Competition Bureau statement regarding Cardinal Health's acquisition of Futuremed

OTTAWA, April 16, 2012  — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition of Futuremed Healthcare Products Corporation (Futuremed) by Cardinal Health Canada Inc. (Cardinal Health), pursuant to an agreement announced on October 25, 2011.

On February 16, 2012, the Bureau issued a No Action Letter (NAL) to Cardinal Health indicating that the Commissioner of Competition does not, at this time, intend to make an application under section 92 of the Competition Act in respect of the proposed acquisition of Futuremed by Cardinal HealthFootnote 1. While the transaction will reduce the number of full-line distributors of medical supplies and surgical equipment serving Quebec markets, the Bureau concluded that expansion by one or more competing distributors within the relevant or adjacent markets was likely, and such expansion would likely constrain an exercise of market power by the merged entity.

Background

Cardinal Health and Futuremed overlap in the distribution of a broad range of medical supplies and surgical equipment to healthcare facilities, such as hospitals and long-term care facilities across Canada (although Futuremed's presence in Atlantic Canada is very limited). Both parties source products from hundreds of global manufacturers and maintain extensive product inventories for sale and delivery to customers.

As prices in this industry are typically set through a tendering process between manufacturers and customers (or buying groups acting for customers), authorized distributors of a product do not compete on price, but instead through distribution fee rebates, quality of service and technical expertise offered to customers. Typically these rebates are available to large customers purchasing large volumes of items.

The Bureau's review focussed on Quebec where, owing to provincial legislation, over 90 per cent of products are purchased through a tendering process, and aside from the parties, there is only one smaller full-line competing distributor. Owing to the limited competition, certain customers were concerned that the transaction could result in a loss of distribution rebates, product variety, and quality of service. In particular, in the face of a price increase (being a loss or reduction of the distribution fee rebate) and/or a reduction of service by distributors, certain large customers in Quebec indicated that, while they could switch to direct shipment by manufacturers for a limited number of high volume or specialized products, the transaction costs of dealing with numerous manufacturers would prevent the majority from switching to either narrow-line distributors or direct supply by manufacturers. In addition, to achieve the level of service customers require, a distributor must have a warehouse facility or service personnel within sufficient proximity to its customers to ensure timely and often next-day deliveries, as well as prompt customer service.

Notwithstanding the concerns, the barriers to expansion by full-line distributors within the relevant or adjacent markets are likely surmountable for the following reasons:

  1. full-line distributors already distribute a broad range of medical supplies and surgical equipment and could readily expand their lines;
  2. a sufficient proportion of the parties' distribution agreements with manufacturers involving the relevant markets will be contestable in the near future;
  3. sunk costs are not substantial; and
  4. a sizeable customer base in the relevant markets could be developed with a relatively limited number of trained or experienced local sales representatives. As such, the Bureau determined that expansion by one or more competing distributors within the relevant or adjacent markets was likely, and that such expansion would likely constrain an exercise of market power by the merged entity.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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