United States: MOFCOM Issues Conditional Clearance of Novartis/Alcon Transaction

On 13 August 2010, China's merger control agency — the Ministry of Commerce (MOFCOM) — published its verdict on the Novartis/Alcon transaction on its website. MOFCOM allowed the proposed acquisition of Alcon by Novartis to go ahead, subject to conditions.

The Novartis/Alcon decision was released almost ten months after the last decision where MOFCOM had imposed conditions to approve a merger. Given that MOFCOM only has a legal obligation to make public conditional approval decisions or prohibitions, implicitly this means that all other notified transactions during this period must have been cleared unconditionally.

The decision

Novartis notified the proposed transaction to MOFCOM in April 2010. Headquartered in Switzerland, Novartis is one of the world's top life sciences companies, with a broad business portfolio. Alcon is a smaller player in the life sciences field, with a high degree of specialization in eye care products.

After identifying competition concerns in the first phase of the procedure, MOFCOM decided to open an in-depth investigation. MOFCOM found competition issues to exist in two relevant product markets: the markets for opthalmological anti-inflammatory/anti-infective products and for contact-lens care products, respectively.

In the opthalmological anti-inflammatory/anti-infective product market, Novartis and Alcon have an aggregate market share of 55% worldwide and over 60% in China. Yet, Novartis' share alone is less than 1% in China. With respect to contact lens care products, the merged entity will hold a global market share of nearly 60% and a share of around 20% in China. With a share of more than 30%, the market leader in China is the Taiwanese company Ginko International, through its Hydron unit. Novartis had entered into an agreement to appoint Hydron as exclusive distributor of its contact lens care products in China.

As a result, in order to address MOFCOM's concerns, the parties had to offer some undertakings which were accepted by the regulator after two rounds of negotiations. While MOFCOM noted that Novartis had already taken the strategic decision to withdraw from the opthalmological anti-inflammatory/anti-infective product market, it imposed an additional condition: during the next five years, Novartis will be barred from selling Infectoflam or similar opthalmological anti-infective products in China. To overcome MOFCOM's concerns with respect to the contact lens care product market, Novartis had to commit to terminate the distribution agreement with Hydron within the next 12 months.

Streamlined timing?

In this case, MOFCOM followed the timeline set out in the Chinese Anti-Monopoly Law (AML) very closely. After the 30-day initial investigation, MOFCOM opened the second phase for its in-depth review of the transaction. According to an interview which the head of MOFCOM's merger control unit gave just one day earlier, up to one third of the transactions filed with MOFCOM enter 'phase 2.' It is notable that MOFCOM used up the entire time available for the phase 2 procedure (that is, 90 days) in the Novartis/Alcon transaction but issued the conditional clearance right at the end of phase 2, thereby averting the need to go into phase 3 — the final phase permitted under the AML before a decision is reached (which can last another 60 days). This may be pure coincidence or an attempt by MOFCOM to keep at bay those voices within the international investment community who have criticized the length of time needed for MOFCOM to complete its internal and external processes and reach a decision.

Perhaps the most striking aspect regarding timing in the decision was the fact that MOFCOM accepted the submissions and opened the case file on the same day as it received the notification. While no information is available on the length of the pre-notification phase (during which the parties may have filed draft versions of the notification), the instantaneous acceptance and case opening is in stark contrast with earlier cases filed in 2008 and 2009, where MOFCOM only opened the case file after several weeks or months during which time the parties were required to provide further data, clarifications or even to make on-site presentations to the MOFCOM case team members.

MOFCOM's continuing evolution regarding substantive analysis

The Novartis/Alcon decision is the first in which MOFCOM has imposed conditions to address 'coordinated effects' arising from a merger transaction. In past cases involving competitors, MOFCOM focused on 'unilateral effects' — that is, the reduction of competition between the two merging parties — or sometimes did not explain its legal and economic thinking in detail at all.

In contrast, 'coordinated effects' refer to the reduction of competition between the newly-merged entity and another competitor in the market — in this case, Hydron. Although the very short text of the published decision does not provide a full analysis of MOFCOM's reasoning, it seems that the regulator may have been concerned that the link between the new Novartis/Alcon entity and Hydron (through the distribution agreement) would align their behavior in the marketplace.

The 'coordinated effects' theory complements MOFCOM's broad spectrum of theories of harm, such as unilateral effects (for example, Panasonic/Sanyo), conglomerate effects (Coca-Cola/Huiyuan) or vertical effects (General Motors/Delphi). The Novartis/Alcon decision shows that MOFCOM is gradually widening its scope of intervention in terms of substantive assessment, to a large extent in alignment with international practice.

On the other hand, however, MOFCOM seems out of touch with developments in more mature antitrust jurisdictions: with less than a 1% market share, Novartis' addition to the 60% share of Alcon in the Chinese ophthalmological opthalmological anti-inflammatory/anti-infective product market seems negligible and would hardly justify the imposition of conditions, no matter what their nature or extent.

Conclusions

The Novartis/Alcon decision is only the sixth decision in which MOFCOM has imposed conditions, out of a total of around 140 notified transactions. While the high number of relatively routine transactions currently going into the phase 2 procedure is clearly unsatisfactory, the fact that the vast majority of cases are being cleared unconditionally shows a certain degree of restraint on the part of MOFCOM.

MOFCOM has recently been going on a charm offensive in the Chinese media, claiming that the AML is applied equally to foreign and domestic applicants alike and there is no "discrimination": MOFCOM asserts it is simply because foreign companies have relatively high market shares that all the conditional clearance and prohibition decisions to date have impacted on multinationals (as opposed to home-grown companies). However, the Novartis/Alcon case will continue to provide fuel for the fire of those observers who complain about discrimination. To date, there has not been any published decision in which a local Chinese company has been subject to an adverse ruling under the AML merger control regime.

The Novartis/Alcon decision evidences MOFCOM's continued willingness to intervene in foreign-to-foreign transactions which it believes raise competition issues in China. Hence, even foreign companies with very small market shares are not immune from MOFCOM intervention when submitting for clearance, and all foreign investors should take note of the increasing sophistication of MOFCOM's approach in terms of applying internationally recognized competition law doctrines to business transactions caught by the AML.

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