UniChem Limited: A report on UniChem's arrangements and proposed arrangements for the allotment of shares in its capital

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On 29 November 1988 the Director General of Fair Trading (the Director General) asked us to investigate whether UniChem's conduct in making and proposing arrangements for the allotment of shares in its capital was anti-competitive, and, if so, operated against the public interest (the reference is at Appendix 1.1).

UniChem is an industrial and provident (I & P) society, whose main activity is the wholesale supply of pharmaceutical goods. The arrangements we were asked to investigate relate to the allocation of shares prior to UniChem's proposed conversion into a public limited company in mid-1990, and subsequent flotation on the stock market. In particular, UniChem would allocate a large number of shares, to both new and existing members, on the basis of the level of each member's business with UniChem in the period up to May 1990 (which we refer to as the Share Scheme). These shares would be additional to those allocated on the basis of membership of UniChem. Partly as a result of these arrangements, and particularly of the Share Scheme, UniChem increased its share of pharmaceuticals supplied to retail outlets from 30 per cent in 1987 to 35 per cent in 1988.

We believe that UniChem is in a unique position among pharmaceutical companies to operate these arrangements. It is a well-established and profitable business, and its stock market value on flotation is likely to be well in excess of the present nominal value of its shares. As an I & P society, its shares are unquoted and cannot be traded. It has therefore been able to attract new members and additional business by the allocation of shares based in part on the future level of purchases, with the prospect of significant capital gains on flotation.

The arrangements therefore enabled UniChem to increase its market share by means other than price reduction or improved quality of service. We do not believe that any of its competitors could offer comparable attractive arrangements. Nor in our view, given the low margins in the industry, would competitors be in a position to compete by price reduction or other discounts. We have concluded that these arrangements have distorted competition, and are therefore anti-competitive.

We have also concluded that the arrangements, in particular the Share Scheme, operated, and might be expected to operate, against the public interest. They have increased the risks and costs and reduced the effectiveness of UniChem's competitors. We believe that the effects of the arrangements will become increasingly serious in the remaining period of the Scheme and would reduce competition in the wholesale supply of pharmaceutical goods to retail pharmacists in Great Britain, resulting in lower discounts to pharmacists, reduced choice of wholesalers, and reduction in quality of service.

We do not believe it would be appropriate to withdraw the shares already allocated nor necessary to change the present allocation of shares on the basis of membership. We have concluded, however, that measures should be taken to prevent further damage to the competitive structure of the industry. We have therefore recommended a requirement that any shares to be issued by UniChem in future should not be related to purchases from UniChem subsequent to the date of publication of this report. We have also recommended that UniChem should be required not to change the minimum level of turnover required for membership, or the number of shares to be allocated to new members, until flotation.

One of our group dissents from these conclusions.

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