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SUN-RANBAXY @ CCI: 1st Structural Remedy!

Published on Sat, Dec 13,2014 | 20:41, Updated at Mon, Dec 15 at 17:31Source : CNBC-TV18 |   Watch Video :

It’s the first time that India’s competition regulator has ordered the sale of certain assets before approving a merger. CCI gave the 4 billion dollar Sun-Ranbaxy deal conditional approval. The 2 companies must sell certain select products identified by the CCI before the merger can take place. This CCI order will set precedent for other such deals in India and hence, today, we are going to examine what it says and what means. First, here’s a brief look at the highlights of the order.

Sun and Ranbaxy are both leading generic pharmaceutical players with most of their revenue from international sales. The CCI examined how a merger between the two would impact the Indian pharma market. To do so, it first defined relevant product market based on the molecule. Thereafter, CCI examined 51 molecules or relevant markets where the combination would have a more than 15% market share. It found that in 7, the combined entity will have an adverse impact on competition. This determination was made not just on the basis of the market share of the merged entity but also taking into account the market share of competitors and number of significant players in the relevant market. For instance, in one of the 7 molecules, the merged entity’s share adds up to just 40-45%; less than half the market. But there are only two other significant competitors and one of them has seen market share decline over the last 4 years. Based on this analysis, Ranbaxy has been asked to sell its product based on this molecule, before the merger is consummated. In total, Ranbaxy is to sell 5 products and Sun 2.

SUN-RANBAXY @ CCI
1st Structural Remedy
Merger gets conditional approval
Sun & Ranbaxy to sell 7 products before merger

How will this CCI order impact future deals? To discuss that, CNBC-TV18’s Menaka Doshi spoke to Amitabh Kumar of JSA and Samir Gandhi of AZB.

Doshi: What do you make of the timeline within which this Phase II application has been dealt with by the Competition Commission of India (CCI)- given that this is a first such big mega pharmaceutical merger that CCI has dealt with. The deal was announced in April and we have a decision come in from CCI in December? How do you assess CCI’s ability to sort of come to grips with this quickly enough?

SUN-RANBAXY @ CCI
1st Structural Remedy

Sun, Ranbaxy announce deal in April 2014
Parties make Phase 2 filing in May 2014
CCI issues order in December 2014

Gandhi: CCI has done a pretty good job. This is the first time that they have undertaken an exercise such as this. So, to that extent they were mindful of the 210 day statutory period within which they needed to clear this.

Doshi: This is what I pickup from those involved in the deal. They were a little dissatisfied - let me put it that way - with the lack of sufficient pre-merger consults and post-merger consults with CCI. In fact they had a parallel process running with the Federal Trade Commission (FTC). In that process, I am told, already that they have understood what the pain points of the FTC are and are already working on divesting some products so that FTC can give them the a go ahead in its order. As opposed to the fact that with the CCI they have run through a 210 day period, now there is an order and then they will have to go through the divestitures before they can get a final approval for their merger. In mergers, time is money, how do you assess how CCI has dealt with this?

Kumar:  There is a little design fault here because if you look at the jurisdictions, in the US or in the EU it is the parties who - when they find these pain points- go and suggest modifications to their own proposals. However, if you look at our law, it says that the CCI will provide the modifications which if the parties do not agree with, they can give their amendments.

Now CCI being a competition agency will not perhaps know the market or industry as well as the parties to the transaction. So, if we put in the reverse that it is the parties who should give the modifications once they have entered into a negotiation with CCI on finding what CCI feels as their concerns and probably this delays the whole process. So, if this is taken care of in the next rounds of amendments perhaps the things will be faster.

Doshi: Let me now come to how CCI has determined the relevant product market and therefore how it has determined which products will have and an appreciable adverse impact on competition and therefore how it is determined which ones need to be sold. They have used the molecular level to determine relevant product market. Is that in keeping with precedent of all pharmaceutical deals across the world?

SUN-RANBAXY @ CCI
1st Structural Remedy

CCI examined 51 molecules

Appreciable Adverse Impact on Competition?
-    Market share of merged entity
-    Market share of competitors
-    Number of significant players

Gandhi: They have indeed defined it at a molecular level and we have at least in the past seen some previous decisions of the CCI to define the market at the therapeutic level. So, to that extent it is a bit of a departure from what they have been doing in previous deals here in India as well. We were a little surprised with this but let me put it this way- we have always known that there is a possibility of defining the market at either of these two levels. It is not entirely out of sync with what happens elsewhere in the world as well.

Doshi: I sense a big but coming in there in your answer. So, let me try and provoke that one. They haven’t just looked at the market share of the combined entity post merger to determine how or what the adverse impact could be, right? They have obviously taken also the market share or the leadership of the remaining competition, the strength of the remaining competition. So there may be instances where the combined market share of the entities would be more than 60 percent but they haven’t said that the products need to be sold and yet in one case where the combined market share of the two was about 40 percent or so, they have said that the products need to be sold because the competition remaining in the market place is not strong enough. When you see this data that they have put out does it give you markers as to how CCI will deal with futures deals?

SUN-RANBAXY @ CCI
1st Structural Remedy

OLMESARTAN + AMLODIPINE + HYDROCLORTHIAZIDE | C9E22
Ranbaxy: 5-10% (TO DIVEST)
Sun: 30-35%
Combined: 40-45%
Only 2 significant competitors: Macleods (15-20%), Micro Labs (10-15%)

CCI Observations
-    Merged Entity market share almost double that of next competitor
-    Micro Labs' market share on the decline for 4 years
-    Ranbaxy recently entered the market & its market share has been increasing.

SUN-RANBAXY @ CCI
1st Structural Remedy

7 products to be divested
-    Via asset sale transaction, including tangible & intangible assets such as IPR
-    Sale does not include manufacturing facilities, customer outstandings
-    Buyers to have Pharma experience, financial resources, expertise, manufacturing capability...
-    CCI to appoint 'monitoring' agency to supervise divestments

Gandhi: The matrix that they have used, at least from what you find from the order, seems to be simply see a) market share b) what is the next significant competitor, how many other competitors exist in the market. However, we are used to seeing worldwide other matrix such a market concentration reflected as an Herfindahl–Hirschman Index (HHI) ratio and also as a concentration ratio (CR4). Again, one understands that it is possible that they used these ratios to understand market concentration but there is nothing in the order which suggests that a) indeed that they have used it and b) more importantly what the outcome of such analysis was.

When you speak of what kind of a message this decision leaves or what kind of a precedent it sets, I think we are still a little unclear after this decision as to what the CCI considers in the pharmaceutical industry as being problematic market share and concentration ratio which means that business is left a little bit in the dark. This goes back to the question about whether they could have offered those remedies earlier.

Kumar: I would like to add three things here. One is that this is a Phase II investigation where the parties have been asked to put in their objections and the CCI does know that they have got objections from many parties which have been examined. Now we don’t know what kind of objections were received and whether they went in to its analysis of whether there is going to be a harm to competition in the market. So that part is missing.

Second thing that I would like to add is that market shares are important and if you are having 85-95 percent, perhaps, you know there is very little to argue. I will take you back in time to the famous Boeing-McDonnell Douglas Merger which was also creating the same problem that out of only 3 parties available in the world, two were merging and so that would leave only two. That is when the thought came out that the market has to be contestable. It is not necessary that if there are three big, larger players and they are getting reduced to two, it necessarily affects market. Now what has not come out in the analysis, which probably CCI may have done as Samir puts it, but it is not there in the order. If the merging parties are having 70 percent market share but the third competitor has 25 but it has gained 0 to 25 pretty quickly, then perhaps market remains contestable. So, without all this analysis, I agree with Samir that there is still little grey area into how CCI will look into it in future.

Doshi: That brings me to the last point that I want to bring up and the fact that this deal, for a final approval from the CCI, requires an upfront buyer which is that the two parties must sell these seven products before their merger can be consummated. It is not unusual for authorities to ask for the divestitures to take place before the merger is approved. However, it links into the very point that we have been talking about saying if you don’t do robust pre and post merger consults and you wait till the timeline is exhausted, you are going to end up forcing the parties to spend more time doing what it takes for the deal to be consummated?

Kumar: I agree with you because it is like if you take the two divestiture periods- incase the first does not succeed- then we are looking at six plus four; ten months. I am reminded of the famous Staples and Office Depot case in the US where the court gave an injunctive relief to FTC after eight months of hearing. The parties withdrew their applications because they felt that eight months have already gone and in another couple of months, the market situation will not remain the same at which they had negotiated the deal.

So, ten months is a fairly long period and that combined with the fact that this is the first time that there will be a monitoring agency which is going to monitor and then also perhaps sell the assets if this doesn’t succeed. It does throw some practical problems before the two merging parties.

Gandhi: Let me also raise one additional practical issue which is that in Sun-Ranbaxy case, it is indeed the case that it was a purely Indian deal in the sense that parties closure or the ability to close the deal is held up until they are able to divest the asset.

However, consider for a moment where there is a global transaction, a large multinational, multijurisdictional global transaction where as a result of an order of a CCI, the global deal itself is unable to close. So it becomes quite problematic from that perspective as well because one depends on the other. The global deal need to close for the Indian companies to have a sense whether this transaction is going to go ahead but the global deal cannot close until an asset which belongs to one of these Indian companies is sold.

So, again when I sit back and look at Sun-Ranbaxy I don’t think it does enough to give us much in terms of precedent - either by way of process or for that matter by way of substance. It is a good decision all things considered but I do hope that the CCI considers what a number of people have been saying in the past that there is a need for detailed guidelines as is the case in many other developed jurisdictions to give India Inc that certainty about how their mergers are going to go ahead in complex situations like this.

 
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