China MOFCOM Approves New Biotech Acquisition
On January 14, 2014, the China Ministry of Commerce (MOFCOM) conditionally approved Thermo Fisher Scientific Inc.’s (Thermo) 13.6 Billion acquisition of rival, Life Technologies Corporation (Life Tech). What are these companies? And why do they need approval from MOFCOM for this acquisition?
Thermo and Life Tech are multinational companies operating in the biotechnology and life sciences industry.
The Anti-monopoly Law of the People's Republic of China applies to mergers and acquisitions within the territory of the PRC, and to those outside of the PRC which may eliminate or restrict competition in the Chinese domestic market. The existing Chinese operations of these two companies make this acquisition subject to MOFCOM approval. This is in line with similar requirements in other countries.
What methods did MOFCOM rely on for its analysis?
The analysis was carried out with input from consultations with relevant government agencies, trade associations and third parties, including similar regulatory agencies from other countries. MOFCOM entrusted the economic analysis to a third party economic consultancy.
What factors were looked at in the review?
The analysis focused on post acquisition product concentration levels in relevant markets and on estimates of future price increases which were established using the Herfindahl-Hirschman Index (HHI), margin-HHI regression analysis, and indicative price increase analysis. These standards are broadly in line with European and USA regulatory agency standards.
What this means is simply if the combined company will have a large market share, the deal won’t be approved or restrictions will be imposed right?
It’s not that simple. Factors such as the number of competitors in relevant markets, the extent of limitations on production capacity, and low technological barriers to entry contributed to ruling out competition concerns even regarding a few products which the combined company would control a high level of market share.
Well, what factors contribute to a finding of competition concerns?
Large post acquisition market-share in China, predictions of insufficient competition, high technological barriers to market entry in low completion categories, predicted high levels of market (pricing) power post transaction with a significant possibility of price increase, predicted changes to the structure of the market which would weaken consumer choice, and strong tendencies of customers to rely on established relationships with proven quality were all factors taken into account in finding completion concerns.
Finally, where the acquisition would give 80%-90% worldwide control of a certain patent held by MIT and licensed by both Thermo and Life Tech (only 4 worldwide licenses granted) to the combined company, MOFCOM found competition concerns even though the actual control over this patent within the China market would still be relatively low.
But the deal was approved… How did MOFCOM handle these competition concerns?
Thermo, the acquiring company was required to:
l Divest its global cell culture business,
l Sell a 51% interest in a separate Chinese Bioengineering Company,
l Divest its global gene modulation business,
l Make commitments to reduce the catalogue prices for certain products by 1% each year for 10 years, along with commitments not to reduce discounts to Chinese distributors, and
l Supply certain products to third parties as an original equipment manufacturer or with a perpetual and non-exclusive license for the next 10 years.
How do the remedies imposed by MOFCOM differ from those used by other countries?
MOFCOM’s requirements went beyond those of other countries’ regulatory agencies by requiring the sale of a 51% stake in a Chinese company, and by fixing pricing controls and equipment sales/licensing contracts over the next ten years. These controls are specifically targeted to the Chinese market rather than by global competitiveness concerns. Such pricing controls have been adopted by MOFCOM in approving similar transactions in the past.