Brief Summary

Competition — Merger Approval — Conditional approval of merger between Dis-Chem Pharmacies Ltd and Pure Pharmacy Holdings (Pty) Ltd — Dis-Chem to acquire 100% of PPH’s issued share capital — Competition Commission assessed market shares and potential impact on competition — Found low accretion in market shares post-merger and no significant competition concerns — Condition imposed requiring notification of future small mergers in the pharmaceutical market for five years.

Comprehensive Summary

Summary of Judgment

1. Introduction

These were large merger proceedings before the Competition Tribunal of South Africa concerning the conditional approval of a transaction in terms of which Dis-Chem Pharmacies Limited (the acquiring firm) sought to acquire Pure Pharmacy Holdings Proprietary Limited (the target firm).

The matter arose from the Competition Commission’s investigation and recommendation regarding the merger. The merger was heard by the Tribunal on 17 September 2021, an order was issued on 20 September 2021, and the Tribunal’s written reasons were issued on 19 October 2021.

The general subject-matter of the dispute concerned the competitive and public-interest effects of consolidation in the retail pharmacy sector, including the structure of pharmacy ownership (corporate groups versus independent groups), the implications of further acquisitions by a large corporate chain, and issues connected to telemedicine services associated with the target group (particularly the Healthforce platform).

2. Material Facts

Dis-Chem is a large pharmacy group active along the pharmaceutical supply chain, including wholesale distribution, the operation of retail pharmacies, and the provision of primary healthcare services through clinics located in most of its stores. It also operates a courier pharmacy service for online orders. The Commission’s investigation treated Dis-Chem as including The Local Choice (Pty) Ltd, a subsidiary that franchises independent pharmacies under The Local Choice brand; the Commission accordingly included The Local Choice franchisees when calculating Dis-Chem’s market shares. Pre-merger, Dis-Chem had 181 stores, and together with The Local Choice pharmacies it controlled a total of 320 pharmacies.

The target firm, Pure Pharmacy Holdings (Pty) Ltd, controlled a group that included Pure Pharmacy Retail (Pty) Ltd, which held the retail pharmacy licences for 50 “Medicare” branded pharmacies. Those stores were located in Gauteng, Limpopo, Mpumalanga, and the Western Cape. PPH previously conducted wholesale distribution under the “Pharmasave” brand, but the Commission found that Pharmasave exited wholesale distribution in October 2020, and that this exit pre-dated merger discussions and was not merger-specific.

The judgment also recorded that PPH previously owned Healthforce (Pty) Ltd, a provider of clinic practice management software that functions as a telemedicine service enabling nurses to provide care with support from remote general practitioners via video link. The parties contended that Dis-Chem’s acquisition of Healthforce in March 2021 was a separate, non-notifiable small merger; however, the Commission requested notification so that it could be assessed as part of Dis-Chem’s acquisition of PPH for purposes of evaluating the transaction’s effects.

The proposed transaction entailed Dis-Chem acquiring 100% of the issued share capital of PPH, resulting in Dis-Chem exercising sole control over PPH and the Medicare pharmacies.

On competition effects, the Commission assessed both national and local markets. Nationally, the Commission assessed wholesale distribution of pharmaceuticals, retail of scheduled pharmaceuticals, retail of unscheduled pharmaceuticals, and retail of front shop products, as well as a national market for telemedicine services. Locally, it assessed retail competition for scheduled and unscheduled pharmaceuticals within a 5 km radius in overlapping areas, and it evaluated overlaps in 35 geographic areas on that basis.

In the upstream wholesale market, the Commission found no post-merger accretion because Pharmasave had already exited. In the national retail markets for scheduled and unscheduled pharmaceutical products, and for front shop products, the Commission found that Dis-Chem (including The Local Choice) held a large share, with low accretions from the addition of the Medicare stores. In local markets, the Commission considered whether the merger reduced the number of competing pharmacies within the 5 km radius and noted that in some areas post-merger shares exceeded 35%, but accretions were nonetheless found to be low and not to raise significant competition concerns on the Commission’s assessment.

A central factual theme in the Commission’s investigation, recorded in the Tribunal’s reasons, was the evolution of market structure over time. The Commission found that corporate pharmacy groups such as Dis-Chem and Clicks had grown considerably between 2017 and 2021, while independent groups declined. Dis-Chem (including The Local Choice) expanded from approximately 159 pharmacies in 2017 to 320 in 2021, with the hearing clarifying that most of this growth was organic rather than acquisitive.

The Commission further found that the transaction would reduce the number of “significant independent pharmacy groups” that could more closely constrain the large corporate chains, observing that PPH had 50 pharmacies nationwide and that other significant “true independent” groups existed, while other independent groupings were described as “commonly branded” pharmacy networks. The Commission’s concern was that the merger could further weaken the competitive role of independent pharmacy groups in relation to competition, innovation, and economic participation.

The Commission also recorded concerns about a possible “creeping mergers” strategy by Dis-Chem, referring to a series of mergers over the prior six years, many of which were not notifiable. This concern was addressed through a condition requiring Dis-Chem to notify certain small mergers for a specified period.

Third-party concerns were recorded in relation to telemedicine. Udok raised a concern about a potential conflict of interest if a pharmacy owned a technology firm operated by prescribing doctors. Allegra raised concerns about interoperability, continuity of care, and patient ability to choose where prescriptions are filled. The Tribunal recorded that it was satisfied that the Commission’s conditions addressed those concerns by requiring open access to the Healthforce platform and the preservation of patient choice.

On public interest facts, the Commission identified likely duplications affecting employees. It recorded that Dis-Chem would absorb some potentially affected employees and that only a limited number of positions were likely to be redundant (the precise figures were not reproduced in the publicly available text). It also recorded that a number of loss-making PPH stores were likely to be closed after implementation to prevent further losses, and that the parties indicated employees would be absorbed elsewhere where possible and retrenchments limited. The Commission imposed conditions capping retrenchments and providing for offers of future employment should vacancies arise.

Finally, the Commission conducted a failing firm assessment (although the parties did not formally advance a failing firm defence). The Commission’s analysis, as recorded, identified significant financial challenges within PPH and efforts taken over time. The Commission did not decisively determine the success of the relevant interventions, and instead imposed a condition requiring an additional period to elapse post-implementation before store closures (subject to an exclusion for certain loss-making stores referenced in the reasons).

3. Legal Issues

The central legal questions were whether the large merger was likely to substantially prevent or lessen competition in any relevant market, and if so, whether that effect could be justified or remedied through conditions. This required determination of issues involving the application of law to fact, including market definition, competitive effects, and the adequacy of remedies.

A further set of legal issues concerned whether the merger raised material concerns regarding market structure, including the removal of an effective competitor and potential entrenchment of a corporate oligopoly, and whether a pattern of acquisitions could amount to a creeping mergers concern warranting regulatory oversight through notification conditions.

Additional issues arose in respect of vertical and adjacent-market effects linked to telemedicine services, including potential foreclosure risks and conduct that could undermine rivalry through platform control, as well as issues of patient choice and interoperability as framed by third parties and addressed by conditions.

Finally, the Tribunal had to consider statutory public interest factors, particularly potential employment effects, store closures, and mitigation commitments. This similarly involved applying the statutory framework to the factual record developed in the investigation and hearing.

4. Court’s Reasoning

The Tribunal’s reasons reflect an acceptance of the Commission’s competitive assessment across both national and local dimensions of rivalry. The Tribunal recorded the Commission’s reliance on precedent and market information to identify relevant markets, and the use of both revenue-based and store-count measures to assess shares and competitive dynamics.

In the upstream wholesale distribution market, the absence of accretion was treated as significant because the target’s prior wholesale activity had already ceased and the exit was found not to be merger-specific. This reduced the likelihood that the transaction would materially change competitive conditions upstream.

In the national retail markets for scheduled and unscheduled pharmaceuticals and front shop products, the Commission’s assessment (endorsed by the Tribunal) emphasised the combination of Dis-Chem’s position with low incremental share increases attributable to the Medicare stores, alongside the presence of other competitors. For front shop products, the Commission considered that pharmacy groups face competition from a wide range of retailers beyond pharmacies, which informed its view that market power concerns were limited in that segment.

In local retail markets, the Commission employed a 5 km radius as a competitive catchment area. The Tribunal’s reasons recorded that, even where post-merger shares exceeded a 35% threshold in certain localities, the accretions were found to be low and not to raise significant concerns on the Commission’s analysis. The Tribunal did not present an independent recalculation, but indicated that it found no basis to depart from the Commission’s evaluation.

A key aspect of the reasoning concerned the structure of the retail pharmacy market and the role of independent groups. The Commission’s analysis observed growth in corporate chains and a reduction in independent groups. The Tribunal accepted the Commission’s conclusion that although the merger would reduce the number of independent groups that contribute to competition and innovation, PPH was not, on the evidence, a credible, sustainable, and effective competitive constraint. This conclusion was reinforced by the Commission’s discussion of PPH’s financial challenges and the prospect that, absent the merger, PPH’s competitive presence might weaken substantially, including through potential store closures.

The Tribunal’s reasons also accepted the Commission’s approach to addressing non-structural risks. In relation to creeping mergers, the Commission’s concern was not limited to this transaction alone but extended to an acquisition pattern that might expand market share without regulatory oversight due to non-notifiable transactions. The condition requiring notification of certain small mergers for a defined period was treated as an appropriate mechanism to mitigate this concern.

Regarding telemedicine and Healthforce, the Tribunal recorded third-party concerns about conflicts of interest, interoperability, and patient choice. The Tribunal’s reasoning was that the Commission’s conditions created open access to the platform and maintained patient choice, and that these measures were sufficient to address the foreclosure-type concerns raised.

On public interest, the Tribunal accepted the Commission’s conclusion that the merger was likely to lead to some duplications and potential job losses, but that these effects were mitigated by absorption commitments, a cap on retrenchments, and an undertaking to offer future employment should vacancies arise. It also accepted the Commission’s approach of imposing time-based constraints on store closures to allow for the implementation of turnaround plans, while recognising an exclusion in respect of specified loss-making stores referred to in the reasons.

Overall, the Tribunal’s reasoning was that any potential negative effects on competition or public interest were adequately mitigated by the final conditions attached to the approval, and it therefore saw no reason to disagree with the Commission’s recommendation.

5. Outcome and Relief

The Competition Tribunal conditionally approved the large merger between Dis-Chem Pharmacies Limited and Pure Pharmacy Holdings (Pty) Ltd.

The approval was subject to conditions proposed by the Competition Commission and accepted by the Tribunal. As recorded in the reasons, these conditions addressed, among other things, concerns relating to potential foreclosure and access issues connected to the Healthforce platform and patient choice, the risk of creeping mergers through a requirement that Dis-Chem notify certain small mergers for a defined period, and public interest concerns regarding employment, retrenchments, and the timing of store closures.

The reasons as provided do not record a separate costs order.

Cases Cited

No decided cases were cited in the Tribunal’s written reasons as provided.

Legislation Cited

The Competition Act 89 of 1998 (as amended) was the governing statute applied to the merger assessment, including competition and public interest considerations, as reflected in the Tribunal’s reasons.

Rules of Court Cited

No specific rules of court were cited in the Tribunal’s written reasons as provided.

Held

The Tribunal held that the large merger should be approved subject to conditions because, on the Commission’s assessment accepted by the Tribunal, the transaction did not raise unmitigated concerns of a substantial prevention or lessening of competition in the relevant national and local markets, particularly in light of low accretions and the continued presence of competitors.

The Tribunal further held, in substance, that although the transaction reduced the number of significant independent pharmacy groups, the target firm was not shown on the record to be an effective competitive constraint, particularly given its financial challenges and the prospect of reduced competitive presence absent the transaction.

The Tribunal also held that the conditions imposed adequately mitigated identified risks, including concerns about creeping acquisitions in the sector, potential foreclosure or exclusionary effects linked to telemedicine platform control and interoperability, and public interest effects related to employment and store closures.

LEGAL PRINCIPLES

The merger assessment applied the principle that competition authorities must evaluate a transaction’s likely effects in relevant product and geographic markets, including both national and local dimensions where competitive interactions are localised. In this matter, the Commission’s use of a 5 km radius to assess local retail pharmacy rivalry was treated as an appropriate framework on the record described.

The decision reflects the application of standard merger analysis in considering both horizontal overlaps (in retail pharmacy and related product categories) and vertical or adjacent-market considerations (including potential foreclosure concerns where a merged firm may control an important input, platform, or service affecting rivals).

The reasons also illustrate the principle that market structure and competitive constraints can be relevant beyond market shares alone, including the competitive role of independent groups relative to large corporate chains, and that authorities may consider longer-term structural trends when assessing rivalry and potential harm.

A further principle applied was that merger approval may be granted subject to behavioural and monitoring conditions where concerns are identified but can be mitigated, including conditions aimed at preventing foreclosure, ensuring open access or non-discriminatory platform availability, and preserving customer/patient choice.

Finally, the decision reflects the application of the Act’s public interest enquiry alongside competition effects, including the evaluation of employment impacts and the use of conditions (such as caps on retrenchments, absorption undertakings, and timing restrictions on closures) to mitigate adverse outcomes identified on the evidence before the authorities.

Dischem Pharmacies Limited v Pure Pharmacy Holdings Proprietary Limited (LM181Jan21) [2021] ZACT 70 (19 October 2021)