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Case No COMP/M.4301 - ALLIANCE BOOTS / CARDINAL HEALTH

Only the English text is available and authentic.

REGULATION (EC) No 139/2004 MERGER PROCEDURE

Article 6(1)(b) NON-OPPOSITION Date: 22/09/2006

In electronic form on the EUR-Lex website under document number 32006M4301

Office for Official Publications of the European Communities L-2985 Luxembourg

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 22.09.2006

SG-Greffe(2006) D/205356

In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC) No 139/2004 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information omitted has been replaced by ranges of figures or a general description.

PUBLIC VERSION

MERGER PROCEDURE ARTICLE 6(1)(b) DECISION

To the notifying parties

Dear Sir/Madam,

Subject: Case No COMP/M.4301 - Alliance Boots/Cardinal Health Notification of 18.08.2006 pursuant to Article 4 of Council Regulation 1No 139/2004

1.On 18.08.2006, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 by which OTC Direct Limited (“OTC Direct”, UK) controlled by Alliance Boots plc (“Alliance Boots”, UK) acquires within the meaning of Article 3(1)(b) of the Council Regulation control of Cardinal Health U.K. 101 Limited and Cardinal Health U.K. 432 Limited (together “Cardinal Health UK”, UK), both controlled by Cardinal Health, Inc. (USA) by way of purchase of assets and shares.

2.After examination of the notification, the Commission has concluded that the operation falls within the scope of the Merger Regulation but does not raise serious doubts as to its compatibility with the common market and the EEA agreement.

I. THE PARTIES

3.Alliance Boots is a UK public company listed on the London Stock Exchange and a leading UK health and beauty retailer. It has resulted from a merger between Alliance UniChem and Boots Group PLC, which was the subject of an Article 4(4) decision by the European Commission on 30 November 2005 and was subsequently cleared by the OFT in the UK. Alliance Boots is active in full-line (retail pharmacies, dispensing doctors, hospitals) and short-line (retail pharmacies, dispensing doctors) wholesaling, retailing and to a limited extent in manufacturing of pharmaceutical products in the EU.

1OJ L 24, 29.1.2004 p. 1.

Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11.

4.OTC Direct, a private company incorporated in England and Wales is a wholly owned subsidiary of Alliance Boots. It is active in the UK in short line pharmaceutical wholesaling, specialising in generics, ethicals and surgicals.

5.Cardinal Health UK (Cardinal Health 101 and Cardinal Health 432) is comprised of two private companies incorporated in England and Wales, currently controlled by Cardinal Health Inc, a US healthcare group. It is active in short-line wholesaling of “ethical” and “OTC” pharmaceuticals to retail pharmacies, dispensing doctors, and to limited extent hospitals, in the UK.

II. THE OPERATION

6.Under the proposed transaction Alliance Boots will acquire, via OTC Direct, Cardinal Health's UK pharmaceutical wholesaling business. OTC will acquire (i) the business, trade and assets of Cardinal Health 101 (carried on under a number of trading names) and (ii) the entire share capital of Caseview (PL) Limited currently owned by Cardinal Health 432.

III. THE CONCENTRATION

7.OTC Direct will acquire sole control over Cardinal Health UK. The proposed transaction constitutes a concentration within the meaning of Council Regulation (EC) No 139/2004.

IV. COMMUNITY DIMENSION

8.OTC Direct and Cardinal Health UK have a combined aggregate worldwide turnover of more than EUR 5,000 million in 2005 (€[…] for Boots, […] for Alliance UniChem and […] for Cardinal Health UK). The aggregate Community wide turnover of the parties exceeds EUR 250 million in 2005 (€[…] for Boots, […] for Alliance UniChem, […] for Cardinal Health UK). Alliance Boots does not achieve more than two-thirds of its turnover in one and the same Member State. Therefore the concentration has a community dimension.

V. COMPETITIVE ASSESSMENT

9.The only overlaps between Alliance Boots and Cardinal Health UK are as follows: i) a horizontal overlap in pharmaceutical wholesaling in the UK, more particularly within "short-line" wholesaling; and ii) a vertical relation between the Cardinal Health UK's upstream UK pharmaceutical wholesaling activities and Alliance Boots' downstream UK retail pharmacy business.

2

A. Relevant Product Market

A.1. Horizontally related markets: pharmaceutical wholesaling in the UK

10.Alliance Boots and Cardinal Health UK are both active in the wholesaling of pharmaceutical products in the UK. The parties procure the relevant products from pharmaceutical manufacturers (and in some cases from other wholesalers/re-labellers) for distribution to their wholesale customers. Alliance Boots' wholesale customers include retail pharmacies, dispensing doctors and hospitals. Cardinal Health UK wholesales to retail pharmacies, dispensing doctors, and, to a limited extent, hospitals.

11.The pharmaceutical wholesale market may be subdivided on the basis of i) categories of wholesalers (full line and short line wholesalers), ii) categories of customers (retail pharmacies, doctors, hospitals and iii) categories of products (ethicals, OTC, generics).

12.Alliance Boots (via OTC Direct) and Cardinal Health UK both operate in short-line wholesaling of pharmaceuticals in the UK. A "short-line" wholesaler offers a limited range of pharmaceuticals (typically, fast moving product lines that sell in large quantities) that do not necessarily require frequent deliveries to pharmacies.

13.Alliance Boots is additionally active as a "full-line" pharmaceutical wholesaler i.e. offering a full range of pharmaceutical product lines, including products that are not typically kept in stock by pharmacies and therefore require twice daily delivery from wholesalers. However, as Cardinal Health UK is not active in “full line” wholesaling, there is no horizontal overlap between the parties in that sector.

Categories of wholesalers: full-line/short-line pharmaceutical wholesaling

14.It can be argued that full-line wholesalers impose a significant competitive constraint on short-line wholesalers: they sell to the same customer base, are subject to the same regulatory framework and, by definition, full-liners offer the full range of products offered by short-liners. In this regard, whilst the Commission has previously treated full-line wholesaling as a distinct product market from short-line wholesaling, the UK competition authorities have recognized, however, that short-liners do provide some degree of competitive constraint for some product lines. Nonetheless, the results of the market investigation lean in favour of treating the full-line wholesaling and short-line wholesaling markets as separate product markets due to the difference in product range offered, price and number of deliveries.

2 Alliance Boots' wholesaling activities are carried out by Alliance UniChem.

3 Case No IV/M. 1243, Alliance UniChem/Safa Galencia, ; Case No COMP/M.2432, Angelini/Phoenix

4 MMC Report on GEHE/UniChem/Lloyd, paragraph 2.38; Anticipated acquisition by Phoenix Healthcare Distribution Limited of East Anglian Pharmaceuticals Limited, OFT´s decision of 16.6.2005, paragraph 18.

Categories of customers: retail pharmacies, doctors, hospitals

15.The Commission has noted in previous decisions that the UK demand side for pharmaceutical wholesaling is characterized by three main categories of customers, namely retail pharmacists, dispensing doctors and hospitals, without, however, defining the market for pharmaceutical wholesaling according to these categories. On the other hand, the UK competition authorities have divided pharmaceutical wholesalers in the UK according to these different categories of customers. On the basis of different purchasing and delivery patterns, they have drawn a distinction between retail pharmacies and dispensing doctors on the one hand and hospitals on the other. Nonetheless, overall this segmentation is not supported by the results of the market investigation.

Categories of products (ethical, OTC, generic)

16.It is also possible to subdivide the pharmaceutical wholesale market on the basis of two principal categories of products: “ethicals” and “OTC” medicines. “Ethicals” are medicines that are supplied to patients on the basis of a doctor's or a dentist's prescription, whereas “OTC” medicines are medicines that can be sold to end consumers “over the counter”, without a prescription. One could also identify parallel imported products as a separate subdivision of the market. The UK competition authorities are of the view that the supply of ethicals is a separate market from the supply of OTC medicines.

17.Ethicals may be either branded or “generic”. Generic drugs are identical, or bioequivalent to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. Although generic drugs are chemically identical to their branded counterparts, they are typically sold at substantial discounts from the branded price.

18.As no competition concerns arise on any possible product market definition (whether segmented on the basis of categories of wholesalers, customer and product categories), the exact scope of the relevant product market can be left open however.

A.2. Vertically related market: retail pharmacy

19.Retail pharmacy is a downstream activity of the pharmaceutical wholesale activities and is therefore a vertically related activity. Retail pharmacies are the main downstream customers of the pharmaceutical wholesaling activities of both Alliance Boots and Cardinal Health UK described above. Alliance Boots owns a national chain of retail pharmacies within the UK with [20-30%] of the retail pharmacy market at national level and [20-30%] of the OTC market at a national level.

5 Commission, Case No COMP/M.716 - GEHE /LLOYDS, paragraph 26.

6 MMC Report on GEHE/UniChem/Lloyd, paragraph 2.36.; Anticipated acquisition by AAH Pharmaceuticals Limited of East Anglian Pharmaceuticals Limited, OFT´s decision of 3 December 2003, paragraph 17.

7 MMC Report on GEHE/UniChem/Lloyd, paragraph 2.35.

23.Both the UK competition authorities and the Commission have recognized in previous decisions that pharmaceutical wholesaling has both national and regional characteristics. At the national level, the regulatory environment for licensing and supervision is the same throughout the United Kingdom. The same NHS list prices apply throughout the UK. In a prior decision, the Commission excluded, however, the existence of a wider geographic market than national because of the need for a continental wholesaler to be able to supply on a twice daily delivery basis over 10000 prescription items. Furthermore, it considered that the current UK market structure as well as the logistics and economics of efficient supply indicate that pharmaceutical wholesaling also has a strong regional dimension. For similar reasons, the UK competition authorities have found it most appropriate to consider both the national and regional levels.

Full-line/short-line pharmaceutical wholesaling

24.In contrast to full-liners, turnaround time from order to delivery is inherently more flexible for products supplied by short-liners. In the majority of cases, short-line wholesalers do not incur the operational costs involved in operating depots and fleets adequate to meet the demands of a twice daily delivery service. Furthermore, short-line wholesalers can easily deliver nationally and those that choose to operate a regional business model would not face any barriers to expansion were they to extend their activities nationally, given the ease with which they could outsource national deliveries to third party courier companies. For these reasons, the parties consider that short-line wholesaling of pharmaceuticals as well as wholesaling of pharmaceuticals in general should be viewed as a national market. However, the results of the market investigation are mixed in this regard.

8 Commission, Case No COMP/M.716 - GEHE /LLOYDS, paragraph 27; Anticipated acquisition by Phoenix Healthcare Distribution Limited of East Anglian Pharmaceuticals Limited, OFT´s decision of 16.6.2005, paragraph 25.

9 Commission, Case No COMP/M.716 - GEHE /LLOYDS.

25.It can be concluded that the relevant geographic market is not larger than the UK. However, the question whether the different pharmaceutical wholesale markets are national or regional can be left open as no competition concerns arise on any considered geographic market definition.

B.2. Vertically related market: Retail pharmacy

26.The UK competition authorities have previously noted that from a supply side there is a national dimension to competition in retail pharmacy. In particular, it considered the existence of national chains such as Alliance Boots, Lloyds and the supermarkets. It also recognised that many pricing decisions are taken on a national basis and that such chains engage in national promotional and advertising campaigns. From a regulatory perspective regulation is broadly uniform throughout the UK. Equally, the same categories of products are dispensed and sold to consumers by pharmacies throughout the UK. However, from a demand side, retail pharmacy markets are fundamentally local in nature. This view was supported by the UK competition authorities in the Alliance UniChem/Boots Group decision, where it considered that the relevant frame of reference was a 1 mile radius around each pharmacy store of the merging parties that were to form part of Alliance Boots.

27.However, the question whether the retail pharmacy market is national or local can be left open as no competition concerns arise on whatever geographic market definition.

C. COMPETITIVE ASSESSMENT

28.Alliance Boots is one of the main players on the market, but the target Cardinal Health UK is a rather minor player in the UK market for wholesaling of pharmaceuticals and the increment in market share is rather low. Other major competitors such as AAH and Phoenix, which are both part of major international pharmaceutical groups, are active on the pharmaceutical wholesale market. Regional wholesalers also have a strong presence in most regions. In relation to short-line wholesaling, where the overlap occurs, the combined market share nationally is relatively low and below a level indicating market power. Alliance Boots is a minor player in short-lining and provides only a small increment to the market share of Cardinal Health.

C.1. Horizontally related markets: pharmaceutical wholesaling in the UK

General Wholesale Pharmaceutical Market

29.The parties estimate their combined share of the general (short-line and full-line) wholesale supply of pharmaceuticals in the UK (retail pharmacies, dispensing doctors and hospitals) at below [15-20%].

10 OFT decision of 6 February 2006.

Full-line/short-line pharmaceutical wholesaling

30.In the narrower potential UK market for full-line pharmaceutical wholesaling, the parties’ activities do not overlap as Cardinal Health UK is not active in full-line wholesaling.

31.On a possible UK market for short-line wholesaling, the parties estimate their combined market share (2005) also at approximately [20-30%] (Alliance Boots [5-10%], Cardinal Health [15-20%]). The transaction does bring the combined entity into first place in the market for short-line wholesaling at a national UK level. However, other short-line wholesalers active on the market are Waymade ([10-15%]), Sigma Pharmaceutical ([5-10%]-[10-15%]), Colorama Pharmaceuticals [5-10%], B&S Healthcare [5-10%], Lexon UK Ltd [5-10%], Trident [5-10%] and others. Alliance Boots is a minor player in short-line wholesaling and provides only a small increment [5-10%] to the market share of Cardinal Health.

Categories of customers: retail pharmacies, doctors, hospitals

32.OTC Direct is Alliance Boots´ only short-line wholesaling business and does not currently supply to hospitals. Cardinal Health UK makes de minimis sales to hospitals. There is therefore no overlap between the parties business in short-line supply to hospitals. As noted above, there is also no overlap between the parties in the full-line supply of pharmaceuticals. As such, market shares given below only relate to the narrower market of pharmaceutical wholesaling to retail pharmacies and dispensing doctors.

33.The parties' combined market share in the UK on the general market for pharmaceutical wholesaling to retail pharmacies and dispensing doctors was [20-30%] (Alliance Boots [15-20%], Cardinal Health UK [2-5%]) by value in 2005. Other competitors active on this market are AAH Pharmaceuticals Limited [30-40%], Phoenix Healthcare Distribution Limited [5-10%], other regional full-line wholesalers [10-15%]) and other short-line wholesalers [20-30%].

34.If the market was to be considered to consist only of pharmaceutical short-line wholesaling to retail pharmacies and dispensing doctors, the parties' combined market share in the UK is estimated at ([20-30%] by value in 2005. Main competitors active on this market are Waymade International plc ([10-15%]-15-20%]), Sigma Pharmaceuticals plc ([5-10%]-[10-15%]), Colorama Pharmaceuticals Ltd ([2-5%]-[10-15%]), B&S Healthcare Ltd ([2-5%]-[10-15%]), Lexon UK Ltd ([2-5%]-[10-15%]) and Trident ([2-5%]-[10-15%]).

Categories of products (ethical, OTC, generic)

35.As regards an even narrower potential definition of product markets, the parties estimate their combined market share on the hypothetical UK pharmaceutical general wholesale markets for branded ethicals, (excluding parallel imports), at [20-30%] (Alliance Boots [20-30%], Cardinal Health [below 2%], for generics at [15-20%] (Alliance Boots [5-10%], Cardinal Health [5-10%]) for parallel imported products at [15-20%] (Alliance Boots [5-10%], Cardinal Health [5-10%]) and for OTCs at below [10-15%]. On the short-line wholesale segment of the above mentioned product categories, the combined market share of the parties is in each case below [20-30%].

Regional Wholesale Pharmaceutical Markets

36.On a hypothetical regional basis the parties´ highest combined market share for general pharmaceutical wholesaling to retail pharmacies and dispensing doctors is [30-40%] in the South West, the London area [20-30%] and Wales and the West [20-30%]. However, the increment in each case is relatively minor (between [2-5%] and [5-10%]) and the competitors mentioned above are all active in the regions.

37.On a regional level, the parties combined market shares for short-line pharmaceutical wholesaling are highest in the South West [30-40%], North West ([30-40%] and the South East [30-40%] and Yorkshire [30-40%]), where there are increments of up [5-10%]. In the London area, which represents the largest sales volume in the short-line segment regionally, the parties have combined sales of [less than £100 million] per annum, equivalent to only [10-15%] of that short-line market and a figure which does not indicate a strong degree of market power.

38.At regional level on the hypothetical UK pharmaceutical general wholesale markets for branded ethicals, (excluding parallel imports), generics, parallel imports products and OTCs, the combined market share of the parties is estimated to be within the perimeters of the market shares provided at general pharmaceutical wholesale level, other than the Midlands and London area for branded ethicals, where combined market shares are estimated to be less than [40-50%]. However, in the latter cases the increment would be very minor at less than [0-2%]. In the London and Midlands, there is competition from other suppliers in branded ethicals, most notably AAH [~30-40%] and Phoenix [~10-15%]. Other suppliers include Medihealth and national suppliers such as Waymade, Sigma, Colorama and B&S Healthcare (London). In the Midlands, Lexon, Mawdsley brooks and P.I.F Medical Supplies are also active.

39.It can be concluded from the above, that the transaction would not cause a significant impediment to effective competition in the common market or in a substantial part of it.

C.2. Vertically related market: Retail pharmacy

40.The proposed transaction does not change the level of concentration in the downstream retail market, so there is no risk of upstream foreclosure in the market for wholesaling. The only vertical issue in this case could be one of downstream foreclosure in terms of the combined parties´ pharmaceutical wholesaling business refusing to supply rival downstream retail competitors.

41.If one considers retail pharmacy on a national basis, the parties’ market share are moderate and amount to [15-20%] by number of outlets, [20-30%] in terms of dispensing sales by value, and [20-30%] in terms of OTC medicine sales.

42.At local level, in line with the UK competition authorities, the UK authorities have used a fascia rule applying a 1 mile radius around the store to identify all pharmacy outlets within the radius. However, this cannot be taken to constitute a substantial part of the common market.

43.The combined wholesaling business of Cardinal Health UK and Alliance Boots is unlikely to have the ability or incentive to raise prices or worsen terms of supply to third party pharmacies without suffering a significant loss of wholesale business. Any attempt to do so would result in customers switching to other wholesalers.

44.The results of the market investigation confirm this. It can be concluded that a sufficient number of other pharmaceutical wholesale companies remain active at national or regional level in order to supply pharmaceutical products to retail pharmacies in the UK.

45.There are no further vertical relationships between the parties, since neither party is engaged in business activities in a product market, which is upstream or downstream of a product market in which any other party to the concentration is engaged, and in which any of their individual or combined market shares at either level is 25% or more.

46.Based on the above, it can be concluded that the operation will not significantly impede competition on any of the pharmaceutical wholesaling or retail pharmacy markets in the UK.

VI. CONCLUSION

47.For the above reasons, the Commission has decided not to oppose the notified operation and to declare it compatible with the common market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EC) No 139/2004.

For the Commission, signed, Neelie KROES Member of the Commission

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