China: Chinese Officials Impose Conditions on Novartis’ Acquisition of Alcon

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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