Nov. 7 (Bloomberg) -- A European Union court ruling allowing drugstore chains into Germany's 35 billion-euro pharmacy market might boost sales of Celesio AG by 20 percent even as the country slips close to a recession.

Europe's largest medicine wholesaler became involved in the EU case after it bought mail-order company DocMorris last year. The Dutch discounter, in a 2006 suit by a German pharmacy trade group, was accused of violating a rule that restricts ownership of retail operations to licensed druggists when it opened a shop in the state of Saarland.

Celesio, based in Stuttgart, has arranged a 600 million-euro ($763 million) credit line to buy more of the country's 21,500 pharmacies. The financing, set up before the global credit squeeze, is in ```no danger,'' said spokesman Rainer Berghausen.

``It's the company's chance for growth, the driver for the shares,'' said Thomas Maul, an analyst at DZ Bank in Frankfurt who recommends buying.

Celesio may rise 46 percent to 35 euros on the prospect of increased retail revenue, Maul projects. The DocMorris name on stores ``will be decisive,'' he said.

Pharmacies will account for 23 percent of Celesio sales by 2017, up from 16 percent in 2007, Ludger Mues, a Sal. Oppenheim Jr & Cie analyst in Frankfurt, wrote in an Oct. 21 research report. The stores produce 10 percent operating-profit margins, compared with 2 percent for the wholesale drug business, said Andreas Theisen, an analyst at WestLB in Dusseldorf.

By 2011, Celesio will be operating 500 pharmacies generating 800 million euros in sales, said Theisen, who rates the shares ``hold.''

Beating German Growth

Celesio fell from a Jan. 2 one-year high of 42.45 euros to 20.89 in Frankfurt on July 31. The shares rose 1.30 euros, or 5.4 percent, to 25.32 euros in Frankfurt trading, trimming their decline this year to 40 percent. The German Stock Index has fallen about the same this year.

The company's growth may outpace Germany's. Europe's largest economy will probably expand by 0.2 percent in 2009, according to the International Monetary Fund and the German Economy Ministry. That would be the lowest in at least three years.

``Celesio should benefit from its non-cyclical business model in a slowing economy,'' Mues wrote.

The EU court in Luxembourg may decide early in 2009 whether Germany's ban on wholesalers operating drugstores is justified as a health measure. A similar case is also pending on Italy.

Thirteen of the 27 EU countries operate without such prohibitions, according to the Pharmaceutical Group of the EU, a trade organization.

Previous Rulings

The restrictions are likely to be overturned, said Michel Struys, an EU law specialist at Allen & Overy in Brussels.

``If the court follows its previous rulings, it doesn't have the choice to rule otherwise,'' Struys said, pointing to case law protecting companies' freedom of establishment anywhere in the union. ``It can't be excluded that the court will pull something unexpected out of its hat'' and rule the other way.

A 2005 ruling against a Greek requirement that only opticians can run prescription-eyewear shops may provide a precedent, said Robert O'Donoghue, an attorney specializing in EU law at London-based Brick Court Chambers. The court ``will need a good deal of persuasion'' that the German and Italian laws are necessary, he said.

Celesio will open 30 to 50 stores within a year of court approval, said Chief Executive Officer Fritz Oesterle, 56, who already operates pharmacies in seven European countries, including the U.K. and France.

CEO's Plan

``We'll be without competition in Germany thanks to the strength of the DocMorris brand, at least in the beginning,'' Oesterle said by e-mail.

About half of Germany's drugstores may be owned by chains in five to 10 years, said Karl-Heinz Scheunemann, an analyst at Landesbank Baden-Wuerttemberg.

Closely held Phoenix Group, Europe's second-largest drug wholesaler, is likely to pose Celesio's biggest challenge, DZ Bank's Maul said. The Mannheim-based company supplies a cooperative network of 1,450 independently owned pharmacies, linked under the brand name Linda, and is linked to the generic drugmaker Ratiopharm GmbH through stakes held by the family of billionaire Adolf Merckle. Olaf Teichert, a Phoenix spokesman, declined to comment.

Pharmacy retailer Alliance Boots Ltd. plans to open stores outside its U.K. home. The company owns about one-third of Frankfurt-based drug wholesaler Andreae-Noris Zahn AG.

Eying Entry

``Of course, Boots will want to enter the market sooner or later,'' Maul said. The closely held company won't comment on its strategy, said James Benjamin, the company's spokesman.

German food retailers, including closely held supermarket chain Rewe Handelsgruppe AG, are also eyeing drugstores, according to Mues.

``We've been watching the market and will continue to do so,'' said Pierre de la Motte, a Rewe spokesman in Cologne. ``We have to wait and see what happens in the EU.''

Celesio may hurt independent pharmacists, just as retailers including Walgreen Co. did in the U.S.

``We fear that unprofitable or less-profitable pharmacies in little served regions will be given up,'' said Christian Splett, a spokesman for the Federal Union of German Associations of Pharmacists, another plaintiff in the case. ``The big companies want a piece of the cake but they're not interested in securing public health care. They're just interested in profits.''

Squeezing the Independent

Pharmacies in Germany are typically small shops of 200 square meters (2,153 square feet) or less, selling only medicine and health-related products. That contrasts with chain drugstores such Boots and Deerfield, Illinois-based Walgreens, the U.S.'s largest drugstore chain, which sell food, cosmetics and small appliances.

Germans ``go directly to their local pharmacist for advice,'' said Johanna Waniczek, 34, a Cologne druggist. ``With DocMorris, people wouldn't get this personal advice.''

Chains might offer discounts on over-the-counter medicines, Waniczek said, echoing Mues at Sal. Oppenheim. Unlike prescription medicines, their prices aren't regulated.

The cases are In re: Apothekerkammer des Saarlandes and Others, C-171/07 and C-172/07, and Commission v. Italy, C-531/06, Court of Justice of the European Communities (Luxembourg).

To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; Eva von Schaper in Munich at evonschaper@bloomberg.net.

Last Updated: November 7, 2008 11:59 EST