CELEX: 31991M0072
Language: en
Date: 1991-06-10 00:00:00
Title: COMMISSION DECISION of 10.06.1991 declaring a concentration to be compatible with the common market (Case No IV/M.0072 - SANOFI / STERLING DRUG) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31991M0072

COMMISSION DECISION of 10.06.1991 declaring a concentration to be compatible with the common market (Case No IV/M.0072 - SANOFI / STERLING DRUG) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 156 , 14/06/1991 P. 0000

 COMMISSION DECISION of 10.06.1991 declaring a concentration to be compatible with the common market  (Case No IV/M.072 - SANOFI / STERLING DRUG) according to Council Regulation (EEC) No 4064/89  (Only the English text is authentic)  The paper version of the decision is available through the sales offices of the Office of Official Publications of  the European Communities. PUBLIC VERSION MERGER PROCEDURE ARTICLE 6(1)(b) DECISION Registered with advice of delivery To the notifying party Dear Sirs, Subject :<ind> Case No IV/M072 -Sanofi/Sterling Drug. <ind> <ind> <ind> Notification pursuant to Article 4 of Council Regulation No 4064/89.  1.<ind> The abovementioned notification concerns a series of agreements between  Sanofi, a French company  controlled by Elf Aquitaine,  and Sterling Drug  Inc ("Sterling Drug"), a wholly owned subsidiary of the  Eastman Kodak  company, by which  Sanofi and Sterling Drug propose to combine  their worldwide human     prescription drug ("ethical") pharmaceutical activities (excluding Japan) and all their European human over-the- counter or non-prescription ("OTC") pharmaceutical activities.   2.<ind> After full examination of the notification  the Commission has come to the conclusion that the notified  operation  falls within the scope of Council Regulation  No 4064/89 (Merger Regulation) and does not raise  serious doubts as to its compatibility with the common market.  I.<ind> THE PARTIES AND THE NOTIFIED OPERATION  3.<ind> Sanofi is  currently active in three  main sectors : human health, including ethical, OTC pharmaceutical  and diagnostic products; agro and food business (additives,  ingredients, surfactants, aromas, veterinary products  and biotechnological applications); and perfumes and cosmetics. It is the second largest French  pharmaceuticals  manufacturer and was ranked 35th worldwide in 1989.     <ind> Its main geographical  markets are in Europe, Africa,  South America and Asia. It has no direct presence  in the USA as far as ethical and OTC pharmaceutical products are concerned.  4.<ind> Sterling Drug is currently active in two sectors :  human health, including ethical and OTC  pharmaceutical products; and household cleaning and other products. It was ranked the 37th largest  pharmaceutical company worldwide in 1989. The majority of its sales are achieved in the USA, with  remaining  sales mainly in Europe.  5.<ind> The parties have entered into a number of agreements, collectively entitled the "Alliance", and which  include the setting up of joint ventures, by which they propose to combine their ethical  prescription activities   worldwide,  excluding Japan, and their European  OTC activities. In each case the parties will combine their  existing manufacturing,  administration, marketing, sales, distribution  and support operations. In addition, the  development of new products will be decided jointly, together with their subsequent registration, manufacture  etc.  6.<ind> The ethical business will be carried out under the name Sanofi  Winthrop. Separate agreements cover  Europe,  Africa,  the Middle East,  China and Taiwan (Prescription Venture A) and North America,  South  America,  Central America, Oceania and South East Asia (Prescription Venture B). The overall division of  interest of the parties in each venture is as follows :  50.055% to Sanofi, 49.945% to Sterling Drug in  Prescription Venture A, and 50.055%  to  Sterling Drug, 49.945% to Sanofi in Prescription  Venture B. The  OTC  venture will be carried out under a name  yet to be decided, under Sterling Drug's control for day to day  business.  II. CONCENTRATION   7.<ind> The proposed transaction  is a concentration  within  the meaning  of Article 3 of Regulation  4064/89.   In arriving at this conclusion the Commission has taken into account the following elements :     <ind> - the parties merge, transfer, or otherwise lease or license on a permanent basis to operating entities   established by the parties  their existing production, distribution and marketing assets. All material contracts,  government permits and licences (including  manufacturing authorisations and product registrations) will be   licensed,  transferred or assigned. Employees  will be transferred to the operating entities.  <ind> - product ranges will be marketed under common trade names  ("Sanofi Winthrop" for the ethical  business, the name for the OTC business as yet undecided),  <ind> - With regard to research and development, which is of crucial  importance for the   ethical business,   the  parties will continue to carry out their research  activities ("discovery process") independently.  However, they  agree to enable each other to participate in the development of future products right from the initial stages of  such development.  Moreover,  from the stage where new molecules might have a market potential, but before  large scale clinical trials are started, all decisions as to further development are taken  jointly by the parties.   <ind> To this effect a  Development Committee is established, in which both parties are  equally  represented,  which will monitor and coordinate all research efforts and which will decide whether or not development should  be pursued jointly.   <ind> In the event that the committee decides against joint development the parties may not continue  development individually, and instead may only assign or license such rights to third parties.  With regard to the  OTC business, the parties  have the choice of carrying out research and development within the "Alliance" or  availing themselves of Sterling Drug's  facilities outside the territory.  <ind> - new acquisitions will be carried out jointly by the parties,  <ind> - the management structure will be fully  integrated. Each  venture provides for a management  entity,   which includes   a strategic  management committee responsible for all strategic management decisions,  the  appointment of financial and operating managers and the establishment of strategic plans including the  rationalisation  of production facilities, and for an operating  committee responsible for the implementation of  the strategic and policy decisions and the establishment of annual budgets.  <ind> With regard to the ethical business, it is intended that Sanofi has prime responsibility for day to day   business  in the territory of Prescription   Venture A,  while Sterling Drug performs  the same role in  Prescription Venture B.  Membership of the strategic management committees reflects their respective equity  interests in the two ventures, with Sanofi  having five out of eight members on the board in Prescription Venture  A, Sterling Drug having five out of eight members on the board of Prescription   Venture B. However,  qualified  majority requirements  (that is, an affirmative vote of the majority of the board, including two representatives of  each of the parties) applies to certain  matters,  including,  inter alia, the annual adoption of rolling five year  strategic plans setting out major business initiatives,  proposed financial performance and major synergy benefits  targets  where appropriate, plus the appointment of members of a nominating committee established  to approve  the appointment of managers  of operations in the most important national markets of the  parties. In effect,   therefore,  both ventures may be considered  to be jointly controlled by both parties. In any event, the lead given  to the parties in each venture is extremely narrow and the fact that the one exactly  mirrors the other would be  likely to ensure that the parties act jointly in both territories in all major  respects.   <ind> With regard to the OTC  business, control for day to day business will be with newly created  companies  in individual  countries in accordance with the current interests  of the parties in those countries.  Sterling Drug,   however, will have a 70%  interest and five out of eight members on the board of the management company, to  Sanofi's 30% and three members.  Before taking any  action with regard to matters,  such as, inter alia, plant  closures, acquisitions and divestitures, annual and multi year business plans, the parties  shall  consult each other  at board level.   <ind> In the event of a failure to obtain a favourable vote of a majority  of Sanofi members, extensive provisions  are made in order to seek their agreement.  These elements make it possible to consider that Sanofi  shares joint  control of this venture.  <ind> - with regard to the ethical business, while profits deriving from existing products will be divided between   the parties in accordance with the value of that contribution, as determined by the parties,  profits  from new  products developed jointly plus any commercial synergies resulting  from the Alliance will be shared in virtually  equal proportions, according to the equity interests of the parties. With regard to the OTC business the same  principle applies, with profits from jointly developed products being shared in most cases in the same virtually  equal proportions.  8.<ind> The Commission considers that these elements taken  together bring about a lasting change in the  structure of the undertakings concerned. The operation implies their effective withdrawal from the markets  concerned,  as they place all  their interests in the various joint ventures.    9.<ind> This situation thus leaves no room for coordination of conduct as between the parents amongst  themselves, or between them and the joint ventures. It is to be recalled that,  the OTC venture covers the  European market only, leaving Sterling Drug as an independent  operator on the USA market. However, by  transferring its assets and all its essential rights to the OTC venture, in particular trademarks and products  registrations, Sterling Drug will not have any realistic  possibility of acting as an independent operator on the  European market. As a result there will be no room for coordination of its competitive conduct with that of the   joint venture.    III. COMMUNITY DIMENSION  10.<ind> The combined aggregate worldwide turnover  of  the parties to the concentration was 39,009 million  ECU in 1990. Both  parties  meet the requirement  of Article  1(2) (b),  Sanofi  and Sterling Drug each  having  an aggregate Community-wide turnover of more than  250 million ECU in 1990, of which  not more than   two- thirds was achieved in one and the same Member State. Consequently, the proposed concentration has a  Community  dimension.  IV.<ind> COMPATIBILITY WITH THE COMMON MARKET  11.<ind> The new combined unit will rank among the first 20 largest pharmaceutical firms worldwide and the  top 12 worldwide pharmaceutical R & D forces. With regard to the overall OTC market, the "Alliance" Sanofi- Sterling Drug will share  with Rhône-Poulenc Rorer the leading position  in Europe with about a 3.5 per cent  share of a highly fragmented market.    Relevant product market  12.<ind> It is inevitable that any workable market definition in the pharmaceutical sector will involve a certain  amount of arbitrariness, because in the final resort, substitutability among medicines may not only depend on the  intrinsic characteristics of the drug itself,  but also their intended use, taking into account the  patient's overall  condition.  13.<ind> The parties submit that the ATC classification of medicines is an appropriate tool for the purpose of  defining product markets. This classification is recommended by the World Health Organisation, and most of the  national administrations in the Community use it for the purposes of comparing different medicines. It is also  the classification used by Intercontinental Medical Statistics (IMS) to establish its drugs sales statistics, which  are generally used by pharmaceutical firms for their market analysis.  14.<ind> The third level classes of the ATC classification provide a grouping of medicines according to their  therapeutic properties, that is, their intended use, and therefore may be accepted as an  operational market  definition. It may be necessary, however, to carry out   analysis at other levels of ATC classification where it is  appropriate to group particular 3rd level categories together or to descend to narrower classes at the 4th level.  15.<ind> Under this approach, well above 20 different product markets are affected by the proposed  concentration. However, given the basic complementarity  of Sanofi and Sterling Drug's activities,  there is, no   significant  ovelapping of the  parties' activities  in the majority of these product markets.   A significant  reinforcement of market positions does arise, however, in the following markets:  <ind> -<ind> Bile therapy, cholalogues and choleretics (ATC class A5A). <ind> -<ind> Centrally acting muscle relaxants (ATC class M3B). <ind> -<ind> Cold preparations without anti-infectives (ATC class R5A). <ind> -<ind> Antitussives and expectorants (ATC class R5F). <ind> -<ind> Laxative fibres, not corresponding exactly to any ATC class.  16.<ind> Within the pharmaceutical industry,  it is generally considered that OTC and ethical products  constitute two distinct markets, although this distinction may be blurred (for instance ethical products may  acquire OTC status after sufficient time has elapsed, conversely a doctor may prescribe an OTC product).  However these  difficulties do not materially affect the analysis of these markets.  Geographical  reference  market  17.<ind> Because the pharmaceutical industry operates within a very tight legal framework, pharmaceutical  markets remain essentially national. No drug may yet be marketed in any Member State without the previous  approval of the respective national administration, although procedures for mutual recognition of marketing  authorizations exist. Notwithstanding the considerable harmonization achieved so far in the Community with  regard to pharmaceutical registration procedures, the evaluation of a drug and the decision to authorize its  marketing remains at present with the competent authorities of the Member States.  18.<ind> In addition,  prices of ethical drugs are directly or indirectly regulated by national laws. The  mechanisms used by each Member State to regulate pharmaceutical prices vary widely. They include direct price  fixing (as in France, Italy or Spain), overall control of companies' profits (as in the UK), and special provisions  affecting the reimbursement of the cost of drugs by the national health insurance systems (as in Germany). The  differences in the pricing and reimbursement mechanisms result in wide disparities in drug price levels among  different Member States.  19.<ind> Prices of OTC drugs are normally excluded from price or reimbursement regulation. However, the  markets also remain national for these products because of the following factors: retail distribution is legally  confined to pharmacies in certain Member States, whereas in others they are available in other consumer outlets  (groceries or supermarkets); the decision to confer OTC status upon a medicine is a national one; the consumer's  attitude to self-medication is to a large extent determined by cultural traditions and because of the importance of  branding for these products. The existence of national markets is confirmed by  the absence of Europe-wide  brand names and the fact that there is little or no parallel trade in OTC products, the price of which may vary  from country to country.  20.<ind> For the purposes of this decision, therefore, and taking into account the particular pharmaceutical  markets affected by the proposed concentration,  its impact has to be assessed in relation to national markets.   Affected markets  21.<ind> The markets affected by the proposed concentration are :  <ind> -<ind> bile therapy, cholalogues and choleretics in Italy <ind> -<ind> centrally acting muscle relaxants in France <ind> -<ind> centrally acting muscle relaxants in Germany <ind> -<ind> cold preparations without anti-infectives in the Netherlands <ind> -<ind> antitussives and expectorants in France <ind> -<ind> laxative fibres in Italy.  22.<ind> Therefore, the analysis of the compatibility of the proposed concentration with the common market  will focus on these product markets.  23.<ind> In respect of the bile therapy market (ATC Class A5A in Italy), the aggregation of Sanofi's and  Sterling Drug's market shares is not meaningful since their  respective products have different indications i.e.  therapeutic properties (Deursil is a gall dissolving product whereas Varecolene is a stimulant laxative). In this  particular case, therefore, the 3rd level of the ATC classification is not appropriate to define the relevant product  market, and an analysis at the 4th level class is more suitable. At this level, no  overlapping exists in Italy.  24.<ind> In respect of the other markets,  which are all OTC markets except for muscle relaxants, the  proposed   combination  of Sanofi and Sterling   leads to   relatively high market shares ranging between  45% in the  laxative market in Italy to 74% in the cold preparations  (without anti-infectives) markets in the Netherlands.   However, in assessing  the importance  of these market shares the following elements  must be taken into  account :    <ind> -<ind> in all cases, there is some  degree of substitution  from alternative products not included in the   operational  market definition given above, because :  they are not registered medicines (dietary products in  respect of laxatives or sweets in respect of antitussives); or because market studies do not include homeopathic  medicines, which may account for a high proportion of the market (as in the case of cold preparations without  antiinfectives in the Netherlands);  or because drugs classified in other 3rd level therapeutic groups are actually  prescribed by doctors for the same indications (such as non steroidal anti-inflammatories or certain analgesics in  the case of centrally acting muscle relaxants);  <ind> -<ind> large pharmaceutical firms, such as Merril Dow, Roussel-Uclaf, Boots, Ciba-Geigy are competitors  of Sanofi and Sterling Drug in certain markets (centrally acting muscle relaxants, laxatives or cold preparations)  and competition from generic products is well established in others (paracetamol);  <ind> -<ind> because of the relatively low technological content of the drugs in question and because  they have  been on the market for a long time, research and patents play a very limited role in these markets. As a result,   barriers to entry are not  significant, in particular for large pharmaceutical firms.   Conclusions   25.<ind> Taking into account:  <ind> -<ind> the basic complementarity of Sanofi's and Sterling Drug's activities, because of the limited number  of product markets in which overlapping occurs,    <ind> -<ind> the  different possibilities for substitution arising from generic products, non-medicines,  homeopathic products, and drugs classified in other therapeutic groups in the affected markets,  <ind> -<ind> the relative ease with which major pharmaceutical firms may enter these markets,  <ind> the proposed concentration does not create or strengthen a dominant position in any of the reference  markets as a result of which effective competition would be significantly impeded in the common market or in a  substantial part of it.  V. ANCILLARY RESTRAINTS   <ind> The parties each agree not to enter into competing businesses  for the duration  of the agreements.  These  non-competition clauses are aimed at expressing  the reality of the lasting withdrawal of the parents from the  businesses in question.  As such they are an integral  part of the concentration and hence ancillary restraints  covered by  the present decision.   VI.<ind> FINAL ASSESSMENT  26.<ind> For the above reasons, the Commission has decided not to oppose the notified operation and to declare  it compatible with the common market. This decision is adopted in application of article 6(1)(b) of Council  Regulation No. 4064/89.  For the Commission