Competition Bureau statement regarding McKesson’s acquisition of Katz Group’s healthcare business

OTTAWA, December 16, 2016 — On December 13, 2016, the Commissioner of Competition entered into a consent agreement with McKesson Canada Corporation and Rexall Pharmacy Group Ltd. to resolve concerns related to McKesson Corporation’s (McKesson) proposed acquisition of the healthcare businesses of the Katz Group, which include the Rexall pharmacy retail chain and the ClaimSecure healthcare claims adjudication business. The agreement requires that McKesson sell-off pharmacies in 26 markets and it further requires McKesson to restrict the transmission of commercially sensitive information between its pharmaceutical wholesale business and the Rexall retail business, to ensure that competition is preserved for the wholesale and retail supply of pharmaceutical products and services in local markets across Canada.

This statement summarizes the approach taken by the Competition Bureau in its review of the proposed transaction. It provides an overview of the Bureau’s determination that, absent the consent agreement, the proposed transaction would likely have resulted in a substantial lessening or prevention of competition and summarizes how the consent agreement will remedy this likely competitive harm.

Background

In the course of its review, the Bureau conducted interviews with numerous market participants, including customers, suppliers and competitors; and reviewed documents and data produced by the parties and third parties.

The parties

McKesson is the largest wholesaler of pharmaceutical products in Canada, including prescription pharmaceuticals, over‑the counter pharmaceuticals, and health and beauty products. It carries more than 55,000 products in its 13 distribution centres and supplies approximately 7,100 pharmacies across Canada. It is the primary supplier of pharmaceutical products to many of Canada’s largest and most recognized pharmacy retail chains, including Rexall. Apart from the proposed acquisition of the Rexall retail pharmacy chain, McKesson does not own any retail pharmacies in Canada but does provide “banner” or franchise services to independent pharmacists who choose to operate under one of McKesson’s own retail banners, which include IDA, Guardian, Remedy’s Rx and Medicine Shoppe.

Katz Group’s Rexall retail pharmacy chain is among the largest retailers of pharmaceutical products in Canada, with more than 400 pharmacies spanning Ontario, Western Canada and the Northwest Territories. The Katz Group also owns ClaimSecure, a health care claims adjudication business that is connected to 99% of all licensed pharmacies in Canada and processes more than 10 million health and dental benefit transactions a year on behalf of corporations, insurers, unions, and other healthcare plan sponsors representing approximately 1.2 million Canadians.

Analysis

Unilateral effects

The proposed transaction is largely vertical in nature—an upstream distributor acquiring a downstream retailer. The Bureau therefore conducted its analysis through the lens of vertical merger economic theory while also taking into account the extent to which McKesson could influence independent pharmacies operating under one of its retail banners. The Bureau determined that the proposed transaction would likely have resulted in a substantial lessening or prevention of competition in 26 local markets across Canada where:

  • McKesson was likely to have an incentive to disadvantage Rexall’s retail rivals by supplying them with prescription and over‑the‑counter pharmaceutical products under less favourable terms, conditions, or service quality;
  • Rexall was likely to have an incentive to compete less aggressively on these products at retail, knowing that lost customers would likely switch to rival retailers that were also supplied by McKesson, on which the merged entity would earn a wholesale margin; and
  • Wholesale competition from other pharmaceutical distributors, and retail competition from pharmacies supplied by a wholesaler other than McKesson, were unlikely to effectively constrain McKesson’s ability to profitably act on these incentives.

Coordinated effects

In the process of serving its wholesale customers, many of which are direct rivals to Rexall, McKesson obtains commercially sensitive information. This encompasses detailed data on the wholesale prices and quantities of pharmaceutical products purchased by customers, information on the timing of those purchases and deliveries, and information about upcoming customer promotions, including information related to the specific products that will be subject to promotion, the timing and duration of promotions, the anticipated retail pricing of promotional products and the markets in which those promotions will occur.

As part of the health care claims adjudication process, Katz Group’s ClaimSecure business collects detailed data on individual prescription drug purchases, including purchases made at Rexall’s retail rivals. These data include information about the retail pricing of Rexall’s rivals and the characteristics of their customers, including information about customers’ claims histories and their prescription drug purchase patterns.

Furthermore, as one of Canada’s leading pharmacy chains, Rexall also has commercially sensitive information on the markets in which it competes, the competitive dynamics in those markets and the strategies and tactics required to compete effectively.

The Bureau determined that combining this competitive intelligence would likely enable the merged entity to alter the competitive dynamics of the retail markets in which Rexall competes. In those markets, the Bureau concluded that the proposed transaction was likely to significantly increase the likelihood of coordination among retail pharmacies by:

  • Enabling Rexall to better anticipate and react to the promotional activities of its rivals, thereby decreasing the value of promotional activity as part of the competitive process;
  • Providing McKesson with the incentive to seek a coordinated outcome at retail and the means to closely monitor and react to deviations from such coordination; and
  • Increasing the overall level of transparency in the industry by providing Rexall additional insight into the costs, competitive strategies, and performance of its rivals.

Conclusion and remedy

In order to address the likely substantial lessening or prevention of competition, McKesson has agreed to divest Rexall retail locations in each of the 26 markets at issue. The divestitures preserve competition by ensuring that these stores will be sold to operators with the independence and business acumen to operate them effectively.

The 26 Markets

  • Alberta: Athabasca, Banff, Barrhead , Blairmore, Fort MacLeod, High Prairie, and Jasper.
  • British Columbia: Burns Lake, Ladysmith, Sechelt, and Vanderhoof.
  • Northwest Territories: Inuvik.
  • Ontario: Campbellford, Deep River, Durham, Englehart, Iroquois Falls, Lindsay, Sioux Lookout, Smithville, Stayner, Sturgeon Falls and Wingham.
  • Saskatchewan: Kamsack, Moosomin, and Shaunavon.

To address the likely substantial lessening or prevention of competition resulting from the increased probability of coordinated effects in local retail markets, the consent agreement establishes a series of firewalls restricting the transmission of commercially sensitive information, such as the commercially sensitive information described above, among McKesson’s wholesale business, the Rexall business and the ClaimSecure business. Subject to narrow exceptions, the consent agreement ensures that the commercially sensitive information of each of the three businesses will be maintained confidentially within those businesses and will not be transmitted to the other two businesses. Readers are invited to consult the registered consent agreement for further details on the operation of these firewalls.

In light of both the firewalls and the Rexall retail divestitures, the Bureau is satisfied that the proposed transaction is unlikely to result in a substantial lessening or prevention of competition.

The 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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