesio) is a German company active in pharmaceutical wholesaling and retailing throughout Europe. In the UK, Celesio operates through its subsidiary Admenta Plc (Admenta), which has two principal business divisions: pharmaceutical wholesaling and retail pharmacy. For the purposes of this transaction the key subsidiaries of Admenta are: Farillon Ltd (Farillon) which provides contract logistics services to pharmaceutical manufacturers and AAH Hospital Service (AAH) which is a full line wholesaler.

Healthcare Services Group Plc (HSG) provides contract logistics services, including distribution, warehousing and sales order processing, to the healthcare industry, but is not active in pharmaceutical wholesaling or retail. HSG's UK turnover for the year ended 31 December 2003 was £37.04 million.
 
TRANSACTION

The parties entered into a sale and purchase agreement for Celesio to acquire the entire issued share capital of HSG on 15 December 2004 and intend to complete the transaction as soon as possible, following a decision from the Office. The transaction was notified to the OFT on 22 December 2004. The administrative deadline for a decision was 25 February, which it has not been possible to meet.

JURISDICTION

As a result of this transaction Celesio and HSG will cease to be distinct. The parties overlap in the supply of contract logistics services to the healthcare industry. Within contract logistics for the healthcare industry, the parties overlap in the provision of 'cold-chain' logistics, i.e. the storage and transportation of healthcare products requiring a controlled low temperature environment, where they will have a combined share of supply of approximately [35–45] per cent. Therefore, the share of supply test in section 23(2) of the Enterprise Act 2002 is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

ASSESSMENT

Healthcare logistics is a specialist sector within contract logistics. Some generalist logistics providers have switched or expanded into healthcare logistics and may act as a competitive constraint to the existing specialist healthcare logistics providers. Therefore, generalist providers with healthcare logistics activities have been included in the product scope, alongside specialist healthcare logistics providers such as Farillon.

Third parties identified two sub-sectors within healthcare logistics – pre-wholesaling and cold-chain – that merited further investigation. Pre-wholesaling involves a subset of logistics activity and, due to supply side substitution, is not considered by the OFT to be a distinct sector. There is, however, little evidence of ambient healthcare logistics providers switching into cold-chain logistics and the costs of doing so may be high for speculative entry. Cold-chain healthcare logistics are therefore considered as a distinct sector.

The parties' combined shares of supply for all healthcare logistics provision are low at approximately [10-20] per cent. Some 96 per cent of the value of the estimated total healthcare sector is represented by products requiring ambient distribution. Third parties were, apart from the concerns rehearsed above about pre-wholesaling, unconcerned about the transaction in this area or, more generally, in healthcare logistics.

Although concerns were raised by some third parties about the cold-chain logistics sector specifically, others were unconcerned. The combined share in this sector is estimated at [35-45] per cent and there are fewer competitors than in ambient logistics. The largest contract in this sector is for NHS childhood vaccines (which makes up about [ ] of the sector) and this attracted five bidders (including both parties) in 2004. This contract – unlike others – required a dedicated fleet leading to high entry costs in relation to a sector valued at £15m. It is unlikely that new firms capable of bidding for such a large contract would be able to enter the sector, although it is possible to contract out distribution to smaller firms. The contract will not be re-tendered for five years. The NHS is unconcerned about the proposed acquisition.

Entry into smaller volume cold-chain operations can be achieved through cheaper methods, such as distribution using cool boxes. MHRA regulations do not cover transportation of cold-chain products, although providers are encouraged to follow MHRA guidelines. A larger number of firms are operational at this level.

Evidence suggests that at least four sizeable firms will be active in cold-chain healthcare logistics post merger, in addition to a number of smaller providers. HSG only entered the sector in 2000 and has about 3-5 per cent of its activity focused on cold-chain healthcare logistics. Customers have consistently stated that they possess buyer power and that contracts, apart from the NHS childhood vaccines contract, are tendered every two years, on average. Therefore, the OFT considers that it is unrealistic that the transaction might be expected to result in a substantial lessening of competition in cold-chain healthcare logistics.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

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