Background

Thermo Fisher and Life Technologies are US-based multi-nationals that are active in biotechnology and life sciences.

The transaction was notified on 3 July 2013 and accepted by MOFCOM on 27 August. On 26 September, MOFCOM initiated a Phase II review and with the parties’ consent it extended its Phase II review to 23 February 2014. MOFCOM completed its review and adopted a conditional clearance decision on 14 January, after concluding that the proposed transaction risked eliminating and restricting competition in cell culture products, SSP kits, SDS-PAGE protein standards and siRNA reagents.

(Technical terms in this briefing are literal English translations of the terms used in MOFCOM’s clearance decision which was made in Chinese. )

Market Definition

MOFCOM found that the parties’ activities overlapped in three broad areas, namely cellular and molecular biology, protein biology and cell culture technologies. It identified 59 relevant product markets based on demand and supply substitutability considerations.

In relation to geographic market definition, MOFCOM determined that two of the product markets – Australian/New Zealand HyClone and siRNA reagent – are global in scope given the nature of the technologies and patents required for production.

For the remaining 57 product markets, MOFCOM determined that the relevant geographic market was China. However, it also considered the parties’ respective market position at the global level. MOFCOM considered, inter alia, the commoditised nature of the products, the nature of production technologies involved and the fact that no unique patents were required for the relevant products, as well asChina’s unique distribution and pricing models in reaching its decision. 

Competition Analysis

As in prior cases, MOFCOM consulted widely during its review. It consulted with relevant governmental agencies, trade associations and relevant third parties. It also conducted on-site visits and appointed a third party economic consultancy to assist with economic analysis.

MOFCOM’s analysis focused on market concentration levels and post-merger estimates of potential price increases. It identified 13 product markets for in-depth review based on the Herfindahl-Hirschman Index (HHI) and estimated post-merger price increases. These products were: medium (research field), Australian/New Zealand characterized foetal bovine serum, medium (industry sector), SSP kits, protein standards, bead-based purification equipment, process fluid, reactive dye, bovine serum, reverse transcriptase, thermal cycler and transfection reagent. 

MOFCOM found that the combined HHI for the identified products exceeded 1500 with a post-merger HHI increment of at least 100. It also found that the transaction would result in a price increase of more than five per cent in 12 of these markets (except bead-based purification equipment) using margin-HHI regression analysis and indicative price increase analysis. 

MOFCOM ruled out competition concerns in the markets for reactive dyes, reverse transcriptase, thermal cyclers and transfection reagents despite high post-merger combined sharesgiven the number of competitors active in the relevant markets, limited limitations on production capacity and low technology barriers to entry. However, it identified competition concerns in: cell culture products, SSP kits, SDS-PAGE protein standards, and siRNA reagents for the following reasons: 

  • Cell culture products: Thermo Fisher and Life Technologies are both major suppliers of cell culture products with a combined market share of 40-60% globally and larger in China. Although other suppliers exist, they are much smaller and their respective market shares are very low. In addition, the market is characterised by high entry barriers and strict product quality requirements with customers relying heavily on suppliers’ reputation and proven track record. As a result, customers are generally reluctant to switch suppliers.
  • SSP kits: The parties both had a pre-merger market share of 20-25% in China and their combined post-merger market share would be 40-50%. MOFCOM found that the merged entity would wield significant market power post-transaction, which in turn would lead to a significant price increase and negatively impact consumer welfare.
  • SDS-PAGE protein standards: The combined market share of both parties in China was 56%. Although the increment in market share was insignificant, MOFCOM found that the transaction would significantly change the structure of the market and significantly increase the market concentration level given the presence of only a few players in the market. In addition, MOFCOM’s market inquiry revealed that the transaction would limit the number of credible alternatives available to customers given the parties’ products high degree of market recognition and customers’ dependence on the parties’ respective product offerings.
  • siRNA reagents: Production of siRNA reagents requires the Tuschl patent owned by Massachusetts Institute of Technology (MIT). To date, MIT has authorised only four manufacturers globally to use its Tuschl patent. The authorised companies include Thermo Fisher and Life Technologies, the two largest manufacturers. MOFCOM noted that the parties’ combined market share in China was relatively low, but that their post-merger combined market share at the global level would be very high (80-90%).

Remedies Imposed

MOFCOM approved the transaction subject to the conditions that Thermo Fisher:

  • Divest its global cell culture business, including tangible and intangible assets required to preserve the viability, marketability and competitiveness of the business;
  • Sell its 51% interest in Lanzhou Minhai Bioengineering Co., Ltd. in China;
  • Divest its global gene modulation business, including tangible and intangible assets required to preserve the viability, marketability and competitiveness of the business;
  • Reduce the catalogue prices for SSP kits and SDS-PAGE protein standards by 1% each year over the next 10 years, and shall not reduce the discounts offered to Chinese distributors; and
  • Supply SSP kits and SDS-PAGE protein standards to third parties (at their election) on an original equipment manufacturing (OEM) basis or based on a perpetual and non-exclusive license for the next 10 years.

Comments

The decision shows the increasing sophistication of MOFCOM’s analysis and use of economic modeling to assess the competitive impact of a transaction with unilateral effects. This is the first time that MOFCOM has provided details of the economic standards applied during its merger review. The decision also reflects MOFCOM’s willingness to rely on external third party economic consultants to assist with its merger reviews.

HHI-based market concentration

MOFCOM has yet to publish guidelines on the HHI standards it will apply when analysing transactions with unilateral effects. The HHI market concentration levels in this decision (i.e. combined HHI above 1500 with a delta of at least 100)  provide a useful reference for future transactions. This is broadly consistent with the HHI benchmarks set in the EU’s Guidelines on Horizontal Mergers and US 2010 Horizontal Merger Guidelines for identifying transactions that may result in anti-competitive harm.

Estimates of price increases

MOFCOM’s reliance on margin-HHI regression analysis and indicative price increase tests also highlights the increasing sophistication of its economic analysis. However, MOFCOM’s decision stops short of providing detailed guidance on how it applied these economic models. This is unfortunate given that the use of certain models – in particular recent price increase models – remains controversial. It will be important for companies to engage early with MOFCOM to understand the economic rationale of its analysis and any economic models on which it has relied. The creation of economic models can be time-consuming and expensive. It is unclear from the decision whether the parties engaged their own economists and if so to what extent the parties’ economists were able to engage with MOFCOM’s economist to discuss the application of economic models in this case. Companies will still  need to consider carefully whether to engage economists in a given case and which econometric analyses to perform. 

Approach to remedies

Like other major competition authorities, MOFCOM imposed remedies. MOFCOM required broadly similar divestment remedies to address its concerns. However, its remedies went further and included a requirement to divest a 51% stake in a local business alongside long-term behavioural commitments with respect to the future pricing and supply of SSP kits and SDS-PAGE protein standards. The behavioural remedies seem designed to ensure that Chinese customers (and ultimately Chinese consumers) have access to products that are rich in technology on reasonable terms, including price. MOFCOM has imposed price-related remedies in the past in cases involving high-value technologies. These ‘local’ remedies highlight MOFCOM’s willingness to adopt remedies that differ from remedies imposed elsewhere. They also serve as a reminder that companies will need to engage with MOFCOM to negotiate a remedies package tailored to address the specific concerns raised in China.