CELEX: 32015M7787
Language: en
Date: 2015-11-23 00:00:00
Title: Commission Decision of 23/11/2015 declaring a concentration to be compatible with the common market (Case No COMP/M.7787 - PANASONIC HEALTHCARE / BAYER'S DIABETES CARE BUSINESS) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

|[pic]                             |EUROPEAN COMMISSION                                                                                      |

Brussels, 23.11.2015
C(2015) 8334 final

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|To the notifying party:                                                |                                                                       |

Dear Sir/Madam,

Subject:    Case M.7787 – PANASONIC HEALTHCARE / BAYER'S DIABETES CARE BUSINESS
Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/2004[1] and Article 57 of the Agreement  on  the  European  Economic
Area[2]

    1) On 22 October 2015, the European Commission received notification of a  proposed  concentration  pursuant  to  Article  4  of  the  Merger
       Regulation by which Panasonic Healthcare Holding Co., Ltd. (“PHCHD”, Japan), holding company of Panasonic Healthcare  ("PHC"),  indirectly
       controlled by private equity funds managed by affiliates of KKR & Co. L.P. (“KKR”, USA), acquires within the meaning of Article 3(1)(b) of
       the  Merger Regulation, sole control of Bayer AG’s diabetes care business (“BDC”, Germany) by way of purchase of shares and assets.[3]

    2) PHC and BDC are designated hereinafter as "the Parties".

       THE PARTIES

    3) PHCHD is a Japanese company active worldwide, through its operating company PHC,  in  developing,  manufacturing,  selling  and  servicing
       medical equipment. PHCHD has 15 subsidiaries in Asia, North America and Europe (including one European  subsidiary,  Panasonic  Biomedical
       Sales Europe B.V.). One of the areas PHC is active in is in vitro diagnostic (“IVD”) devices (for example, blood monitoring systems).

    4) KKR is a global asset manager and provider of financial advisory services.

    5) BDC is active in the distribution of blood glucose monitoring systems (“SMBG systems”).

       THE OPERATION AND THE CONCENTRATION

    6) The Transaction will be effected by way of purchase of shares and assets within the conditions set forth in the Share and  Asset  Purchase
       Agreement (“SAPA”) entered into by the Parties on 8 June 2015. Under the SAPA, PHCHD will acquire (i) all of the shares in Delphi Diabetes
       Care Deutschland GmbH (“NewCo”), a newly established company for the purpose of receiving certain assets, rights and obligations  relating
       to certain data and a database exclusively used for the business of BDC, and (ii) assets pertaining to the activities  belonging  to  BDC,
       currently embedded with various subsidiaries of Bayer AG, pursuant to a number of local asset deal agreements with such subsidiaries.

    7) The Transaction therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

       EU DIMENSION

    8) The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 000  million  (KKR:  EUR  […];  BDC:  EUR  900
       million[…]).[4] Each of them has an EU-wide turnover in excess of EUR 250 million (KKR: EUR […]; BDC: EUR […]), but they  do  not  achieve
       more than two-thirds of their aggregate EU-wide turnover within one and the same Member State.

    9) The notified operation therefore has an EU dimension.

       COMPETITIVE ASSESSMENT

   10) SMBG systems manufacturers and distributors can be either vertically integrated or non-vertically integrated, depending  on  whether  they
       perform both manufacturing and distribution in-house.

   11) PHC manufactures SMBG systems; it does not distribute them, but relies on third-party distributors (BDC to a very large extent). BDC  does
       not manufacture SMBG systems, but only distributes systems manufactured by third parties, mainly PHC's. BDC is PHC’s  primary  distributor
       of SMBG systems, accounting for most of PHC's systems sales worldwide and almost all  in  the  EEA.  Consequently,  there  is  a  vertical
       relationship between the Parties regarding SMBG systems.[5]

1 Product market definitions

   12) SMBG systems are used by patients at home to measure glucose concentration in capillary blood samples. They are  commonly  composed  of  a
       glucose meter and disposable sensors (also called “reagent” strips, “test” strips, or assays) which are inserted into the meter.

   13) Glucose meters are portable, handheld, battery operated instruments used in conjunction with disposable sensors to rapidly measure glucose
       concentration in a small sample of blood. Sensors are disposable strips on which a very small blood sample is laid and that  are  inserted
       in the meter for glucose reading. Measurements rely on electrochemical or color responses which are automatically measured and equated  to
       glucose concentration in the sample. In the EEA sensors are proprietary and patent-protected and can be used with only one brand of meter,
       which means that the glucose meters and sensors of one company cannot be used interchangeably with those of another.

   14) SMBG systems also use a lancing device to draw a very small amount of blood from a patient’s finger. These  are  spring-powered,  pen-size
       contraption devices that advance and retract a small sharp piece of metal called a lancet. Unlike sensors, lancing devices are generic and
       can be used with any SMBG system. Besides, lancing devices can also be used in other sectors such as lactate testing (professional sports)
       or for coagulation supervision.

1     Supply of SMBG systems

   15) The Parties submit that they are not aware of any Commission decision concerning  SMBG systems. They however argue that such systems  fall
       within the wider category of IVD devices.

   16) In previous cases, the Commission indicated that clinical IVD systems comprise the manufacture and sale of tests (in essence, the sensors)
       and related equipment/instruments (in essence, the meters) for the purpose of conducting tests outside the human body.[6]

   17) In its analysis,[7] the Commission relied on the classification of IVD tests used by the  European  Diagnostic  Manufacturers  Association
       (“EDMA”). EDMA classifies IVD reagents in six main categories: Clinical Chemistry (11), Immunochemistry (12), Haematology/Histology  (13),
       Microbiology (14), Infectious Immunology (15) and Genetic Testing (16). Within each of these categories, the EDMA further  classifies  IVD
       tests into three levels that constitute progressively narrower segments.

   18) SMBG sensors are considered as reagents, belonging to EDMA level category 11, “Clinical Chemistry”.  Clinical  chemistry  diagnostics  are
       primarily used to test for glucose, cholesterol, sodium, and other substances found in large concentrations  in  the  blood  stream.  SMBG
       sensors further fall within the 2nd level category 11.70, “Clinical Chemistry - Rapid Tests & Point of Care”.

   19) In addition to the classification of reagents, EDMA offers a classification of (i) IVD instruments  and  consumables,  (ii)  after  sales,
       (iii) supporting software and (iv) sample containers.

   20) The Parties submit that SMBG meters are considered as instruments and consumables, falling within the EDMA level  category  21  (chemistry
       and immunochemistry instruments). They can then be further classified within the 2nd level category, under category  21.07  (“chemistry  /
       immunochemistry rapid test + POC, “point of care”).

   21) The Commision held that all clinical chemistry tests and instruments belong to the same market for clinical chemistry  systems  since  (i)
       they have common characteristics, (ii) on the demand side, customers regularly buy almost all of their requirements  for  such  tests  and
       instruments from one source and, (iii) on the supply side, all major suppliers offer the same range of instruments and reagents.[8]

   22) The Commission further considered whether a segmentation of the relevant product markets should be made between tests and instruments  and
       found this further segmentation to be unnecessary as IVD instruments are usually proprietary or "technically closed", i.e. the reagents of
       one manufacturer cannot be used with equipment of any other manufacturer and vice versa.[9]

   23) The Parties submit that there is one relevant market for SMBG systems, including both the instrument (the meters)  and  the  reagent  test
       strip as SMBG systems are proprietary and sensors supplied by one manufacturer cannot be used with meters  supplied  by  another.  Indeed,
       there are no generic or universal sensors currently offered in the EEA (in the United States, generic versions of sensors  for  Johnson  &
       Johnson’s OneTouch SMBG meters have recently become available).[10]

   24) The Parties submit that there can be a further delineation, that is a market for the supply of SMBG systems by  non-vertically  integrated
       manufacturers to distributors.

   25) The market investigation did not provide indications to depart from the Parties' view that there is a relevant market for SMBG systems. In
       particular, it confirmed that each meter needs a proprietary type of strip.[11]

   26) The exact product market definition, and in particular  the  distinction  between  vertically  integrated  and  non-vertically  integrated
       manufacturers of SMBG systems, can in any event be left open as the Transaction raises no competition issues under any market definition.

2     Distribution of SMBG systems

   27) The Parties submit the downstream market for the distribution of SMBG systems includes vertically integrated and non-vertically integrated
       distributors.

   28) The exact product market definition can be left open as the Transaction raises no competition issues under any market definition.

2 Geographic market definitions

   29) Concerning the manufacture of SMBG systems, the Parties note that the Commission has considered that markets for the provision of  medical
       devices on an OEM basis or markets for contract manufacturing services are at least EEA-wide, and possibly wider.[12]

   30) The Parties agree with this approach because (i) usually suppliers of SMBG systems have centralized production,[13] (ii) in Europe,  there
       is a single marketing requirement need to sell into the EEA, the CE mark, (iii) are  no  specific  barriers  for  transportation  of  SMBG
       systems or barriers to trade.

   31) Concerning the distribution of SMBG systems, the Parties, in line with previous Commission decisions,[14] suggest that the downstream  IVD
       market as national in scope, because of primarily with regard to demand side considerations such  as  (i)  the  national  organization  of
       suppliers’ distribution networks, (ii) the fact that customers tend to buy their reagents and instruments in their  home  country  due  to
       their need for rapid and reliable service to ensure continuous availability of these products and (iii) the considerable price differences
       existing among Member States that reflect the divergences in national health policies, social security regulations and the technology used
       in laboratories.

   32) In any event, the question of the exact geographic scope of the  markets  concerned  can  be  left  open  as  the  Transaction  raises  no
       competition issues under any market definition.

3 Competitive assessment

   33) PHC currently has two distribution partners for its SMBG systems, BDC and Arkray.

   34) PHC’s worldwide sales of SMBG systems to BDC represented [75-100]% of PHC's total 2014 sales of SMBG systems (and [75-100]% of its  direct
       sales in Europe). Indeed, BDC has:

a. […] rights to distribute PHC's second-generation of SMBG systems in certain territories, including certain EEA Member States; and

b. a […] agreement with PHC for the distribution of its so-called "third-generation" SMBG systems.[15]

   35) On the other hand, Arkray currently has:

a. a […] agreement with PHC for the distribution of its so-called "first-generation"[16] SMBG systems; and

b. […] distribution rights for certain models of PHC's so-called "second-generation"[17] SMBG systems in certain EEA countries ([…]).

   36) The SMBG systems sold by BDC are manufactured by a number of external suppliers, mainly PHC  (around  [75-100]%  and  [75-100]%  of  BDC's
       worldwide and EEA sales, respectively), […].

   37) PHC’s share on the upstream market for the manufacture of SMBG systems is below 25% under all but one  possible  market  definitions.  The
       only exception is the narrower upstream market for the supply of SMBG systems on an OEM basis by non-vertically  integrated  manufacturers
       to distributors, where PHC's market share in the EEAwould be [40-50]%, but the  Parties  stress  that  therein  the  sales  of  the  major
       vertically-integrated suppliers are not included.

   38) In the downstream market for the distribution of SMBG systems, BDC’s share exceeds 30% (by value or by volume)  in  the  following  Member
       States: Croatia ([30-40%), Denmark ([40-50]%), Finland ([40-50]%), Germany ([30-40%), Greece ([40-50]%), Norway ([30-40]%),  Poland  ([30-
       40]%) and Slovenia (40-50]%). The large majority of these sales are   achieved  by  sales  of  PHC's  SMBG  systems,  under  the  existing
       distribution agreement. If these volumes were to be excluded, BDC's share would not exceed 5% in any Member State.

   39) The transaction will lead to the vertical integration of PHC's manufacturing and BDC's distribution  activities  for  SMBG  systems.  Both
       input forclosure and customer forclosure can however be excluded, for the reasons set out below.

   40) Regarding input foreclosure, it should be noted first that the main competitors of BDC in the downstream distribution market are the three
       vertically integrated competitors (Roche, Abbott and J&J), which between them account for around [60-70]% of the total  downstream  market
       and would not be affected by an input foreclosure strategy.

   41) Second, PHC has already an […] distribution agreement with BDC for its main products (the third-generation SMBG systems).  The  pre-merger
       situation will therefore remain unchanged in relation to these products. As regards the first- and second-generation SMBG  systems,  which
       are also distributed by Arkray, PHC submits that it will continue to supply those to Arkray. More importantly, Arkray has  indicated  that
       it is not concerned by the Transaction, as Arkray's purchases from  PHC  are  […],  and  they  represent  a  small  part  of  its  overall
       business.[18]

   42) The fact that PHC has traditionally chosen to distribute its SMBG systems through […]  distribution  agreements,  and  not  to  make  them
       available in an "off the shelf" manner, means that there are no other distributors of PHC's SMBG systems  who,  potentially,  risk  to  be
       affected by the transaction.

   43) Customer foreclosure can also be excluded in the 8 EEA Member States for which the downstream market is vertically  affected,  given  that
       PHC's SMBG systems (supplied from BDC on an […]) account for around [75-100]% of BDC's sales in this segment. If such  sales  were  to  be
       discounted, BDC's market shares would fall to no more than 5%. Moreover, the  remaining  suppliers  of  BDC  either  provide  soon  to  be
       discontinued products, or could have access to other distributors. There are at least 20 other non-vertically integrated  distributors  of
       SMBG systems besides BDC active in the EEA, including Menarini, Sanofi, Merck, GE, Wellion, ForaCare, Diamet. Consequently, non-vertically
       integrated manufacturers of SMBG systems will continue to have many alternative distributors for their products.

   44) Consequently, no competition concerns arise regarding the vertical relationship between the Parties.

       CONCLUSION

   45) 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)
Margrethe VESTAGER
Member of the Commission

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[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]   Publication in the Official Journal of the European Union No C 357, 29.10.2015, p.16.

[4]   Turnover calculated in accordance with Article 5 of the Merger Regulation.

[5]   Both Parties are also active in the area of lancing devices, but these do not give rise  to  competitive  concerns.  BDC  produces  lancing
devices solely for sale with its SMBG meter kits and does not supply lancing devices to third parties manufacturers or distributors for  sale  on
a stand-alone basis. PHC manufactures and sells lancing devices, but only in[non-EEA country]. Should the market for lancing  devices  be  deemed
worldwide in scope, no affected markets would arise under any plausible product market definition.

[6]   Hoffmann La Roche/Boehringer Mannheim Case No. IV/M.950 (1998), paragraphs 25  to  44;  Siemens/Bayer  Diagnostics,  Case  No.  COMP/M.4321
(2006), paragraph 10; Siemens/Dade Behring Case No. COMP/M.4865 (2007), para. 7;  Abbott/Solvay,  Case  No.  COMP/M.5661  (2010),  paragraph  19;
Danaher/Beckman Coulter, Case No. COMP/M.6175 (2011), paragraph 7.

[7]   Thermo Fisher/Phadia, Case No COMP/M. 6293 (2011), paragraph 8.

[8]   Hoffmann La Roche/Boehringer Mannheim, Case No COMP/ M. 950 (1998), paragraphs 34 to 37 ; Bayer/Chiron Diagnostics, Case  No  COMP/M.  1325
(1998), paragraph 15.

[9]   Hoffmann La Roche/Boehringer Mannheim, Case No COMP/M.950, paragraphs 28 to 31; Siemens/Bayer  Diagnostics,  Case  No  COMP/M.4321  (2006),
paragraph 19; Thermo Fisher/Phadia, Case No COMP/M. 6293 (2011), paragraph 19.

[10]  In any case, even if the Commission were to distinguish between meters and sensors, the market shares would be largely  similar  given  the
proprietary nature of the overall system.

[11]  Agreed non-confidential minutes of a conference call with Roche, 9 October 2015.

[12]  GE/Abbott Diagnostics Division, Case No COMP/M. 4569 (2007), paragraph 15; Sanofi-Aventis-Zentiva, Case No COMP/M. 5253  (2009),  paragraph
191; Abbott/Solvay, Case No COMP/M. 5661 (2010), paragraph 16; Thermo Fisher / Phadia, Case No COMP/M. 6293 (2011), paragraph 69.

[13]  PHC manufactures its SMBG systems only in[non-EEA countries].

[14]  Danaher/Beckman Coulter, Case No. COMP/M.6175, para. 18.

[15]  In the form of a long-term […] relationship, including […].

[16]  As of  June 2016, the first-generation SMBG systems will be prohibited from being supplied in the EEA if they are not  redesigned  to  meet
the latest ISO standard (ISO15197-2013).

[17]  The second-generation SMBG systems may also not meet the latest ISO standard but Arkray is conducting the appropriate  clinical  trials  in
order to check the complience with those requirements.

[18]  Agreed non-confidential minutes of a conference call with Arkray, 8 October 2015.

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

                                                                  PUBLIC VERSION

                                                                 MERGER PROCEDURE