The Pharmaceutical Journal
Vol 269 No 7214 p307
7 September 2002

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Office of Fair Trading (more)
Credit Suisse First Boston (CSFB) (www.csfb.com)

OFT will relax control of entry, analysts predict

The Office of Fair Trading will recommend significant relaxation of the regulations controlling the granting of dispensing contracts, analysts at merchant bank Credit Suisse First Boston (CSFB) predict.

Nathan Cockrell, European retail analyst at CSFB, told The Journal that pharmacy has been chosen as "an easy target" by the OFT and one where it is unlikely to simply issue a "clean bill of health".

"We believe that the OFT will be aware of the conclusions of the Restrictive Practices Court's findings on resale price maintenance, even though the hearings were not held in public," Mr Cockrell said.

CSFB's conclusions are published in a research note looking at the potential effects on the Boots Co Plc and Boots The Chemists. Of the OFT's inquiry, it says: "At its very heart, this inquiry is about the price of health care products and, by implication, the appropriate levels of profits achieved by retail pharmacies." In the case of Boots, it says: "We would suggest that Boots The Chemists' very high levels of profitability is supportive of substantial change."

The research note says that other pharmacy chains will have told the OFT that the cost of obtaining pharmacy contracts prevents their expansion and limits their ability to offer competitive prices to consumers. Superdrug, for example, is quoted as having paid on average about £190,000 for the contracts it acquired over the past four years.

"While in our view it is unlikely that the OFT will fully abolish legislation regulating the pharmacy market, particularly after the abolition of RPM, there are a number of ways in which we believe that it could be relaxed to create substantially greater competition. For example, the number of pharmacy contracts allocated to serve a discrete area with a given population could be increased."

The research note continues: "To the extent that applications are being sought for locations with the greatest commercial potential, primarily by introducing new competition into populous areas, this would represent a substantial concession to market forces."

Boots has previously said that it expects any relaxation of control of entry to have a neutral effect on its chain of pharmacies (PJ, 8 June, p794). There are around 90 Boots branches that do not currently have contracts. CSFB says this is optimistic, adding: "While the greater availability of pharmacy licences would benefit Boots The Chemists in these locations, we suspect that increased competition in the 1,340 locations with licences would more than cancel out the advantage."

The report notes that any increase in the number of pharmacy contracts will increase demand for pharmacists and lead to wage inflation, for both Boots and other pharmacy employers.

A spokesman for the OFT said that no decisions had been reached yet in the pharmacy inquiry. The team's report is expected to be published "in the late autumn".