Commission decision

of 17 April 2002

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case COMP/M.2547 - Bayer/Aventis Crop Science)

(notified under document number C(2002) 1462)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/304/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area, and in particular Article 57 thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1), as last amended by Regulation (EC) No 1310/97(2), and in particular Article 8(2) thereof,

Having regard to the Commission's decision of 4 December 2001 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission,

Having regard to the opinion of the Advisory Committee on Concentrations(3),

Having regard to the final report of the Hearing Officer in this case(4),

Whereas:

(1) On 29 October 2001 Bayer AG (Bayer) notified the Commission of its intention to acquire all shares in Aventis Crop Science Holding SA (ACS), constituting the agrochemical business of Aventis SA.

(2) After examination of the notification, the Commission has concluded that the notified operation falls within the scope of Regulation (EEC) No 4064/89 ("the Merger Regulation") and raises serious doubts as to its compatibility with the common market and with the EEA Agreement. Therefore, on 4 December 2001, the Commission decided to initiate proceedings pursuant to Article 6(1)(c) of the Merger Regulation.

(3) Following a detailed investigation of the case, the Commission has come to the conclusion that the proposed concentration as notified would indeed create or strengthen dominant positions on a number of markets as a result of which effective competition would be significantly impeded in a substantial part of the common market. However, the commitments entered into by Bayer modify the proposed concentration in such a way that the concentration concerns identified in respect of the concentration are resolved.

I. THE PARTIES

(4) Bayer is an international public quoted company, which is active in four business segments: healthcare, agricultural business, polymers and chemical business. The agricultural business segment, which is relevant for this transaction, comprises the crop protection and the animal health business groups. The crop protection business group develops, produces and markets crop protection products to control plant diseases, pests (insects, other little animals) and weeds in crops. The animal health business group produces a wide range of veterinary medicines and vaccines to maintain the health of life stock and companion animals as well as a variety of grooming products. Other products developed and supplied by the animal health business groups are agents designed to protect food supplies and to control disease vectors.

(5) ACS is the combination of AgrEvo (the former Hoechst/Schering joint venture), and the Rhône-Poulenc agriculture division and was formed in 1999. ACS comprises four business segments: The crop protection business is active in the development, production and marketing of agricultural crop protection agents including herbicides, insecticides, fungicides, plant growth regulators and seed treatments, ACS's environmental science business develops, produces and distributes non-agricultural products including household insecticides, industrial weed agents, and products for lawn and garden. The seed business is active in the research, production and breeding of field seeds and vegetable seeds. Finally, the bioscience business of ACS is active in the development of technologies to enhance plant value using input traits, agronomic traits and output traits.

II. THE OPERATION

(6) The transaction involves the acquisition of all shares in the ACS business by Bayer. The proposed concentration gives rise to an acquisition of sole control within the meaning of Article 3(1)(b) of the Merger Regulation.

(7) Bayer currently ranks seventh of all agrochemical companies in terms of worldwide sales. ACS ranks fourth on the worldwide scale. Together they will become the second largest in the world with a market share of about [20 to 30] %, just behind the largest agrochemical company, Syngenta, but ahead of BASF, Dupont, Dow and Monsanto.

III. COMMUNITY DIMENSION

(8) Bayer and ACS have a combined aggregate worldwide turnover in excess of EUR 5000 million(5) (Bayer: EUR 30971 million; ACS: EUR 4034 million). Each of them has a Community-wide turnover in excess of EUR 250 million (Bayer: EUR 10905 million; ACS: EUR [...] million), but they do not achieve more than two thirds of their aggregate Community-wide turnover within one and the same Member State. The notified operation therefore has a Community dimension and constitutes a cooperation case under the EEA Agreement, pursuant to Article 57 of that Agreement.

IV. COMPETITIVE ASSESSMENT

INTRODUCTION

(9) The proposed merger will have an impact primarily on the markets of agricultural crop protection products comprising a large variety of products that are designed to protect crops against all forms of damage which might be caused by insects, weeds or fungi.

(10) The parties have overlapping activities in the following main areas: agricultural insecticides, herbicides, fungicides and seed treatment. Other, smaller areas of overlap include active substances (the actual molecules which have activity against weeds, insects, or diseases), industrial weed control and insecticides for professional pest control.

(11) Non-agricultural crop protection products for home and garden, small animal ectoparasiticides and household insecticides constitute vertically affected markets.

INDUSTRY DRIVEN BY R & D COMPETITION

(12) The crop protection industry is characterised by a few large international companies involved in research and development of new and more effective products and a large number of "generic producers" without substantial research and development activities. The R & D-based companies are currently Syngenta, Aventis, BASF, Bayer, DuPont, Dow and Monsanto.

(13) The last few years have seen strong consolidation among this group of firms. Dow in 2001 bought the agrochemical business of Rohm & Haas. Syngenta was formed in 2000 by the spin-off of the agrochemical businesses of AstraZeneca and Novartis. BASF in 2000 bought American Cyanamid, the agrochemical business of American Home Product. There are furthermore several Japanese R & D-based companies, which however do not have strong positions in Europe but often choose to license their products to companies with strong sales organisations in Europe. Among the generic producers, the largest are Makhteshim Agan and Cheminova.

(14) It has been argued that the dynamics of the agrochemicals industry results largely form R & D and market access. In the last three years, the industry has suffered a general downward trend which has led to intensified competition in a falling market. Growth has occurred only where major innovative modes of action have been introduced into the market. It has also been argued that the main source of competition in this industry is non-price R & D competition between R & D companies. On the one hand, effective research and development allows a firm to exploit the advantages offered by new chemistries and obtain a wide portfolio of new products that can be leveraged to sustain a strong market position across a broad range of markets. For instance combining off-patent products with new patented products into a joint product offering or the development of new mixtures including patented active substances can prolong the life cycle of an off-patent product and limit the competitive constraint of generic companies.

(15) Moreover, the potential competitive constraint of generic companies is reduced by the fact that off-patent products and active substances may be further protected by patented technical know-how of production. Essential know-how is not accessible and not necessarily transparent from the published patents or scientific literature. This means that the best technology is generally protected significantly longer than the original patent protection period.

(16) In markets subject to intensive R & D, potential entry cannot be generally expected in the short to medium term, firstly because of the length of time required for development of equally effective substances, and, secondly, due to the costs involved in the development of a product capable of competing with the new or improved one. Market entry by means of innovative products is extremely difficult and resource-intensive. As regards the agricultural crop protection industry, the costs of R & D and registration programs vary widely, but for innovative products, the cost can exceed EUR 100 million and the total time can exceed 10 years. In particular, new product development requires over a decade for chemical synthesis, laboratory testing, formulation, process development, pilot production, pilot trials, field trials, testing for toxicity, environmental testing, data collection, product registration, and construction of production facilities. Once a product is introduced in the market, several years are often required to gain customer acceptance through demonstrated safety, performance and reliability over a variety of weather conditions. Only R & D-based firms seem to have the capabilities and sufficient economic strength to conduct these activities and enter the various European product and geographic markets and/or to expand sales and market share.

(17) Following the merger, the R & D capabilities of the new entity will be one of the biggest in the industry. Based on third party estimates, the R & D budget of the merged entity will be USD 750 million and, thus, similar to the R & D budget of Syngenta. This will be twice as much as the other R & D companies such as BASF and DuPont. The investigation shows that, in the crop protection industry, new product launches are the primary driver of market share growth. The more money a company can afford to invest in R & D, the more new molecules it will discover and can afford to bring to market.

(18) It has been indicated that the merging of two strong product portfolios leads to a number of immediate opportunities for product development based on new mixtures. In addition to the potential effect of new mixtures in foreclosing generic competitors, such new products could make the commercial opportunities for competing new R & D work less attractive. Third parties have further indicated that the operation would strengthen the parties' position in the pipeline where, before the merger, development of new products would have infringed existing patents. Following the merger, such patent restrictions would disappear and new developments would become possible and be the nucleus of a very strong market position. Finally, third parties have argued that the proposed operation results in the removal of a competitor from the market and could lead also to the reduction of the total R & D potential on the market by reducing the number of research centres.

(19) In the past the Commission has often seen reasons for concern in the grouping of companies with strengths in R & D and innovation. For the purpose of this decision, the Commission considers that the parties R & D capabilities and incentives have to be taken into account as regards the potential elimination of future competition in current product markets and future markets. Moreover, where appropriate, the Commission considers it may be necessary to concentrate on the effects of the concentration on R & D competition between the parties and in the overall R & D potential.

CALCULATION OF MARKET SHARES

(20) In order to assess whether the proposed transaction results in any affected market regarding formulated products including insecticides, herbicides, fungicides and seed treatment products, the parties have provided estimated market shares on the basis of a database called Agrowin, which in turn is based on "panel surveys" as far as the larger Member States are concerned. These panel surveys provide for detailed data regarding the plant-protection business in various Member States. They are produced by independent market research companies such as Kleffmann, often specialised in particular Member States. In the case of smaller Member States, which are not covered by any panel survey, market share calculations are based upon best estimates of the parties.

(21) Due to merger activity and internal accounting reasons, the parties have been able to provide reliable market share data only for 1998, 1999 and 2000. The Commission has requested corresponding data also from third parties. The Commission has verified the data provided for by the parties by comparison with data supplied by other market participants.

RE-REGISTRATION OF CROP PROTECTION PRODUCTS BY 2003

(22) As part of a Community policy initiative in the environmental field, Council Directive 91/414/EEC of 15 July 1991 concerning the placing of plant protection products on the market(6), as last amended by Regulation (EC) No 806/2003(7), requires all companies that intend to continue selling their crop protection products to enter into a re-registration process. All manufacturers of agrochemical products are legally obliged to withdraw those products from the market which have not been re-registered. In practice, this means that all those products, which have not been submitted for re-registration, will disappear from the market in 2003. Registration will typically not be sought for a number of older products, since they are typically less environmentally friendly and/or they generate only modest turnover. It has been estimated that some 600 of the 900 existing active ingredients will not be re-registered.

(23) The ongoing re-registration process will affect the assessment of the case in two ways: Firstly, it has to be taken into consideration that the market shares of today may not be indicative of market positions in the near future. Secondly (this issue being directly related to the first one), as regards the position of the generic companies, the removal of a large number of older and less profitable products in the near future could weaken the position of a number of generic producers. It has effectively been suggested that the re-registration process will hit hard especially on the generic companies as they are typically active in older, off-patent products and in low value market niches. In this respect, it has been suggested that whereas large R & D-based companies can spread the cost of re-registration on a large number of products, generic companies do not have the same possibility. Therefore, it has been argued that the re-registration could increase the cost of the generic producers and the price of older products could consequently rise in the future. It has also been indicated that re-registration is very costly and could have a negative impact also on some of the other, smaller companies active on the market.

RELEVANT GEOGRAPHIC MARKETS

(24) The parties have submitted that, due to already visible trends towards standardisation at the European level, the relevant geographic market for all crop protection products is EEA-wide in scope.

(25) The parties have referred to the effects of Directive 91/414/EEC. According to the parties, the Directive does not only establish a positive Community list of active substances which are deemed in advance to be acceptable for human and animal health and for the environment, but also establishes a system of authorisation by the Member States of different formulations containing active substances listed in its Annex I in accordance with requirements laid down in the Directive and according to uniform principles. The parties have also argued that the Directive acknowledges a system of mutual recognition of authorisation by the Member States provided that plant health, agricultural and environmental conditions are comparable in the regions concerned. This system allows the Member States to recognise the registration of a product in the country where it was first introduced. Although the Directive has not yet come into full effect, all companies which want to continue selling specific active ingredients have to enter into a re-registration process. The information which must be provided by the companies under this process must be produced by May 2003. The parties have argued that, even though at present individual screening of products in every Member State is still required, it can be expected that due to the mutual recognition procedure the time for registration procedures will be uniform.

(26) The Commission found in its decision in Case M.1806 - AstraZeneca/Novartis that the markets for formulated products and growth regulators had to be considered national in scope. The Commission gave a detailed argumentation for this conclusion. One important reason was that crop protection products must still be registered in a Member State before they may be marketed. Furthermore, distribution is organised on a national basis, with suppliers having in most cases national sales organisations or distributing via the sales organisation of another manufacturer operating in the relevant Member State. Parallel-imported products are seen as difficult to commercialise, among other reasons because brand names and formulations may vary between Member States, because registration fees may be high, and because it may take a long time to register the products.

(27) The market investigation in this case has confirmed that the reasons given in Case M.1806 - AstraZeneca/Novartis for finding national markets are still largely valid. The investigation has confirmed that differences in biological conditions and treatment patterns of farmers leads to the fact that products may differ from one country to another. The market position of the players varies in different Member States depending e.g. on the fit of the products to the markets' needs and the strength of the sales organisation.

(28) The markets for crop protection products (insecticides, molluscicides, herbicides, fungicides, seed treatment, professional pest control, small animal ectoparasiticides and non-agricultural crop protection agents for home and garden) will therefore be assessed on a national basis.

A. AGRICULTURAL INSECTICIDES

A.1. Relevant product markets

(29) Both Bayer and ACS are active in the development, production and distribution of agricultural insecticides. Agricultural insecticides are products designed to control insects that damage cultivated plants, especially food crops.

(30) In accordance with previous Commission decisions(8), the parties have proposed to define the insecticides markets on a crop-by-crop basis, rather than on a insect-by-insect basis, because they claim that most insecticides are designed to combat a whole range of insects infecting particular plants. The Commission has found in previous decisions that a breakdown of insecticides by type of plant rather than by insects is appropriate in general. The main reason is that there is only one plant-specific insect that affects a major crop, namely the cornborer affecting maize. For all other main crops a variety of insects infests the plant. Therefore, it was found that most insecticides combat a range of insects.

(31) In its decisions in BASF/American Cyanamid and Case M.1806 - AstraZeneca/Novartis (Syngenta), the Commission noted that a differentiation could be envisaged between sucking and chewing insects. While the Commission noted in those cases that this describes rather the way of feeding than the mode of action of insecticides, the question of whether such a breakdown is appropriate was left open in both cases.

Division of insecticides into soil and foliar insecticides

(32) The parties have argued that a division should be made between soil and foliar insecticides. In this respect, they have argued that the major concern of the farmer, who is confronted with certain pests, is whether the respective insect problem is above ground or below ground since this determines the kind of product required and the kind of application equipment necessary. According to the parties, the spray equipment used for foliar application normally differs from that required for soil application(9). Furthermore, the parties have argued that soil and foliar insecticides are, in general, based on different active substances which cannot be substituted for each other. The parties therefore submit that soil insecticides, designed to treat soil insects within the soil by applying them on or into the soil, and foliar insecticides applied to the crops by spraying, constitute separate markets. The parties submit nevertheless that for a number of crops, e.g. maize, beets and cereals, the farmer has the choice of using soil or foliar insecticides and, hence, there is a certain degree of substitution between these two types of products.

Division of insecticides into sucking and chewing insects

(33) As regards the soil segment, the parties have argued that since there are no sucking pests of any consequence in the soil, differentiation between sucking and chewing pests in soil has no relevance.

(34) As regards the question whether, in addition to dividing the market by crop and into foliar and soil applications, a further division into sucking and chewing insects should be made in foliar applications, the parties have argued that a division of the market along the lines of different pest groups, and into sucking and chewing insects, is not appropriate.

(35) More particularly, the parties have submitted that farmers generally purchase products combating groups of harmful insects whose composition may vary by type of plant. The parties have argued that farmers are thus inclined to purchase either products with a broad spectrum of activity, combination products or insecticides with a narrow spectrum which they mix themselves. Hence, the parties have argued, from the farmers' point of view, broad spectrum insecticides and insecticides with a narrow spectrum are substitutable and, thus, a breakdown of markets by type of plant already contains a breakdown of insecticides by the spectrum of pests they are designed to control.

(36) The parties have furthermore argued that there is no clear separation for the farmer between sucking and chewing insects as he/she can be confronted with one or the other or both depending upon crop, season and climate. The parties have argued that sucking and chewing insects can occur as foliar pest either individually or together depending on the life cycle of the particular pest, which is influenced by the crop, season and climate. Therefore, the parties have submitted that the farmer is in need of insecticides which are effective against both sucking and chewing insects.

(37) The parties have also claimed that products belonging to the main insecticides classes, including organophosphates, pyrethroids, carbamates and neonicotinoids, are active against both sucking and chewing insects. The definition of insecticides markets encompassing both sucking and chewing insects is according to the parties supported by the fact that a large number of insecticides are used to combat both sucking and chewing insects. In this respect, the parties have submitted that insecticides of almost all chemical classes (e.g. Deltamethrin, Cyfluthrin, Beta-Cyfluthrin, Cypermethrin, Parathion-Methyl, Carbaryl) are used on both insect pest groups. In this respect, the parties have argued that pyrethroids are used, inter alia, in potatoes against Colorado potato beetle (chewing pests) and aphids (sucking pests) at the same time, whereas organophosphates can be used on some fruits against codling moth (chewing pests) and aphids (sucking pests). The parties have further submitted that even products with a specific efficiency against sucking pests also offer control of chewing pests. Imidacloprid, for example, is according to the parties effective against white flies and scales (sucking insects) but also controls leaf miners (chewing insects) in citrus fruit.

(38) Third parties have generally agreed that it is meaningful to divide the relevant market into the soil and the foliar segment. However, as regards the questions whether a further subdivision should be made for sucking and chewing pests, most third parties have disagreed with the parties. While it is broadly agreed that the distinction is not relevant for the soil segment, third parties have argued that, as regards foliar applications, grouping insects and insecticides based on feeding habit is a valid and meaningful categorisation scheme. Some respondents have even suggested that sucking and chewing insects constitute separate markets.

(39) The investigation shows that while there is a certain relation between insects and crops, in reality, crop groupings are often artificial divisions created by government registration agencies and chemical companies. Registration is based on a particular crop or crop grouping. Chemical companies may pursue registration on certain crops based on the economic value of that crop while not registering on others where efficacy is similar. A company which is able to offer an insecticide with activity against insects occurring in different crops can potentially cover the whole range of crops with this product. Therefore, a breakdown of markets by type of plant would not necessarily reflect the full potential of a compound. While some species are plant specific, most economically important pests occur across many crops. Especially sucking pests such as aphids and whitefly are not isolated pests of single host plants but occur on many different crops.

(40) It has been indicated that farmers are faced with various insect pests occurring on different crops and at different times during a growing season. Each of these different insect pests has to be combated at a given time, i.e. when the pest actually occurs and certain economic thresholds are reached. The exact time of combating the different insect pests during a growing season is not the same for the various insects infesting a certain crop.

(41) Because insecticides have different residual activity profiles, it is critical that the products are applied at the best time to get effective control of the targeted pest: a late application, which can mean only two to three days, can result in substantial crop damage and an application made too early will not result in effective control of the targeted pest either. Consequently, there is only a relatively narrow window for optimal application. Even though it is correct that sucking and chewing insects can occur as foliar pests either individually or together depending upon the life cycle of the particular pest as influenced by the crop and the season, this does not mean that the very short application window for such pests coincides. It is in fact rare that two different insect pests have their optimal application window at the very same time.

(42) Therefore, if farmers use a broad-spectrum insecticide and apply it once, they will be able to get good control of such pests as are occurring during that application window but they can only benefit from partial additional side effects against other pests. It has therefore been argued that there is no broad-spectrum insecticide which could result in satisfactory total control of all the various pests that occur during a growing season. It has been submitted that no substitutability exists between narrow and broad spectrum insecticides but substitutability exists between products with activity against key pest to be combated.

(43) In this respect, it has also been pointed out that the vast majority of insecticides products will only provide good control of either sucking or chewing pests, but not of both of these groups of pests. It has been indicated that even broad-spectrum products are primarily targeted against either sucking or chewing insects. It is therefore not normally true that farmers can use products that control a wide group of insect pests.

(44) Therefore, it has been submitted that key pests have to be considered and, generally, it is one key pest exceeding economic threshold which triggers a treatment to prevent damage to the crop. Accordingly, the farmer's choice regarding the appropriate insecticide is based upon this key pest of major concern. Two observations underline the importance of key pests: first, registration of insecticides is granted for a specific crops with an indication of the pest spectrum and for the application at a defined point of time with a defined dose rate. This is done in order to address the issue of selectivity, as only key pests occurring at a certain point of time should be combated without harming beneficials. Second, it has been argued that the 80 to 90 % of insecticides only contain one active ingredient with a certain spectrum of activity. It has been argued that the ready-made mixtures with several active ingredients are the exception and are mostly used to overcome resistance or enhance the activity on key pests. It has been further argued that tank-mixing of insecticides by the farmer is not a common practice. In this respect, it has been pointed out that mixing narrow-spectrum products to achieve a broader spectrum of control is normally more expensive than applying various narrow-spectrum products sequentially as the pests occur and reach economic thresholds. The parties themselves have submitted in their reply to the statement of objections for herbicides that "a tank mixture is not as easy to handle as a single product" and that the cost is higher. The parties have not provided arguments why the same submission would not apply also to insecticides.

Differences between sucking and chewing insects

(45) Insects can be classified first into collembola (springtails) and pterygota (winged insects). Pterygota can be further classified into three large subgroups: blattoid-orthopteroid, hemipteroid and endopterygote. Blattoid-orthopteroid are insects with biting mouth-parts (e.g. cockroaches, termites), hemipteroid are insects with sucking mouth parts and endopterygote are insects which go though a complete metamorphosis and pupate. Hemipteroid are sucking insects and endopterygote are chewing insects.

(46) The most important subclass of hemipteroid are hemiptera, which includes most importantly aphids, whitefly and leafhoppers. Endopterygote include most importantly lepidoptera (butterflies and moths) and coleoptera (beetles and weevils). It has been indicated that these three classes of insects - hemipteroid, lepidoptera and coleoptera - are commercially the most important insecticides in Europe. Aphids and whitefly are the most important sucking insects in Europe. The relative size of the hemiptera market (sucking insects) is more or less the same as lepidoptera and coleoptera (chewing insects) put together.

(47) Sucking insects refer to those insects, which feed on sap and liquid plant components (sap-feeders). Chewing insects tear apart and digest plant components. The different feeding habits of sucking and chewing insects cause a fundamental difference in their physiology: chewing insects need to excrete a lot of solid while sucking insects need to excrete a lot of high sugar content liquid (honeydew). Sucking insects cause damage by transmitting disease, feeding on the plant and causing fungus infection because of honeydew. They reproduce very fast and, as a consequence, can develop resistance quickly.

(48) Sucking insects are less visible since they do not consume foliage. Chewing pests such as hornworms and cutworms are very visible to the farmer since the damage is completely visible even on cursory inspection. Aphids, whitefly and others are very small and are often first noticed by the honeydew they deposit than by any overt damage. No preventive warning of infestation to control sucking insects is possible and monitoring generally takes place by looking for infestation. Because sucking insects reproduce very fast, the infestation must be tackled quickly. Sucking insects tend to appear in early season.

(49) Chewing insects have a long and complex life cycle and consequently they take a longer time to develop resistance. Infestation can often be monitored via adult traps and preventive applications are possible (e.g. the presence of eggs indicates that larvae will soon be infesting the crop). For chewing insects, slower control is possible. Chewing insects can infest the crop at any time.

(50) One fundamental difference between sucking and chewing insects is where they can be found on a plant. While chewing insects can be found anywhere on the plant, sucking insects are normally found under the leaf. This is because sucking insects suck the plant liquid and there are fewer plant waxes under the leaf, thereby facilitating sucking.

(51) As regards the efficiency of insecticides, this means that sucking insects are more difficult to control than chewing insects, which can be found anywhere on the plant: in order to control sucking insects, some contact under the leaf is required. Compounds hitting only the surface of the leaf and not moving are not very effective. What is required is some ability for the compound to move in the plant (systemic properties) or, as a minimum, ability to move from one side of the leaf to the other (translaminar properties). This means that to be effective for sucking insects, the substance must be able to at least to penetrate the leaf. Older chemistries, such as carbamates and organophosphates, have some translaminar function and they are able to move in the plant but generally only to a limited extent. Neonicotinoids, on the other hand, are systemic in the way that if e.g. only part of the plant has been sprayed, the substance will move within the plant and protect the whole plant against sucking insects.

(52) Third parties have indicated that the division between sucking and chewing insects is made in industry positioning papers and advertising for a particular insecticide. Bayer itself uses the terms sucking pest or sap-feeder to classify a product. In reviewing web sites and advertising for Bayer products, it is apparent that sucking insect control is a key consideration tied to the commercial viability of their products.

Division by chemical class

(53) As regards the question whether the relevant product market should be defined along the lines of chemical classes, the parties have argued that this is not meaningful. In this respect, the parties have contended that the farmer, who is faced with a certain pest in a given crop, does not select insecticides along the lines of chemical classes but according to the product's price and efficiency on certain insect pests in a given crop.

(54) The parties have argued that the same type of pest can, in general, be controlled by a number of insecticides belonging to different chemical families. In light of the interchangeability of different chemistries as regards to their ability to provide an efficient control of certain pests, the definition of submarkets along the lines of chemical classes is not, according to the parties, appropriate. The same is true, the parties have argued, in cases where a certain crop can be protected most effectively by insecticides of one and the same chemical class.

(55) Some third parties have argued that the market should be divided according to chemical classes. They have submitted that, generally, insecticidal active ingredients are clustered into chemical classes which usually go hand in hand with a certain mode of action. It has been argued that mode of action and different classes of insecticides are critical for resistance management both in solving the problem when it arises and in avoiding it in the first place.

Substitutability between soil and foliar treatments for maize, beets and cereals

(56) As regards the parties' submission that for maize, beets and cereals the farmer has the choice of using soil or foliar insecticides, third parties have indicated that the substitutability is generally limited. The parties have corrected their statement and submitted at a later stage of the investigation that the issue is not relevant for cereals.

(57) Third parties have indicated that in sugarbeets, maize and cereals, the early season sucking pests are mainly controlled through seed treatment and that seed treatment has virtually eliminated any market for control of early sucking pests by foliar application in these crops. At the later growth stage, however, other methods are required to control pests.

(58) Similarly, some systemic soil insecticides might substitute at least one foliar application. However, foliar pests arising in a later growth period can not be effectively treated with soil insecticides. They still have to be controlled by foliar application.

(59) It has also been indicated that soil insecticides, which are used to control foliar pests, can not be simply replaced by foliar insecticides. Soil insecticides are often used to protect plants against foliar pests in the early growth period, where the crop is very sensitive to pest attacks. In this early growth period, foliar insecticides do not give sufficient protection, since spraying conditions are not optimal and, therefore, application of foliar insecticides is difficult.

(60) Therefore, while the market for soil and foliar applications for these crops may be growing smaller as a result of seed treatment or the soil applications may reduce the need for foliar applications, the investigation does not lend support to the parties' argument that soil and foliar applications are substitutable.

Conclusion

(61) For the purposes of this decision and following the Commission's practice in this field, the relevant market for insecticides is defined by type of crop and subdivided into foliar and soil insecticides. Special attention has been paid in this decision to the particular strength of the parties in the sucking and chewing insects, which are included in the overall market definition. Special attention has also been paid to neonicotinoids and pyrazoles, which also are included in the overall market definition.

A.2. Competitive assessment

Introduction

(62) Following the merger, the new entity would hold a particular strong position on the insecticide market, both at the EEA-wide level and also at the national level. A large number of third parties have indicated that the parties' position in insecticides would be significantly strengthened in the near future due to their position in the "new" chemical classes, neonicotinoids(10) and pyrazoles(11). This strengthened position would take place both in the existing products and also in the future products

(63) The market investigation shows that there are five key step changes in the insecticides technologies:

- organochlorines in the 1950s,

- organophosphates in the 1960s,

- carbamates in the 1970s,

- pyrethroids in the 1980s,

- neonicotinoids/pyrazolesin the 1990's/2000.

(64) According to the Wood Mackenzie study(12), in contrast to the other sectors of the agrochemical market, in insecticides fewer chemical classes have been found to possess useful activity. The search for other active chemistries produced relatively few successes between the introduction of the synthetic pyrethroids in the mid 1970s and the introduction in the early 1990s of the fiproles, the neonicotinoid derivatives, the pyrroles and the spinosyns. These products offer different modes of action from existing chemistries and hence have improved the options available to the farmer.

(65) According to the Wood Mackenzie study, recent years have seen a considerable decline in the market for the older insecticides chemistry classes. Sales of organophosphates, carbamates and pyrethroids all peaked in 1995 and over the past few years the average growth rate of each of these categories has been a decline in real terms. The global sales of the older product chemistries such as the organophosphates, carbamates and pyrethroids all declined in 2000. The only positive and strong growth was seen in the new natural based products and neonicotinoids, led by Imidacloprid. Neonicotinoids grew by 8,3 % in 2000. The real growth rate of neonicotinoid insecticides was 10,6 % in 1995 to 2000 and it has been estimated as 8,7 % in 2000 to 2005.

(66) Few categories of insecticides are expected to achieve real growth in the next five years; those that are include neonicotinoids, pyrroles and fiprols. Bayer's Imidacloprid has enjoyed significant growth and Imidacloprid is now the leading insecticide worldwide. As well as proving to be a realistic alternative to older insecticide chemistries, Imidacloprid has also created new markets such as stem application and as a component in several seed treatments. This class is expected to grow at high rate. Sales of the pyrazole Fipronil are also growing rapidly. According to the market research company Phillips McDougall, the growth rate of the pyrazole insecticides in 2000 to 2005 is 8,4 %, similar to that of the neonicotinoids. For all the other insecticides chemistry classes, the growth rate is expected to be much slower or even negative.

Neonicotinoids

(67) Neonicotinoids are acetyl choline receptors. They are extremely effective insecticides which act on the central nervous system of insects, blocking the transmission of neural impulses. As a result, the insects stop feeding, become paralysed and die from starvation, dehydration or predation. This novel mode of action and the site of action, which is different from those of carbamates, organophosphates and pyrethroids, makes neonicotinoids suitable for use in resistance management strategies as they also control pests that have developed resistance against conventional insecticides. Neonicotinoids are very effective against aphids and whitefly, the commercially most important sucking insects in the EU.

(68) Bayer has developed successfully the neonicotinoid chemistry and has already commercialised one product, Imidacloprid, which is currently the world's largest selling insecticide and ranks first in sales also in Europe. Bayer is also developing two other neonicotinoids: Thiacloprid and Clothianidin [...]. ACS is developing Acetamiprid [...](13). Each of these products will be discussed in the following.

(a) Imidacloprid

(69) Imidacloprid took only six years to develop. It has been on the market since 1991 under the trade names Gaucho, Confidor, Admire and Provado. It is sold in over 80 countries for use in over 60 different crops.

(70) Imidacloprid is an active ingredient with systemic activity. Systemicity means that the substance is active within the plant, as opposed to non-systemic substances which are applied on the plant.

(71) Imidacloprid can be applied as seed treatment, soil treatment or foliar treatment. As seed treatment, the seed is covered with the active ingredient, which moves to the emerging plant and covers it against pest attacks during the early stages of development. When applied as soil treatment, the active ingredient is transferred from soil into the roots and thence to the leaves with the sap. As seed and soil treatment, Imidacloprid protects crops during the most vulnerable stages of development. Applied as foliar treatment, Imidacloprid protects the plant from insects even with small amounts of active ingredient present in the leaf. It leads to deterrence against feeding and a diminished reproduction rate. Imidacloprid is also used in new areas, such as stem treatment. In stem treatment, Imidacloprid is applied on the trunk of the tree, where the active ingredient is distributed with the ascending sap.

(72) Imidacloprid is very efficient with a broad spectrum of action. It provides long-lasting protection over a period of several weeks or months primarily against sucking insects such as aphids, leaf hoppers, whitefly, and some thrips, scale insects, and mealy bugs. It is active against some chewing insects, such as various species of coleoptera (beetles like Colorado beetle and weevils), some diptera (flies) and a limited number of lepidoptera (leaf miners). Imidacloprid has no activity against nematodes (soil insects) or mites (sucking insects).

(73) Imidacloprid has favourable toxicological properties and it is particularly well tolerated by plants. Its systemic action spares beneficial organisms.

(b) Thiacloprid

(74) Like Imidacloprid, Thiacloprid interferes with the transfer of chemical signals within the insect's nervous system. It has systemic action. Thiacloprid targets mainly sucking insects (aphids, whitefly, thrips, scales, bugs, mealy bugs, psyllids) but has some control also in the chewing pest segment (weevils, leaf beetles, grubs, leaf miners, codling moth and stemborer). It is said to be more active than Imidacloprid on several pests, especially as regards foliar application, and safer to bees and other pollinating insects. Thiacloprid does not harm beneficial insects and it shows only low toxicity to warm-blooded animals.

(75) The parties have argued that Thiacloprid [...]. Third parties have indicated that Thiacloprid has the benefit that it controls codling moth and related insects in fruits and nuts as well as aphids (sucking insect) while, at the same time, being safe to bees in the flowering period. Bayer has [...].

(76) Bayer has submitted that, [...].

(77) [...] are the most important crops for Thiacloprid, and the market shares in these crops significant drivers for the value of Thiacloprid. Strategic documents show that Bayer expects the sales in EU to attain EUR [...] million in [...] and EUR [...] million in [...] by 2004. Sales revenues have been forecast also [...], although Bayer has submitted that [...].

(78) Thiacloprid will be under patent protection in the EU until 2007, [...]. Bayer has explained that an extension of patent protection through an SPC is granted when the time period between filing the patent application and the first registration is very long. [...].

(c) Clothianidin

(79) Bayer's Japanese subsidiary Nihon Bayer Agrochem (NBA) and [...] conducted research independently from each other in the field of insecticidally active neonicotinoid compounds in the late 1980s. As a result of such research, NBA found a new group of insecticidally active compounds. [...].

(80) In [...].

(81) [...].

(82) [...].

(83) [...].

(84) Clothianidin is active against [...]. Bayer has reported that Clothianidin [...]. Compared to Imidacloprid, Clothianidin [...].

(d) Acetamiprid

(85) Also ACS is developing neonicotinoids. [Confidential information of ACS].

(86) [Confidential information of ACS].

(87) [Confidential information of ACS].

(88) [Confidential information of ACS].

(89) Acetamiprid controls [confidential information of ACS]. According to the parties, Acetamiprid competes with [...] and will become a significant competitor particularly to Imidacloprid [...] in Europe.

(90) Third parties have indicated that Acetamiprid is not particularly efficient for seed treatment, as its ability to stay within the plant is limited as compared with Imidacloprid or Clothianidin. It is therefore considered to be suitable for foliar treatment but not for seed treatment. ACS has submitted the registration plans for Acetamiprid to the Commission. [Confidential information of ACS].

Other neonicotinoids

(91) The parties have submitted that a number of other neonicotinoid compounds will be launched in the EEA: Thiamethoxam, Dinotefuran, Flonicamid, AKD-1022 and Nitempyram. These will be briefly discussed below.

(a) Thiamethoxam

(92) Thiamethoxam is active against sucking, leaf-weeding and soil-dwelling insects. Active at low dose rates, the product provides a rapid kill. It can be used as a foliar treatment, soil treatment or as a seed treatment product.

(93) Third parties have indicated that Thiamethoxam is a very versatile insecticide with the same mode of action as Imidacloprid and the other neonicotinoids. It stays within the plant for a long time and is therefore suitable for seed treatment.

(94) Syngenta's competitive position was severely restricted over a period of time as a patent dispute with Bayer excluded it effectively from competing on all the main EEA markets. Thiamethoxam is currently registered only in Spain, Finland and Austria for some limited crop uses. Bayer and Syngenta settled this patent dispute on 20 December 2001. According to the agreement between Bayer and Syngenta, the latter will have full and undisputed access to the world market for Thiamethoxam and can launch insecticides based on this active ingredient in every national market.

(b) Dinotefuran (MTI-466)

(95) The parties have claimed that this neonicotinoid product developed by Mitsui has a large spectrum of activity, which should enable it to be used on a broad variety of crops. The market launch of Dinotefuran is expected for Japan in 2003 and in Europe for 2004/05. The parties have argued that Dinotefuran will become a significant competitor in the near future.

(96) [Confidential information concerning Dinotefuran].

(c) Flonicamid (IKI-220)

(97) The parties have submitted that Flonicamid is developed by Ishihara in collaboration with FMC. It is expected to be registered in Japan by 2003/04 and in Europe in 2005/06. According to the parties, Flonicamid targets mainly aphids, leaf hoppers, thrips and has an excellent systemicity and IPM-fit.

(98) All third parties have indicated that Flonicamid has a different structure and mode of action from the neonicotinoids and cannot therefore be considered to be a neonicotinoid. Third parties have also indicated that, as a slow acting anti-feedant aphicide, Flonicamid is not a competitor to neonicotinoids. Neonicotinoids have a relatively fast action and they are effective against a wide spectrum of homoptera, not just aphids. The anti-feedant action means that there is a probability that the aphids will not be affected until after they have transmitted any viruses to the plant. One of the major impacts of aphid attack in many crops is the virus diseases they transmit.

(d) AKD-1022

(99) The parties have submitted that AKD-1022 is a new neonicotinoid developed by Agro-Kanesho. According to the parties, this product has a fairly large spectrum of activity, which should enable it to be used on a broad variety of crops. However, as according to the parties the development of this product is pending, its competitive effect on the EEA market will not be assessed any further for the purposes of this decision.

(e) Nitempyram

(100) Takeda has developed a neonicotinoid Nitempyram and introduced it in 1996 in Japan for use on rice, fruit, tea and vegetables. Nitempyram has not been launched in the EEA and there are no indications that it will be launched in the near future. Therefore, the competitive effect of Nitempyram on the EEA market will not be assessed any further for the purposes of this decision

Pyrazoles

(101) The pyrazole chemistry is unique to ACS. ACS has two existing molecules in this class, Fipronil and Ethiprole. Fipronil has been commercialised throughout the EEA in several crops and applications. Ethiprole has not been registered in the EEA.

(102) The parties have argued in their reply to the statement of objections that they are not the only ones with pyrazole chemistry. They have submitted that both Mitsubishi Chemical and BASF have pyrazoles in their pipeline. According to the parties, Mitsubishi Chemical is the patent owner of the ETK-I inhibitor Tolfenpyrad (OMI 88) which shows activity on aphids, thrips, whitefly, plutella, rust mite and broad mite in fruits and vegetables. The parties have further argued that BASF enjoys patent protection for the active ingredient Chlorfenapyr, which according to the parties is a pyrazole analog uncoupler of oxidative phosphorylation.

(103) The Commission's investigation, however, shows that although Chlorfenapyr and Tolfenpyrad both contain pyrazoles, they are not pyrazoles. They act at a different site, have a different spectrum and are, in fact, in every way different. These products will therefore not be assessed any further in this decision.

(104) Third parties have indicated that pyrazoles are the current state of the art insecticides against coleoptera (beetles) and soil-born diptera (flies).

(a) Fipronil

(105) The investigation shows that Fipronil is a [confidential information of ACS]. Outside agricultural use, it is also effective against [confidential information of ACS]. Fipronil is applied most commonly through soil applications and seed coating, but also through foliar application, and is said to be competing with neonicotinoids for these usages.

(106) According to the information submitted by the parties, as regards the control of chewing insects, [...]. Third parties have, however, indicated that both Fipronil and Imidacloprid are excellent on coleoptera (chewing beetles) and particularly on elateridae (wireworms) which are arguably the most important soil insect group. Both Imidacloprid and Fipronil are also reasonable for the control of the main lepidoptera, agrotis (cut worms), which attach the plant as the first foliage emerges from the ground. For diptera (soil-born flies), which are important in a range of cereals and vegetables, third parties have argued that both Imidacloprid and Fipronil show high levels of activity depending on the exact species.

(107) While Fipronil [confidential information of ACS].

(108) Third parties have indicated that, as mainly a chewing insect pesticide, Fipronil does not in general compete directly with neonicotinoids for the control of sucking insects. They have indicated that as Fipronil does not move very well within the plant, it does not therefore have the same potential as neonicotinoids. Third parties have however indicated that Fipronil is used for foliar application e.g. against thrips and coleoptera (e.g. Colorado potato beetle). Third parties have further indicated that the effect on competition by combining Imidacloprid and Fipronil in the parties' portfolio is twofold: First, it has been argued that the pest spectrum covered with new chemistries is extended and completed. Both compounds are applicable to a wide range of crops, provide high effectivity and secure control of the key pest and offer a new mode of action capable to break existing resistance against other chemical classes. In this respect, the parties' possibilities to offer technically superior treatment programs would be unique and unmatched by any competitor. Therefore, third parties have argued that combining Imidacloprid's superior sucking pest control with Fipronil's superior chewing pest control would lead to competition concerns. Second, because of the target pest does overlap and the different mode of action of Imidacloprid and Fipronil there are powerful opportunities for resistance management by rotation between both products in those areas, where the two products target the same pest.

(b) Ethiprole

(109) Ethiprole is a [confidential information of ACS] fiprol insecticide. Third parties have indicated that Ethiprole is a second generation Fipronil product. [...].

(110) Ethiprole can be used on [confidential information of ACS]. The toxicological profile is said to be better than that of Fipronil. [...].

(111) The parties have submitted that [confidential information of ACS]. The Commission notes in this respect also that a dormant patent prevents entry and limits competition.

(c) Acetoprole and Vaniliprole

(112) Third parties indicated in the first phase of the investigation that ACS is developing two other compounds in the pyrazoles class: Acetoprole and Vaniliprole. As regards these active ingredients, the parties have submitted that [confidential information of ACS]. These products will therefore not be assessed any further in this decision.

The parties' other pipeline products

(113) In addition to neonicotinoids, Bayer has also other pipeline products which are to be launched on the market in the near future; Methoxyfenozide, Spirodiclofen and Spiromesifen.

(a) Methoxyfenozide

(114) Methoxyfenozide [...].

(115) According to the parties, Methoxyfenozide [...].

(b) Spirodiclofen

(116) Spirodiclofen [...]. An acaricide, Spirodiclofen [...].

(117) Spirodiclofen [...].

(c) Spiromesifen

(118) Spiromesifen [...].

Competitive effects of the parties' portfolio of new chemistries

(119) Following the merger, the new entity would have in their product offering four of the six current and future neonicotinoids, which are or will be introduced in the EEA. The parties would have Imidacloprid, Thiacloprid, Clothianidin and Acetamiprid covering, to a varying extent, the whole range of foliar, soil and seed treatment applications. The only effective competitor to these active substances, Syngenta's Thiamethoxam, would remain outside the parties' portfolio. Takeda's Clothianidin will be introduced in the EEA, [confidential information concerning Clothianidin](14). The Commission also notes that [...]. Moreover, the operation would add, in the EEA, the pyrazole Fipronil into Bayer's product offering. No other company has products from this chemical class.

(120) As regards Syngenta's Thiamethoxam, as will be shown below, the Commission does not consider that Thiamethoxam will be able to offset the market power of the new entity, who will have three neonicotinoids and one pyrazole (and Ethiprole) in their product offering for foliar and soil applications. The parties have argued in their reply to the statement of objections that the Commission has not considered the competitive impact of competing neonicotinoids and submitted that "only after two months after the settlement of the patent dispute between Bayer and Syngenta, Thiamethoxam has been registered in Spain, Finland and Austria". While the parties attempt to demonstrate with this example how quickly Thiamethoxam will enter the EEA markets after the patent settlement, the Commission notes that Thiamethoxam was already registered in these Member States before the patent dispute was settled because Imidacloprid is not under patent protection in Spain, Finland and Austria and the patent dispute did not therefore concern these Member States.

(121) The investigation shows that both neonicotinoids and pyrazoles belong to the fastest growing classes of insecticides, which are expected to grow at the expense of the older chemistries. Therefore, third parties have argued that the parties' position on the insecticide markets, particularly in the sap feeding segment, and in all three applications, soil, foliar and seed, will be significantly strengthened in the near future.

(122) In addition to neonicotinoids and pyrazoles, it has been argued that the parties have also other R & D activities which would strengthen the competitive position of the new entity in insecticides further. In this respect, it has been indicated that ACS has a patent on acetylcholine agonists, which would be complementary to the existing neonicotinoids. According to third parties, also a new nematicide (thienyl pyrazole) could lead to particular strength in soil insect and nematode control when coupled with the top carbamates and organophosphates and a strong technology presence in seed treatment. Finally, it has been argued that ACS is developing isobutylamides, which could be efficient for lepidoptera control. ACS has indicated that [confidential information of ACS].

(123) The parties have submitted in their reply to the Commission's request for information that neonicotinoids and pyrazoles do not represent the latest chemistry classes in insecticides. They have argued that that neonicotinoids have been sold on the market since 1990 and pyrazoles entered the market in 1994. Therefore, the parties argue that both chemical classes are established rather than new chemistry and do not represent the latest technology. New generation insecticides coming onto the markets include according to the parties bezoylhydrazines, tetronic acids, spinosyns and carboxylates.

(124) Third parties have, however, indicated that although it is true that newer chemistries than those represented by neonicotinoids and pyrazoles have been or will be launched, the newness of these compounds relative to neonicotinoids and pyrazoles is from a commercial point of view not relevant. Neonicotinoids and pyrazoles are said to be commercially far more important than any of the above mentioned chemical classes. The market potential of neonicotinoids and pyrazoles is further increased as they serve as replacement products for those products which will not be re-registered and for older chemistry with resistance problems. Therefore, while a number of products from the older chemistry classes will be re-registered and used also in the future, the overall importance of neonicotinoids and pyrazoles will grow in the future.

(125) As regards the specific examples the parties have given above, third parties have indicated that bezoylhydrazines are not a new class and that e.g. Diflubenzuron was launched on the markets several years ago. The other new classes mentioned by the parties have a relatively narrow spectrum of application and have a much smaller market potential. They control mainly chewing pests (tetronic acids can only be used to control acaricides). Bezoylhydrazines are mostly sold in the vegetable and pome fruit markets. Bezoylhydrazines only represent a low market share and are destined for niche products since they are slow-acting and active by ingestion only, in other words, they have no contact activity and no systemicity. Carboxylates have mainly ingestion and some contact activity.

(126) None of the chemical classes mentioned by the parties compete at the same level with the neonicotinoids in the market for control of sucking pests as foliar, soil or seed applications. Neonicotinoids are according to the market investigation the only state of the art insecticides in these markets. None of them compete with Fipronil at the same level either.

The parties claim that the transaction will not affect competition

(127) The parties have argued that, even if assessing the proposed operation at the national level, the concentration does not give rise to concerns over market dominance in any of the affected markets. The parties' arguments are discussed in the following.

Substitutable products

(128) The parties have argued that the Commission has overestimated the importance of neonicotinoids and pyrazoles. They have argued that, even after the re-registration process, organophosphates, carbamates and pyrethroids will still belong to the leading chemical classes. According to the parties, quite a large number of products belonging particularly to older classes of insecticides will be available on the market after 2003. Due to their pricing, the parties have contended, these products will remain extremely competitive, particularly in comparison to neonicotinoids and pyrazoles.

(129) The parties have further argued that there are substitutable products for neonicotinoids and pyrazoles in all chemistry classes. The parties have argued that Parathion-Methyl, for example, is used for both sucking and chewing insect control as a foliar spray. Potential replacements for the control of sucking insects are also according to the parties organophosphates (e.g. Acephate, Lambda-Cyhalothrin) offer the same range of biological activity as Bayer's Imidacloprid and could thus entirely substitute any product of the neonicotinoid family. In this respect, the parties have also argued that Imidacloprid is not active against all types of sucking pests but that it is particularly efficient as for the control of homoptera (plant suckers). The parties have argued that Syngenta's Lambda-Cyhalothrin is as efficient as Imidacloprid to control these pests and Dow's Spinosad is more effective on thrips. Chewing insect control can according to the parties be achieved by Spinosad, Indoxacarb and organophosphates.

(130) The parties have further argued that not all the phased-out products can be replaced either by neonicotinoids or pyrazoles. As regards e.g. organophosphates, the parties have contended that neither Imidacloprid nor Fipronil can cover the entire insect spectrum of broad-spectrum organophosphates. The parties have argued that the farmers are not likely to buy two products to replace organophosphates but, instead, they will seek the cheapest and most efficient alternative based on the insect spectrum they want to control.

(131) The parties have also argued that the submission that neonicotinoids are environmentally friendly is only partially correct. The parties have contended that Imidacloprid, for example, is not safe to bees and therefore cannot be used during the flowering period of crops. [...]. The active ingredient Indoxacarb (from DuPont) belonging to the chemical class of Carboxylates, for example, does not have these effects.

(132) Finally, the parties have argued that as regards for instance Imidacloprid, the investment to be made by the farmer when applying crop protection products consist of the product price and the application costs (tractor, gasoline, water, etc.). Thus, even if the product price of a given product per hectare and per treatment might be higher than the price of a substitutable product, the application costs may deviate since the cheaper product has to be applied more often. For this reason, the parties have argued that the overall expenses for the farmer, in these cases, do not deviate substantially and demand-side substitutability between the products in question therefore exists.

Third parties' views

(133) Third parties have indicated that, already now, it is a fact that more than 55 % of the insecticides will disappear. Furthermore, it cannot be expected that a positive Annex 1 decision will be reached for all active substances which are still in the re-registration process. Therefore, it has been argued that the number of active substances may drop below 45 %. Considerably fewer active ingredients belonging to the older classes of insecticides will be available in the future. The re-registration process will lead to fewer uses, both as regards crops and pests, for older products. According to Wood Mackenzie, especially organophosphates are currently "under the most stringent reviews" by the American and EU regulatory authorities due to problems associated with their long-term use and chronic toxicity. Organophosphates are together with organochlorines the fastest decreasing chemistry class by 2005 with a negative growth of 8,7 % according to Phillips McDougall. With the re-registration process, the older families of technologies will be gradually phased out and the new chemical classes are expected to be the main replacements and increase their share in the overall market.

(134) Very importantly, the investigation shows that, today, the environmental impact has become a key consideration alongside with better efficacy of the product. While purchase of a broad spectrum insecticide was the norm in previous years, in today's competitive environment the opposite is often true. It has been argued that integrated pest management (IPM) stresses control of the detrimental pest species with minimal impact to beneficials and other species within the field. In other words, IPM requires farmers to use insecticides which are specifically targeted at a particular insect pest and, thus, to avoid broad-spectrum insecticides. Moreover, IPM requires that those products are applied at such a time when they will provide the best results. IPM aims at avoiding that broad-spectrum insecticides are applied over a long period of time which will result in unacceptable aggregated side effects on non-targeted pests. Because products are specific for different pests, farmers following IPM will always use IPM friendly sucking-pest product against sucking pests and a different, IPM friendly chewing-pest product against chewing pests.

(135) Third parties have also indicated that as IPM and farming become more complex, more and more farmers are relying on professional crop consultants to help determine which specific pests within the field need control. Regulatory agencies give preference to narrow-spectrum reduced-risk pesticides. According to third parties, many University studies have been done in the last several years to document the impact of IPM and narrow-spectrum insecticide sprays. Products fitting within this category are touted for this, both by the chemical manufacturer, the scientific community and regulatory agencies.

(136) In this respect, it is to be noted that higher rates are required e.g. in the case of carbamates and organophosphates as compared to the more recent chemistries. While some 50 to 75 g/hectare is often sufficient for neonicotinoids, 800 to 1000 g/hectare may be required for carbamates and organophosphates. The higher rates required causes problems as regards environmental safety and IPM. There is also a residue problem and the time between the spraying and the harvest affecting the pre harvest interval (PHI) which is the time between which spraying and harvest are permitted. It is also to be noted that the parties have themselves recognised the importance of low-toxic insecticides. They have submitted in their reply to the statement of objections that formulations of neonicotinoids and pyrazoles are launched as "low toxicity alternatives to organophosphates".

(137) For all the foregoing reasons, the investigation shows that the use of broad-spectrum insecticides is fast decreasing.

(138) As regards the parties' submission in their reply to the statement of objections that the Commission "gives an unbalanced view of environmental implications" and that Imidacloprid [...], the Commission notes first that third parties have indicated that a number of other compounds on the market are [...] toxic to bees and cannot be applied during the flowering period. [...]. Second, as regards the parties' argument that Imidacloprid has been temporarily suspended from the use in sunflowers, the Commission notes that this measure is limited only to France and that it only applies for seed treatment. Third, the Commission notes that Bayer has itself rebutted the causal relationship between Imidacloprid and the bees' symptoms. In Bayer's website, it is argued that: "in numerous controlled experiments Bayer has proven that the alleged relationship cannot be supported by facts". Therefore, bee toxicity will not be considered in this case any further.

(139) The investigation shows further that while older insecticides, e.g. organophosphates, carbamates and pyrethroids, have activity against both sucking and chewing insects, newer insecticides are not generally effective against both sap-feeding and chewing insects but are more specialised than their predecessors. Although both neonicotinoids and pyrazoles have some efficacy in both sucking and chewing insects, the neonicotinoid chemistry is targeting primarily sucking insects and the pyrazole chemistry chewing insects.

(140) The Commission requested competitors to indicate to which of their products customers could switch if the parties raised the prices of their products permanently by 5 to 10 %. The Commission requested competitors to consider products which are substitutable in terms of e.g. mode of action, which are effective in the same crop, which target the same insects or insect groups and which are more or less comparable in terms of price. As regards Imidacloprid, which is the only neonicotinoid on the economically important markets, the results of the investigation clearly show that, apart form other neonicotinoids, there are no viable substitutes for Imidacloprid in the competitor's product portfolios. The same applies for Fipronil.

(141) Third parties have indicated that neonicotinoids are highly effective and fast, which reduces the risk of disease transmission. Neonicotinoids are also systemic and with broad spectrum activity against sucking insects, i.e. they have applications in a wide range of crops. It has been argued that for combating whitefly, neonicotinoids are the only effective insecticides available at present. Other products registered for use on whitefly either have problems of efficacy (these are older products where resistance is already present) or speed of kill.

(142) As regards the parties' argument that pyrethroids are used in potatoes against Colorado potato beetle (chewing) and aphids (sucking) at the same time, it has been indicated that the two pests often have a different application window, meaning that they appear at different times. Moreover, it has been indicated that acceptable control of Colorado potato beetle is achieved only in western Europe, where the limited side effect of pyrethroids is sufficient to control the pest which is not a real problem. However, in the USA where Colorado potato beetle is a key pest, it has to be treated specifically.

(143) As regards the parties' example that organophosphates can be used on some fruits against codling moth (chewing) and aphids (sucking), it has been indicated that while organophosphates are used this way in apples, they are applied in specifically timed applications against each pest. It has further been indicated that the organophosphates primarily used against codling moth (e.g. Gusathion) is not the best organophosphate against aphids. On the other hand, other organophosphates such as Vamidothin and Dimethoate are primarily targeted against sucking insects and have no effective control of chewing pests. They are therefore not applied for the control of codling moth.

(144) As regards the parties argument of overall expenses, a number of third parties have indicated that that a product has a number of parameters and that price is only one factor influencing the buying decision of the farmer. Other parameters are for instance technical performance, image/brand, environmental profile and the service provided either by the dealer or the manufacturer. The farmer associates with a crop protection product certain value for money. As long as this perceived value is in the mind of the farmer fair or competitive, he/she will not see the need to switch to other products.

(145) It has been indicated in particular that an important parameter for the end-user is the active ingredient's resistance status and selectivity on beneficials. It has been argued that these considerations result in a constant pressure to move away from older chemistries - carbamates, organophosphates and pyrethroids - and to use the latest introduced compounds with best performance available in order to prevent and overcome resistance as well as to select insecticides with excellent selectivity on beneficials and lowest impact on environment. According to third parties, this pressure is strongly enforced by the authorities via registration of new compounds and re-registration of older compounds and by the demands of the end-consumer.

(146) It has also been argued that because the farmer cannot, in general, foresee the number of insect attacks on his field and he/she may therefore opt for applying newer chemistry classes, which offer longer lasting control of insects. In this way, the farmer obtains immediate control as well as a certain degree of preventive control provided by the longer lasting effect of newer insecticide chemistries. When using an older product, it may be that the product does not control the insect attack efficiently and repeated insect infestations increase the overall expenses for the farmer through increased application costs. By way of example, broad-spectrum insecticides often cause secondary pest outbreaks, such as aphid blooms in cotton after treatment for chewing insects. The overall expense may thus result being higher with the older chemistries. It has therefore been indicated that demand-side substitutability does not exist between new chemistry products such as Imidacloprid and the older chemistries.

(147) For all the above reasons, the Commission concludes that there are no effective substitutes for the neonicotinoids and Fipronil in the old chemical classes.

R & D competition

(148) The parties' have argued that the markets for agricultural products are characterised by intense R & D activity resulting in new products launched onto the market in quick succession.

(149) In view of the total number of pipeline products under development for the EEA insecticides markets and the fact that it takes some 10 years to launch a new product, the Commission does not agree with the parties that new products are launched in quick succession.

(150) Third parties have indicated that, compared to previous periods, the major companies are today spending a bigger portion of their sales returns in order to meet the requests of Directive 91/414/EEC for re-registration of their existing product portfolios. Moreover, many of the new product launches are actually new formulations or combinations of existing active ingredients rather than new active ingredients.

(151) As discussed above, the dynamics of the agrochemicals industry results largely form R & D and market access. In this respect, the Commission notes that, according to the Phillips McDougall study, Bayer and Aventis have together introduced 39 new pest control products since 1980, compared to 38 introduced by Syngenta. The parties have currently 13 products under development while Syngenta and BASF have eight products each. All the other competitors have three or fewer products under development.

(152) Following the merger, the R & D capabilities of the new entity will be one of the biggest in the industry.

(153) In view of the foregoing and given the parties' successful insecticides pipeline so far, the Commission considers that the new entity will be one of the few companies in a leading position to launch new compounds onto the insecticides market.

Fluctuating market shares

(154) Insecticide usage is directly dependent on intensity and seasonality of insect attacks. Several factors such as climate have an impact on the occurrence of insects. Therefore, the total size of the market varies from one year to the next.

(155) The parties have argued that market shares fluctuate sharply over time and even a strong market position at a given point of time does not ensure that this position can be maintained in the future.

(156) As discussed above, the parties have not been able to submit market share data for longer than a three year period for a reliable time series analysis. On the basis of the submitted data, however, the Commission has been able to conclude that market positions are usually kept even though the total market size changes. This has been also confirmed by the investigation.

Competition from generic companies

(157) The parties have argued that all of the parties' products can be substituted by products which have been produced not only by one of the other multinational R & D companies, but by any supplier selling generic products or readily available commodities. The parties have argued that most of Bayer's and ACS's active substances are already off-patent and subject to generic competition. Since generic competitors do not have to invest in research and development, the parties have argued that they enjoy a competitive advantage over multinational suppliers, since they are able to approach wholesalers and retailers in the various Member States with relatively low prices and are thus able to ensure free market access to all customers currently supplied by the parties. The parties have contended that generic companies are able to obtain and to maintain approvals for off-patent active ingredients with fewer expenses and very limited data packages compared to the efforts which are requested by the authorities from the original data owner in order to obtain and maintain a national approval. Furthermore, marketing and distribution costs are low since the original products are already on the market and their competitive strength and weaknesses are already known by the customers. The parties have argued that the increasing presence of generic manufacturers has resulted in fierce competition and in an appreciable price decline over the last years in almost every market for crop protection products.

(158) It has been indicated to the Commission that if the product profiles of a generic product totally match the profile of the parties' product (i.e. the formulation type is identical), a price increase could lead to an increase of sales of existing generic products. However, according to some third parties this is rare in practice. Third parties generally agree that, in such situations, generic companies have had a downward pressure on prices to some extent. Having said this, third parties have indicated that the competition between the R & D producers is the main reason for any price decline. Also, general problems in the agriculture sector and the competition at the dealer level have largely contributed to the pressure on prices.

(159) The investigation shows that market penetration by generic companies is much more cumbersome than described by the parties. Despite the fact that most of the parties' products are off-patent and thus open to generic competition, it has been argued that the parties generally still have the leading market shares of these products. This, according to generic companies, illustrate that generic companies do not easily take over significant market shares even if they have a more competitive cost structure.

(160) In this respect, it has been argued that the technical know-how of production is often protected by a series of patents. This means that the best technology is usually protected significantly longer than the original patent protection period. Essential know-how is not accessible and not necessarily transparent from the published patents or scientific literature. Therefore, generic companies often have to develop competitive manufacturing processes for products coming off patent. ACS has submitted in their internal documents that process patents [confidential information of ACS]. In addition, while access to raw materials is crucial to process development and production, the original producer may be able to block access to key raw materials by commercial agreements or captive production. In this respect, the Commission notes that the internal documents of ACS show that the company is [confidential information of ACS]. In this way the access to active ingredients by third parties could be either blocked or at least controlled. Another reason is to tie up capacity and keep the potential generic producer off the market. Generic companies have also indicated that it may be difficult to obtain production permits for certain raw materials that are under environmental and toxicological concern.

(161) The investigation also shows that, in some markets, the original producers have a very strong position due to their company name as well as brand recognition at the distributor and farmer level. Since trademark protection does not expire like patents, generic companies cannot use the original, well-established brand names. It has been argued that products are recognised by brands to a fairly large degree. In these cases, the distributors/farmers require a substantial incentive to switch to less well-known brands supplied by companies not well recognised. ACS's internal documents show that [confidential information of ACS].

(162) It has also been submitted that the new entity would further limit generic suppliers' access to distribution via the parties. For example, generic companies do not expect Bayer to distribute a generic version of a product originally developed by ACS and vice versa. The parties' complementary product portfolio will thus leave less room for generic companies.

(163) It has been argued that market access by generic producers could be limited by sales of mixture products containing a desired proprietary product, or rebate systems that make purchase of an off-patent product very attractive to the buyer if a desired proprietary product is also purchased. It has been argued that a competitor's large portfolio can make life very difficult for generic suppliers with a narrow product portfolio. In conclusion, a generic supplier typically expects a limited market share and, in a small and sometimes declining market, also a lower profit.

(164) Finally, it has been argued that because generic suppliers are not able to spread the re-registration costs across a large product portfolio like R & D companies, the prices of the older active substances can be expected to increase as a consequence of the high investment associated with re-registering an off-patent ingredient. Also, those products which will suffer label reductions, will make them less competitive and leave a much narrower market for obtaining the return of investment.

(165) Therefore, the Commission considers that generic competition is not sufficient to offset the market power of the new entity. As regards Imidacloprid particularly, for the above reasons, the Commission does not consider that generic competitors would be able to offset the market power of the new entity when the Imidacloprid patent expires in 2006, contrary to what has been submitted by the parties.

Products will not be re-registered

(166) The parties have argued that a number of Bayer's and ACS's products will not be re-registered according to Directive 91/414/EEC and will thus be phased out in 2003 at the latest. Furthermore, the parties have argued that TOX-I products, classified by the WHO as the most toxic active ingredients available as crop protection products, which suffer from the lack of political acceptance and which might not survive re-registration, represent a fairly large proportion of Bayer's and ACS's product portfolio.

(167) The Commission does not agree with the parties' argument. The fact that a number of the parties' products will not be re-registered is not relevant for determining the competition effects of the case because all the other competitors, both R & D companies and generic suppliers, will face the same loss of their portfolios. The Commission has received confidential information from the parties' competitors and concludes that all competitors are faced with product losses and label restrictions.

(168) Therefore, in view of the foregoing, the Commission does not consider that the parties' argument is generally relevant for the assessment of this case.

Third party agreements

(169) The parties have argued that part of Bayer's and ACS's turnover in a number of markets is accounted for by the distribution of third party products. Since the third party products will in many cases interfere with the product portfolio of the combined entity, the parties expect that in most cases the supply of these products will be discontinued by the respective supplier.

(170) While the parties are correct in arguing that that the distribution of third party products will probably be affected as a consequence of the merger, the investigation shows that those products which most likely will be withdrawn are those which clearly overlap with the new entity's enhanced product portfolio and which are not expected to be supported by the parties. The parties are expected to review the new entity's product portfolio and replace some products with their own solutions. Some third parties have also argued that the parties' third party portfolio would be largely kept as the new entity would be very strong and thereby attract such products. The investigation shows that a number of third parties would rather be keen in continuing the distribution relationship with the parties but fear that their products will no longer be supported by the parties, given the overlapping product portfolio. Therefore, it may be argued that, overall, the parties' product portfolio will not be affected.

Countervailing bargaining power

(171) The parties have argued that customers of agricultural products - wholesalers and agricultural cooperatives - are sophisticated purchasers and exercise substantial countervailing bargaining power and are well aware of the supply sources that are readily available. Therefore, facing this bargaining power, the parties could not raise the prices as a consequence of the merger.

(172) It has been indicated to the Commission that, in general terms, supply sources are getting fewer and, hence, choice is becoming less available. Strong market position will erode substantially the bargaining power of purchasers. The Commission's investigation shows that the demand side is relatively unconcentrated. It is also to be noted that as regards those markets, where no effective substitutes exist for the parties' products (eg. Imidacloprid and Fipronil), the demand elasticity is very low. Furthermore, customers cannot produce the products in-house nor is inducing a new entry easy (development and registration costs).

(173) In general terms, most third parties expressing their opinion believe that the new entity would be able to raise prices or keep a high price level compared to the rest of the market in those markets where they enjoy a strong market position.

(174) Therefore, the Commission does not consider that buying power is relevant for the assessment of this case.

Pricing of products

(175) The parties have argued that almost all of their products are registered and marketed for a variety of crops. Therefore, the parties have argued, a relatively high market share in a secondary market does not give rise to concerns of market dominance since the prices for the products are determined according to the competitive conditions in the main market, where the product is primarily used or, if the sales accounting for specific products are more or less equally spread among a number of markets, prices are even fixed according to the competitive situation in several markets. Since most of the products are used on various crops and the competitive strength of the combined entity varies in different segments, the manufacturer will neither have the possibility nor the incentive to raise prices for certain products in order to target a distinct market. Since the main markets for the parties' products are highly competitive, the combined entity will not have the possibility of abusive pricing.

(176) The parties have also argued that price discrimination and abusive pricing cannot be achieved by labelling formulated products separately for each crop. The parties have submitted that the development of a new formulation on the basis of existing active ingredients requires a financial investment of approximately EUR [...], depending on the product involved, it takes about [...] years to complete the registration process. Due to the amount of costs incurred and the time necessary to launch new products onto the market, at least each of the R & D companies has the incentive to register its products for the use on as many crops as possible.

(177) Third parties have confirmed that, for those products that can be used in several crops, the main target crop and/or market or the most important ones together determines the pricing positioning. The investigation has also confirmed that price discrimination towards growers of a particular crop and abusive pricing in secondary crop markets cannot be achieved by developing separate formulations and applying for separate registrations for each crop. The Commission has no evidence that labelling formulated products separately for each crop would be common practice in crop protection industry.

Effects of a large product offering

(178) EPPO(15) has defined a number of resistance management strategies, including that of alternation of products provided:

"Alternations (rotations) are only effective if the alternating partner or partners are known to be from different cross-resistance groups and to control the target pest. They work by reducing the exposure and, thus, reducing the selection pressure. At the same time, they allow any resistant biotypes that may develop to be controlled by the alternating partner."

[GU]

(179) Insects develop resistance against modes of action throughout time. From a biological standpoint, a broad product portfolio comprising active ingredients with different modes of action will provide better resistance management, because a range of active ingredients with different modes of action can be rotated.

(180) In this respect, the investigation shows that resistance has developed against a number of older products and that resistance management is one of the reasons why the use of old broad-spectrum products is diminishing. Because the application of a single type of insecticides leads to resistance to the specific mode of action from that chemical class, farmers change the class of insecticides used.

(181) As a result of the notified operation, the parties would have a broad range of active ingredients with different modes of action. The combined product portfolio comprises all chemical classes. Most importantly, however, the parties would have key active ingredients from the neonicotinoids and pyrazoles chemistry classes. The novelty of the mode of action is important in combating resistance. Insects have not, as yet, developed resistance against Imidacloprid and Fipronil in the EEA. The parties' insecticide portfolio is also important in that it contains products with different modes of action for controlling similar insects.

(182) Whereas the combination of products allows the distributor the possibility for a one-stop shop for a number of compounds, some third parties have voiced concerns that this could have a negative effect on the competition.

(183) The merger would lead to a single dominant position in a number of markets through a horizontal overlap both in the foliar and the soil markets. Moreover, third parties have argued that by combining neonicotinoids, Fipronil and Ethiprole with the parties' broad portfolio in other chemical classes, e.g. acaricides, benzoylureas, carbamates, nematicides, organophosphates, organochlorines, pyrethroids, the parties would have access to the by far broadest range of different modes of action in the industry. Contrary to what the parties have argued, they would be the only ones in the market place who could offer a range of neonicotinoids and a pyrazole, thus having the most complete product portfolio on the market in the key chemical classes. While neonicotinoids and the pyrazole Fipronil overlap in some target pests (thrips, Colorado potato beetle), they also complement each other, thus giving the parties a unique position to offer the most efficient products to control both soil and foliar pests (and also the most efficient seed treatment, as will be discussed below).

(184) Neonicotinoids and Fipronil but also the parties' other good products in the older chemistry classes would give the new entity a unique position in resistance management, where neonicotinoids and Fipronil are likely to be used as the main drivers. This would render the parties' offering de facto indispensable, giving them the power to increase prices and/or exclude competition. As to the latter, the parties could offer spraying programmes consisting of their own products for resistance management purposes. In a programme, products with differing modes of action are substituted one for the other and products rotate in order to control key pests in specific crop segments throughout the course of the growing season. With a large enough portfolio, a company can recommend a rotation programme containing only their products.

(185) Bayer recommends specific spray programmes to the customers to avoid resistance problems. Following the merger, their ability to recommend programmes containing only their own products would be significantly enhanced. While the parties have argued that there are no benefits arising from combining or rotating two or three products belonging to the same class, the fact that the parties would have three neonicotinoids against Syngenta's one neonicotinoid would, by definition, give them more opportunities to build their spraying programmes. Third parties have also argued that two or three products are better than a single one because the pest control profile, within the same chemical class, varies with different products. Rotating products may not prevent resistance, but selecting the most appropriate one will help against resistance and enhance efficacy. Moreover, it has been indicated that there is a whole spectrum of resistance (e.g. penetration resistance, metabolic resistance) that an insect may develop. Therefore, even if the insect develops resistance against one neonicotinoid, other neonicotinoid products could still work. There are therefore clear advantages of having several products belonging to the same chemical class in the product portfolio.

(186) The parties could in addition leverage their strong market position and unique product offering through rebate systems to the distributors. The parties could leverage their strong market position, since both neonicotinoids and Fipronil are products which the distributors must supply. They could offer a discount package deal for their spraying programmes. Competitors could not match this offering, given the higher prices that would have to be paid for the parties' indispensable products on a stand-alone basis. Third parties have indicated that this can exclude competitors' products from entering rotation and, thus, being sold on such markets. The parties could offer also year-end rebates on their total purchases including the proprietary products and commodity products, thereby giving substantial incentive for the wholesaler to also buy the commodity products from the parties. In this respect, it has been indicated that due to the re-registration process, the number of suppliers of the commodity active substances may be reduced. In some cases, this may mean a few or only one supplier. Should the parties be one of such suppliers, this could further strengthen the parties' position.

(187) Third parties have indicated that the product offering with a number of strong proprietary products could be strengthened by developing new mixtures between proprietary products and commodity products. Such offers could possibly prolong the life cycle of a product which would much more rapidly decline without the supporting effect of a strong technical innovation and create "a second life" for off-patent products under patent protection. ACS submits in their internal documents that [confidential information of ACS]. [...]. Combining off-patent products with proprietary products is also to fend off generic competition.

(188) The parties have argued that since e.g. pyrethroids are off-patent and easily available on the market as generics, it is sufficient for a company to have one neonicotinoid in its product portfolio in order to develop these mixtures. H