Merger review

Thresholds and triggers

What are the relevant thresholds for the review of mergers in the pharmaceutical sector?

Acquisitions of shares, mergers (mergers), transfers of joint shares, transfers of companies or assets and divisions (or divisions) of companies are subject to prior notification under the antimonopoly law ( AMA) if they exceed certain thresholds. Transactions whose patterns involve more than one of these transactions are analyzed separately at each stage of the transaction and may require multiple reports. Under the AMA, different notification thresholds apply depending on the different types of transactions.

For stock acquisitions, which are the most common, the thresholds are based on both domestic turnover and the level of participation in the target. First, the total domestic turnover of all companies in the combined business group of the acquiring company must exceed 20 billion yen, and the total domestic turnover of the target company and its subsidiaries must exceed 5 billion yen. yen. Second, such an acquisition must cause the acquirer to own more than 20 or 50 percent of the total voting rights of all shareholders of the target.

These general rules apply to the pharmaceutical sector.

Is the acquisition of one or more patents or licenses subject to notification of merger? If so, when would this be the case?

The mere acquisition of one or more patents or licenses will not be subject to notification of merger under the AMA.

Market definition

How are product and geographic markets generally defined in the pharmaceutical industry?

In the Sankyo / Daiichi and Yamanouchi / Fujisawa merger case (both in 2005), the Japanese Fair Trade Commission (JFTC) defined the pharmaceutical market in light of the Anatomical Therapeutic Chemical (ATC) classification code developed by the European Pharmaceutical Marketing Research Association . The ATC code classifies drugs according to the main drug efficacy of the main ingredients. Although there are four levels of classification in the ATC code, from level 1 to level 4 (level 4 is the most detailed), the JFTC noted that the drug market should generally be defined in accordance with the level 3 classification. While this is the basic method for defining the product market, the JFTC also considers substitutability from the perspective of medical institutions and physicians. the Novartis / GlaxoSmithKline The case of the 2014 financial year defined these product markets on the basis of a level 4 classification for certain products and independently of the ATC code for certain other products. The JFTC may be more likely to deviate from the ATC code-based approach when new types of drugs are involved.

In the pharmaceutical industry, geographic markets are generally defined as the Japan market. In the distribution sector, geographic markets are probably defined as the markets of 47 prefectures.

Sectoral considerations

Are the sector specificities of the pharmaceutical industry taken into account when examining mergers between two pharmaceutical companies?

Like other mergers, the merger of two pharmaceutical companies is examined under the substantive test of whether the merger “may have the effect of materially restricting competition in a particular business area”.

In some merger cases, the JFTC characterized the prescription drug market as an industry where competitive pressure from the downstream market was intense (Sankyo / Daiichi; Yamanouchi / Fujisawa). However, in another subsequent case, the JFTC said that competitive pressure from the downstream market in the prescription drug market was not intense, as patients had little control over which drugs their doctors would prescribe, and doctors had little incentive to prescribe more affordable drugs. drugs to patients, since patients pay the cost of prescription drugs (Kirin Holdings / Kyowa Hakko, 2008).

In mergers related to medical equipment, the JFTC did not find that there was significant pressure from downstream markets, although price negotiations were observed, as physicians generally prefer medical equipment over the market. ‘they are used to using rather than new and cheaper equipment (Abbot / St Jude Medical Laboratories, 2016; Zimmer / Biomet, 2015).

Respond to competition concerns

Can the merging parties advance arguments based on strengthening local or regional research and development activities or arguments based on effectiveness in addressing antitrust concerns?

A call for increased research and development activities in Japan is unlikely to be helpful in allaying antitrust concerns. While the JFTC’s Antimonopoly Law Enforcement Guidelines Regarding the Review of Business Combinations (the Merger Guidelines) mention efficiency as one of the factors, as improving efficiency efficiency must be specific to the merger (i.e. it should not be that which can be achieved by some other method), we do not know of any case of merger in which the efficiency has singularly played a role. important role in obtaining authorization.

Horizontal mergers

Under what circumstances will a horizontal merger of companies currently active in the same product and geographic markets be considered problematic?

A geographic and product overlap between two parties to the concentration will be problematic if the concentration “may have the effect of significantly restricting competition in a particular business area”. “Competition” here includes both actual and potential competition (AMA, Article 2 (4)). The Tokyo High Court once ruled that “significantly restricting competition” means that due to reduced competition, a particular firm or group of firms creates a situation where it can dominate a market by setting, of its own volition and freely, to certain extent, price, qualities, quantities and other conditions (In re Toho and Shin-Toho, judgment of the Tokyo High Court, December 7, 1953).

The Merger Guidelines provide more detailed guidelines for reviewing horizontal mergers. According to the Merger Guidelines, where the relevant products are characterized as being differentiated by brands, etc., the concentration will be problematic if the parties to a concentration sell products that are highly substitutable for each other and the products of the concentration. Other competitors are not as highly substitutable for the products of the merging parties, as the parties could increase the price of the product without losing many sales after the merger. Even where the products concerned are characterized as being homogeneous, a merger of competitors will be problematic if other competitors cannot increase their production due to their limited production capacity.

However, the Merger Guidelines set out the following Safe Harbor rules. Horizontal mergers are unlikely to be considered problematic if:

• the Herfindahl-Hirschman (HHI) index after melting is not more than 1,500;
• the HHI after melting is greater than 1,500 but not greater than 2,500, while the increment of HHI does not exceed 250; or
• the HHI after fusion is greater than 2,500, while the increment of HHI does not exceed 150.

Product overlap

When is an overlap in products under development likely to be a problem? How is the potential competition assessed?

When product X developed by one merging party is expected, if launched, to become an influential competitor with existing product Y of another merging party, and the launch of product X is likely, a such an overlap between products X and Y can be problematic. In the Kirin Holdings / Kyowa Hakko 2008 case, the JFTC cited such an overlap involving products under development as one of the reasons why remedial action was required. In addition, in the Novartis / GlaxoSmithKline In that case, the JFTC analyzed that there was an overlap between two products due to be launched in the near future of one party and two products during phase III clinical trials of the other party.

Remedies

What remedies will generally be needed to resolve the issues that have been identified?

In the area of ​​merger control, the most common remedies would force the parties to a merger to part with overlapping products or assets. Other typical remedies include: allowing competitors access to bottleneck facilities owned by the parties; provide technological assistance to competitors; and granting competitors or customers the right to source overlapping products on the basis of cost of production.

However, in Japan, the JFTC has not issued any divestiture orders or other merger review appeals for about 50 years, as nearly all merger cases that may generate the JFTC’s interest have been handled by through an unofficial prior procedure. consultation process with the JFTC until June 2011, and the parties had almost always voluntarily followed the remedy resulting from the negotiation with the JFTC, if any. While the JFTC abolished the pre-consultation system on July 1, 2011, all parties to major merger cases have since appeared to have negotiated their remedies during Phase II (or sometimes Phase I), and have asked the JFTC not to issue an assignment order by committing to implement the agreed measures. Therefore, it remains unlikely that we will see any divestment orders in the near future.

Declaration date of the law

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April 1, 2020