After a four-month review, on 13 August 2010, China's
Ministry of Commerce ("MOFCOM") authorized Novartis'
acquisition of Alcon subject to conditions. Taking different
approaches than one would see in the U.S. or European Union,
MOFCOM's decision is notable for the demanding view it takes of
transactions involving a combination of large and small market
shares and for the nature of the remedy imposed.
Background
This is MOFCOM's seventh published merger control decision
under the Anti-Monopoly Law ("AML"). These include six
conditional approvals and one prohibition (Coca
Cola/Huiyuan). MOFCOM is required to publish only rejection or
conditional approval decisions, and it has reviewed many
transactions beyond these seven.
The decision was announced the day after MOFCOM held a press
conference to provide an overview of two years of merger control
enforcement under the AML. In that press conference, MOFCOM
emphasized that it does not discriminate against foreign companies,
notwithstanding the fact that all seven published
"negative" decisions have involved foreign companies and
none has been a purely domestic transaction.
MOFCOM also provided some new statistics. MOFCOM has reviewed 140
cases under the AML, and over 60% of these investigations were
concluded in fewer than 30 days. It has prohibited or conditioned
only 5% of the cases reviewed, a number that is consistent with
those of other leading antitrust jurisdictions. MOFCOM appears more
frequently (in one-third of all cases) than other jurisdictions to
have initiated more intensive second stage investigations. This may
be simply a way for MOFCOM to obtain additional time –
because AML procedures do not permit MOFCOM to "stop the
clock" by suspending review after a filing is accepted
– rather than due to substantive concerns. Absent more
complete statistics on the total number of days MOFCOM has taken to
issue decisions, one cannot infer more from MOFCOM's frequent
initiation of second stage reviews.
MOFCOM's Novartis/Alcon Decision
MOFCOM's decision in Novartis/Alcon explains that
it found the transaction could adversely affect competition in two
product markets and therefore imposed several conditions to address
the potentially anticompetitive effects.
First, in a product or "commodity" market of ophthalmic
anti-inflammatory and anti-infective combination products, MOFCOM
found that the combined entity would have a 60% share of China
sales, although Novartis' sales reflect only 1% of this
combined share. Novartis already had announced it would stop
selling its own product after the merger, and MOFCOM's decision
required this be "set in stone" in the form of a
commitment not to sell the Novartis product in China for at least
five years after the decision.
It is somewhat surprising that a combination with one party having
only a 1% share could be considered anticompetitive in a situation
not involving a newly launched product. Moreover, it is difficult
to understand how consumers will benefit from removing a competing
Novartis product from the market, as opposed to requiring that
Novartis maintain consumer choice by continuing to produce and sell
the Novartis product or transfer the product line to a third-party
competitor. This condition appears similar to that imposed by
MOFCOM in
Mitsubishi/Lucite (where the
parties were required not to construct new plants in China in their
overlapping business lines) in its emphasis on restricting further
improvements in a leading firm's competitive strength.
MOFCOM's requirement that Novartis make binding its strategic
decision to exit the market stands in marked contrast to, for
example, the European Commission's recent acceptance of
"informal commitments" in the Oracle/Sun merger, which
took the form of unilateral statements rather than formal
conditions to the EU clearance decision.
Second, in the product market consisting of contact lens care
products, MOFCOM found that the parties would have a combined China
share of only 20%. But Novartis had an existing exclusive
distribution agreement with a leading (30% share) competitor, which
would have resulted in the combined entity's products also
being distributed by that competitor. MOFCOM decided this created a
risk of anticompetitive coordination between the
competitor/distributor and Novartis/Alcon, and therefore required
that Novartis terminate that pre-existing exclusive distribution
agreement.
It is interesting to note some differences between this MOFCOM
decision and its prior merger decisions. For example, this decision
refers to "commodity markets" rather than "relevant
markets," and it does not specify a geographic market,
although it references statistics on both China and worldwide
shares. It is unclear whether these changes are intended to have
substantive importance or reflect a change in analytical
approach.
Conclusion
The Novartis/Alcon decision is the first merger review decision MOFCOM has published since October 2009. It is particularly noteworthy to see conditions imposed on a horizontal combination in which one party had only a 1% share, suggesting that mergers in which one party has a potentially "dominant" share – 60% in this case – may be held to a particularly high standard.
An informal translation of the MOFCOM decision is available here.
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