The European Commission has routinely considered potential harm to innovation as part of its merger assessments, particularly in R&D driven sectors such as pharmaceuticals and technology. In recent years, however, the Commission’s traditional innovation concerns have developed into broader, more far-reaching concerns, requiring divestments of assets and R&D related to early stage pipeline products as well as of entire R&D capabilities. Such an approach has been applied most recently in the Commission’s conditional approval of Bayer/Monsanto.[1]

Traditional Innovation Concerns

Theoretically, innovation can be both enhanced and diminished by the level of competition in a market; on the one hand, less competition could lead to more innovation by encouraging companies to realize greater profits from innovations given fewer competing rivals (also known as increased appropriability). On the other hand, more competition could lead to more innovation, with increased competitive pressure encouraging companies to produce better products and services.

Within the Commission’s own guidance, innovation is identified as a general factor for consideration in substantive merger assessments, from both a horizontal and vertical perspective.[2] In horizontal cases, the Commission has traditionally been concerned with a decrease in the merging parties’ incentives to innovate, related to less investment in pipeline products and has limited divestments to late stage pipeline products and accompanying technology, most notably in the pharmaceutical industry.[3] In vertical cases, the Commission has previously identified innovation efficiencies in support of merger clearance, usually related to improved technical capabilities resulting from the merger.[4]

A More Aggressive Approach to Horizontal Innovation Assessment: Agricultural Mergers

Building on its traditional approach, the Commission has continued to include innovation harm as part of its merger assessment within industries heavily driven by R&D, most recently in the agricultural industry. However, its perspective of potential harm (in concentrated sectors at least) has become broader and more far-reaching, arguably evolving into a fundamentally more interventionist approach: two illustrative examples of this are the Commission’s conditional approvals of Dow/DuPont[5] in March 2017 and Bayer/Monsanto almost a year later.

Dow/DuPont

The Commission finally approved the merger in Dow/DuPont in March 2017 following Phase II commencement in August 2016. Its finding of innovation harm included: (i) harm to early stage pipeline products in respect of which the parties’ existing R&D overlapped and (ii) harm to overall innovation in the crop protection industry.[6] As a result and with a view to ensuring a purchaser’s ability to continue to innovate for the benefit of consumers, the Commission ordered a divestment of almost the entirety of DuPont’s global R&D organization, including all related assets, personnel, know-how, patents and other IP rights.[7] This applied despite the Commission’s acknowledgement of the very early stage nature of the pipeline products in question (taking up to 10 years and costing almost US$250 – 300 million to be launched),[8] and the absence of analysis to identify specific products or lines of research affected by its concerns about the impact on the overall level of innovation following the merger.[9] This is notwithstanding its guidance in the Horizontal Merger Guidelines that the Commission will ordinarily limit its innovation analysis to foreseeable or reasonably predictable changes to existing product or technology markets.[10]

Bayer/Monsanto

The Commission cleared the ChemChina/Syngenta merger in April 2017 without identifying innovation concerns in the pesticides market,[11] but went on to impose significant divestment remedies in this and other agricultural markets (seeds and digital agriculture) in its conditional approval of Bayer/Monsanto in March 2018, following Phase II initiation in August 2017. Although more detailed information of the Commission’s underlying theories has yet to be publicized, it is clear from the Commission’s press release[12] and Commissioner Vestager’s accompanying statements that the Commission is using its decision in Dow/DuPont as inspiration for continuing to assess innovation harm aggressively, translating this into significant divestment packages: in Bayer/Monsanto, the package is worth approximately EUR 5.9 billion and spans three product markets (seeds, pesticides and digital agriculture).

Similar to its approach in Dow/DuPont, the Commission has imposed a divestment of Bayer’s global R&D organisation for its broadacre seeds and traits,[13] and has ordered Bayer to grant a licence over its global digital agriculture portfolio and accompanying pipeline products.[14] The former, the Commission notes, is necessary to ensure the continuing viability of the business (required for a valid remedy). The characterisation by the Commission of the latter product market as “emerging,” however, illustrates the breadth of its approach and mirrors the far-reaching assessment of innovation harm in Dow/DuPont.

By contrast to Dow/DuPont, however, the Commission in Bayer/Monsanto is more specific as to the particular products in respect of which R&D and assets should be divested to maintain innovation competition. For example, Bayer has committed to divest assets related to a non-selective herbicide product (glufosinate) directly competing with a corresponding Monsanto product (glyphosate), as well as three lines of research focusing on, in the Commission’s words, “the research race” to finding future challenger products to glyphosate which is currently being phased-out across Europe. Similarly, Monsanto has committed to divest assets related to its nematode seed treatment product, with the aim of maintaining competition between Bayer and Monsanto as regards future products developed for such treatment.

The Future for Innovation-Based Theories of Harm

It is clear that parties contemplating mergers in concentrated, R&D heavy sectors ignore at their peril the Commission’s more interventionist stance on innovation competition, likely driven by its views that competition is needed to drive innovation and, in Bayer/Monsanto, to “push companies to continue to develop new products.” There is also a material risk that such an approach could lead to a higher divestment price than might have been the case in years past.