Completed acquisition by Adastra Software Limited of Owl Software Limited

No. ME/1397/02

A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 29 August 2002, to the Secretary of State for Trade and Industry under section 76 of the Act.

ASSESSMENT

Jurisdiction

The merger satisfies the share of supply test in respect of the supply of specialist application software to GP Out of Hours (OoH) service providers. The ECMR does not apply.

The parties

Adastra Software Limited, a UK company formed in 1994, is active in the provision and support of specialist application software and hardware to GP OoH service providers. For the 15 month accounting period to February 2001 turnover was reported as £3.4m, of which £1.2m was generated by sales of software licences and accompanying software support services.

Owl Software Limited was formed in 1996 to provide specialist software to GP OoH service providers in England, Wales and Scotland and also bespoke software and consultancy services. For the year ending 31 March 2002, turnover was reported as £329,000.

Relevant market

The parties overlap in the provision of specialist application software to GP OoH service providers.

GPs currently have a legal duty to ensure that 24-hour care is available to all their patients. There are three ways of achieving this: self provision; extended practice rota, where GPs within a practice or group of practices provide cover for others in the group; and third party provision, where GPs contract an organisation to provide the necessary telephone and other support. The vast majority of GPs fulfil their OoH obligations in the latter case. There are two types of third party provider, commercial OoH service provider firms and GP co-operatives.

There are around 260 GP co-operatives of varying sizes in the UK. These are individually set up and owned by associations of local GPs to provide OoH services collectively. There are also around 30 OoH centres operated by Nestor Healthcare plc as commercial third party providers. Providers of OoH services typically operate a call centre, to intercept and receive all telephone calls made by patients to their own GP's surgery outside surgery hours.

The OoH software logs incoming calls and checks the OoH database for any information on the patient. The software transfers the details electronically to the treatment centre or duty GP. Details of the final outcome are also transmitted electronically to the database system operated by the patient's own GP. The Adastra system also provides OoH services with GP rota management, accounting, statistical and reporting features as well as prescribing, clinical governance, electronic health record and third party system links.

On the demand side, there appear to be few realistic substitutes to OoH software support systems. OoH software is not essential for running OoH services, as it is possible for GP co-operatives to use paper-based systems or simple software systems created in-house. Indeed, a few, generally larger, co-operatives have developed their own software systems. However, the vast majority of co-operatives do not appear well placed financially or technically to develop their own systems. Moreover, paper-based systems are inefficient and are unlikely to be effective in the long term. Consequently, there are no close demand side substitutes to specialist application software for OoH service providers.

On the supply side, while some GP co-operatives have created their own OoH software systems, this is not generally their area of expertise. This might suggest a narrow product market definition of specialist application software for GP OoH service providers. However, although knowledge of OoH services as well as software expertise is required, large general software companies and those already active in the provision of related healthcare software could potentially develop alternative OoH software systems. Therefore this may form a competitive constraint in terms of supply substitutability, especially in light of imminent changes to the nature of demand for OoH software. In that case the relevant market would be far wider than the narrow definition above. However, it is not necessary to conclude on this issue. If the ability of software providers to develop OoH software is not counted as supply side substitution it will count as potential entry. The competitive discipline is the same however it is categorised, and in either case an effective constraint would be imposed.

The relevant geographic market for specialist application software for GP OoH service providers is considered to be national at present. The parties have stated that there are no geographical restrictions to using the product within the UK. Adastra supplies an adapted version of its software to Ireland and the Netherlands. In the latter case, Adastra's share of supply is around 25 per cent. There are no alternative suppliers in Ireland. Supply to both these regions is possible because they possess a fundamentally similar health service to that of the UK. Conversely, this may imply potential competitive constraints from outside the UK, although there are presently no imports into the UK. Adastra do not believe that software providers in the Netherlands will access the UK sector in the near future, as their own healthcare software sector is less mature.

Horizontal issues

The parties have a combined share of supply of 61 per cent (increment 13 per cent) of OoH software to GP co-operatives. (Adastra alone currently supplies 87 per cent of all third party commercial OoH service providers). Those GP OoH service providers that do not utilise Adastra or Owl software rely upon in-house software systems, non-computerised systems or systems developed by other small software houses. To put these figures in context the parties estimate the value of the OoH software sector to be in the region of £2 million.

Although the Adastra software has been in operation for over 8 years, the parties estimate that similar software could be developed within a year. This has been corroborated by a third party. There are a number of potential competitors that could enter the sector. The parties have argued that providers of more generalist software to GP surgeries would be able to use their expertise in clinical functionality to provide OoH software. Moreover, the NHS clinical assessment system, used in NHS Direct, is capable of onward development as an OoH application. There do not appear to be any substantial barriers to entry to the segment for these alternative providers. The software can be readily developed and customers appear willing to switch to alternative software providers.

Adastra provides an open interface that is licensed to NHS Direct for integration with OoH systems. This interface provides connectivity between OoH systems and NHS Direct to a number of OoH software systems, irrespective of whether they are Adastra, Owl or other systems. It does not appear that Adastra could in future restrict access to this interface by third party software providers. Therefore new entry appears to be feasible.

Prospects for new entry in the future appear likely to be further enhanced, in light of the DoH's plans for a new integrated OoH service. The DoH's independent review of OoH services gave rise to a number of recommendations, which are due to be implemented by 2004 (see note 1). One of the recommendations is that the responsibility for the provision of OoH services is transferred to PCTs. Once this is in place, all GP OoH service providers will have to submit an application to the PCT for accreditation. The DoH forecasts that the impact of the review will lead to a reduction in the number of GP co-operatives from 260 to around 100, as they merge into area-wide operations. This, in addition to the need for a more integrated service and committed funding, should provide significant opportunities for other large general software providers to enter the sector.

At present, the customers of OoH software are predominantly GP co-operatives. Existing buyer power is not considered to be significant. However as a result of the future changes to OoH services, discussed above, PCTs and larger GP co-operatives will become the customers of OoH software. Therefore buyer power is expected to develop further.

Vertical issues

No vertical issues arise. Adastra can supply hardware as well as software to its customers. However, the hardware is not specifically modified and many customers choose alternative suppliers. Adastra also supplies software support services, which account for a large proportion of their revenue.

Other issues

The parties have argued that the changing environment within the NHS severely impinged upon Owl software's operations and as a result they were in considerable commercial difficulty. Although the evidence is not sufficient to satisfy the failing firm defence, the parties believe that Owl would have soon exited the sector, as have a number of other players in the last few years.

Third party views

The OFT received a number of representations from customers and competitors. Third party views were mixed. Some third parties expressed concern about the level of concentration in the OoH software sector, others believed new entry was likely.

CONCLUSION

The merger would give the parties a substantial combined share of supply of specialist application software for GP OoH service providers in the UK. However, barriers to entry are low and new entry would appear to be feasible, as there are a number of potential competitors, not least those already active in the provision of related GP software. Further, following the implementation of the OoH review, it is likely that general software providers will enter this sector. In addition, as responsibility for the provision of OoH services is transferred to PCTs and GP co-operatives merge into larger area wide operations, buyer power is expected to develop further.

I therefore conclude and recommend that you do not refer this merger to the CC.

NOTES

1. In October 2000 the Department of Health published a report on OoH care following an independent review. One of the recommendations of the report is that a more integrated service be developed by 2004 to address disparities in quality standards for OoH services across the country. This has been incorporated in the Government's NHS plan.

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