The Sun-Ranbaxy Merger

DEAL BETWEEN SUN-RANBAXY:

 

·      It was on 6th April, 2014 that Sun Pharma agreed to buy Ranbaxy at $3.2 billion in stock from its parent Daiichi Sankyo Ltd, creating the largest pharmaceutical company with an 8.5% share of India’s pharmaceutical market, worth an annual Rs.76,000 crore by sales.

·      As per the Merger and Acquisition (“M&A”) Rules, companies need to take CCI’s approval for mergers if the combined assets of the two entities are worth more than Rs.1,500 crore or sales amount to more than Rs.4,500 crore in India[1].

·      The investigations conducted by CCI found that the proposed merger would lead to high concentration in forty six drug categories and hence instead of showing a green signal in the first phase, CCI sent a show cause notice to the companies taking the merger investigations to phase II for the first time. (Phase II investigations are done when a merger raises serious doubts about efficient functioning of market to achieve effective competition ).

            Merger Control in India

Merger control aims to distinguish between harmful and pro-competitive transactions. Merger Analysis by Competition Authorities is a complex process as they are carried out ‘ex-ante’.

Ex- ante merger analysis refers to process of analysis carried out before the merger takes place. This is done in order to ensure that there is no abuses in future due to creation of market power. Also, to maintain competitive market structures which lead to significant gains for consumers.

Merger evaluation involves the following process:

     I.         Identification of the relevant market, consisting of relevant product market and relevant geographic market

The Act envisages appreciable adverse effect on competition in the relevant market in India as the touchstone. The concept of relevant market as defined in the Act, consists of the relevant product (including goods and services) market and the relevant geographic market.

 The Act lays down the factors, any one or all of which shall be taken into account by the Commission while defining the relevant product/ geographic market[2] as the case may be.

 

  II.         Consideration whether the merger has appreciable adverse effect on competition in the relevant market in India

 Mergers are regulated under the Act in view of their potential appreciable adverse effect on competition ( AAEC) – when merging parties market shares / control is strengthened affecting the market structure to be concentrated in their hands – enabling them to abuse this dominant position in future.

Evaluation of the adverse effects is not based on any single criterion. The Commission uses the rule of reason approach for evaluation of combination. The Commission evaluates the effect of merger on competition based on the theory of competitive harm to assess – whether that segment of market will be better or worse in future for consumers.

 III.         Approval, rejection, or approval with modification of the merger

Based on evaluation of the combination as above, the Commission may decide to approve the merger, reject the merger or approve the merger subject to modifications.

 A large portion of such cases are eventually approved by competition authorities subject to modifications.

 As Indian Competition Law is still developing, we shall now proceed to        viewing how the developed jurisdictions such as EU approach similar cases.

EUROPEAN COMMISSION’S APPROACH TO MEGERS AND ACQUISITIONS

European Merger Regulation refers to control of ‘concentration’, which includes, inter alia, mergers, joint ventures and share acquisitions, which lead to acquiring control over the target company.

Some of the landmark merger cases in pharmaceutical sector are discussed below –

How are Competing Markets delineated in Pharmaceutical Industry?

EU measures the pharmaceutical ‘market’ on several criterion. Quite often it is on the basis of Anatomical Therapeutic Chemical (ATC) ClassificationIt considers the products that are on the market, as well as those in the pipeline and their market entry likely.

 

The ‘market definition’ is usually narrow and includes analysis of problematic markets in the industry.

For instance, on substitutes of generic drugs markets–  competition might primarily be between drugs based on the same molecule, especially in the case of drugs against serious illnesses purchased by hospitals. But not in those cases when it could be established that drugs based on other molecules were indeed substitutable. Thus, “Relevant Market” was the market comprising molecule for oncology products involved in T/B.

 

On distinction between OTC and prescription market[3] – There is obviously a distinction[4], however, may not always lead to separate markets[5].

 

“Market” based on specific characteristics of hospital use and demand[6]– Involves analyzing the hospital segment separately[7].

 

Price and Non-Price Competition

The SA/Z merger raised the possibility that, as is implicit in the definition of relevant product market[8], price may sometimes be a relevant indicator to consider for market definition purposes in pharmaceutical cases, particularly for drugs whose prices differ greatly. However, price by itself is not conclusive[9].

 

In SA/Z, two factors had relevance in defining markets –

 

(i)            Active Pharmaceutical Ingredients(APIs), where the Commission concluded that the ingredient (molecule) may not always be the relevant market if it can be substituted by other inputs for the same class of medicines, at least where it takes a limited overall share of comparable inputs used in this class [10].

 

(ii)          Contract Manufacturing, where the Commission concluded that the relevant geographic market was likely to be at least EEA-wide, but left open the extent to which specific technologies might create separate relevant product markets[11].

This approach though widely followed but EU has seen a recent development in GSK/Stiefel where drugs classified in ATC 4 were further classified in different product markets using the diagnosis for which they were prescribed.

 The “Filter System” approach by market share thresholds –

 

Since Novartis/Hexal[12], the Commission has been using a classification with three groups. This classification was used in the T/B and SA/Z cases too, where Group 1 products are those with a combined market share of over 35 % post-merger and an increment of over 1 %, Group 2 products those with an increment in market share of less than 1 % and Group 3 products those with a combined market share of below 35 %. The purpose of this classification is to focus the investigation on those markets where issues are most likely to arise.

 

In SA/Z the Group 2 classification proved to require particular scrutiny in instances where a low market share reflected Zentiva’s very recent entry into a category previously dominated by patent drugs, including those of Sanofi-Aventis [13].

 

Market based on “originators and generic manufacturers” –

 

It is fairly uncontroversial that generic drugs are substitutes for original drugs and thus form part of the same product market. So, generic drugs are treated as close competitors to original drugs.

 With regard to the acquisition of generic manufacturers, the European Commission noted that market shares based on value may not properly reflect the competitive strength of the generic drug and considered that it may be necessary to also conduct a volume based (e.g. treatments per day, or other) analysis to establish the full competitive force of a particular generic company

Potential Competition

In SA/Z the Commission had to consider potential competition in two ways.

 

(i)            Number of planned generic entries by the target into markets where the acquiring innovator had molecules with ongoing or recently expired patent protection. Such competition would very probably materialize in the near term.

 

(ii)          Whether generic competition itself would be damaged by the transaction, resulting in the innovator’s molecules becoming less exposed to such competition.

 

The first is based on a product-by-product analysis and the second is based both on the results of an econometric study and on evidence gathered during a field visit[14].

Process of Merger analysis in EU

EU follows the concept of ‘one stop merger control’. The merger cases have to be notified to the commission. Upon receipt of the application, commission determines whether the merger could significantly impede effective competition in common market or substantial part of it. Most cases are complete within phase I investigations. But where serious doubts about compatibility of merger are found, the commission processed to phase II investigations.

 

Some Landmark Judgments

 

1.    Teva/Barr Pharmaceuticals[15]

In December 2008 the European Commission cleared the acquisition by Teva of Barr Pharmaceuticals, both large generic manufacturers, subject to divestitures. The parties had significant overlaps in the oncology field in a number of eastern European countries. The decision contained an extensive analysis of the overlaps in the field of oncology. In the analysis of cancer drugs, the ATC 3 classification is typically not used. Instead, the European Commission focused on cancer types and on molecules.

 

2.    Sanofi-Aventis/Zentiva[16]

 In February 2009, the European Commission cleared the acquisition by Sanofi-Aventis of Zentiva, considering competitive analysis on volume shares and not value, whether the acquisition of Zentiva would reduce generic competition for Sanofi-Aventis and also for other originator companies.

 

Analysing large number of individual product markets, the European Commission found that the parties’ products were number one and number two with high combined market shares in a number of markets, and thus required divestments.

 

3.    Lonza/Teva – JV[17]

In May, 2009, European Commission cleared a joint venture for the development, production and commercialisation of biosimilar products[18] between Israel-based Teva Pharmaceuticals and Swiss based Lonza Group, a manufacturer of biopharmaceutical products. No foreclosure effectsfound.

 

The European Commission found that the JV even at peak capacity would only require a limited (undisclosed) percentage of Lonza’s overall capacity. Lonza did not contract manufacture any product that competes downstream with the envisaged portfolio of the JV.

 

4.    GSK/Stiefel Laboratories[19]

European Commission reviewed the parties’ activities based on level 3 of the ATC classification. In ATC 3 class D6D, topical antivirals, the parties succeeded in showing that their products were not substitutes despite being classified within the same ATC 3 and ATC 4 classes.

 

5.    Novartis/EBEWE[20]

The commission clearing Novartis acquisition stated, its principle that the ATC 3 classification may not be appropriate when assessing product markets in the oncology field. With reference to Teva/ Barr, it added that in particular for generic manufacturers, the correct product-market delineation would have to consider the underlying molecule.

 

6.    Merck/Schering-Plough[21]

The European Commission looked at a number of affected Group 1 markets, particularly in the field of asthma and allergic rhinitis. The commission analysed a several future markets where (i) either of the parties had an existing product and the other had a pipeline product and (ii) where both parties had pipeline products.

 Remedying the Problems in Merger

Commission often provides remedies to the problems of merger so that the deal can get green signal.

 In Phase I mergers cleared by European Commission – Pfizer/Wyeth[22] between two originators ultimately raised no issues in the area of human pharmaceuticals but was cleared subject to a number of divestments relating to animal-health vaccines, animal-health pharmaceuticals and medicinal-feed additives. Abbott/Solvay Pharmaceuticals[23] raised competition concerns in relation to certain IVD genetic testing products. Abbott submitted divestment commitments in relation to CF testing.


 

ENDNOTES –

 

A.        Relevant product market is defined in terms of substitutability of products. It means “a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use.” It can be taken as the smallest set of products which are substitutable given a small but significant non-transitory increase in price (SSNIP).

       Relevant geographic market is defined in the Act in terms of “the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas”. It can be understood as the geographic region within which substitutable products can be made available at similar price.

B.          Sec.20(4) – Factors for assessing AAEC are:

a)          actual and potential level of competition through imports in the market;

b)          extent of barriers to entry into the market;

c)          level of concentration in the market ;

d)          degree of countervailing power in the market;

e)     likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

f)           extent of effective competition likely to sustain in a market;

g)          extent to which substitutes are available or are likely to be available in the market;

h)          market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;

i)            likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

j)            nature and extent of vertical integration in the market;

k)          possibility of a failing business;

l)            nature and extent of innovation;

m)        relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;


[1] Section 6 – The Competition Act, 2002

[2] S.2(r), (s), (t)

[3] T/B paragraphs 12-13; SA/Z paragraphs 21-24

[4] SA/Z paragraphs 106, 148-150, 161

[5] SA/Z paragraphs 51-54, 58

[6] T/B paragraph 17; SA/Z paragraph 80

[7] SA/Z paragraph 80, paragraphs 292-294, paragraphs 297-299

[8]Section 6(1) of form CO in Annex 1 to the Implementing Regulation.

[9] SA/Z paragraphs 81, 95

[10] SA/Z paragraphs 184-185

[11] SA/Z paragraphs 187-192.

[12] Case No COMP/M.3751, Decision of 27 May 2005

[13] This eventuality is also contemplated by paragraph 20(a) of the Horizontal Merger Guidelines

[14] SA/Z, paragraphs 542-552

[15]COMP/M.5295,  Teva/Barr, clearance decision of 19 December 2008, paras. 11, 16- 17.

[16]Cases COMP/M.5253, Sanofi-Aventis/Zentiva, clearance decision of 4 February 2009

[17]Case COMP/M.5479, Lonza/Teva/JV, clearance decision of 14 May 2005.

[18]Biosimilar drugs are not exact copies of the originator drugs

[19]Case COMP/M.5530, Glaxo Smith Kline/Stiefel Laboratories, clearance decision of 17 July 2009.

[20]Case COMP/M.5555, Novartis/EBEWE, clearance decision of 22 September 2009

[21]Case COMP/M.5502, Merck/Schering-Plough, clearance decision of 22 October 2009.

[22]Cases COMP/M.5476, Pfizer/Wyeth, clearance decision of 17 July 2009

[23]Cases COMP/M.5661, Abbot/Solvay, clearance decision of 11 February 2010


One thought on “The Sun-Ranbaxy Merger

  1. Reblogged this on Lawgical Matters and commented:

    Sun-Ranbaxy USD 4 billion merger completed

    The two firms have received nod from the Competition Commission for sale of seven brands to Emcure Pharma to comply with the fair trade watchdog’s conditional nod for their merger. In an order issued yesterday, CCI approved the deal with Emcure, which would purchase the ‘divestment products’ that were ordered to be sold in an earlier direction issued in December last by the Competition Commission of India (CCI). These seven brands were at the core of the CCI’s contention that the merger between Sun Pharmaceutical Industries and Ranbaxy Laboratories was ‘prima-facie’ in violation of competition laws and therefore the regulator had ordered divestment of those products under its ‘conditional’ approval to the deal. In December, CCI had directed Sun Pharma to divest all products containing ‘Tamsulosin + Tolterodine’ which are marketed and supplied under the Tamlet brand name. Similarly, Ranbaxy was directed to divest all products containing Leuprorelin which are marketed and supplied under the Eligard brand name. It also had to divest products such as Terlibax, Rosuvas EZ, Olanex F, Raciper L and Triolvance.

    Read more at: http://www.moneycontrol.com/news/business/sun-ranbaxy-usd-4-billion-merger-completed_1338347.html?utm_source=ref_article

    Remedying the Problems in Merger

    Commission often provides remedies to the problems of merger so that the deal can get green signal.

    In Phase I mergers cleared by European Commission – Pfizer/Wyeth[22] between two originators ultimately raised no issues in the area of human pharmaceuticals but was cleared subject to a number of divestments relating to animal-health vaccines, animal-health pharmaceuticals and medicinal-feed additives. Abbott/Solvay Pharmaceuticals[23] raised competition concerns in relation to certain IVD genetic testing products. Abbott submitted divestment commitments in relation to CF testing.

    Like

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