|EUROPEAN COMMISSION |

Brussels , 26.7.2011

In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC) No 139/2004 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information omitted has been replaced by ranges of figures or a general description. C(2011) 5432 final

MERGER PROCEDURE ARTICLE 6(1)(b) DECISION

PUBLIC VERSION

To the notifying party:

Dear Sir/Madam,

Subject: Case No Comp/M.6231 - KKR/ CAPSUGEL Notification of 23 June 2011 pursuant to Article 4 of Council Regulation No 139/2004 [1]

Publication in the Official Journal of the European Union No C 190, 30.06.2011, p. 38.

1. On 23/06/2011, the European Commission received a notification of a proposed concentration pursuant to Article 4 and following a referral pursuant to Article 4(5) of Council Regulation (EC) No 139/2004 by which the undertaking KKR & Co. L.P. ("KKR", USA) acquires within the meaning of Article 3(1)(b) of the Merger Regulation control of the whole of Capsugel ("Capsugel", USA) by way of purchase of shares.

I. THE PARTIES

2. KKR is a global alternative asset manager, offering a broad range of alternative asset management services to public and private market investors and providing capital markets solutions for the firm, its portfolio companies and clients. KKR’s affiliated private equity funds invest in companies in a variety of sectors.

3. Capsugel provides solid oral dosage delivery mechanisms and services to the pharmaceutical, over-the-counter and health and nutrition industries. Capsugel’s products include hard gelatine, soft gelatine, liquid and alternative polymer capsules. It is headquartered in the United States with locations throughout the world, including in France and Belgium in the EEA. Capsugel is currently owned by Pfizer Inc. ("Pfizer", USA)

II. THE OPERATION

4. On 04/04/2011, Chester Holdings, a special purpose vehicle indirectly controlled by KKR signed a Stock and Asset Purchase Agreement with Pfizer under which it will acquire the Capsugel business unit as well as certain Capsugel-related assets from Pfizer and certain of Pfizer’s affiliates. These subsidiaries and assets comprise the entire Capsugel business. Accordingly, KKR will have sole control over Capsugel.

5. The proposed transaction therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

III. EU DIMENSION

6. The operation does not have an EU dimension within the meaning of Article 1 of the Merger Regulation as in 2010 (i) Capsugel's EU turnover (EUR […]) did not exceed EUR 250 million and (ii) Capsugel did not generate a turnover in excess of EUR 25 million in at least three EU Member States.

7. On 20/05/2011, the Commission received, by means of a reasoned submission, a referral request pursuant to Article 4(5) of the Merger Regulation with respect to the transaction cited above. A copy of this submission was promptly transmitted to the Member States. The transaction fulfilled the two conditions set out in Article 4(5) of the Merger Regulation since (i) it is a concentration within the meaning of Article 3 of the Merger Regulation, and (ii) it has to be notified in at least three Member States.

8. As none of the Member States competent to review the transaction expressed its disagreement as regards the request to refer the case, the notified concentration has an EU dimension following a referral pursuant to Article 4(5) of the Merger Regulation.

IV. ASSESSMENT

9. According to the parties there is no horizontal overlap between Capsugel and KKR. On the other hand, an undertaking jointly controlled by KKR, Alliance Boots GmbH ("Alliance Boots"), is active in the sale of finished dose pharmaceutical products administered through solid oral dosage delivery mechanisms – there are thus vertical effects resulting from the transaction [2] .

Product and Geographic Market Definitions

10. The upstream side is the production of solid oral dosage delivery mechanisms and services to the pharmaceutical, over-the-counter and health and nutrition industries. Hard and soft gelatine, liquid and alternative polymer capsules are solid forms dosage in which a drug can be delivered. Capsugel’s products include hard gelatine and soft gelatine, liquid and alternative polymer capsules.

11. Hard gelatine capsules are a form of oral dosage in which a drug can be delivered. Hard gelatine capsules are a commodity product manufactured from animal gelatine. Soft gelatine capsules are formed, filled and sealed by a manufacturer, and can not be sold as empty capsules for subsequent filling. They are sold in conjunction with filling and sealing services. Liquid filled capsules are specialized two-piece capsules for liquid and semi-solid fills. They are manufactured using both traditional gelatine and vegetarian material. Alternative polymer capsules are designed to meet the dietary restrictions and religious requirements of certain consumers, since alternative polymer capsules do not contain any gelatine.

12. The notifying party submits that the relevant product market may be all solid oral dosage delivery mechanisms (hard gelatine, soft gelatine, liquid and alternative polymer capsules). In previous Commission decisions the Commission left the product market definition open [3] .

13. Also in accordance with past Commission decisions, the notifying party submits that the relevant geographic market is worldwide, or at least EEA-wide.

14. The downstream side is the market for the procurement of solid oral dosage delivery mechanisms and services by the pharmaceutical, over-the-counter and health and nutrition industries. Its geographic scope is at least EEA-wide.

15. In this case the exact product and geographic market definitions can be left open, as the transaction does not raise competition concerns under any alternative possible market definition.

Competitive Assessment

16. Alliance Boots is a pharmaceutical retailer, wholesaler and contract manufacturer active in the EEA (mainly the UK, but also in France, Ireland, Italy, Portugal and Spain) that uses hard and soft gelatine capsules and alternative polymer capsules, produced either by Capsugel (for hard gelatine and alternative polymer capsules) or one of its competitors, as an input for certain of its products. It does not use liquid capsules.

17. In the EEA, Alliance Boots products used hard and soft gelatine capsules and hard alternative polymer capsules as inputs in the following ways in 2010:

- In Alliance Boots' Almus [4] Generic Prescription Pharmaceuticals, for empty hard gelatine capsules and alternative polymer capsules. The notifying party stresses that Alliance Boots does not direct the use of any particular capsule supplier for these finished generic pharmaceuticals, since this is part of the relevant national dossier authorisation of the product;

- In Alliance Boot's Branded over-the-counter ("OTC") Pharmaceuticals and Vitamins and Complementary Medicines, for hard gelatine capsules and soft gelatine capsule;

- For its Boots Contract Manufacturing business which produces special prescription medicines for individual use, for hard gelatine capsules.

18. There exists an actual supply relationship between Capsugel and Alliance Boots as regards hard gelatine capsules and alternative polymer capsules procurement, whilst Alliance Boots is not currently purchasing soft gelatine capsules from Capsugel.

Vertical overlaps upstream – hard gelatine and alternative polymer capsules

19. Capsugel’s primary product (approximately […]% of its sales in 2010) is the empty two-piece hard gelatine capsule, which is produced from animal gelatine. […]% of Capsugel sales in 2010 were of soft gelatine capsules (used in dietary supplements and pharmaceuticals), whilst […]% of sales in 2010 were of hard alternative polymer capsules and […]% of sales in 2010 relate to the sale of equipment.

20. On the upstream side of the market, Capsugel's market share on a market for all solid oral dosage delivery mechanisms (hard gelatine or soft gelatine capsules, liquid capsules, alternative polymer capsules and tablets taken together) is below 25%, both at worldwide and EEA-wide level. The same is true for the soft gelatine capsules segment.

21. Should hard gelatine and alternative polymer capsules be considered narrowly as separate relevant markets, then two vertically affected markets upstream arise at the worldwide and the EEA level. Capsugel's market shares are of approximately [60-70]% and [70-80]% respectively for hard gelatine capsules and of approximately[60-70]% and [50-60]% respectively for alternative polymer capsules.

Vertical overlaps downstream – purchase and use of hard gelatine, soft gelatine and alternative polymer capsules in finished pharmaceutical products

22. In 2010, the total value of hard gelatine capsules sold was, according to the notifying party, approximately EUR […] in the EEA. Capsugel’s 2010 sales amounted to EUR […]. The value of the hard gelatine capsules purchased and used by Alliance Boots’ products set forth above totalled approximately EUR […] in 2010, or less than [0-5]% of total EEA sales of hard gelatine capsules. Alliance Boots’ purchase and use of hard gelatine capsules also represented an insignificant portion of Capsugel’s sales of hard gelatine capsules (less than […]% in the EEA).

23. The notifying party argues that since […]% of Capsugel’s EEA sales of hard gelatine capsules are made to customers other than Alliance Boots, it would not make economic sense for KKR to direct Capsugel to supply hard gelatine capsules only to Alliance Boots. It furthermore submits that since KKR holds only […]% of the equity in Alliance Boots, it would bear all of the costs of any foreclosure strategy through lost Capsugel sales while obtaining less than […] of the benefits. For these reasons, it can be concluded that KKR will have no economic incentive to stop supplying Alliance Boots’ competitors and thus there is no risk of input foreclosure.

24. In 2010, Alliance Boots’ direct purchases from Capsugel amounted to approximately EUR […] (less than […]% of Capsugel’s total sales in the EEA). The notifying party submits that even if Alliance Boots shifted its remaining hard gelatine capsule demand to Capsugel, it would represent no more than approximately [0-5]% of the market for hard gelatine capsules at either the EEA-wide or worldwide level, i.e., it is a very insignificant customer in terms of overall sales. Consequently, if Capsugel’s competitors lost these sales, no significant detrimental effect would result on consumers in the downstream markets. [5] As regards the incentive for Alliance Boots to undertake to purchase all of its purchases from Capsugel, it should be noted that as Alliance Boots is not solely controlled by KKR, the other party who jointly controls Alliance Boots, [Mand that]* Mr. Stefano Pessina, would also have to agree to change the purchases of Alliance Boots and would have no incentive to do so […]

25. In 2010, the total market size for sales of soft gelatine capsules was around EUR 561 million in the EEA. Alliance Boots used around EUR […] of soft gelatine capsules in its products, which represents around [0-5]% of the total market. There is therefore no vertically affected market.

26. In 2010, the total value of alternative polymer capsules sold was approximately EUR 43.5 million in the EEA. Capsugel’s 2010 sales amounted to EUR […]. Alliance Boots used approximately EUR […] of alternative polymer capsules, or around [0-5]% of total EEA sales of alternative polymer capsules. Alliance Boots’ use of alternative polymer capsules also represented a small portion of Capsugel’s sales of alternative polymer capsules ([…]% in the EEA).

27. As was outlined for hard gelatine capsules above, given that approximately […]% of Capsugel’s EEA sales of alternative polymer capsules are made to customers other than Alliance Boots, it would not make economic sense for KKR to direct Capsugel to supply alternative polymer capsules only to Alliance Boots. Consequently, KKR will have no economic incentive to stop supplying Alliance Boots’ competitors. Accordingly, this vertical link will not give rise to input foreclosure.

28. Equally, there is no risk of customer foreclosure, since Alliance Boot's purchases of alternative polymer capsules represent [0-5]% of total EEA alternative polymer capsules, even if Capsugel’s competitors lost these sales entirely, no significant detrimental effect would result on consumers in the downstream markets, as they would still have access to customers representing more than [90-100]% of EEA demand for alternative polymer capsules.

29. It can thus be concluded that there are no incentives to foreclose arising from the transaction and consequently it will not lead to input or customer foreclosure. Accordingly, these two vertical relationships do not raise competition concerns.

V. CONCLUSION

30. For the above reasons, the European Commission has decided not to oppose the notified operation and to declare it compatible with the internal market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of the Merger Regulation.

For the Commission,

(signed) Maria DAMANAKI Member of the Commission

[1] OJ L 24, 29.1.2004, p. 1 ("the Merger Regulation"). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ("TFEU") has introduced certain changes, such as the replacement of "Community" by "Union" and "common market" by "internal market". The terminology of the TFEU will be used throughout this decision.

[2] The notifying party submits that two of its portfolio companies also provide incidental services to Capsugel. However these effects appear so limited that they will not be analysed any further:• First Data ("First Data", USA) provides incidental credit card processing services to Capsugel, only in the USA. The value of these services are very reduced and amounted to approximately EUR […] in 2010 and represents less than […]% of First Data’s total revenues for the same year;• Pages Jaunes ("Pages Jaunes", France) provides advertising services to Capsugel in France. The value of these services is negligible and amounted to approximately EUR […] in 2010 and represents less than […]% of Pages Jaunes' total revenues for the same year.

[3] Cases COMP/M.5476 Pfizer/Wyeth, decision of 17 July 2009; and COMP/M.2922 Pfizer/Pharmacia, decision of 27 February 2003.

[4] Almus products are sourced from third-party generic pharmaceutical manufacturers. Almus does not manufacture any pharmaceuticals on its own.

[5] Indeed, this customer foreclosure analysis would not change even when proceeding to a detailed analysis of this potential vertical link at the level of Alliance Boots’ individual end-products, since Alliance Boots’ sales at the individual end products level represent an even smaller share of hard gelatine capsule demand and therefore the customer foreclosure at this level is even smaller as well. Therefore it can be concluded that there is no risk of customer foreclosure.* clerical error.