CELEX: 32017M8362
Language: en
Date: 2017-04-21 00:00:00
Title: Commission Decision of 21/04/2017 declaring a concentration to be compatible with the common market (Case No COMP/M.8362 - LONZA GROUP / CAPSUGEL) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

EUROPEAN COMMISSION
                                                                 Brussels, 21.4.2017
                                                                 C(2017) 2802 final
  In the published version of this decision, some
  information has been omitted pursuant to Article
  17(2) of Council Regulation (EC) No 139/2004
  concerning non-disclosure of business secrets and
  other confidential information. The omissions are                     PUBLIC VERSION
  shown thus […]. Where possible the information
  omitted has been replaced by ranges of figures or a
  general description.
                                                                 To the notifying party:
Subject:           Case M.8362 - Lonza Group / Capsugel
                   Commission decision pursuant to Article 6(1)(b) of Council
                   Regulation No 139/20041 and Article 57 of the Agreement on the
                   European Economic Area2
Dear Sir/Madam,
(1)     On 17 March 2017, the European Commission received a notification of a
        proposed concentration pursuant to Article 4 of Council Regulation (EC) No
        139/20043 by which Lonza Group AG ("Lonza", Switzerland) acquires within the
        meaning of Article 3(1)(b) of the Merger Regulation control of the whole of
        Capsugel SA ("Capsugel", Luxembourg) by way of purchase of shares (the
        Transaction)4. Lonza and Capsugel are collectively referred to as "the Parties".
1         OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty
          on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the
          replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The
          terminology of the TFEU will be used throughout this decision.
2         OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').
3         OJ L 24, 29.1.2004, p. 1 (the "Merger Regulation").
4         Publication in the Official Journal of the European Union No C 96, 28.3.2017, p. 6.
Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE
Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË
Tel: +32 229-91111. Fax: +32 229-64301. E-mail: COMP-MERGER-REGISTRY@ec.europa.eu.
 ---pagebreak---   I.  THE PARTIES AND THE OPERATION
 (2)  Lonza is a company active in the supply of various services from research to final
      product manufacturing in the pharmaceutical, health care and life science industries
      worldwide. It is also active in the manufacture and development of active
      ingredients for use in the agricultural sector, surface protection in various
      industries, and water treatment.
 (3)  Capsugel designs, develops and manufactures a range of dosage forms for the
      pharmaceutical and nutrition industries. Capsugel’s products include oral dosage
      delivery products, including hard gelatine, soft gelatine, liquid and alternative
      polymer capsules.
 (4)  On 14 December 2016, the Parties concluded a stock purchase agreement for
      Lonza to acquire 100% of Capsugel's shares.
 (5)  In the light of the above, the Transaction constitutes a concentration within the
      meaning of Article 3(1)(b) of the Merger Regulation.
 II.  EU DIMENSION
 (6)  The undertakings concerned have a combined aggregate worldwide turnover of
      more than EUR 2 500 million5 (Lonza: EUR 3 562 million, Capsugel: EUR 907
      million) and a combined aggregate turnover of more than EUR 100 million in each
      of at least three Member States (France (Lonza: EUR […] million, Capsugel: EUR
      […] million), Germany (Lonza: EUR […] million, Capsugel: EUR […] million),
      United Kingdom (Lonza: EUR […] million, Capsugel: EUR […] million). Each of
      them has an aggregate turnover of more than EUR 25 million in each of at least
      three of the Member States included above (France, Germany, United Kingdom)
      and has an EU-wide turnover in excess of EUR 100 million (Lonza: EUR […]
      million, Capsugel: EUR […] million), but they do not achieve more than two-thirds
      of their aggregate EU-wide turnover within one and the same Member State.
 (7)  The notified operation therefore has an EU dimension under Article 1(3) of the
      Merger Regulation.
III.  COMPETITIVE ASSESSMENT
            A. INTRODUCTION
 (8)  Through the proposed acquisition, Lonza's objective is to expand its offering and
      open up new market opportunities in the pharmaceutical and health and nutrition
      industries.
 (9)  The Parties' products are largely complementary.
 (10) Lonza is active in contract manufacturing of active pharmaceutical ingredients
      (APIs) for pharmaceutical customers, and manufactures and sells a few APIs on a
 5      Turnover calculated in accordance with Article 5 of the Merger Regulation and the Commission
        Consolidated Jurisdictional Notice (OJ C 95, 16.4.2008, p. 1).
                                                       2
 ---pagebreak---      proprietary basis.6 Lonza also manufactures and sells health and nutrition
     ingredients which are sold as raw materials for health and nutrition customers.7
(11) Capsugel is primarily active in the production and supply of various forms of oral
     dosages in which a drug can be delivered, also called solid oral dosage delivery
     mechanisms (SODDMs). More specifically, Capsugel provides empty and liquid
     filled hard capsules as well as soft gelatin and alternative polymer capsules.
     Capsugel also offers ancillary technology solutions services such as dosage
     formulation services and development services for solid oral dosage products.
(12) The activities of the Parties are located at different stages of the production process
     of finished drugs, as illustrated by the graphic overview of the production chain of
     a pharmaceutical or health and nutrition product used in SODDMs.
       Diagram 1 - Production chain of a pharmaceutical or health and nutrition
                                        product used in SODDM8
(13) As a result, the activities of the Parties do not give rise to any horizontal overlap.
     The transaction leads to de minimis vertical links in the limited instances where
     Capsugel purchases ingredients to be directly integrated into the production of its
     liquid filled capsules. Since the Parties nevertheless have activities in neighbouring
     markets, the decision will assess the possible conglomerate effects of the
     Transaction.
6      Lonza's sales of proprietary APIs relate mainly to [name of drug] and [name of drug].
7      Lonza's main proprietary nutrition and health ingredients are: (i) L-Carnitine (Carnipure®);
       (ii) Nicotinates; (iii) a larch bark derived compound consisting of soluble fibre arabinogalactan
       and bioactive flavonoids (ResistAid®); (iv) Collagen (UC II®); and (v) a combination of zinc
       monomethionine aspartate, magnesium aspartate and vitamin B6 (ZMA®).
8      Step 5 Encapsulation is a process that only applies to capsules, which are just one type of solid
       oral dosage form.
                                                       3
 ---pagebreak---            B. Market definition
(14) This section defines the relevant markets where Lonza or Capsugel are active, and
     which are vertically related or neighbouring.
(1)  Markets where Lonza is active
  i.   API contract manufacturing services to pharmaceutical companies
Product market
(15) In previous decisions, the Commission analysed the market for contract
     manufacturing of finished dose pharmaceuticals, considering possible segmentation
     by technology and know-how needed to produce different forms of
     pharmaceuticals (e.g. cytotoxic products) or by type of API used, but ultimately left
     the exact definition open. The Commission has not previously assessed the market
     for contract manufacturing of APIs.
(16) The Notifying Party submits that the relevant market for Lonza is contract
     manufacturing of APIs.
(17) Lonza submits that for the production of APIs, it generally uses basic chemistry
     production methods. Whilst the manufacturing method will depend on the specific
     API, in general the process involves the purchase of basic chemicals and reagents
     (e.g., acids, bases, reducing agents) and industrial solvents (e.g., acetone, methanol,
     water) which are then chemically processed, isolated and purified (e.g.,
     centrifuged, crystalized, filtered) to produce advance intermediates and the final
     API. Lonza adds that it also occasionally uses microbial fermentation and
     enzymatic production during the manufacturing processes, although this is less
     common and normally specific to a particular process.
(18) The Notifying Party argues that it is not necessary to consider a possible
     segmentation by manufacturing method because all technologies to manufacture
     APIs are standard and readily available. The Notifying Party however considers
     that the precise market definition can be left open.
(19) For the purpose of the present case, the product market definition can be left open,
     since irrespective of whether the market is defined as encompassing the contract
     manufacturing of all APIs or is segmented by manufacturing method, the
     Transaction does not raise serious doubts as to its compatibility with the internal
     market.
Geographic market
(20) The Notifying Party considers that the relevant geographic market of contract
     manufacturing of APIs is worldwide.
(21) In its previous decisional practice,9 the Commission considered that the geographic
     market for contract manufacturing of finished dose pharmaceuticals is at least
9      See e.g. COMP/M.6278 Takeda/Nycomed, paragraph 23; COMP/M.5555 – Novartis / Ebewe,
       paragraph 19; COMP/M.5530 – Glaxo Smith Kline / Stiefel Laboratories, paragraph 43;
       COMP/M.5253 - Sanofi-Aventis/Zentiva, paragraph 191-192.
                                                   4
 ---pagebreak---        EEA-wide and likely to be global but ultimately left the exact geographic scope
       open. The market investigation in this case confirmed that contract manufacturing
       of APIs would be at least EEA-wide in scope and possibly worldwide.10
(22) For the purpose of the present case, the geographic market definition can be left
       open, since irrespective of whether the market for contract manufacturing of APIs
       and its possible segmentations are EEA-wide or global, the Transaction does not
       raise serious doubts as to its compatibility with the internal market.
   ii.   API manufacturing on a proprietary basis
Product market
(23) The Commission has previously considered that the manufacturing of APIs forms a
       distinct relevant product market which is upstream to the market for finished dose
       pharmaceuticals, and that each individual API may potentially constitute a relevant
       product market, whereas certain APIs may be substitutable with each other for all,
       or for a range of applications, but ultimately left the product market definition
       open.11
(24) The Notifying Party considers that the relevant product market is the market for the
       manufacture of APIs.
(25) For the purpose of the present case, the product market definition can be left open,
       since irrespective of whether the market is defined as encompassing the
       manufacturing of all APIs or of individual API, the Transaction does not raise
       serious doubts as to its compatibility with the internal market.
Geographic market
(26) The Commission has previously considered that the markets for the manufacture
       and supply of APIs are wider than the market for finished dose pharmaceuticals
       and possibly worldwide. Nevertheless, the exact scope of the geographic market
       was left open.12
(27) The Notifying Party submits that the market for the manufacture of APIs is global
       in nature, and if not then at least EEA-wide.
(28) For the purpose of the present case, the geographic market definition can be left
       open, since irrespective of whether the markets for manufacturing of proprietary
       APIs and its possible segmentations are EEA-wide or global, the Transaction does
       not raise serious doubts as to its compatibility with the internal market.
10       See replies to question 2.1.4 of Questionnaire Market Investigation.
11       See e.g. COMP/M.6278 Takeda/Nycomed, paragraphs 17-18; M.5555 – Novartis / Ebewe,
         paragraph 16; Case COMP/M.5295 - Teva/Barr, paragraph 189; COMP/M.5253 - Sanofi-
         Aventis/Zentiva, paragraphs 179-181.
12       See e.g. COMP/M.6278 Takeda/Nycomed, paragraphs 19; COMP/M.5555 – Novartis / Ebewe,
         paragraph 20; COMP/M.5295 - Teva/Barr, paragraph 190; COMP/M.5253 - Sanofi-
         Aventis/Zentiva, paragraphs 186.
                                                         5
 ---pagebreak---  iii.   Manufacturing and commercialisation of human health and nutrition ingredients
Product market
(29) The Notifying Party submits that human health and nutrition ingredients belong to
      a single relevant product market, and that there is no need to segment by
      production method or by ingredient.
(30) In a previous case,13 the Commission considered the human health and nutrition
      market distinguishing between cultures, colour and flavour ingredients for food
      production and envisaging various sub-delineation within these categories, but
      ultimately left the precise market definition open. In another case,14 the
      Commission considered a market for synthetic emulsifiers, with a possible
      distinction by type of emulsifiers15 but ultimately left the market definition open.
(31) In this case, Lonza is manufacturing a small range of nutrition and health
      ingredients, including among others L-Carnitine, Nicotinates and sorbitan ester
      products.
(32) For the purpose of the present case, the product market definition can be left open,
      since irrespective of whether the market for the manufacturing of health and
      nutrition ingredients is defined as encompassing the manufacturing of all nutrition
      and health ingredients or is segmented by categories (e.g. by type of synthetic
      emulsifiers), by production method or by individual ingredient, the Transaction
      does not raise serious doubts as to its compatibility with the internal market.
Geographic market
(33) According to the Notifying Parties' view, the relevant geographic market definition
      for manufacturing of human health and nutrition ingredients is global in nature or
      at least EEA-wide.
(34) As regards the geographic market definition, in previous decisions, the
      Commission considered the geographic scope of markets for the manufacturing of
      human health and nutrition ingredients would be at least EEA-wide and possibly
      worldwide16, but left the exact definition open.
(35) For the purpose of the present case, the geographic market definition can be left
      open, since irrespective of whether the market for manufacturing of nutrition and
      health ingredients and its possible segmentations are EEA-wide or global, the
      Transaction does not raise serious doubts as to its compatibility with the internal
      market.
13      See COMP/M.3845 - PAI/Chr. Hansen, paragraphs 10-12.
14      See COMP/M.5109 - Danisco/Abitec, paragraphs 10-25.
15      Undistilled Monoglycerides ("MONO-DI"), Distilled Monoglycerides ("DISMO"), Diacetyl
        Tartaric Esters of Monoglycerides ("DATEM"), Sodium or Calcium Stearoyl Lactylates
        ("SSL/CSL") and other emulsifiers.
16      COMP/M.3845 -      PAI/Chr. Hansen, paragraphs 13-14; COMP/M.5109 - Danisco/Abitec,
        paragraphs 27-30.
                                                  6
 ---pagebreak--- (2)   Markets where Capsugel is active
   i.   Solid oral dosage delivery mechanisms
Product market
(36) In previous decisions17, the Commission considered the production of solid oral
      dosage delivery mechanisms (SODDM) as a distinct market that is upstream to the
      pharmaceutical, over-the-counter (OTC) and nutrition industries. The Commission
      has also considered both a wider market for the production of SODDM to the
      pharmaceutical, OTC and nutrition industries and the narrower segments: (i) hard
      gelatine capsules; (ii) soft gelatine capsules; (iii) liquid filled capsules and (iv)
      alternative polymer capsules. The Commission ultimately left the product market
      definition open.
(37) The Notifying Party indicated that the relevant product market is the market for
      SODDM and there is no need to further define sub-segments according to the
      different types, i.e. empty hard gelatine capsules, soft gelatine capsules, liquid
      filled hard capsules and alternative polymer capsules.
(38) The Notifying Party specified that empty hard gelatine capsules have been used in
      the pharmaceutical industry for over 100 years and submitted that with some
      limited exceptions, there are no drugs or nutritionals for which hard gelatine
      capsules are the sole or preferred method of oral dosage, or for which hard gelatine
      capsules offer significant performance advantages over alternative dosage forms.
(39) The Notifying Party added that other oral dosage mechanisms on the market
      include soft gelatine capsules, liquid filled hard capsules, alternative polymer
      capsules, tablets, powders and liquids. Soft gelatine capsules are primarily used to
      deliver oils and active ingredients that are dissolved or suspended in oil. Traditional
      hard and soft gelatine capsules are derived from pork or beef products. To meet the
      dietary restrictions and religious requirements of certain consumers, capsule
      suppliers have developed alternative polymer capsules, which do not contain any
      gelatine or other animal products.
(40) In an internal document, another type of capsules is identified, namely inhalation
      capsules.18 These capsules would be designed more for respiratory and systemic
      drug delivery.19 The Notifying Party considers that it is not a separate segment and
      that inhalation capsules can be either hard gelatine or alternative polymer capsules.
(41) For the purpose of the present case, the product market definition can be left open,
      since irrespective of whether the market for the manufacturing of SODDM is
      defined as encompassing the manufacturing of all SODDM or is segmented by type
      of capsules (hard gelatine, soft gelatine, alternative polymer and liquid filled), the
      Transaction does not raise serious doubts as to its compatibility with the internal
      market.
17      See Case COMP/M.6231 - KKR/Capsugel, paragraphs 10-15. See also Case COMP/M.2922 -
        Pfizer/Pharmacia
18      Annex 5.4.2 of the Form CO, page 42.
19      http://www.capsugel.com/biopharmaceuticals/capsule-encapsulation-technologies/inhalation-
        capsules/dpi-technology/
                                                    7
 ---pagebreak--- Geographic market
(42) As regards the geographic market definition, in a previous decision20 the
        Commission suggested that it is at least EEA-wide.
(43) For the purpose of the present case, the geographic market definition can be left
        open, since irrespective of whether the market for manufacturing of SODDM and
        its possible segmentations are EEA-wide or global, the Transaction does not raise
        serious doubts as to its compatibility with the internal market.
   ii.    Dosage formulation and development services
Product market
(44) The Commission did not analyse the market of dosage formulation and
        development services in its previous decisions.
(45) The Notifying Party submits that the relevant product market to be the provision of
        contract development and manufacturing organisation (CDMO) services which
        include dosage-related technology and development solutions services for solid
        oral dosage products to biopharmaceutical and consumer health and nutrition
        companies. According to the Notifying Party while not all providers offer all the
        same or identical services, such dosage-related technology and development
        solutions services for solid oral dosage products can include design of the dosage
        formulation, technology selection consulting (i.e. identifying the appropriate
        dosage form for a product), development of targeted delivery technologies (i.e.
        modified and targeted release solutions), bioavailability enhancement solutions
        such as the development of spray-dried dispersions and nanoparticle technologies,
        formulation optimization consulting, etc.
(46) The Notifying party does not consider it appropriate to further segment
        development services (dosage related technology and development solutions
        services for solid oral dose products) by technology. Although some variation
        exists, reportedly the majority of competitors providing these services have a broad
        menu of offerings similar to Capsugel and customers for solid oral dosage
        development services generally do not view the sector in any sub-categories by
        technology, but consider development services to be one sector.
(47) For the purpose of the present case, the product market definition can be left open,
        since irrespective of whether the market for the dosage formulation and
        development services is defined as encompassing all CDMO services or is
        segmented by technology, the Transaction does not raise serious doubts as to its
        compatibility with the internal market.
Geographic market
(48) According to the Notifying Party's view, the geographic market of dosage
        formulation and development services is worldwide.
(49) For the purpose of the present case, the geographic market definition can be left
        open, since irrespective of whether the market for dosage formulation and
20    See COMP/M.6231 - KKR/Capsugel, paragraph 14
                                                   8
 ---pagebreak---        development services and its possible segmentations are EEA-wide or global, the
       Transaction does not raise serious doubts as to its compatibility with the internal
       market.
              C. Competitive assessment
(1)    Vertical relationships
(50) The Transaction leads to vertical links between the manufacture of nutrition and
       health ingredients by Lonza, and more specifically the manufacturing of sorbitan
       ester and L-Carnitine products (Lonza, upstream) and the manufacturing of liquid-
       filled hard capsules (Capsugel, downstream).
   i.    Sorbitan ester (Lonza, upstream) and liquid-filled hard capsules (Capsugel,
         downstream)
(51) Capsugel purchases Lonza's sorbitan ester products (sold under Lonza's trademark
       Glycomul) and uses them as synthetic emulsifiers in the encapsulation process of
       its liquid-filled hard capsules for certain health and nutrition customers. More
       specifically, in 2016, Capsugel purchased EUR […] worth of Glycomul globally
       ([50-60]% of Lonza's Glycomul sales), all of which outside of the EEA.
(52) The Notifying Party submits that Lonza's market share in the upstream market for
       the manufacturing and supply of all human health and nutrition ingredients, of
       synthetic emulsifiers or any possible narrower segmentation including a market
       limited to sorbitan esters or sorbitan monolaurate is de minimis, less than [0-5]% at
       global and EEA level.
(53) The Notifying Party submits that Capsugel's market share in the downstream
       market for all SODDM is [10-20]% at global level and [10-20]% at EEA level, of
       soft gelatine and liquid-filled hard capsules together is less than [10-20]% at global
       and EEA level, and for liquid-filled hard capsules is only slightly higher at around
       [30-40]%, [30-40]% at global level and [20-30]% at EEA-level.
(54) The Commission did not identify any risk of foreclosure post-Transaction.
(55) As to input foreclosure, the market investigation indicated that sufficient alternative
       sources of supply will remain post-Transaction.21 Capsugel identified for instance
       [name of supplier] as an alternative supplier, from whom it used to purchase
       sorbitan ester. The existence of alternative sources of supply is also confirmed by
       [name of supplier], the only other current customer of Lonza for Glycomul, which
       specified that it is a "very small buyer of Glycomul for industrial use coating
       application".22
(56) As to customer foreclosure, in addition to Capsugel having limited purchases of
       Glycomul, this product has a variety of applications, not limited to food emulsifier,
       but also including cosmetics, plastics, inks and coatings. Lonza's other customer
       [name of supplier] is not active like Capsugel in SODDM. Suppliers will therefore
       continue having sufficient output post-Transaction.
21   Replies to question 4.1 – Questionnaire market investigation.
22   Reply of [name of supplier] to question 4.1 – Questionnaire market investigation.
                                                         9
 ---pagebreak--- (57) In view of the above, the Transaction does not give rise to serious doubts as to its
        compatibility with the internal market stemming from the vertical relationship
        between Lonza sorbitan ester Glycomul product and Capsugel liquid filled hard
        capsules activities. The same conclusion holds if the markets are defined as broader
        than sorbitan ester products or liquid filled of hard capsules.
   ii.    L-Carnitine (Lonza, upstream) and liquid-filled hard capsules (Capsugel,
          downstream)
(58) Capsugel purchases Lonza's L-Carnitine (Carnipure) product, which is a derivative
        of amino-acids, for the formulation of certain liquid filled hard capsules. Carnipure
        is used as raw ingredient in a variety of human and animal health and nutrition
        products, in order to aid weight management or to supplement a consumer's intake
        of L-Carnitine through their diet. In 2016, Capsugel purchased EUR […] of
        Carnipure from Lonza, of which EUR […] were purchased at EEA level.
(59) The Notifying Party submits that Lonza's market share in the upstream market for
        the manufacturing and supply of nutrition and health ingredients is less than [0-5]%
        at global or EEA-level. More specifically in the segment for L-Carnitine, its market
        share decreased from [30-40]% in value and [20-30]% in volume in 2014 to [20-
        30]% in value and [20-30]% in volume in 2016 at global level and from [30-40]%
        in value and [20-30]% in volume in 2014 to [20-30]% in value and [20-30]% in
        volume in 2016 at EEA level.
(60) As mentioned above in paragraph (53) above, the Notifying Party submits that
        Capsugel's market share in the downstream market for the manufacture of all
        SODDM is [10-20]% at global level and [10-20]% at EEA level, of soft gelatine
        and for liquid-filled hard capsules is only slightly higher at around [10-20]% at
        global and EEA level, and for liquid-filled hard capsules only slightly around [30-
        40]%, [30-40]% at global level and [20-30]% at EEA-level.
(61) The Commission did not identify any risk of foreclosure post-Transaction.
(62) As to input foreclosure, post-Transaction, there will remain several competitors
        holding market shares above 5% at global and EEA levels, such as Biosint,
        Liaoning, Northeast pharmaceuticals, Kaiyuan Hangtai Fine Chemicals and
        Zhejiang Jiashan Chengda. Capsugel's current main supplier of L-Carnitine is
        [name of supplier]. In addition, Lonza sales of Carnipure to Capsugel represent less
        than [0-5]% of its total sales of Carnipure. The market investigation confirmed that
        customers, and in particular Lonza's other customers such as [name of customer]
        and [name of customer], could find alternative sources of supply and no risk of
        foreclosure were identified.23
(63) As to customer foreclosure, in addition to Capsugel's limited amount of purchases
        of L-Carnitine, the latter can be sold not only to Capsugel's competitors but also
        directly to nutrition and health companies. Suppliers will therefore continue having
        sufficient output post-Transaction.
(64) In view of the above, the Transaction does not give rise to serious doubts as to its
        compatibility with the internal market stemming from the vertical relationship
        between Lonza L-Carnitine Carnipure product and Capsugel liquid filled hard
23    Replies to question 4.1 – Questionnaire market investigation.
                                                         10
 ---pagebreak---       capsules activities. The same conclusion holds if the markets are defined as broader
      than L-Carnitine products or liquid filled of hard capsules.
(2)   Conglomerate effects
Introduction
(65) The Commission investigated whether the Transaction would lead to conglomerate
      effects within the meaning of its Guidelines on the assessment of non-horizontal
      mergers (non-horizontal merger guidelines),24 since the Parties have to a certain
      extent complementary portfolios.
(66) According to the non-horizontal merger guidelines, while non-horizontal mergers
      are usually not anti-competitive, the combination of products in closely related
      markets may confer upon the merged entity the ability and incentive to leverage a
      strong market position in one market to another, by means of tying or bundling.
      Tying and bundling, as such, often have no anti-competitive effects, as companies
      engage in tying and bundling in order to provide their customers with better
      products or offerings in cost-effective ways. In certain circumstances, however,
      these practices may lead to a reduction in rivals' actual or potential ability or
      incentive to compete. This could, in turn, reduce the competitive pressure on the
      merged entity, thus allowing it to increase prices.25
Products and markets concerned
(67) The Commission assesses the extent to which the combination of Lonza's activities
      in contract manufacturing of APIs, manufacturing of proprietary APIs and
      manufacturing of human health and nutrition ingredients and Capsugel's position in
      the manufacturing of SODDM and dosage formulation and development services
      could have anti-competitive conglomerate effects.
(68) Indeed, post-Transaction, the merged entity will be able to provide combined
      offers, including its pharmaceutical and nutrition and health ingredients as well as
      formulation and encapsulation services.
(69) The activities of Lonza and Capsugel ultimately address the needs of the same
      customer base, of the nutrition and health industry and of the pharmaceutical
      industry. The Parties can be considered as being active in closely related
      neighbouring product markets.
(70) In the EEA, Capsugel manufactures more specifically a) hard capsules (80-90% of
      sales), b) soft gelatines capsules and liquid filled hard capsules (<1% of sales) and
      c) alternative polymer capsules (approx. 10% of sales). Capsugel also performs
      formulation and development services. The Commission considers that an
      assessment of potential conglomerate effects is necessary in view of the strong
      position of Capsugel on the market for SODDM, in particular in relation to the
      potential sub-segments for hard gelatine capsules, liquid filled capsules and
24      Commission's Guidelines on the assessment of non-horizontal mergers under the Council
        Regulation on the control of concentrations between undertakings (OJ C 265, 18.10.2008, p.6).
25      Non-horizontal merger guidelines, paragraph 91.
                                                       11
 ---pagebreak---        alternative polymer capsules where the market shares are close to or above [30-
       40]%.
(71) The Parties' market shares at global and EEA levels in the different markets are
       summarized in Tables 1 and 2 here below.
                1. Table 1 –Market shares for Lonza at EEA and global levels 26
           Contract manufacturing of                      Nutrition and health ingredient
                     APIs
          All             By           All         L-Carnitine            Nicotinates          Synthetic
                          production                                                           emulsifiers
                          method
           Vol     Val    Vol/Val      Vol/Val     Vol          Val       Vol         Val      Vol/Val
                                                  2016
Global    N/A    [0-      <[30-40]%    <[0-5]%     [20-30]%     [20-      [20-        [20-     <[0-5]%
                 5]%                                            30]%      30]%        30]%
EEA       N/A    [0-      <[30-40]%    <[0-5]%     [20-30]%     [20-      [20-        [20-     <[0-5]%
                 5]%                                            30]%      30]%        30]%
                                                  2015
Global    N/A    [0-      <[30-40]%    <[0-5]%     [20-30]%     [20-      [20-        [20-     <[0-5]%
                 5]%                                            30]%      30]%        30]%
EEA       N/A    [0-      <[30-40]%    <[0-5]%     [20-30]%     [20-      [20-        [20-     <[0-5]%
                 5]%                                            30]%      30]%        30]%
                                                  2014
Global    N/A    [0-      <[30-40]%    <[0-5]%     [20-30]%     [30-      [30-        [30-     <[0-5]%
                 5]%                                            40]%      40]%        40]%
EEA       N/A    [0-      <[30-40]%    <[0-5]%     [20-30]%     [30-      [30-        [30-     <[0-5]%
                 5]%                                            40]%      40]%        40]%
26       Only nutrition ingredients where market shares of Lonza are close to [30-40]% are added. As to
         proprietary APIs, Lonza market shares are less than 5% for [name of drug] and less than 25% for
         [name of drug] both at EEA and global levels (see footnote 6).
                                                       12
 ---pagebreak---                Table 2 –Market shares for Capsugel at EEA and global levels
                                                SODDM                                           Development
                                                                                                Formulation
           Hard gelatines      Soft gelatines capsules     Liquid filled hard    Alternative    Val/Vol
             capsules27                                         capsules           Polymer
                                                                                 capsules28
           Vol    Val            Vol            Val           Vol        Val   Vol        Val
                                                      2016
Global   [30-     [50-       <[0-5]%        <[10-20]%      N/A         N/A    [40-     [50-     < [5-10]%
         40]%     60]%                                                        50]%     60]%
EEA      [50-     [60-       <[0-5]%        <[10-20]%      N/A         N/A    [40-     [60-     < [5-10]%
         60]%     70]%                                                        50]%     70]%
                                                      2015
Global   [30-     [50-       <[0-5]%        <[10-20]%      [30-        N/A    [40-     [50-     < [5-10]%
         40]%     60]%                                     40]%               50]%     60]%
EEA      [50-     [70-       <[0-5]%        <[10-20]%      [20-        N/A    [40-     [50-     < [5-10]%
         60]%     80]%                                     30]%               50]%     60]%
                                                      2014
Global   [30-     [60-       <[0-5]%        <[10-20]%      N/A         N/A    [40-     [40-     < [5-10]%
         40]%     70]%                                                        50]%     50]%
EEA      [60-     [70-       <[0-5]%        <[10-20]%      N/A         N/A    [30-     [40-     < [5-10]%
         70]%     80]%                                                        40]%     50]%
(72) Tables 1 and 2 show Capsugel’s strong presence in the EEA in hard capsules,
       alternative polymer capsules and to a lesser extent, liquid filled hard capsules. The
       respondents to the market investigation indeed generally considered that Capsugel
       has a very strong market position in hard capsules especially in Europe.29
(73) The Notifying Party submits that the combination of a contract manufacturer and a
       capsule supplier does not provide the merged entity with any material or
       insurmountable competitive advantage vis-à-vis customers or competitors.
       According to the Notifying Party customers have significant and sufficient
       negotiating strength on a bilateral basis to either continue to buy individual
       products from the merged entity or, in the alternative, to easily and quickly switch
       to one of the many rivals of Lonza and Capsugel, for each of the necessary
       individual inputs, thus defeating any tying or bundling strategy.
27       The market shares in the table reflect Capsugel's market position for hard gelatine capsules overall
         and a possible segment for inhalation hard gelatine capsules only.
28       The market shares in the table reflect Capsugel's market position for alternative polymer capsules
         overall and a possible segment for inhalation alternative polymer capsules only.
29       Replies to question 6.2 – Questionnaire market investigation.
                                                           13
 ---pagebreak--- (74) The Commission assesses below whether the merged entity could and is likely to
     engage into tying or bundling strategies and whether such strategies could lead to
     the exclusion of competitors from the market and ultimately to possible price
     increases.
(75) Given the nature of the products, there is no technical bundling possible, i.e. –
     capsules cannot be technically tied so that they could only be used for APIs
     produced in-house. The merged entity could however offer commercial bundling,
     which is foreseen in the Transaction synergies through cross-selling of products.30
(76) As regards the possibility for commercial bundling, the market investigation
     showed that the Transaction is not likely to give rise to effects through commercial
     bundling either, since alternative suppliers for manufacturing of ingredients, such
     as Catalent, Fareva, Patheon and Evonik for contract manufacturing of APIs to
     pharmaceutical companies, and for manufacturing of capsules, such as ACG,
     Qualicaps, Suhueng, and Pharmacapsulas for the manufacture of hard gelatine
     capsules, would remain on the markets.
(77) Two of the respondents to the market investigation31 indicated a concern that the
     merged entity will impose its capsules in the context of its offers for contract
     manufacturing of APIs, leading to the exclusion of competing capsules providers
     that would not be able to provide such combined offers. However, other
     respondents and in particular all the customers considered such scenario unlikely,
     since they would keep the possibility of buying the products separately from other
     alternative sources of supply. One respondent replied that “Lonza could try to
     implement such a practice [imposing to all customers a bundle] but it would likely
     not be attractive to customers who could then go to other suppliers".32 Many
     respondents consider that alternative suppliers both on the market for capsules and
     pharmaceutical ingredients will remain.33
(78) In general, respondents considered that the merged entity “may propose
     combination solutions comprising multiple products and services”34 and
     “customers may wish to consider purchasing such combined solution”.35 However,
     as a range of alternative sources of supply will continue to be available, the
     combined entity “will not be in a position to force customers to purchase a
     combined package of goods and/or services”36. Moreover, according to a common
     customer, if the merged entity will be better to address supply chain needs, it will
     not engage into imposing commercial bundles as "it would likely alienate
     customers and drive business away overall".37 Thus, the allegation by a competitor
30     See Form CO, paragraphs 307 and followings.
31     Replies to e.g. question 5.1 – Questionnaire market investigation.
32     Replies to question 7.1 – Questionnaire market investigation.
33     Replies to question 7.2 – Questionnaire market investigation.
34     Reply of a customer to question 7.2 – Questionnaire market investigation.
35     Reply of a customer to question 7.1 – Questionnaire market investigation.
36     Replies to question 7.2 – Questionnaire market investigation.
                                                      14
 ---pagebreak---      of Capsugel that customers will likely be locked in38 is not supported by the overall
     results of the market investigation. What is more, the market investigation suggests
     that any anti-competitive bundling strategy would have the effect to make the
     customers look for alternative suppliers.
(79) In particular, even if Capsugel's market position is strong in hard gelatine and
     alternative polymer capsules, it faces competitive constraints from existing players
     such as ACG, Qualicaps, Suhueng, and Pharmacapsulas mentioned above. In
     addition, several respondents considered that there would not be high barriers to
     entry for these products.39 Market participants also indicated that pharmaceutical
     companies could relatively easily switch supplier of capsules, since this variation
     does not require an agreement from the regulatory authorities which only need to
     be informed.40
(80) The market investigation showed that the combination of Lonza and Capsugel's
     products could enhance a new market trend to provide combined offers to
     customers. One of the market participants outlines the positive effects post-
     transaction considering that there will be a possibility for "higher level of service
     and quality through suppliers consolidation and better alignment to pharma
     industry" with "possible end-to-end, integrated offering for customers with positive
     business case (i.e. leaner supply chain, easier planning of supply)".41 Other market
     participants highlighted that this merger follows a trend in the market to offer the
     full supply chain services and that other competitors, such as Patheon, started to
     also implement such strategy.42 Another respondent considered however that the
     combined offer could change the competitive landscape as competing companies
     may not be able to house the expertise of the merged entity and could find it
     difficult to compete in the development of novel therapeutics. A respondent to the
     market investigation43 pointed out that combining the expertise is worth noting
     because it has the capacity to change the therapeutic development business related
     to the delivery of novel modality. The synergies of the Transaction anticipated by
     the Parties confirmed that the merger may create new combination products or
     development projects, although such projects are not "intrinsic to the deal" and
     would require substantial investments.44 However, the market investigation did not
     bring elements as to why such innovation, which may better address customers'
37     Reply of a customer to question 7.3 – Questionnaire market investigation.
38     A reply to question 7.3 – Questionnaire market investigation.
39     See e.g. Minutes of the conference call with a customer, 13 March 2017; Minutes of the
       conference call with a competitor, 7 March 2017.
40     See e.g. Minutes of the conference call with a customer, 13 March 2017.
41     A reply to question 8 – Questionnaire market investigation.
42     See e.g. Minutes of the conference call with a customer, 13 March 2017; Minutes of the
       conference call with a competitor, 7 March 2017.
43     Replies to question 7.3 – Questionnaire market investigation.
44     See Annex 5.4.5 of the Form CO, "Project Ama Dablam – Commercial synergies DD", Lonza,
       24 November 2016.
                                                       15
 ---pagebreak---      needs, would be ultimately harmful to competition and in particular why
     competitors would not be able to replicate such strategy.
(81) In light of the above considerations, the Commission did not identify serious
     doubts as to the compatibility of the Transaction with the internal market stemming
     from the combination of Lonza's and Capsugel's portfolio of products and services.
IV.    CONCLUSION
(82) For the above reasons, the European Commission has decided not to oppose the
     notified operation and to declare it compatible with the internal market and with the
     EEA Agreement. This decision is adopted in application of Article 6(1)(b) of the
     Merger Regulation and Article 57 of the EEA Agreement.
                                                    For the Commission
                                                    (Signed)
                                                     Cecilia MALMSTRÖM
                                                     Member of the Commission
                                               16