On 8 August 2013, China’s Ministry of Commerce (“MOFCOM”) granted a clearance on the proposed acquisition of the Swedish dialysis equipment manufacturer Gambro AB (“Gambro”) by its US rival healthcare company Baxter (“Baxter”) in accordance with the Anti-monopoly law. The approval is subject to the conditions of the divestment of Baxter’s continuous renal replacement therapy business and the termination of an outsourcing production agreement with Niplo Corporation (“Niplo”) in China. After the acquisition Gambro will become a wholly owned subsidiary of Baxter.
MOFCOM received the notification on 31 December 2012 and officially decided to entertain the case on 12 March 2013 after receiving supplementary submissions made by the parties. MOFCOM proceeded into Phase II review on 10 April 2013 and subsequently an extension of deadline of the review was awarded on July 9. Although the MOFCOM clearance for Gambro/Baxter was granted less than one month after the approval by the European Commission (the “Commission”), which was also subject to similar conditions, the review process of MOFCOM was significantly prolonged as against the review of the Commission who received the filing of the transaction on 3 June 2013 and approved the same on 22 July 2013.
According to a recent news release of MOFCOM, 105 concentration filings have been accepted in the first half of this year, of which as many as 103 filings have been officially concluded. The Gambro/Baxter deal was the third conditionally approved merger case this year and also the 19th conditional approval since the implementation of the Anti-monopoly Law in August 2008.
Market definition, Market Concentration and Market Share
In the MOFCOM decision, the markets for continuous renal placement therapy (CRRT) products and haemodialysis (HD) products are defined as the relevant product markets. Considering relevant factors such as customs duties, transportation cost, exports and imports and trading conditions, MOFCOM determined the geographic market should coincide with the global market, with a focus on the impacts on China market.
Market concentration is a useful way to describe the competitive structure of the relevant market. As demonstrated in previous cases (e.g. Pfizer/Wyeth, Henkel/Tiande), MOFCOM has been becoming sophisticate in using economic methodologies such as the HHI index and CRn index to measure the level of market concentration. In the present case, MOFCOM found that the concentration level of CCRT series products market is very high based on the high HHI before/after the concentration, and the increment in each product market (namely, CRRT monitor, CRRT blood tubing set and CRRT dialyzer) both worldwide and China-wide. MOFCOM concluded that the transaction would lead to the increase in market concentration of CRRT series products. Furthermore, as indicated in Diagram II, the HHI increments in the China CRRT products market is particularly higher than those in the global market.
Baxter and Gambro are major competitors to each other in the CCRT series products market before the transaction. In assessing the competitive effect of the transaction on the market, MOFCOM analyzed the market share of Baxter and Gambro in each CCRT product market before and after the transaction. MOFCOM found that the combined market share of the two parties in each product market in 2012 was significantly higher than other market players either in China or across the world. MOFCOM concluded that Baxter would gain a dominant market position for CRRT products after the merger since the transaction would eliminate a main competitor of Baxter, thus would have negative impact on the market competition.
In the HD product market, MOFCOM reviewed the possible coordination between Baxter and its main competitor. In 2012, the main rivals (i.e. Niplo, Gambro, and Baxter) in the HD products market of China enjoyed a respective market share of 26%, 19% and 3%. Furthermore, the Baxter co-operated through an OEM agreement with Niplo. According to MOFCOM, after the transaction, as the two remaining main competitors, Baxter and Niplo, will have a combined 48% market share. MOFCOM was concerned that the continued existence of the OEM agreement would facilitate the potential coordination between Baxter and Niplo, and therefore restrict market competition.
Apart from the assessment of market concentration and market share, MOFCOM analyzed the likelihood of new entry into both CCRT products market and HD product market. MOFCOM held that these markets require long-term investment of capital and research and sales network. Also, relevant patents and other relevant intellectual property rights are crucial to effective entry. Furthermore, the requirement for approval from the Chinese government constitutes an additional barrier. Based on these factors, MOFCOM determined that the transaction poses great difficulties for new entry of enterprises into the relevant markets.
After several round of consultations, MOFCOM accepted the remedial measures proposed by the parties, and decided to approve the transaction on the condition that the two parties shall fulfill the obligations as follows in order to address the competition concerns.
Baxter shall divest its worldwide CRRT business, including its tangible and intangible assets necessary to ensure the survival and competing ability of the divested business.
Baxter shall terminate the agreement of OEM production with Niploas as far as it is relevant to Chinese market.
The divestment condition imposed by MOFCOM is identical with that under EU’s conditional clearance, while MOFCOM imposed an additional behavioral remedy (termination of the OEM contract) on the parties as the OEM contract might raise competition concerns in China. As discussed above, MOFCOM has employed many economic methods such as HHI index during the review, which suggests the MOFCOM’s growing experience in competition assessment and merger control enforcement. Also, as manifested in this case, the concern that China is usually the last jurisdiction to wait for clearance might persist in the near future. It’s notable that the parties actually submitted the merger filing to the Chinese regulator long before they did so in the EU (i.e. more than five month earlier). This maneuver might help them to obtain the conditional nod from China shortly after Baxter secured EU merger approval on 22 July 2013. We would suggest multinationals assign sufficient time and adopt a “Chinese Specific” strategy in order to secure a merger approval for a global transaction subject to MOFCOM’s review.