PROPOSED MERGER BETWEEN CLICKS RETAILERS (PTY) LTD AND NETCARE PHARMACIES (PTY) LTD AND NETCARE PHARMACIES 2 (PTY) LTD 2016Jun0297

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1 ICPA (NPC), Unit 3, Mews 2, Rosmead Centre, 67 Rosmead Avenue, Kenilworth, Cape Town, 7708 Tel: Fax: Website: CIPC Reg. No: 2012/021809/08 NPO Reg. No: VAT Reg. No: August 2016 Portia Bele Mergers and Acquisitions Competition Commission SA By PortiaB@compcom.co.za Dear Ms. Bele, PROPOSED MERGER BETWEEN CLICKS RETAILERS (PTY) LTD AND NETCARE PHARMACIES (PTY) LTD AND NETCARE PHARMACIES 2 (PTY) LTD 2016Jun We refer to the telephone conversation and following correspondence between your Portia Bele and our Mark Payne on 28 July As mentioned in the above previous correspondence, the Independent Community Pharmacy Association ( ICPA ) is an organisation which provides independent community pharmacies with collective strength in their dealings with government, medical schemes, pharmaceutical suppliers and consumers. 3. ICPA represents over independent pharmacies amounting to roughly pharmacists and supportive healthcare personnel. ICPA s objective is to assist and support its members in securing a sustainable and successful future as independent owner-managed pharmacies. 4. The supply of medicines is regulated with legislative parameters set out for the single exit price of medicine and the dispensing fee that may be charged by pharmacies and which limits the profitability of pharmacies. 5. ICPA has concerns regarding the proposed merger between the abovementioned parties which is to be discussed under the following headings: Board of Directors: Mogologolo Phasha (Chairman), Wim Grobbelaar (Vice-Chairman), Mehboob Ali Cassim (Treasurer), Rakesh Daya, Maropeng Modiba, Sham Moodley, Simoné Eksteen

2 5.1 Transgression of the Pharmacy Act by Clicks Retailers (Pty) Ltd It is prohibited for an owner of a retail (community) pharmacy (like the current Medicross pharmacies and Clicks pharmacies) to have a direct or indirect beneficial interest in a manufacturing pharmacy Clicks Group Limited (trading under registration number 1996/000645/06) is the holding company of Clicks Retailers (Pty) Ltd ( Clicks ), trading under registration number 2000/013054/07, and Unicorn Pharmaceuticals (Pty) Ltd ( Unicorn ), trading under registration number 2000/017879/ On 30 May 2012 Unicorn was issued with a manufacturing licence. As it is prohibited for the owner of a community pharmacy to have a direct or indirect beneficial interest in a manufacturing pharmacy, all licences issued subsequent to 30 May 2012 were erroneously issued and should be revoked. This issue was raised in our submissions made to the Competition Commission Health Market Inquiry in February 2016 and a formal complaint was also lodged with the Department of Health (attached hereto as Annexure 1), who referred it to their legal department for investigation Should this merger proceed all the Clicks pharmacies that will take over control from the Medicross pharmacies will have to apply for new community pharmacy licences in order to proceed conducting business as community pharmacies. Should these licences be granted, they will be conducting business in contravention of the Pharmacy Act and we will be obliged to approach the courts to interdict them from conducting business in contravention with the law. We appreciate that this issue should be raised with the Department of Health, but we have done so and is yet to receive any resolve in this regard. We submit, however, that this should be taken into account by the Competition Commission before awarding them permission to proceed with this merger. 5.2 Vertical integration Clicks have vertically integrated their pharmaceutical supply chain in that the distributor, wholesaler and retailer are all subsidiaries of Clicks Group Limited. 1 In terms of section 22A of the Pharmacy Act, Act 53 of 1974, read together with Regulation 6 of the Regulations relating to the Ownership and Licensing of Pharmacies, dated 21 February

3 5.2.2 As a result hereof profit can be generated at different levels of the supply chain and losses can also be absorbed at different levels. This, together with their negotiating power as a corporate pharmacy, to be discussed below, allows them to contract with medical aid schemes at lower dispensing fee rates. This, in turn, results in medical aid schemes contracting Clicks pharmacies as the designated service provider ( DSP ) for chronic medicine denying the medical aid scheme members choice of service provider and forcing them to use the DSP or face a hefty penalty co-payment Understandably this does not necessarily constitute vertical restrictive practices as to our understanding Clicks and Unicorn can be viewed as a single economic entity, but because of the highly regulated end to end medicine supply chain, privately owned pharmacies are unable to compete as a result of these factors. 5.3 Negotiating power of corporate pharmacy as opposed to independent pharmacies As mentioned above the medicine supply chain is heavily regulated and innovative business models are required for a retail pharmacy to maintain profitability A restriction on independent pharmacies is the fact that they are barred from collectively negotiating dispensing fee rates with medical aid schemes as well as forming joint purchasing arrangements with manufacturers and wholesalers, as this may be regarded as price fixing. We attach hereto as Annexure 2 the advisory letter from the Competition Commission in this regard This restriction is not applicable to corporate pharmacy (and thus to Clicks pharmacies). Clicks therefore has more negotiation power to negotiate dispensing fee rates with medical aid schemes and may purchase unregulated predominantly front shop items in bulk enabling them to sell it at a lower price. This, again, makes it impossible for independent pharmacies to compete. 5.4 Transgression of the Medicines and Related Substances Act, Act 101 of 1965 ( Medicines Act ) It is illegal for a person to supply any medicine according to a bonus system, rebate system or any other incentive scheme. 2 2 In terms of section 18A of the Medicines Act. 3

4 5.4.2 Clicks, under the Healthycare benefit to Discovery Vitality members, acts unlawfully by offering rebates classified as incentives on medicines regulated by a single exit price. This contravention of the Medicines Act gives Clicks a competitive advantage above independent community pharmacies who once again lose out on successfully competing with corporate pharmacy. 5.5 Dominance in the market and exclusivity of Unicorn products ICPA is not in a position to make submissions based on economic analysis on Clicks market share and market power, but trusts that the Competition Commission will evaluate same to establish if Clicks is indeed a dominant firm or not In the event of the Competition Commission finding that Clicks has enough market power to establish itself as a dominant firm, then it can be argued that there is an abuse of market dominance in that Unicorn products are only made available to Clicks pharmacies and to a lesser degree Link pharmacies (who is also affiliated with Clicks Group Limited). Independent pharmacies are precluded from procuring products from Unicorn, despite some of these products being on medical aid scheme formularies. This seems to be a transgression of section 8(d)(i) the Competition Act Annexure J to Annexure 1 hereto indicates the Clicks private conversion tool, supposedly advising Clicks personnel which products compete with their branded range and the equivalent Clicks private label product to be marketed to customers. The logical assumption is that Clicks pharmacists are incentivised for selling Clicks (Unicorn) products, despite it perhaps not being the best indicated medicine. If this is indeed the case, it can also resort under the same transgression of section 8(d)(i) of the Competition Act and can lead to serious harm to consumer welfare. ICPA again trusts that the Competition Commission will investigate the possible abuse of dominance by Clicks The fact that Clicks has a beneficial interest in the manufacturer of medicines marketed in pharmacies may lead to perverse incentives. The consumer s choice is being swayed to Unicorn products, as opposed to a variety of products from different pharmaceutical manufacturers as the case would be in a community pharmacy. 4

5 5.6 Compliance to the Pharmacy Act, its regulations and the Rules to Good Pharmacy Practice Pharmacy premises situated within another business must be clearly identified and demarcated from the premises of any other business or practice The pharmacies situated in the Netcare hospitals have institutional pharmacy licences and those situated in Medicross have community pharmacy licences. The biggest distinction between the two is that institutional pharmacies may not provide pharmaceutical services to the general public, but only to in-patients of the facility 4. The proposed Netcare front shop operations to be taken over by Clicks will only be at liberty to sell unscheduled medicine and other unregulated products located in the front shop. The above will require monitoring to ensure compliance with the Pharmacy Act. Should the proposed merger proceed, the market share and market power of Clicks will increase in a market that is already difficult for independent pharmacies to compete. We have indicated in the aforementioned that Clicks continues to transgress the relevant legislation and this affects the ability of small and medium enterprises to compete on equal footing. On these ground we hereby request the Competition Commission not to grant approval for the merger. Regards, INDEPENDENT COMMUNITY PHARMACY ASSOCIATION Per: Mogologolo David Phasha Chairman 3 In terms of Rule (a) of the Rules relating to Good Pharmacy Practice. 4 In terms of the 2003 Regulations relating to Ownership and Licensing of Pharmacies of the Pharmacy Act. 5