[Federal Register: January 3, 1997 (Volume 62, Number 2)]
[Notices]
[Page 409-414]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja97-60]
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FEDERAL TRADE COMMISSION
[File No. 961-0055]
Ciba-Geigy Limited, et al.; Analysis to Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed Consent Agreement.
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SUMMARY: In settlement of alleged violations of federal law prohibiting
unfair or deceptive acts or practices and unfair methods of
competition, this consent agreement, accepted subject to final
Commission approval, would permit, among other things, the $63 billion
merger of Ciba-Geigy Limited and Sandoz Ltd., two leading commercial
developers of gene therapy products, so long as the companies carry out
the divestiture, licensing and certain other requirements. If the
divestiture is not completed on time, the consent agreement would
permit the Commission to appoint a trustee to complete the transaction.
DATES: Comments must be received on or before March 4, 1997.
ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.
FOR FURTHER INFORMATION CONTACT:
William Baer or George Cary, FTC/H-374, Washington, D.C. 20580. (202)
326-2932 or 326-3741.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby
given that the above-captioned consent agreement containing a consent
order to cease and desist, having been filed with and accepted, subject
to final approval, by the Commission, has been placed on the public
record for a period of sixty (60) days. The following Analysis to Aid
Public Comment describes the terms of the consent agreement, and the
allegations in the complaint. An electronic copy of the full text of
the consent agreement package can be obtained from the FTC Home page,
on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A
paper copy can be obtained from the FTC Public Reference Room, Room H-
130, Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C.
20580, either in person or by calling (202) 326-3627. Public comment is
invited. Such comments or views will be considered by the Commission
and will be available for inspection and copying at its principal
office in accordance with Section 4.9(b)(6)(ii) of the Commission's
Rules of Practice (16 CFR 4.9(b)(6)(ii)).
Analysis of Proposed Consent Order To Aid Public Comment
The Federal Trade Commission (``Commission'') has accepted, subject
to final approval, an agreement containing a proposed Consent Order
(``Order'') to resolve anticompetitive concerns raised by the proposed
merger of Ciba-Geigy Limited (``Ciba'') and Sandoz Ltd. (``Sandoz'')
into a new entity, Novartis AG (``Novartis''). The agreement is between
the Commission and Ciba, Sandoz, and Chiron Corporation (``Chiron'').
Ciba, which owned 46.5% of Chiron's voting stock as of September 30,
1996, participates in the field of gene therapy through Chiron. Under
the proposed Order, the companies have agreed to license certain Sandoz
and Chiron gene therapy technologies, to divest Sandoz' corn herbicide
business, and to divest Sandoz' United States and Canadian flea control
business. In addition, the parties have entered into an Agreement to
Hold Separate Sandoz's agricultural chemicals business, including
herbicides and other pesticides, and Sandoz's flea control business
until the required divestitures have been accomplished.
The proposed Order has been placed on the public record for sixty
(60) days for reception of comments by interested persons. Comments
received during this period will become part of the public record.
After sixty (60) days, the Commission will review the agreement and the
comments received and will decide whether it should withdraw from the
government or make final the agreement's proposed Order.
On March 6, 1996, Ciba and Sandoz signed a merger agreement
providing that both companies will merge to form Novartis AG
(``Novartis''). The total value of the stock involved in the
transaction is in excess of $63 billion. The merged entity, Novartis,
will control worldwide assets valued at approximately $80 billion.
The proposed complaint alleges that the merger violates Section 7
of the Clayton Act, as amended, 15 U.S.C. Sec. 18, and Section 5 of the
FTC Act, as amended, 15 U.S.C. Sec. 45, by lessening competition or
tending to create a
[[Page 410]]
monopoly in markets involving three general areas: (1) gene therapy
research and development; (2) corn herbicides; and (3) flea control
products. According to the complaint, the merger will increase the
level of concentration and increase barriers to entry in each of the
relevant markets and eliminate Ciba and Sandoz as substantial,
independent competitors both for currently marketed products as well as
products that are under development.
According to the proposed complaint, entry into the relevant
markets would not be timely, likely, or sufficient in its magnitude,
character, and scope to deter or counteract anticompetitive effects of
the merger. Regulations by the Food and Drug Administration (``FDA'')
covering gene therapy products and systemic flea control products, and
by the Environmental Protection Agency (``EPA'') covering corn
herbicides and externally applied flea control products, create long
lead times for the introduction of new products. Additionally, patents
and other intellectual property create large and potentially
insurmountable barriers to entry.
Gene Therapy Research and Development
The proposed complaint alleges that therapy technology and the
research and development of gene therapies constitute relevant markets
in which to analyze the effects of the proposed merger. The proposed
complaint also alleges that there are four specific gene therapy closet
to market use retroviral vectors, the delivery vehicle for genes, to
place an HSV-tk gene into the cancerous cells and are anticipated to
have sales exceeding $600 million by 2002. HSV-tk gene therapy is also
expected to be used to treat graft versus host disease, an acute,
chronic and sometimes fatal complication occurring in a significant
percentage of all bone marrow transplantations. Gene therapy treatments
for hemophilia A are likely to be used prophylactically for many
sufferers; in cases of trauma, gene therapy products would likely be
used in combination with recombinant and purified Factor VIII proteins.
Cancer patients could benefit significantly from gene therapy for
chemoresistance by providing protection to patients' blood systems and
allowing higher, more effective doses of cancer chemotherapy to be
administered. If chemoresistance gene therapy research is successful,
sales are projected to exceed $1 billion by 2004.
The complaint alleges that each of the gene therapy markets is
highly concentrated and that Ciba/Chiron and Sandoz are two of only a
few entities capable of commercially developing a broad range of gene
therapy products. Ciba/Chiron and Sandoz control crucial inputs into
the development of gene therapy products and the merger creates an
unmatchable portfolio of intellectual property assets that are
necessary to commercialize gene therapy products. In addition, they
both posses the technological, manufacturing, clinical, and regulatory
expertise and manufacturing capability to commercially develop gene
therapy products. A substantial number of other companies are able to
conduct gene therapy research. Without licenses to crucial intellectual
property held by Ciba/Chiron and Sandoz, however, these other
researchers would not be likely to continue development. The critical
intellectual property rights for gene therapy held by Ciba/Chiron and
Sandoz include a broad patent covering all ex vivo approaches product
markets. These are the markets for the research, development,
manufacture and sale of: (1) herpes simplex virus-thymidine kinase
(``HSV-tk'') gene therapy for the treatment of cancer; (2) HSV-tk gene
therapy for the treatment of graft versus host disease; (3) gene
therapy for the treatment of hemophilia A; and (4) chemoresistance gene
therapy. Sandoz and Ciba/Chiron are two of only a very small number of
entities capable of commercially developing gene therapy products. They
posses the intellectual property, the technological, manufacturing,
clinical, and regulatory expertise, and the manufacturing assets to
commercially develop gene therapy products.
Gene therapy involves treating diseases or medical conditions by
modifying genes and then inserting the modified genes into a patient's
cells. Patients' genes may be altered using one of two broad
approaches: ex vivo, outside the body, for subsequent administration
into the patient; or in vivo, inside the body, by gene therapy products
that are given directly to the patients. Gene therapy research today
targets fatal or disabling diseases such as cancer for which there are
no current effective treatments and for which no drugs are in advanced
development.
While no gene therapy product has yet been approved by the FDA for
commercial sale, gene therapy treatments now in clinical trials offer
patients the prospect of significant medical improvements or cures for
diseases, particularly in oncology, transplantation and central nervous
system diseases. Gene therapy may be useful in treating a wide array of
diseases and conditions. Sales of all gene therapy products are
projected to reach up to $45 billion by 2010.
The first regulatory approvals for commercial sales of gene therapy
products, expected by the year 2000, will most likely be in the area of
cancer treatment of brain tumors. Gene therapy offers brain cancer
patients their first hope of a real cure. The brain cancer gene therapy
products used in gene therapy and the use of cytokines, a protein
necessary for many ex vivo gene therapy applications that is used to
increase the number of cells taken from a patient. The parties also
have vital intellectual property rights in retroviral vectors, the only
delivery vehicle for gene therapy that has been proven safe and
relatively effective.
The complaint alleges that only two companies, Ciba/Chiron and
Sandoz, are capable of commercially developing HSV-tk gene therapy
products with retroviral vectors and are either in clinical development
or near clinical development to treat cancer and to treat graft versus
host disease. Similarly, these two companies are the most advanced of
all companies capable of commercially developing viral vectors using
the Factor VIII gene for the treatment of hemophilia A and using the
MDR-1 gene and the MRP gene for the treatment of chemoresistance. In
each instance, Ciba/Chiron and Sandoz are either in clinical
development or near clinical development for the treatment of these
diseases, are the leading commercial developers of these gene therapy
technologies and control critical proprietary intellectual property
portfolios, including patents, patent applications, and know-how. For
example, with respect to the HSV-tk gene therapy products, both Ciba/
Chiron and Sandoz control intellectual property portfolios sufficient
to make it likely that they could market HSV-tk gene therapy products
in competition with one another. The merger would eliminate that
competition, and because of the parties' patent portfolios, it is
extremely unlikely that any other firm would be able to enter to
replace that lost competition.
The complaint alleges that entry into the gene therapy markets
requires lengthy FDA approved clinical trials, data collection and
analysis, and expenditures of significant resources over may years. No
company may reach advanced stages of development in the relevant gene
therapy markets without: (1) clinical gene therapy expertise; (2)
scientific research that requires years to complete; (3) patent rights
to all the necessary proprietary inputs into the gene therapy product
sufficient to provide the company with reasonable
[[Page 411]]
assurances of freedom to operate; and (4) clinical grade product
manufacturing expertise, regulatory approvals and capacity to complete
clinical development. The necessary proprietary inputs may include
genes, vectors and vector manufacturing technology, and cytokines.
Ciba/Chiron and Sandoz each possess virtually all of the gene
therapy intellectual property needed to ensure their ability to
independently perform gene therapy development. Through the merger, the
companies' alternative competing gene therapy technologies will be
combined, reducing innovation competition. That combination changes the
competitive incentives of the merged entity. It will likely lead to a
reduction in development of gene therapy products, as the parties
combine their research and development pipelines and eliminate or slow
down their parallel development projects.
In addition, Novartis, the merged firm, will have a disincentive to
license intellectual property rights to or collaborate with other
companies as compared to the pre-merger incentives of the independent
competitors, Ciba/Chiron and Sandoz. Although Ciba/Chiron and Sandoz
had substantial individual intellectual property portfolios pre-merger,
they had the incentive and did act as rival centers from which others
could obtain needed intellectual property rights. Ciba/Chiron and
Sandoz would grant limited intellectual property rights to other
developers and researchers in return for receiving marketing or other
valuable rights back from them. Consequently, as the complaint alleges,
the merger may heighten barriers to entry by resulting in one entity
holding so extensive a portfolio of patents and patent applications, of
uncertain breadth and validity, as to diminish its incentives to
license, thus impeding the ability of other gene therapy researchers
and developers to continue developing their products.
To remedy the alleged competitive harm, the proposed Order provides
for a set of patent licenses to allow other companies to replace the
competition otherwise lost due to the merger. The Commission believes
that licensing, rather than divestiture of assets, is sufficient
because access to certain key intellectual property rights held by the
merged firm is a crucial component of successful commercialization of
many potential gene therapy products. Competitors already have (to
varying degrees) the hard assets, e.g., production facilities,
researchers and scientists, needed to compete. Rivals and other
scientists confirm that licensing would enable them to develop gene
therapy products and replace the competition lost due to the merger.
Further, an asset divestiture might create substantial disruption in
the parties' research and development efforts. In this case, therefore,
a licensing remedy appears to be the preferred approach to restoring
the competition lost by the merger.
The proposed Order includes the following remedy provisions. First,
in the research, development, manufacture, and sale of gene therapy,
the proposed Order would require Sandoz and Chiron to provide to all
gene therapy researchers and developers non-exclusive licenses or
sublicenses to certain proprietary and patented technologies essential
for the competitive development and commercialization of gene therapy
products. In the United States, Chiron owns the rights to commercialize
cytokine Interleukin 2 (``IL-2''), and Sandoz has exclusive rights to
the Anderson ex vivo patent, and claims arising there-under, and owns
the rights to cytokines Interleukin 3 (``IL-3'') and Interleukin 6
(``IL-6''). Within thirty (30 days of the date the Order becomes final,
the companies are required to grant to other gene therapy researchers
non-exclusive licenses to each of these essential gene therapy
technologies. In addition, each licensee must be given access to drug
master files, the data filed with the FDA establishing the safety and
purity of these cytokines. These licensing arrangements will remedy the
reduction in competition in research and development of gene therapy
caused by the merger.
As detailed in the Order, the IL-2, IL-3 and IL-6 cytokines and the
Anderson ex vivo patent licenses include a right to a royalty payment
at low rates (based upon net sales with no minimum amount). In the
past, the Commission has had concerns with royalty payments in
connection with licenses that are meant to restore competition
eliminated by a merger. This is because continuing entanglements
between the divesting company and the acquirer might provide
opportunities for information exchange between competitors and
interfere with their economic incentives to compete vigorously. These
risks are relatively slight under the terms of the proposed Order,
particularly because of the low royalties and potential number of non-
exclusive licenses to the industry required under the proposed Order.
In addition, to minimize further the financial relationships and the
exchange of competitively sensitive information among Novartis, Chiron
and potential competitor-licensees, an independent auditor will be
appointed to collect and aggregate the royalty payments. Sandoz, Ciba,
Chiron, and Novartis will be prohibited from gaining access to this
confidential sales information. Each license will also include a
binding arbitration clause to resolve disputes regarding the royalties
or any other terms, a provision that further insulates Sandoz, Ciba,
Chiron, and Novartis from interactions with the potential licensees.
Second, the proposed Order provides for further remedies regarding
the anticompetitive harm alleged with respect to the HSV-tk product
markets. Both Sandoz and Ciba/Chiron are developing HSV-tk gene
therapies for cancer and graft versus host disease. After the merger,
Ciba/Chiron and Sandoz would control dominating intellectual property
portfolios for HSV-tk gene therapy. The proposed Order restores the pe-
merger incentives for research, development, manufacture and sale of
HSV-tk gene therapy products for cancer and graft versus host disease
by requiring licensing of the Sandoz' and Chiron's worldwide HSV-tk
patent rights, including rights relating to vectors. By September 1,
1997, Sandoz and Chiron each are required to grant a non-exclusive
license to Rhone-Poulenc Rorer (``RPR''), with whom Ciba, Sandoz and
Chiron have entered into a letter of intent for this purpose. If the
agreement between RPR and Ciba, Sandoz, and Chiron were to fall
through, Ciba, Sandoz and Chiron would be required to license these
assets to another licensee who has received Commission approval by
September 1, 1997. Under the terms of the proposed Order, the license
granted to RPR, or an alternative licensee, must include the right to
sublicense in fields that are not developed by RPR or the licensee, as
well as a technology transfer from Sandoz of necessary HSV-tk know-how,
including know-how relating to vectors, within one year of execution of
the license.
Third, to ensure the continued research, development, manufacture
and sale of Factor VIII gene therapy products for the treatment of
hemophilia A, the proposed Order requires that by September 1, 1997,
Sandoz shall either: (1) convert its exclusive license for the use in
gene therapy of the partial Factor VIII gene to a non-exclusive
license; or (2) grant to RPR a sublicense to those gene therapy Factor
VIII rights. At the option of the sublicensee, Sandoz may be required
to provide technical information and know-how relating to Factor VIII
gene therapy products.
Finally, to ensure the continued research, development, manufacture
and sale of chemoresistance gene
[[Page 412]]
therapy products in the United States, the proposed Order requires that
neither Ciba, Chiron, Sandoz nor Novartis shall acquire exclusive
rights in intellectual property and technology related to the MDR-1
and/or MRP genes. With exclusive rights to the genes necessary for this
treatment area, both parties would have potentially dominating
intellectual property rights for the use of the MDR-1 or MRP
chemoresistance genes in gene therapy. The merger combines the parties'
two competing chemoresistance gene therapy programs and potentially
concentrates the important intellectual property rights for these
genes. Thus, the proposed restriction on exclusive licensing of the
MDR-1 and MRP genes will ensure access to the chemoresistance genes to
at least one other competing company.
The proposed Order also provides for the appointment of a trustee
if Novartis and/or Chiron fail to grant any of these licenses within
the appropriate time period. In that event, the trustee is authorized
to divest either Sandoz' or Chiron's HSV-tk businesses in their
entirety.
Corn Herbicides
According to the Commission's proposed complaint, the merger of
Ciba and Sandoz into Novartis, absent relief, would have adverse
effects on various markets for corn herbicide. United States sales of
corn herbicides--chemical products designed to kill or control weeds
that interfere with corn production--totaled $1.4 billion in 1995.
According to the proposed complaint, the markets for corn herbicide are
distinguished by the types of weeds--broadleaf or grass--against which
the herbicide is chemically effective as well as by the stage of growth
of the corn crop or weed--pre-emergent or post-emergent--at which the
herbicide is safe for us on the corn crop and chemically effective
against the weeds to be controlled.
The Commission's proposed complaint alleges that Ciba's metolachlor
herbicides, sold under the brands Dual<Register> and Bicep<Register>,
are the leading corn herbicides for pre-emergent control of grasses.
The complaint alleges that Sandoz' recently introduced dimenthenamid
grass herbicides, sold under the brands Frontier<Register> and
Guardsman<Register>, are gaining share against Ciba's metolachlor grass
herbicides.
The complaint also alleges that Sandoz' dicamba herbicides, sold
under the brands Banvel<Register>, Marksman<Register>, and
Clarity<Register>, are the leading corn herbicides for post-emergent
control of broadleaf weeds. According to the complaint Ciba's recently
introduced sulfonyl urea broadleaf herbicide, sold under the bran
Exceed<Register>, is rapidly gaining share against Sandoz' dicamba
broadleaf herbicides, and Ciba and Sandoz recognize that current users
of Sandoz' dicamba herbicides are the principal target for expected
market share gain by Ciba's Exceed<Register> herbicide. Ciba is also
the dominant supplier of atrazine, a broadleaf weed control product
that is widely used as a component in premixed herbicide formulations
sold by Ciba, Sandoz and their competitors.
According to the complaint, each of the corn herbicide markets is
highly concentrated, as measured by the Herfindahl-Hirschman Index
(``HHI'') and other measures of concentration. Ciba accounts for over
35 percent of corn herbicide sales in the United States and over 40
percent of treated acres, while Sandoz has approximately a 10 percent
share by either measure. Further, the complaint alleges that the
proposed merger would increase concentration, as measured by the HHI,
by approximately 700 points for dollar sales, and by approximately 1000
points for treated acres, to approximately 3000 for sales and
approximately 3300 for treated acres.
In the market for pre-emergent treatment of corn acres for grasses,
the complaint alleges that Ciba products accounted for over 40 percent
and that Sandoz accounted for approximately 3 percent in 1995. The
proposed merger would increase concentration in that market, as
measured by the HHI, by aprpoximately 300 points to approximately 3400.
In addition, in the market for post-emergent treatment of corn acres
for broadleaf weeds, the complaint alleges that Sandoz products
accounted for over 30 percent and that Ciba's Exceed<Register> brand
accounted for approximately 5 percent in 1995. Combining
Exceed<Register> and other Ciba products with Sandoz' products, the
proposed merger would increase concentration in that market, as
measured by the HHI, by approximately 1900 points to over 4000.
The complaint alleges that entry into the corn herbicide markets
requires over a decade for chemical synthesis; laboratory and
greenhouse testing; formulation; process development; pilot production;
pilot trials; field trials; testing for acute, subchronic and chronic
toxicity, possible carcinogenic and mutagenic effects and effects on
prenatal deformation; environmental toxicology testing; measurement of
plant, animal, soil, water and air residues and testing of degradation
of plant, animal, soil, and water environment; data collection; product
registration and EPA review; construction of production facilities; and
use optimization. Further, according to the complaint, once a product
is introduced to the market, several years are often required to gain
customer acceptance through demonstrated safety, performance and
reliability, over a variety of weather conditions.
Additionally, the complaint alleges that, despite the expiration of
United States patents on dicamba and metolachlor, post-patent
strategies pursued by Ciba and Sandoz, including product reformulation,
distribution agreements, purchase and supply contracts with
manufacturers, and joint product development agreements, have limited
entry of generic competition to Ciba's leading pre-emergent grass
herbicides and Sandoz' leading post-emergent broadleaf herbicides.
Further, according to the complaint, supply agreements, joint
product development agreements, and joint marketing agreements among
producers of corn herbicide increase coordinated interaction and the
recognition of mutual interdependence among competitors in each of the
relevant markets for corn herbicide.
The complaint further alleges that the proposed merger of Ciba and
Sandoz would eliminate Ciba and Sandoz as substantial, independent
competitors; eliminate actual, direct, and substantial competition
between Ciba and Sandoz, including the reduction in, delay of or
redirection of research and development projects; eliminate the
potential for increased actual, direct and substantial price
competition and cause consumers to pay higher prices for corn
herbicides; increase barriers to entry; increase the level of
concentration in the corn herbicide markets; increase the merged firm's
ability unilaterally to exercise market power in the market for corn
herbicide for post-emergent control of broadleaf weeds by combining the
two closest substitutes in the market; and increase the likelihood and
degree of coordinated interaction between or among competitors in the
market for corn herbicide for pre-emergent control of grasses.
The Order accepted for public comment contains provisions that
would require Sandoz to divest its corn herbicide business, including
Sandoz' dicamba and dimethenamid plants in Beaumont, Texas, and United
States and Canadian assets to BASF Aktiengesellschaft (``BASF''), no
later than ten days after the Order becomes final, pursuant to an
agreement between Sandoz and BASF for approximately $780 million. If,
through no fault of Sandoz, BASF fails to acquire the
[[Page 413]]
business, the Order requires Sandoz to divest its corn herbicide
business, within sixty days after the Order becomes final, to an
alternative acquirer approved by the Commission and in a manner that
receives the approval of the Commission, and to divest such additional
ancillary assets and businesses and effect such arrangements as are
necessary to assure the marketability, independence, viability and
competiveness of the divested business. The Order further provides for
appointment of a trustee to divest Sandoz' agricultural chemicals
business, including herbicides and other pesticides, in the event
Sandoz is unable to complete the required corn herbicide divestiture
within the specified period.
Flea Control Products
According to the proposed complaint, the proposed merger will have
anticompetitive effects in the market for the research, development,
manufacture and sale of flea control products in the United States.
Flea control products are chemical products designed to treat and
prevent flea infestation in cats and dogs. They are sold in various
forms, including pills, collars, shampoos, sprays, and foggers and are
sold through various channels of distribution: veterinarians, pet
specialty stores, lawn and garden centers, mass merchandisers, and
grocery stores. The complaint alleges that there are no economic
substitutes for flea control products for the treatment and prevention
of flea infestation in cats and dogs.
The complaint further alleges that the flea control products market
is a very highly concentrated market that had sales in the U.S. of
approximately $400 million in 1995. Ciba is the leading developer,
manufacturer and seller of flea control products, and Ciba's market
share is approximately 50 percent. Ciba's Program<Register> brand flea
control products have a dominant share of the flea control products
market. Sandoz ranks second in flea control products sales from sales
of its flea control products, under the Vetkem<Register> and
Zodiac<Register> brands, and from sales of the active ingredient,
methoprene, used by other companies in flea control products. The
complaint also alleges that, prior to the merger, Sandoz and Ciba were
both developing additional flea control products, which likely would be
in direct and substantial competition with each others' products.
The proposed complaint alleges that entry into the flea control
products market requires over a decade for chemical synthesis, lengthy
clinical trials, data collection and analysis, and expenditures of
significant resources over many years as well as qualified
manufacturing facilities in Order to achieve the required EPA or FDA
approvals for commercial sale of these products. Once a product is
introduced to the market, extensive sunk costs must be incurred for
advertising and promotion to gain significant customer and pet owner
acceptance. Despite the expiration of United States patents on
methoprene, the base active ingredient used in Sandoz' second
generation flea control products, the EPA registrations and proprietary
technology involved in the production of methoprene have prevented
entry of generic competition to Sandoz' flea control products.
The complaint further alleges that the proposed merger of Ciba and
Sandoz would increase the merged firm's ability unilaterally to
exercise market power in the flea control products market by combining
the two closest substitutes in the market. According to the complaint,
the proposed merger would increase the likelihood of coordinated
interaction between or among competitors in the flea control products
market and eliminate the potential for actual, direct and substantial
price competition between them. Consumers would then pay higher prices
for flea control products and would not receive the benefits of
innovation competition among producers of flea control products.
The proposed Order seeks to remedy the anticompetitive effects of
the proposed merger by requiring Sandoz to divest its flea control
business for the United States and Canada. Under the Order, the Sandoz
flea control business and the Sandoz Dallas facility, which is largely
devoted to production of flea control products for the United States
and Canada, must be sold to Central Garden and Pet Supply (``Central
Garden'') within thirty days after the Order becomes final pursuant to
an agreement between Central Garden and Sandoz that will be modified to
conform to the terms of the consent Order. Alternatively, Novartis is
required by the Order to divest the assets to an alternative acquirer
that has received Commission approval, within ninety days after the
Order is final. The Order further provides for appointment of a trustee
to divest these assets in the vent Sandoz is unable to complete the
required divestiture within the specified period. Ciba, Sandoz, and
Novartis have entered into an agreement to hold these assets separate
from the rest of Ciba, Sandoz, and Novartis pending completion of the
divestiture.
The proposed Order also includes a technology transfer agreement to
enable the acquirer to produce its own methoprene, the principal active
ingredient in the products to be sold pursuant to the Order, as well as
a temporary supply agreement to provide methoprene to the acquirer
until its own manufacturing capability has achieved necessary
government approvals. Some products currently produced at the Dallas
facility that are manufactured for sale outside the United States and
Canada may continue to be manufactured for Sandoz on behalf of the
acquirer for two years.
To ensure the viability of the flea products acquirer, Novartis is
prohibited from re-entering the U.S. market with a methoprene-based
flea control product for six years. In addition, Novartis is required
under the proposed Order to notify the Commission if it plans to
acquire flea control assets in the U.S. during the next ten years.
The purpose of this analysis is to facilitate public comment on the
proposed Order, and it is not intended to constitute an official
interpretation of the agreement and proposed Order or to modify in any
way its terms.
Benjamin I. Berman,
Acting Secretary.
Separate Statement of Commissioner Mary L. Azcuenaga in Ciba Geigy
Limited, File No. 961-0055
The Commission today accepts a proposed consent order for public
comment to settle allegations that the planned merger of Ciba Geigy
Ltd. and Sandoz Ltd. would violate Section 7 of the Clayton Act in
certain agricultural chemical, pet flea control and gene therapy
markets.
There appears to be reason to believe that the proposed merger
would be unlawful in the corn herbicide and flea control markets
identified in the complaint and that divestiture in each market is the
appropriate remedy. Because BASF makes and sells a specialized corn
herbicide, the proposed divestiture of Sandoz's corn herbicide business
to BASF would not entirely restore pre-merger conditions, but BASF's
product is sufficiently differentiated from the divested assets that
the minor overlap does not appear to be significant.
It is premature, in my view, to select Central Garden and Pet
Supply to acquire Sandoz's flea control business, because the
Commission has virtually no information about Central beyond that
contained in the proposed order and the Analysis To Aid Public Comment.
While the early identification of a candidate to acquire assets to be
[[Page 414]]
divested under an order is to be preferred in order to restore
competition quickly, the Commission does not yet have the information
to evaluate the competitive implications of a proposed divestiture to
Central Garden and Pet Supply.
The alleged gene therapy markets involve products now in clinical
trials and others that appear to be more distant in time and perhaps
more speculative. The proposed complaint also alleges a technology
market, comprising the technology that firms use to develop gene
therapies. The theory is that the post-merger combination of Sandoz and
Ciba Geigy will control such a critical mass of proprietary information
that its incentives to cross license will be diminished, either
deterring entry or raising the price of it. I would be interested in
public comment on these allegations.
Assuming a violation, it is not entirely clear that the proposed
licensing relief is preferable or adequate. A divestiture is the
preferred remedy in a Section 7 case. The proposed order, among other
things, requires a license of the ex vivo patent, also called the
Anderson patent, which was licensed to Sandoz by the National
Institutes of Health. The merger does not add to the scope of the
patent monopoly, and I see no basis in the proposed complaint for this
aspect of the relief. Nor is there any apparent reason why a
divestiture in these markets could not be accomplished. I look forward
to reviewing the comments on this issue as well.
[FR Doc. 97-5 Filed 1-2-97; 8:45 am]
BILLING CODE 6750-01-P