Pharmaceutical giants, London based GlaxoSmithKline plc (‘GSK’) and Swiss Novartis AG (‘Novartis’) recently agreed to enter into a multi-tier M&A agreement. The proposed arrangement had three prongs- first, the acquisition of Novartis’ vaccine business by GSK; second, a consumer-health care joint venture and third, the acquisition of GSK’s oncology arm by Novartis. Antitrust regulators across jurisdictions had their ears perked up in light of the very real possibility of creating anti-competitive ripples through the market. This included the Competition Commission of India (‘CCI’) which passed its order on the proposed combination in December 2014.
In accordance with Sections 5 and 6 of the Competition Act, 2002 (‘Competition Act’), any proposed merger would not be permitted if it is likely to have an ‘appreciable adverse effect on competition’ (‘AAEC’). To give effect to these provisions, the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (‘Combination Regulations’) have been implemented. As per the new regime, approval by the CCI is required before certain merger agreements are effectuated.
Accordingly, the concerned companies gave the CCI notice of the proposed agreement in July 2014. As was the scenario in the Aditya Birla Nuvo-Pantaloons Retail order, in this case as well the CCI found the notice to be inadequate (in terms of Regulation 14 of the Combination Regulations). Thus, the parties were required to file additional information, following which the CCI proceeded to examine the agreement for the possible effect it would have on competition in India.
Vaccines Transaction
The first aspect of the tripartite agreement to be examined was the Vaccine Agreement (under which GSK is set to acquire Novartis’ global vaccine business, excluding its influenza vaccines). GSK and Novartis are both active in the production of vaccines. It was stated that while the former was engaged in the sale of vaccines for a number of diseases such as measles, mumps, meningitis etc., Novartis was only engaged in the sale of rabies vaccinations in India.[1]
However, the CCI found that in March 2014 Novartis had launched a DTP vaccination, Quinvaxem. GSK was also engaged in the sale of a DTP vaccination, Infanrix. The question before the CCI was whether this overlap would have an appreciable adverse effect on competition. The parties submitted that the vaccines being sold by each company were different- while GSK sold a trivalent vaccine, quinavaxem is a pentavalent vaccine that protects infants against hepatitis B and haemophilus influenza type B in addition to diphtheria, tetanus and pertussis. They submitted that these vaccines cannot be a substitute for each other.
Accepting the submission of the parties, the CCI held that the vaccines, not being substitutable, constitute different relevant product markets. However, this finding was qualified by the observation that even if the vaccines were considered to be part of the same relevant product market, the companies both had very small shares in the DTP vaccine market and therefore the transaction was unlikely to result in an appreciable adverse effect on competition. In CCI’s view, the negligible presence of the companies in the market also diluted the dangers of the possible horizontal overlap between existing and pipeline products.
Concerns of vertical foreclosure, which were recently highlighted in the Sun-Ranbaxy merger, were given primacy by the CCI. The foreclosure doctrine states that upstream or downstream firms are acquired to weaken the rival firms’ access to the part of the market being acquired. Presently, two kinds of possible vertical foreclosures were identified, namely input and customer foreclosure. With regard to the former, the CCI found that the supply of antigens for the manufacture of vaccines by Novartis would be taken over by GSK under this transaction and thus input foreclosure would be unlikely. Secondly, although Novartis has antigen supply relationships with other customers, these customers not active in the monovalent and multivalent vaccine markets. This was sufficient for the CCI to dismiss concerns of customer foreclosure.
Consumer Healthcare Transaction
In an effort to create a world leading consumer healthcare business, GSK and Novartis entered into the second arm of the joint venture (‘J.V.’), wherein the former will have a 63.5% equity interest and the latter 36.5%. The J.V. aims to couple the advantages of GSK’s global outreach and Novartis’ over-the-counter medications and provide the products to a larger market. (More about the strategy: here).
Notably, it was this arm of the agreement that ran into anti-competitive charges with the United States Federal Trade Commission (‘FTC’). Both GSK and Novartis were engaged in the sale of nicotine replacement therapy (‘NRT’) transdermal patches, aimed at those with smoking habits due to nicotine addiction. Being the only suppliers of branded NRT patches, and two or only three private suppliers to retailers, the FTC was of the opinion that the agreement would substantially reduce competition. In the final settlement, Novartis agreed to divest Habitrol, its version of the NRT patches to Dr. Reddy’s (More information on the FTC’s decision can be found here).
In the Indian examination of the agreement, which succeeded the Habitrol transaction with Dr. Reddy’s, the CCI identified possibility of overlap in the product market for calcium, anti-rheumatics & analgesics, systemic nasal preparations, cold preparations, expectorants, antitussives and antihistamines systemic. It was noted, however, that in none of these sectors do the combined market shares of the two companies exceed 10%. Thus, it was held that the joint venture was unlikely to hamper competition.
Oncology Transaction
The third and last part of the agreement is the Oncology Transaction under which Novartis is set to acquire GSK’s oncology products business. Globally, this transaction involves eleven products and two pipeline products, however only four of these are being sold in India. The CCI relied on a two-fold reasoning to approve the said acquisition.
First, that none of the four products were being sold by Novartis in India. To arrive at this decision the CCI delineated product markets based on Active Pharmaceutical Ingredient (‘API’). Based on this, it was held that there was no overlap between products.
Alternatively, it was held that oncology products can be differentiated on the basis of the stage of cancer and the type of cancer they aim to cure, or the line of treatment and the mechanism of action. Consequently, these drugs cannot be used interchangeably. This was reiterated with regard to the pipeline oncology drugs. Based on this alternative market definition, the CCI concluded that the proposed transaction was unlikely to result in an appreciable adverse effect on competition in India.
Thus, the proposed transaction- including the acquisition of Novartis’ vaccination arm by GSK, the consumer healthcare joint venture as well as the acquisition of GSK’s oncology products by Novartis- has been approved by the CCI. Pharmaceutical players are keen on realigning and restructuring their products to adapt to the vagaries of the market. Intricate arrangements such as the one between Novartis and GSK, allowing players to build upon their strengths, are likely to increase investment into innovation. At the same time, the basic premise of competition regulations is to maintain a level of competition which is conducive to innovation, allowing large players can compromise on this aim. Some have also raised concerns about how these mergers may divert assets to restructuring internal management instead of innovation. Questions of balancing the interests of companies looking to increase profits and the societal interest in innovation acquire increased importance in the field of pharmaceuticals. The CCI’s order will certainly be a landmark at a time when pharmaceutical mergers are becoming more popular, and is bound to be relied upon when similar questions are becoming far more common.
[1]Novartis has also entered into another agreement with Eli Lilly involving the divesture of its animal healthcare arm. Notably, Novartis’ influenza vaccine is separately being divested to the Australian company CSL Ltd. For further information read http://www.novartis.com/newsroom/media-releases/en/2014/1865897.shtml last accessed on 22 January 2015.
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