Competition policy brief

Issue 1 | April 2024 ISBN 978-92-68-14914-0, ISSN: 2315-3113

KD-AK-24-001-EN-N, doi 10.2763/67590

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Page 1 Non-Price Competition: EU Merger Control Framework and

Case Practice

Page 16 Assessing Innovation Competition in Pharma Mergers

This issue focuses on non-price competition in EU merger control:

The content of this article does not necessarily reflect the

official position of the European Commission. Responsibility

for the information and views expressed lies entirely with

the authors.

In a nutshell

Mergers may affect both

price and non-price

parameters of competition,

such as innovation, quality,

capacity, data protection and

privacy, sustainability, and

reliability of supply.

When reviewing mergers, the

Commission takes these

factors into account, be it for

the purposes of defining the

affected markets, the

competitive assessment, or

potential efficiencies.

The importance of such non-

price parameters depends on

the specific industry and

merger but has grown over

the last years due to the

digital and green transition

and other economic changes

of market realities.

Competition Policy Brief

Non-Price Competition: EU Merger

Control Framework and Case Practice

Alexander Iken, Terézia Kianičková, Marion Bailly, Andrea Usai,

Gabor Koltay, Stephan Simon

Introduction - Why looking at non-price

competition?

Mergers are long-run events that may affect important

parameters of competition. Besides prices, transactions can

influence available products and services, or change their quality

and variety. Mergers might also influence the merging firms’

production processes, technologies, and capacities. These

changes might become effective immediately or only in the more

distant future. But they can have profound competitive

implications and the assessment of non-price parameters of

competition has been gaining an increasing prominence in merger

reviews by the European Commission.

In the EU, the competitive process is at the centre of the

assessment of the effects of mergers. The Commission applies a

broad “consumer welfare” standard, which focuses on preventing

harm to the competitive process, thus ensuring competitive

outcomes to the benefit of consumers. The notion of “consumers”

is wide, encompassing not just end-consumers, but also

customers at upstream levels of the value chain, including large

and small companies that act as consumers in various markets

and business transactions and that may suffer from competition

harm. This standard therefore applies regardless of which

parameters of competition may be adversely affected by a

merger. Consumer welfare depends directly on non-price aspects

of competition, such as variety, quality and availability of

products and services. The Commission’s scrutiny of harm to

consumers includes harm to the competitive process and is

integral to the significant impediment to effective competition

(“SIEC”) test under the EU Merger Regulation (“EUMR”)

Council Regulation (EC) No 139/2004 of 20 January 2004 on the

control of concentrations between undertakings, OJ L 24, 29.1.2004,

p.1.

To be clear, while the

Commission pursues a

consumer-centred

enforcement approach, it

does not go beyond a

competition-related

consumer welfare standard.

Merger control is part of EU

competition policy, and

while it can contribute to

other EU objectives, it does

not typically address other

societal goals if they are

not related to competitive

processes.

Parameters of competition

typically correspond to the

characteristics of the (final)

products and services

valued by consumers, for

instance price, quality,

innovation, environmental

impact, and the protection

of personal data and

privacy. But they are not

limited to those: relevant

parameters of competition

also encompass

(intermediary) processes

which reflect the companies’ longer-term business decisions (e.g.,

capacity, R&D efforts, capital expenditures) that will ultimately

affect the products and services offered to consumers in the

medium to long term.

For example, competition enforcement may impact labour conditions to

the extent that anticompetitive conduct occurs on labour markets.

Labour markets have thus been investigated in antitrust cases, notably

with respect to wage-fixing and no-poach agreements. At the national

level, the Hungarian and Portuguese competition authorities have

imposed fines for antitrust infringements in no-poach agreements

(case references VJ/61/2017 (Hungary) and PRC/2020/1 (Portugal)).

Similarly, the Commission is looking to investigate anti-competitive

conduct in labour markets (Speech by Margrethe Vestager at the Italian

Antitrust Association Annual Conference, "A new era of cartel

enforcement", on 22 October 2021).

Non-Price Competition: EU Merger Control Framework and Case Practice |

Competition Policy Brief No 1/2024

Consumers have always and will continue to put an important

weight on price as a parameter of competition. Nevertheless,

assessing the impact of a merger beyond (short term) effects on

prices allows for the capture of the negative effects for

consumers on all the parameters that matter to their purchasing

decisions. It thus seeks to prevent a structural negative impact of

a merger in the longer term. Non-price effects of horizontal

mergers amplify negative consequences for consumers through

reduced competition and compound price increases.

From a legal standpoint, EU law does not pose any obstacles to

assessing the non-price effects of mergers. The EUMR's

substantive test does not preclude the Commission from

considering any particular type of effect on competition that a

merger may bring. Furthermore, the Horizontal Merger

Guidelines

indicate that it is not only the ability of the merged

entity to profitably increase prices, but also to reduce output,

choice or quality of goods and services, diminish innovation, or

otherwise influence parameters of competition negatively in a

significant way that could lead to an intervention by the

Commission. The EUMR thus provides a flexible framework that

allows the Commission to assess competition between the

merging parties and their rivals across a spectrum of parameters

that are relevant in a given market.

This brief will explore a number of aspects of the Commission’s

approach to assessing the non-price parameters of competition.

Section 1 provides a non-exhaustive overview of the type of

non-price parameters of competition that may be relevant in a

merger review, pointing to industries where the Commission

would find them particularly relevant. Section 2 explores where

and how non-price parameters may be taken into account in the

Commission’s assessment of mergers.

1. Which non-price parameters, and in

which industries?

The Commission’s assessment of non-price effects is conducted

on a case-by-case basis, taking into account the specificities of

markets, products, and customer behaviour. In its case practice,

the Commission has developed a non-exhaustive set of criteria to

establish whether a non-price parameter is relevant in a specific

industry or market.

1.1 Innovation

Innovation is the essential driver of economic progress that

benefits consumers, businesses, and the economy as a whole.

Innovation efforts range from incremental technological progress

to more radical changes in how markets function, for instance in

See e.g., Haucap/Stiebale, “Non-price Effects of Mergers and

Acquisitions” (DICE Discussion Paper 402, 2023), Section 1, paper

commissioned by the European Commission.

Guidelines on the assessment of horizontal mergers under the Council

Regulation on the control of concentrations between undertakings, OJ C

31, 5.2.2004, p. 5 (“Horizontal Merger Guidelines”).

relation to renewable energy technologies and sources,

computer-integrated manufacturing, digital delivery of services,

and artificial intelligence.

Innovation requires competition. Undertakings normally have

an incentive to innovate to gain a competitive advantage to

capture sales away from each other and protect their existing

sales from each other. A merger may internalise this effect and

reduce the innovation incentive. In this case, the effects can be

thought of as standard unilateral effects, applied in this case to

innovation efforts rather than to prices or volumes. As a result,

mergers between rival innovators tend to reduce innovation

incentives, unless there are sufficient knowledge spillovers or

other efficiencies

Innovation-related harm to consumers manifests itself in three

ways – (i) a discontinuation of existing pipeline products, (ii) a

reduction in future R&D efforts, and (iii) a reduction in future

product market competition. In its merger control practice, the

Commission has thus found innovation to be an important

competitive parameter in several industries, for example the

pharmaceutical, medical device, agrochemical, financial services,

and digital sector. Assessing the importance of innovation in a

certain industry or market requires a close look at its features

and structure.

Industries with a significant expenditure on R&D. A starting

point and first indicator of the relevance of innovation is the

amount of expenditure on R&D across a given market or industry.

In its review of Dow/DuPont, a merger between two agrochemical

companies, the Commission’s analysis of innovation effects relied

on the high costs of discovery and development for new active

ingredients in the crop protection industry (of USD 286 million

per active ingredient).

In General Electric/Alstom, the Commission

examined the transaction’s effects on innovation for heavy-duty

gas turbines, in part because of the high R&D spend, the need

for specialised engineers, and the high headcount for R&D

programmes across the industry.

When reviewing mergers in the

pharmaceutical industry the Commission also pays particular

attention to effects on innovation because of its important role in

the competitive process, as exemplified by the significant

expenditure on R&D.

Rapidly growing or evolving markets. Innovation plays a

particularly important role in markets or industries which are

rapidly growing or changing. This does not only apply to the areas

of IT and digital services, but can extend to all kinds of industries,

such as pharmaceuticals, manufacturing, transport, or energy.

G. Federico, "Horizontal Mergers, Innovation and the Competitive

Process”, Journal of European Competition Law & Practice, Volume 8,

Issue 10, December 2017, Pages 668–677.

M.7932 Dow/DuPont, paragraph 242.

M.7278 General Electric/Alstom, paragraphs 385 – 387.

See for example M.7559 Pfizer/Hospira, paragraphs 55 – 56, where the

Commission observed development costs of up to EUR 400 million per

product (in this case a biosimilar).

Non-Price Competition: EU Merger Control Framework and Case Practice |

Competition Policy Brief No 1/2024

In its recent review of the acquisition by Illumina, a supplier of

Next-Generation Sequencing technology (‘NGS’) for genetic and

genomic analysis, of GRAIL, a customer of Illumina using NGS

systems to develop cancer detection tests, the Commission found

innovation to be a key parameter in the markets where the

parties were active. The Commission noted that GRAIL and its

rivals were engaged in an innovation race to develop early cancer

detection tests. While there was still uncertainty about the exact

results of this innovation race and the future shape of the market

for NGS-based early cancer detection tests, it was expected to

expand rapidly and to become highly lucrative.

At the same time, the importance of innovation is assessed

individually for each market without presuming that certain

trends apply throughout a given industry. Not every ‘digital

market’ is necessarily characterised by a high level of innovation.

For example, in Apple/Shazam, the Commission’s market

investigation did not find, at that time, innovation to be a relevant

parameter in the market for dedicated music recognition apps for

smart mobile devices.

Industries where price plays a limited role. When

competition in a given market is not primarily based on price,

innovation can be a key parameter of competition. Examples

include the pharmaceutical industry and, more recently, digital

services. While pharmaceutical products have a substantial price

tag, their cost is often covered by insurances or national health

systems and not by prescribing doctors or patients. Efficacy, new

modes of action, new treatment options and other innovative

aspects often outweigh the importance of price as a parameter

of competition. Digital services, for their part, often do not require

any monetary payment from consumers and suppliers instead

compete by offering the most innovative, practical, or user-

friendly service.

Industries with a ‘need’ for innovation. Certain products or

markets may require a certain level of innovation for purposes

other than the mere improvement of quality. For example, in

Dow/DuPont and Bayer/Monsanto, the Commission found that

innovation plays an important role in pesticide and herbicide

development due to the adaptation of certain weeds or insects to

existing products. Thus, innovation may be needed in these

markets to maintain a degree of effectiveness.

Similarly,

regulators might require suppliers to innovate. Thus, in

Dow/DuPont, the Commission found that, due to the growing

environmental and food safety requirements, some active

ingredients for crop protection products are prohibited over time

or the renewal of approval for use is refused.

In Hyundai Heavy

Industries Holdings/Daewoo Shipbuilding & Marine Engineering,

the Commission found that innovation was needed in the market

for large LNG carriers to reduce the boil-off rate of the

M.10188 Illumina/GRAIL, press release of 6 September 2022 available

at https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5364.

M.8788 Apple/Shazam, paragraph 163.

M.7932 Dow/DuPont, paragraph 1976 and M.8084 Bayer/Monsanto.

M.7932 Dow/DuPont, paragraph 1977.

transported LNG, to improve cost/effectiveness, and reduce fuel

consumption and CO

emissions.

Industries with a high level of IP protection. The level of

innovation effort in an industry can depend on the innovators’

ability to protect – or appropriate – their innovation results and

prevent knowledge spillovers to other firms. A firm will be less

likely to invest in innovation if its competitors could free-ride off

that investment by imitating. Wide-spread, efficient and lengthy

IP protection in an industry usually indicates a high level of

appropriability and the importance of innovation.

For instance, in Dow/DuPont, the Commission found that

appropriability in the crop protection industry was high pre-

merger. Most of the innovation takes place via the introduction of

new products (i.e., new active ingredients), which are patent

protected for a long time (25 years), while enjoying significant

sales with high margins both during the patent period and post-

patent expiry.

Similarly, in General Electric/Alstom, the

Commission noted the importance of intellectual property rights

and know-how in the market for heavy-duty gas turbines.

Therefore, in both cases, the Commission found innovation to be

an important parameter of competition and specifically assessed

the effects of the merger on innovation.

Industries with a high level of contestability. Markets or

industries where the best product wins shares away from rival

suppliers tend to incentivise innovation. When a firm knows it can

gain or protect profitable sales by providing greater value to

customers, it – and its rivals – will be motivated to innovate. If,

on the contrary, market shares are sticky, for example, because

consumers have strong brand preferences or high switching

costs, relatively few sales are contestable and innovation

incentives will be lower.

Process innovation. Innovation can also involve the

implementation of a new or significantly improved production or

delivery method. This includes significant changes in techniques,

equipment and/or software. Such process innovation may

decrease the unit costs of production or increase the quality of

products and delivery in many industries, including in mature

sectors. For instance, just-in-time production in car

manufacturing allowed to significantly reduce production costs by

reducing automakers’ working capital needs.

1.2 Quality and product differentiation

Quality often plays a central role in consumer decisions, and

therefore the competitive dynamics of markets. The term

“quality” can be defined as the range of product characteristics,

M.9343 Hyundai Heavy Industries Holdings/Daewoo Shipbuilding &

Marine Engineering, Section 8.3.3.

M.7932 Dow/Dupont, paragraph 458.

M.7278 General Electric/Alstom, paragraph 388.

C. Shapiro, “Competition and Innovation - Did Arrow Hit the Bull’s Eye?”,

page 364.

Non-Price Competition: EU Merger Control Framework and Case Practice |

Competition Policy Brief No 1/2024

other than price, which affect the value of the product to

consumers. These characteristics can include functionality,

design, know-how, track-record, durability, reliability, and

technology. Improving product characteristics covers both

providing a product of higher quality (i.e., vertical product

differentiation) and serving differentiated consumer tastes (i.e.,

horizontal differentiation).

In some differentiated product markets, firms may offer different

options of those characteristics, sometimes at different price

points. This is why customers across various industries may

attach a significant value to having access to high-quality

products at a competitive price. In this context, quality is one of

the most relevant non-price parameters of competition in

markets where product differentiation plays an important role

and/or where price competition is less relevant.

Industries with a (high) level of differentiation. The

importance of quality often depends on whether a market is

differentiated and whether quality is one of the top parameters

of competition. The Commission regularly reviews mergers in

differentiated markets and has found quality to be a

determinative parameter of competition. This is notably true in

the manufacturing industry, where industrial customers might

have specific requirements in relation to the characteristics,

reliability and durability of certain materials or parts.

The Commission’s practice in mergers between steel

manufacturers illustrates this trend, with the Commission’s focus

on quality as a prevailing parameter of competition being guided

by the existence of certain customers’ specific requirements or

the distinction, across the industry, of high-end v. low-end

products.

For example, in Tata Steel/thyssenkrupp/JV, the

Commission found that automotive customers had particularly

stringent requirements for hot-dip galvanised steel products used

for the exterior parts of a car, including the product’s technical

capabilities in terms of surface quality, which were one of the

most relevant parameters of competition.

Other examples abound. Thus, in markets for bespoke equipment

manufactured in response to particular technical requirements,

and set out in tender specifications by each individual customer,

quality is, by definition, a top parameter of competition and

determines the degree of closeness of competition.

In cases

involving food products, products may be geographically

differentiated, such that different levels of quality are attributed

or perceived, depending on a product’s origin.

The Commission

See cases M.8713 Tata Steel/thyssenkrupp/JV, paragraph 145 et seq.

and 798 et seq.

See for example M.9343 Hyundai Heavy Industries Holdings/Daewoo

Shipbuilding & Marine Engineering, paragraphs 105 and 396; M. 9779,

Alstom/Bombardier, paragraph 345 and 378.

See for example cases M.9110 Amerra/Mubadala/Nireus/Selonda,

paragraph 161, M.6850 Marine Harvest/Morpol, paragraphs 27-28,

M.10699 SalMar/NTS paragraphs 14-22, where the Commission

focused on quality as a declination of fish origin, an important

parameter of competition in the relevant market.

thus examines a variety of aspects of quality that may be

relevant depending on the industry at stake, with examples

ranging from interoperability across medical equipment,

network quality in mobile telecommunication services,

or to the

composition of a specific product in the food and chemical

industries.

Quality may also depend on the capacity of the

suppliers to adapt to specific consumers’ tastes.

Finally, the importance of quality in differentiated markets is also

manifest in situations where brands matter. In Merck/Sigma

Aldrich, the Commission thus found that quality (chemical

composition, purity of the product) was perceived by customers

through brands and worked as an important parameter of

competition, notably due to the strong safety hazard in the

laboratory chemicals markets.

Industries where price competition is less relevant. Quality

also plays an important role in the assessment of mergers in

markets where price competition is less relevant. In so-called

‘zero-price’ markets, competitors offer products and services for

free and thus, the impact of a merger on prices for customers

may not be the relevant metric for assessment. Instead, the

potentially negative effects of such transactions lie elsewhere –

for instance, in the form of quality degradation.

This phenomenon can also be observed in mergers in the digital

sector that do not concern zero-price markets such as online

advertising, where quality is a relevant parameter of competition.

For example, in Google/Fitbit, the Commission considered that the

target’s data was bringing an additional advantage to Google’s

already dominant position in online advertising when competing

on non-price parameters such as quality with other players.

1.3 Data protection and privacy

Data is a key input into many online services. The use of data or

access to data plays an important role in the assessment of

M.9945 Siemens Healthineers/Varian Medical Systems, paragraph 116,

where the Commission found that simulators and radiotherapy

solutions were differentiated products and focused on interoperability

as a form of quality.

M.7018 Telefónica Deutschland/E-Plus, where the Commission found

that retail mobile telecommunication services was a differentiated

product and that the merging parties competed closely on the quality

of their networks.

See cases M.9019 Mars/AniCura, paragraph 90, where the Commission

found that quality - in terms of ingredients and quality controls - was

an important parameter of competition for veterinarians when

selecting dietetic pet food and M.6813 McCain Foods Group/Lutosa

Business, paragraphs 10 and 35 where the Commission found that

potato products can be either premium or non-premium quality, when

sold to the food service market, depending on frying time, different

coating, and yellow colour as well as content of dry solids which

impacts crispness.

See case M.10433 Vivendi/Lagardere where the Commission found that

the market for people magazines was a differentiated one on the basis

of the quality of the magazine, including the way in which the

information provided is treated.

M.7435 Merck/Sigma Aldrich, paragraph 136 and ff.

M.9660 Google/Fitbit, paragraph 452 and ff.

Non-Price Competition: EU Merger Control Framework and Case Practice |

Competition Policy Brief No 1/2024

digital and tech mergers. In recent years, the Commission has

assessed data-related effects in several cases, as part of the

assessment of horizontal effects stemming from data

accumulation or in vertical assessments, where data is an

important input and could lead to foreclosure of rivals from an

important data input.

Furthermore, data protection and privacy are particularly relevant

parameters of competition in mergers in the digital and

technology industries, where companies use the data collected

from customers/users for commercial profit. As such, the data

that a company controls have in some industries become a key

driver of competition and a source of competitive advantage.

While the protection of data and privacy per se are specifically

regulated by data protection regulations,

in some cases privacy

can be an important element of quality of a product or service

offered and thus a parameter of competition between the

merging parties and their rivals and an element of differentiation.

The Commission may also examine whether data protection

regulations can pose certain limitations on the merging parties,

for instance with respect to combination of datasets or rules on

the collection, processing, storage and usage of personal data.

1.4 Sustainability

Merger control can play a role in supporting and complementing

the green transition in all sectors of the economy, such as

pharma, high technology, manufacturing, construction as well as

recycling markets. Indeed, a merger could undermine

sustainability goals by reducing investments in green technology.

As such, the environmental effects of a merger can be

assimilated to a specific form of innovation theory of harm.

Sustainability can also be a very important consumer preference,

for instance attached to goods produced locally or free of

pesticides. While the Commission will only intervene under the

EUMR to the extent that an impediment to competition induces

environmental harm,

there is a clear trend towards the growing

importance of sustainability-related aspects in the Commission’s

merger reviews.

Sustainability in merger control is not limited to a defined set of

industries. Companies across all industries strive to become more

sustainable, green, and environmentally friendly. However, in

order to take environmental considerations into account in

For more details on the Commission’s assessment of data in merger

investigations, see the Competition Policy Brief, Issue 02/2022 “Merger

Enforcement in Digital and Tech Markets: an Overview of the European

Commission’s Practice”, Section 1.3.

For instance, the EU’s General Data Protection Regulation (Regulation

(EU) 2016/679) or the Privacy and Electronic Communications Directive

(Directive 2002/58/EC, as amended).

See to this effect the reasoning included in M.8084 Bayer/Monsanto in

Section XIV: Non-Competition Concerns.

For more details on the Commission’s approach to sustainability in

merger control cases, see the Competition Merger Brief, Issue 02/2023

– September.

merger reviews, sustainability needs to play a role in the

competition between companies active in the given market.

Industries where sustainable products reflect consumer

preferences. In industries where consumer preferences for

(more) sustainable products are a key driver of competition, such

preferences need to be taken into account. Such preferences can

stem from personal preferences, ethical norms, societal norms or

environmental policies and can be observed across various

industries. For instance, more stringent carbon-footprint

standards resulting from the Green Deal

are pushing car

manufacturers to source ‘greener’ aluminium, with a low carbon

footprint. Thus, the Commission’s review of two recent cases in

the aluminium industry, Norsk Hydro/Alumetal

and KPS Capital

Partners/Real Alloy Europe,

considered customers’ preferences

for recycled aluminium products and production of aluminium by

using renewable energy or recycling. Waste management is

another example of an industry where customers care about

sustainability in the form of recycling, as shown for instance by

Schwarz Group/Suez Waste Management Companies.

Sustainability is also a factor to be taken into account when

assessing transactions involving consumer goods, as consumers

may have strong preferences based on societal or ethical norms

or environmental standards.

Industries driven by sustainable objectives. In some

industries, companies compete to bring green(er) technologies,

products, or services on the market. Such innovations can be

driven by environmental policy initiatives such as the EU Green

Deal and the accompanying targets included in the ‘Fit for 55’

package.

In the EU, the European climate law regulation

imposes a legally binding target of cutting net greenhouse gas

emissions in the EU by at least 55% by 2030 compared to 1990

levels. Meeting that target to ensure a transition to climate

neutrality will require significant changes in business models and

product offering across industries, which will prompt businesses

to bring innovations to the market in order to stay competitive.

Greener energy sources, less polluting cars and planes, energy

efficient buildings, bio and organic food products, reusable

materials, cleaner cities are just a few of many examples of how

sustainability objectives will change (and are already changing)

market dynamics. For instance, emission-heavy industries such as

the construction industry and more specifically concrete

production need to adapt. Recently in Sika/MBCC,

the

For an overview of the EU Green Deal policy initiative, see for instance

https://commission.europa.eu/strategy-and-policy/priorities-2019-

2024/european-green-deal_en.

M.10658 Norsk Hydro/Alumetal.

M.10702 KPS Capital Partners/Real Alloy Europe.

M.10047 Schwarz Group/Suez Waste Management Companies.

See, for instance, case M.7220 Chiquita Brands International/Fyffes,

where the Commission found that customers made a clear distinction

between organic/Fairtrade and conventional bananas.

For an overview of the legislation included in the Fit for 55 package,

see the press release: Completion of key ‘Fit for 55' legislation

(europa.eu).

M.10560 Sika/MBCC.

Non-Price Competition: EU Merger Control Framework and Case Practice |

Competition Policy Brief No 1/2024

Commission observed that the production of greener chemical

admixtures that can reduce CO

emissions were part of the

merging parties’ R&D efforts and a parameter of differentiation

for customers The Commission took this into account when

assessing the closeness of competition between the parties and

their competitors, as well as in the assessment of the remedy

proposal.

1.5 Capacity and reliability of supply

In markets where capacity cannot be expanded easily, the

existence of excess capacity, capacity constraints or planned

capacity expansions becomes an important non-price parameter

of competition. Many basic industries are characterised by a form

of price competition with capacity constraints because new plants

require significant capital investment and time. In these markets

capacity decisions become a variable of competition that

determine market power and dynamic outcomes. For example,

capacity was an important parameter of competition either for

market definition or for the competitive assessment in the

following industries: aluminium production Novelis/Aleris,

base

and process oils in Nynas/Shell/Harburg Refinery,

PVC supply in

INEOS/Solvay/JV,

crop protection in Dow/DuPont, beverage cans

in Ball/Rexam,

titanium dioxide pigments in Tronox/Cristal,

steel production in Tata Steel/thyssenkrupp/JV, and stainless steel

in Outokumpu/Inoxum.

However, capacity can also be an important parameter of

competition in network industries like aviation (Ryanair/Aer

Lingus

cases) where airports can be congested, and mobile

telecommunications (Hutchinson 3G UK/Telefónica UK

) where

capacities might be limited by long-term contracts.

2. Where and how to take non-price

competition into account?

When assessing a merger and its impact on competition, the

Commission takes into account non-price parameters of

competition and the non-price effects of a concentration in

different parts of its assessment, namely when defining markets

(2.1), assessing the competitive impact (2.2), and potential

efficiencies (2.3) of a merger, as well as when assessing the

suitability of remedies (2.4). This is also relevant when taking

jurisdiction over certain cases which fall below the notification

thresholds (2.5).

M.9076 Novelis/Aleris.

M.6360 Nynas/Shell/Harburg Refinery.

M.6905 INEOS/Solvay/JV.

M.7967 Ball/Rexam.

M.8451 Tronox/Cristal.

M.6471 Outokumpu/Inoxum.

M.4439 Ryanair/Aer Lingus, M.5434 Ryanair/Aer Lingus II, M.6663

Ryanair/Aer Lingus III.

M.7612 Hutchinson 3G UK/Telefónica UK.

2.1 Market definition

Non-price factors influence consumers’ preferences. Therefore,

such factors play a role in the assessment of substitutability and

whether products sold in certain geographic regions constitute

effective alternatives for customers, in other words whether the

conditions of competition (not only on price) are sufficiently

homogeneous in a given region. As such, the Commission

assesses not only price, but also non-price factors when

determining the exact scope of the product and geographic

market definition in merger cases.

Innovation spaces and areas. Innovation can play a role at

product market level as well as on an industry-wide level. The

level of innovation of a product can play a role when defining the

boundaries of a relevant market, for example by informing

demand and supply side substitutability.

In cases where effects on innovation are relevant, the potential

output of the relevant research and discovery activities is

typically several years away from commercialisation. The

definition of the relevant market may therefore be based on

specific innovation pipelines and pipeline products. This is

particularly true in the pharmaceutical industry where the

innovation activities and pipelines are often focused on specific

areas of treatment or modes of action. While such products are

not yet on the market, they have a pathway to commercialisation

and may constitute a basis to define the relevant market.

However, innovation activities do not always target specific,

existing, or future product markets, but may take place at an

earlier stage, before any product market is identified. In such

situations, while companies do compete in certain innovation

activities, these can be more properly defined as “innovation

areas” or “innovation spaces”. The merging parties’ overlaps in

innovation spaces may differ from their overlaps in product

markets and pipeline products.

In addition, the parties’

importance as innovators may be different from their position in

product markets. As a result, it may be necessary to identify and

examine the innovation spaces in which market players apply

their research efforts to determine the scope and significance of

innovation competition.

The Commission’s practice thus identified innovation spaces in

agrochemical mergers. In Dow/DuPont, the Commission analysed

innovation competition in the whole industry and in innovation

spaces consisting of groupings of crop/pest combinations at the

global or at least EEA-wide level to assess how agrochemical

companies compete to discover and develop new active

ingredients.

Similarly, in Bayer/Monsanto, the Commission

assessed innovation competition between both companies in a

number of innovation spaces, for example for traits, consisting of

According to paragraph 38 of the Horizontal Merger Guidelines,

assessing pipelines and pipeline products is only one example of how

to assess the effects of a merger on innovation.

M.7932 Dow/DuPont, paragraphs 362 and 361.

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groupings of crop/functionality combinations as well as for crop

protection.

The concept of innovation spaces is relevant in other industries,

where innovation takes place at an early stage before a relevant

market can be identified. Such is the case, for instance, in certain

financial services. Thus, in Deutsche Börse/NYSE Euronext, the

Commission found that the merger between two major stock

exchanges would have limited the introduction of new products

and would have reduced innovation in technology, process, and

market design in relation to several types of European financial

derivatives. The Commission’s investigation focused on the

European innovation space for equity indices.

The Commission’s 2024 Market Definition Notice recognizes the

importance of innovation as a key parameter of competition

relevant for market definition. As innovative industries

characterised by significant R&D present specific characteristics

affecting competitive relationships, the Commission takes such

specificities into account, for instance with respect to pipeline

products and innovation efforts.

Relevant markets by quality standard. Quality can play an

important role at product or geographic market level and can

lead to the Commission identifying separate markets. The Market

Definition Notice relies on quality as one of the parameters of

competition that the Commission takes into account when

defining markets – for instance, when assessing demand

substitution in product market definition, when analysing barriers

and costs associated with switching demand to potential

substitutes (e.g., due to uncertainty about the quality of

alternative products), or when defining markets in the presence

of discrimination between customers or customer groups by

offering different level of quality of products.

In its decisional

practice, the Commission has defined distinct markets based on

quality considerations in a wide variety of sectors. For example,

for hot dip galvanised steel products for the automotive

industry,

farmed seabream seabass of Turkish origin

and

premium frozen potato products.

Sustainability as a factor affecting substitutability. The

Commission takes into account customers’ sustainability

preferences when defining markets.

Sustainability-driven

customer preferences can determine the extent of demand-side

substitutability. Thus, for example, in Marine Harvest/Morpol,

customer preferences for sustainably farmed salmon were one of

the factors that led to the conclusion that farming and primary

M8084 Bayer/Monsanto, theory of harm outlined in paragraphs 80-88.

M.6166 Deutsche Börse/NYSE Euronext, paragraph 923.

Commission Notice on the definition of the relevant market for the

purposes of Union competition law (OJ C 1645, 22.02.2024), “Market

Definition Notice”.

Market Definition Notice, paragraphs 23, 27, 57, 88.

M.8713 Tata Steel/ThyssenKrupp/JV, paragraphs 145-259.

M.9110 Amerra/Mubadala/Nireus/Selonda, pargraph 68.

M.6813 McCain Foods Group/Lutosa Business, paragraph 35.

Market Definition Notice, paragraph 15.

processing of Scottish salmon is not part of the same market as

Norwegian salmon

In Novelis/Aleris,

the Commission

concluded that aluminium and steel for car body parts were not

part of the same market, particularly in view of CO

emission

reduction targets, that required fuel savings and that were driving

‘light weighting’ of vehicles (since lighter vehicles consume less

fuel) and thus demand by car manufacturers of aluminium ABS

(body sheets) of a high grade and performance. In another

aluminium case, Norsk Hydro/Alumetal,

the Commission found

that low carbon is at least an element of differentiation that

plays a role at product and geographic level when it comes to

solid advanced aluminium foundry alloys.

Sustainability also plays a role in the definition of the relevant

geographic market, as observed in Schwarz Group/Suez Waste

Management Companies. The investigation in that case showed

that Dutch customers tried to avoid transporting lightweight

packaging for sorting over long distances in order to minimise the

associated CO

emissions. The environmental cost of transport

was also a factor taken into account in tender procedures, where

more distant lightweight packaging sorting plants were penalized

in tenders due to the increased CO

emissions associated with

longer transport.

Ultimately, the relevant geographic market

was defined as national, i.e., the Netherlands.

Privacy and data protection. In some cases, where privacy is

an important consideration for consumers and a parameter of

competition between the merging parties, the Commission will

consider the level of privacy protection afforded when defining

product and geographic markets.

Such considerations are likely

to be particularly relevant in cases involving digital, technological,

or communication products and services, where consumers’ data

forms part of the product. One example of such products are

professional social networking sites. In Microsoft/LinkedIn, the

Commission considered privacy requirements and the data

protection regulatory framework in the geographic market

definition assessment. The Commission’s investigation

highlighted differences in the regulatory and privacy

requirements among EEA countries, which stakeholders viewed as

examples of differences when it comes to the provision of social

network services across the EEA. More specifically, with respect to

professional social networks, certain stakeholders considered

privacy considerations to play an important role as a requirement

demanded by local customers, as privacy rules vary among

jurisdictions.

M.6850 Marine Harvest/Morpol.

M.9076 Novelis/Aleris.

M.10658 Norsk Hydro/Alumetal, press release of 4 May 2023 available

at https://ec.europa.eu/commission/presscorner/detail/en/ip_23_2566.

M.10047 Schwarz Group/Suez Waste Management Companies,

paragraphs 44, 56-58.

Market Definition Notice, paragraph 15.

M.8124 Microsoft/LinkedIn, paragraph 121.

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2.2. Competitive assessment

In markets where companies offer differentiated products,

customers base their purchasing decisions on parameters that go

beyond the mere price of a given product. Whether it is the

innovativeness of products, the quality of products, product

choice or the ability to offer a good level of security of supply,

shorter lead-times or sustainable products, such non-price

elements have an impact on the way companies compete against

each other.

Therefore, when assessing whether a merger would harm

competition, the Commission carries out a holistic assessment of

the factors driving the competition between the parties and their

competitors. Non-price parameters of competition have therefore

played a role in the assessment of closeness of competition and

barriers to entry and expansion. Moreover, the Commission has

developed a case practice on how to review horizontal as well as

non-horizontal mergers that would lead to loss, reduction and/or

harm to innovation, quality, and capacity.

Closeness of Competition

Closeness of competition between companies is determined not

only by comparing the prices of their products, but also by

assessing the non-price competition between them. Thus, while

non-price factors may not always justify a definition of a

narrower product or geographic market, the Commission takes

these factors into account in its competitive assessment and in

particular in the assessment of closeness of competition between

the merging parties and vis-à-vis their competitors.

Innovation rivalry between merging parties. Closeness in

innovation can manifest itself through competitive overlaps

within each R&D stage (e.g., overlapping discovery targets/lines of

research, overlapping pipelines in the discovery stage, and

overlapping pipelines in the development stage), and across

different stages of the lifetime of a product (e.g., discovery

pipelines-to-development pipelines, overlaps, discovery pipelines-

to existing product overlaps, and development pipelines-to-

existing product overlaps). The existence of such overlaps

between the merging parties indicates that absent the merger

the merging parties expected to divert future sales from each

other by innovating.

While lines of research or pipelines at the discovery stages have

an uncertain outcome, such inherent uncertainty should not be

confused with whether or not competition concerns are present.

Even in the presence of uncertainty as to the outcome of the

innovation process, a merger between firms with competing lines

of research is likely to affect the incentives to invest in research,

leading to either delay, reorientation, or discontinuation of lines

of research or pipelines and ultimately the chance of an

innovation outcome.

Quality. Quality can play an important role as both a parameter

of differentiation and of competition when assessing closeness

of competition between the merging parties and their

competitors. A merger between two quality-leaders, i.e.,

companies offering products or services of a particularly high

quality, might result in market power going beyond what is

indicated by the parties’ market shares. As a result of a merger,

these firms could profitably raise prices precisely because of the

quality-related divide that will separate them from competitors

or possible entrants, without necessarily reducing quality. In prior

cases, the Commission thus found that a merger of companies

with a particularly good quality record in industries where quality

was of great importance to customers would have resulted in

higher prices.

Conversely, a merger between companies offering products of

inferior quality may also result in market power going beyond

what is indicated by the parties’ market shares, especially vis-à-

vis certain customer groups. For example, in Telefónica

Deutschland/E-Plus the Commission argued that the merging

parties were close competitors because their networks were

“perceived of being of lower quality than the networks of

Deutsche Telekom and Vodafone” [i.e., the only other two

operators of an own mobile network in Germany] and concluded

that the parties were “close competitors for mobile products that

offer a network quality below the level achieved by the networks

of Deutsche Telekom and Vodafone”. The Commission thus found

that because of the perceived lower network quality, Telefónica

and E-Plus would compete for the same subset of customers that

do not place as high a value on network quality.

Merging parties’ efforts to bring more sustainable

products to the market. As demand for more sustainable and

environmentally-friendly products grows, companies face

pressure to meet that customer and societal demand, which can

be observed in the companies’ innovation efforts as well as

potential M&A strategies. Differences in sustainable product

positioning and related R&D capabilities influence how closely

companies compete with each other. Sustainability is therefore a

parameter of differentiation when assessing closeness of

For example, in Dow/DuPont, the Commission found that both parties

were competing head-to-head for a significant number of innovation

spaces in herbicides, insecticides, and fungicides with specific and

similar discovery targets and past innovations. This analysis was based

on the parties’ internal documents and their patents. See case M.7932

Dow/DuPont, paragraphs 1123 – 1245.

For example, in M.9343 Hyundai Heavy Industries/Daewoo Shipbuilding

& Marine Engineering for large LNG carriers; in M. 8900

Wieland/Aurubis Rolled Products/Schwermetall for rolled copper

products; and in M.7435 Merck/Sigma Aldrich for catalogue solvents

and inorganics.

M.7018 Telefónica Deutschland/E-Plus, paragraphs 292-293.

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competition between the merging parties and their competitors.

For instance, the Commission can assess how closely the parties’

products compete based on the products’ emission levels.

parties are strong innovators, the Commission also assesses their

green R&D capabilities and technological advancements, notably

when the investigation shows that green innovation is a key

challenge in the industry going forward.

Moreover, customers’

sustainability preferences, for instance, in terms of environmental

costs can also be relevant for the assessment of the merging

parties’ geographic closeness.

Important competitive force

Some firms may have more of an influence than that which their

market share would suggest.

Their capacity to disrupt the

market may not only result from their (aggressive) pricing

strategy but also relate to other competitive dynamics, such as

innovation, or quality.

Innovation. Innovation capabilities are of course a critical

parameter of competition which is not (yet) reflected in (actual)

sales or turnover. Hence, an innovative player would typically be

considered as an important competitive force, having more

influence than reflected in its market shares.

This has also been

reflected in the Commission’s case practice. To give one example,

in Dow/Dupont, the Commission considered that by removing two

out of three main R&D integrated players, the transaction would

remove an important competitive force.

See, for example, M.8829 Total Produce/Dole Food Company,

paragraphs 81, 91.

In General Electric/Alstom, the Commission concluded that the merger

would have eliminated a significant and close competitor of GE in the

overall market for 50Hz heavy-duty gas turbines, given that GE and

Siemens had developed machines which are relatively close to Alstom's

machines in terms of emissions. See M.7278 General Electric/Alstom,

paragraphs 511 and ff.

In Sika/MBCC, the Commission found that innovation efforts and R&D

capabilities to develop new polymers and bring more sustainable

chemical admixture formulations to the market played a key role in the

concrete/cement industry. Sika and MBCC were both strong innovators,

including on green R&D, which was seen as important to meet

sustainability challenges. The parties’ innovation capabilities were one

of the main factors taken into account by the Commission when

assessing the closeness of competition between them and vis-à-vis

other players. See M.10560 Sika/MBCC, paragraphs 210-226. In

Hyundai Heavy Industries/Daewoo Shipbuilding & Marine Engineering,

the Commission found that the parties were each other’s close

competitors on a number of key parameters of competition such as

innovation and that both parties were important innovators in vessel

technologies including those technologies allowing for lower fuel

consumption and lower emissions. See M.9343 Hyundai Heavy

Industries/Daewoo Shipbuilding & Marine Engineering, paragraphs 400

and ff, 491 and ff.

In Schwarz Group/Suez Waste Management Companies, sorting plants

for lightweight packaging waste (LWP) located further away from

collection points imply more CO

emissions and therefore higher long-

term environmental costs. Therefore, the parties were considered to

compete closely with one another for Dutch LWP sorting contracts

while sorting plants located in Germany were competing less closely.

See M.10047 Schwarz Group/Suez Waste Management Companies,

paragraph 118.

Horizontal Mergers Guidelines, paragraph 37.

Horizontal Mergers Guidelines, paragraph 38.

Quality. Quality can play an important role in the assessment of

whether one of the merging parties is an important competitive

force and may grow going forward. For example, in Hutchison 3G

UK/Telefónica UK, the Commission found that Three, was an

important competitive force, not only due to its aggressive device

prices but also in light of its generous data offers and attractive

voice/text bundles.

This approach was confirmed by the CJEU,

finding that “price is often not the only important parameter for

assessing competitive dynamics, in particular in differentiated

product markets in which quality and innovation could play a key

role in the positioning of the products concerned. Therefore, an

exclusively price-focused approach for the purposes of classifying

an undertaking as an ‘important competitive force’ would

necessarily be incomplete.”

Sustainability. A company offering greener products may also

be considered as an important competitive force, especially if the

sector and customers’ preferences are becoming more sensitive

to environmental aspects. In this context, the company might be

expected to grow in the near future, and its market share would

not reflect its full competitive potential. This consideration has

been assessed in the Commission’s past cases.

Barriers to entry and expansion

Higher barriers to entry or expansion are likely to result in fewer

successful entrants in a market or industry. Non price elements,

such as innovation and capacity, often constitute significant

barriers to entry or expansion due to the significant costs and

time associated with those intermediary processes.

Innovation. Industries with high levels of innovation are often

characterised by high barriers to entry as well. Innovation-

intensive industries, markets, or products require significant

expertise, know-how and financial investments. For example, in

Pfizer/Hospira, the Commission found that higher concentration

levels could dampen innovation for the discovery and

development of certain biosimilars due to high barriers to entry.

Biosimilars are biologic medical products which exhibit high

molecular complexity and may be quite sensitive to changes in

manufacturing processes. The Commission found that barriers to

entry for biosimilars are typically higher than for generics and the

pool of potential entrants upon patent expiry is typically smaller

for biological drugs than for small-molecule chemical drugs.

Mergers can thus increase innovation-related barriers to entry or

expansion, for example if a rival is partially foreclosed and

M.7612 Hutchinson 3G UK/Telefónica UK, paragraph 764 and ff.

CJEU, judgement of 13 July 2023, Case‑376/20 P, paragraph 165.

For example, in Norsk Hydro/Alumetal, the Commission concluded that

given the sustainability trend, automotive customers may increasingly

turn to recycled aluminium providers such as Alumetal in the future, so

that the latter may be an important competitive force. However, on

balance, and considering the capabilities of other suppliers, the

Commission ultimately concluded that it would likely not be the case.

M.7559 Pfizer/Hospira, paragraph 54.

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cannot reach the necessary scale to continue investing in

innovation.

Sustainability. In industries undergoing a green transition due

to customer demand or the need to meet various sustainability

goals and new environmental standards, sustainability can

represent a barrier to entry and expansion for market players.

This may be due to high capex investments needed to become

active on a certain market, the need to obtain regulatory permits

and meet, often demanding, regulatory requirements.

Innovation loss theories of harm

Economic literature suggests that less competition typically

reduces market-wide innovation, in particular in concentrated

markets. Specifically, the vast majority of ex post evaluations of

horizontal mergers estimate large negative effects on

innovations inputs and outputs.

The literature on patent races in the presence of uncertainty

supports the view that a reduction in rivalry in the process of

introducing innovation can be expected to lead to less innovation,

and thereby to consumer harm. For example, economic models

indicate that a reduction in the number of firms racing to be the

first to patent a new product leads to a delay in the expected

arrival date of a new invention.

In addition to these general observations, there are a number of

criteria or factors which can indicate that a transaction would

have a particularly strong effect on innovation activities and

product innovation. The Horizontal Merger Guidelines specify that

if a merger combines two important innovators, or eliminates a

firm with promising pipeline products, the transaction can

eliminate an important competitive force and thus lead to a

significant impediment of effective competition against which the

Commission should intervene.

The innovation potential of the

merging firms is taken into account regardless of the current

market position of the companies.

Instead, the Commission has

in its case practice relied on several forward-looking criteria.

R&D ‘input’. The R&D investments of a company as well as the

headcount and capabilities of its R&D function – especially in

In KPS Capital Partners/Real Alloy Europe, the market investigation

showed that there were high barriers for entry and expansion for a

company to become active and maintain presence in dross recycling

and slag recycling, in particular due to the capex investment needed,

the need to obtain an operating permit, as well as national

requirements regarding waste treatment and air pollution. See

M.10702 KPS Capital Partners/Real Alloy Europe, paragraphs 183 –

187 and 217 – 219. Similarly, in Hyundai Heavy Industries/Daewoo

Shipbuilding & Marine Engineering, the Commission assessed how

certain innovative vessel technologies including those allowing for

lower fuel consumption and lower emissions could represent barriers to

entry or expansion. See M.9343 Hyundai Heavy Industries/Daewoo

Shipbuilding & Marine Engineering, paragraphs 1052 and ff.

Haucap/Stiebale, “Non-price Effects of Mergers and Acquisitions”

(2023), Section 2.1, paper commissioned by the European Commission.

See M.7932 Dow/DuPont, paragraph 48 for sources.

Paragraph 38 Horizontal Merger Guidelines.

See paragraphs 38 and 20b Horizontal Merger Guidelines.

comparison to its competitors – can provide useful insights into a

company’s innovation strength and importance. For example, in

GE/Alstom, the Commission found that Alstom’s innovation

output was understated by its market shares. Its R&D spent,

headcount and testing infrastructure were proportionately greater

than its market share. Alstom’s large installed base also helped it

to develop and introduce a range of improvements and

modifications to its products.

R&D ‘output’. The number of patents, product launches and

pipeline projects can also provide an indication of a company’s

innovative strength. Such quantitative factors should be

complemented by a qualitative assessment. For instance, in

Dow/DuPont, the commission carried out a comprehensive

assessment of the parties R&D ‘output’. First, the Commission

found that both companies had ambitious targets for innovation

efforts and output (number of new products and innovative

impact in terms of new mode of actions, chemical classes, and

favourable regulatory profile). Second, the Commission calculated

the patent shares of Dow, DuPont and their competitors. This

calculation was based on the number of patents adjusted by their

quality. Such adjustment is important as patents can have very

different qualities. The quality of each patent was measured by

the number of citations accumulated in subsequent patents.

Third, the Commission assessed the firms’ capabilities to develop

and distribute active ingredients on a large scale in the market

based on their past commercial performance.

Killer acquisitions. Specific evidence of discontinuation of R&D

efforts by the merging parties may play a role in the

investigation of the effects of a merger. Such evidence can, for

example, relate to the closure of plants, the reduction of

innovation targets, or a cut in R&D budgets or investments.

Incumbent firms may acquire innovative targets solely to

discontinue the target’s innovation projects and pre-empt future

competition. For example, pharmaceutical industry data shows

that acquired drug projects are less likely to be developed when

they overlap with the acquirer’s existing product portfolio,

especially when the acquirer’s market power is large because of

weak competition or distant patent expiration.

Reactions of competitors. The competitive role played by non-

merging parties also needs to be assessed before concluding on

the significance of any loss of innovation competition from the

merger. If only a few non-merging parties effectively constrain

the merging parties, then it is more likely that the merger will

lead to a significant loss of innovation competition. Moreover, in a

concentrated market, any reaction of non-merging parties to the

loss of innovation competition between the merging parties is

unlikely to fully offset the reduction in innovation, in particular

when competitors’ innovative capabilities differ from those of

the merging parties.

M.7932 Dow/DuPont, paragraph 387.

Cunningham/Ederer/Ma, “Killer Acquisitions”, Journal of Political

Economy, Volume 129, Number 3, March 2021.

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Previous or historic developments. Past events can provide a

useful indicator for assessing the relationship between increased

concentration levels and innovation in a certain industry or

market. In Dow/DuPont for example, the Commission observed

that previous waves of consolidation were accompanied by a

certain reduction in the innovation intensity and output, as

demonstrated by lower R&D spend and fewer active ingredients

for pesticide products brought to the market.

Overlaps in pipeline products. When assessing the effects of

a merger on innovation the Commission may look at the merging

parties’ and their competitors’ pipeline products. Such

assessment is of particular relevance in the research-intensive

pharmaceutical industry with its clear and often standardised

development and regulatory approval processes. In

J&J/Actelion

, the Commission thus found that both companies

were developing a promising drug with a similar new mode of

action to treat insomnia. Both drugs were at an early stage of

clinical trials (so-called Phase II), but close in their expected

efficacy and safety profiles. In Novartis/GSK’s oncology

business

, the Commission found that both companies had R&D

programmes for innovative drugs aimed at treating skin and

ovarian cancer with the same mechanism of action. In

Pfizer/Hospira, the Commission found that Pfizer was developing

a competing medicine to Hospira’s biosimilar for the treatment of

chronic inflammatory diseases. In all three cases, the

Commission’s concern was that the merged entity would have

fewer incentives to continue the overlapping or duplicate research

programmes, not only for cost reasons but also in light of a

heightened risk of future cannibalisation.

Non-horizontal effects. Innovation concerns can also arise in

non-horizontal mergers, where the parties’ activities are vertically

linked or complementary to each other. In particular, foreclosure

risks can manifest themselves in a reduction of innovation

activity. Recently, in Illumina/GRAIL, the Commission found that

customer foreclosure strategies could have stifled innovation on

the emerging downstream markets for NGS-based cancer

detection tests. According to the Commission’s in-depth

investigation, following the acquisition of GRAIL, Illumina would

have had the ability and incentive to foreclose GRAIL’s

competitors from its high-throughput NGS systems. It could for

instance refuse to supply its NGS systems to GRAIL's rivals,

increase the prices, or degrade quality and delay supplies. This

could have had severe and negative effects on the innovative

capabilities of early cancer detection test developers and of this

emerging industry as a whole – at a very critical stage of

development.

In another case, Broadcom/Brocade, the

Commission assessed the innovation impacts of a potential

interoperability degradation between networking products

(upstream) for communications and datacentre infrastructures

M.7932 Dow/DuPont, paragraphs 2124 - 2158.

M.8401 J&J/Actelion.

M.7275 Novartis/GSK’s oncology business.

M.10188 Illumina/GRAIL.

and applications (downstream).

The risk that merging parties

might implement interoperability degradation strategies and

thus negatively impact innovation is higher in fast-developing

and fast-growing industries, in particular those driven by

technology and data.

Dynamic effects. Foreclosure cases in dynamic industries are

often about preventing future innovation. A dominant firm in one

market may foreclose a rival in a neighbouring market,

preventing it from becoming an innovative force that competes

better in the neighbouring market or that would innovate into the

market where the dominant firm is already active.

Both

Broadcom/Brocade and Illumina/GRAIL concerned dynamic

industries and the Commission was concerned that foreclosure

strategies could lead to a reduction of future competition on the

respective downstream markets.

Quality degradation

A merger can result in a degradation of quality and product

variety. The results of empirical studies indicate that merger-

induced market power increases tend to reduce incentives to

provide high-quality products.

Merging firms might also have an

incentive to drop competing varieties within the newly combined

firm to avoid cannibalisation and save fixed costs. The effects of

a merger on quality tend to be very industry-specific and the

Commission found that a merger would result in a degradation of

quality in a number of cases, for example concerning the quality

of food,

of medias content,

of medical devices

and of mobile

communication networks.

Data driven theories of harm

Privacy as a competitive parameter and element of

quality. In cases where privacy and data protection play a role in

the competitive dynamics, the Commission assesses the extent to

which the parties compete with respect to privacy and whether

the transaction could have a negative impact on privacy-related

competition. For instance, in Apple/Shazam, privacy was

considered an important element of competition between music

streaming service providers. The Commission assessed how the

companies treated user data and their relevant data collection

practices/transmission of personal data.

In Microsoft/LinkedIn,

the market investigation confirmed that privacy was an important

parameter of competition and a driver of customer choice in the

M.8314 Broadcom/Brocade, paragraph 205.

For more details on the Commission’s assessment of dynamic effects

in merger investigations, see the Competition Policy Brief, Issue

02/2022 “Merger Enforcement in Digital and Tech Markets: an Overview

of the European Commission’s Practice”.

See e.g. Haucap/Stiebale, “Non-price Effects of Mergers and

Acquisitions” (2023), page 32, paper commissioned by the European

Commission.

M.9019 Mars/AniCura, paragraph 125.

M.10433 Vivendi/Lagardere, paragraphs 1910 and ff.

M.9945 Siemens Healthineers/Varian Medical Systems, paragraph 108.

M.7612 Hutchinson 3G UK/Telefónica UK, paragraph 2308 and ff.

M.8788 Apple/Shazam, paragraphs 313 – 315.

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market for professional social networking services.

The

Commission took this factor into account when assessing the

impact of foreclosure concerns – if a competitor which offers a

greater degree of privacy protection to users than LinkedIn were

to be marginalized (or entry of any such competitor would be

made more difficult as a result of the merger), the transaction

would also restrict consumer choice in relation to this important

parameter of competition.

Similarly, in Facebook/WhatsApp,

privacy and security were considered as important parameters of

competition in relation to consumer communication services, and

an element of differentiation between the parties’ offering.

These cases illustrate that in sectors where data, and in

particular personal data, is a source of value, the privacy

protection offered by companies to that data is an important

competitive parameter. The potential impact of the transaction

on this parameter of competition is therefore not overlooked.

Using customer data to put competitors at a

disadvantage. When assessing mergers involving companies

that collect customer data, it is also important to look at the

potential use of that data post-transaction as the merged entity

could have the ability and incentive to use such data and

information to put competitors at a disadvantage. For example, in

Apple/Shazam, the Commission assessed whether, through the

acquisition of control of the Shazam app and Shazam database,

Apple could gain access to certain data on its competitors. The

Commission considered that the customer information to which

Apple would gain access constituted commercially sensitive

information. When assessing whether Apple would have the

ability and incentive to use the customer information to put

competitors at a disadvantage, the Commission took into

consideration the legal obligations imposed on Apple by the

relevant privacy and data protection regulations.

Combination of datasets. In some cases, limitations posed by

data protection rules can restrict or prevent certain data-related

actions by the parties, such as combination of datasets. If the

Commission finds that the applicable rules do not pose such

limitations, the Commission examines the competitive effects

stemming from such combination of datasets. For instance, in

Microsoft/LinkedIn, the Commission concluded that the data

protection rules that Microsoft and LinkedIn were subject to,

limited their ability to process the dataset they maintain.

Capacity-related theories of harm

The immediate effect of any merger is a reallocation of

production capacities, which can lead to price effects if rivals

face capacity constraints.

Moreover, as regards non-price

M.8124 Microsoft/LinkedIn, footnote 330.

M.8124 Microsoft/LinkedIn, paragraph 350.

M.7217 Facebook/WhatsApp, paragraphs 87, 102 and footnote 79.

M.8788 Apple/Shazam, paragraphs 209 – 259.

M.8124 Microsoft/LinkedIn, paragraphs 177, 178.

For example, in M.8451 Tronox/Cristal, the Commission found that the

ability of existing suppliers to increase production in response to a price

competition, e.g., where capacity expansion is a variable of

competition, a merger can have dynamic effects on capacities

should it change the merged company’s incentives to expand

capacity and rivals’ reaction to it.

Merging producers may compete less aggressively on capacity

expansions post-transaction, as they will take account of the

negative effect that new capacity in the market has on the sales

of the respective merging partner. Stated differently, pre-

transaction each merging party only took into account the

negative impact that new capacity would have on its own sales

(via the decrease in overall market price due to the additional

capacity) but did not take into account the negative effect on the

sales of the other merging party. This effect is internalised post–

transaction, which results in a loss of competition on the market.

The merger might not only change the future capacity extensions,

or lead to a plant closure and a reduction in capacity, but also

change the geographic distribution of capacity if competition has

a strong local aspect.

Dynamic competition in capacities was an important element in

the Commission’s decisional practice. For example, in

Novelis/Aleris, the Commission concluded that the transaction

would have dynamic effects in the medium/long term, because

Novelis’ limited incentive to increase overall market capacity

would be further weakened. The decision argued both that post-

transaction Novelis would have less incentive to increase capacity

than an independent Aleris, and that Novelis would have fewer

incentives to implement its own expansion plans. The

investigation analysed in detail the past capacity expansions in

the market, as well as the future expansion plans of Novelis and

Aleris. In Ball/Rexam, the investigation focused similarly on future

capacity expansions. Absent the transaction, it was likely that

Rexam would have increased capacity in North-East Europe and

consequently reduced market concentration. This future capacity

expansion of Rexam was a key factor in determining the size and

geographical distribution of the commitments. In

INEOS/Solvay/JV, the history of output and capacity reductions

provided evidence on the likely effects of the merger. Earlier

mergers of INEOS were followed by output reductions in North-

West-Europe and increased exports, and finally plant closures

that reduced the effective capacity of the merged entity. These

capacity reductions likely lead to increased market power, since

the decision also found that margins in North-West-Europe

increased compared to the rest of Europe after the second

previous merger.

Whether these theories of harm apply in a concrete case depends

both on the level of the parties’ capacity shares and the extent of

spare capacities held by rivals. All else being equal, anti-

competitive effects are more likely if merging parties control a

large part of the available capacity after the transaction and

rivals have little excess capacity.

increase by the merging Parties is limited by the low levels of spare

capacity and competitors' existing commitments to other customers.

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Finally, capacity constraints can often be local, especially in the

case of products of basic industries that require costly

transportation. The result is geographic product differentiation

that sometimes makes detailed assessment of local competition

necessary. For example, in Ball/Rexam, a case involving beverage

cans, the Commission’s assessment focused on customers and

their potential suppliers: capacity-based market shares for

catchment areas around customers with filling locations were the

basic tools of the competitive assessment. Based on an

assumption about the feasible transport distance, the

Commission was able to assess which potential suppliers and

with what capacity could serve customers in a given geographic

area.

2.3 Efficiencies

In addition to negative non-price effects, the Commission

recognises that mergers may also result in non-price benefits to

consumers, such as bringing new and improved products. Such

positive effects are typically assessed by the Commission in the

context of efficiency claims. To be accepted, the claimed

efficiencies have to benefit consumers, be merger specific and be

verifiable. Under the Horizontal Merger Guidelines, efficiencies

should, in principle occur within the markets where competition

concerns are found.

Innovation efficiencies. Mergers may in some circumstances

enhance innovation, for example by allowing the parties to share

knowledge more effectively and by internalising knowledge spill

overs. The Horizontal Merger Guidelines specifically mention "new

or improved products or service resulting from efficiency gains in

the sphere of R&D and innovation".

100

In its review of agrochemical mergers (Dow/DuPont and

Bayer/Monsanto), the parties did not provide evidence of case-

specific innovation efficiencies. The Commission observed that in

the relevant innovation spaces the protection against imitation

was strong already pre-merger, thanks to effective IP rights and

product lifecycle management techniques. Hence, it was less

likely that each of the two mergers would increase the incentive

to innovate by internalising significant involuntary knowledge

spillovers.

Quality efficiencies. In several mobile telecom mergers, the

parties argued that their transaction would result in quality

improvements, such as larger networks, better coverage and

faster roll-out of the newest-generation mobile network with

better quality and higher data speeds. In Orange/MásMóvil, the

Commission considered that network roll-out efficiencies could

be accepted in principle, if they are incremental to the roll-out

plans absent the merger. If accepted, these efficiencies would

have to be weighed against the anti-competitive harm of the

merger in terms of the share of consumers benefiting from

M.7567 Ball/Rexam, Sections 9.2.1 and 9.2.2.

100

Horizontal Merger Guidelines, paragraph 81.

higher network quality and consumers’ willingness to pay for

higher quality. However, in line with earlier cases, the Commission

found that these improvements were subject to an uncertain

timeline, not verifiable and not merger-specific because the

Parties would have realistic alternatives to expand capacity on a

stand-alone basis or enter into network-sharing agreements as a

less anti-competitive alternative to the merger.

101

Green efficiencies. A merger may have positive effects on

sustainability, for instance by improving product quality, by

decreasing the level of toxicity of a product or by enabling cost

reductions resulting from generating less waste or requiring the

use of fewer raw materials. Efficiencies can also result in the

development of newer technologies, novel “green” products and

more generally “green” innovations. For example, in

Aurubis/Metallo, a case that concerned access to copper scrap in

the EEA, the Commission looked at positive technological

synergies associated with the transaction, in particular improved

combined metal extraction capabilities and know-how of the

merged entity, the benefits of which could in part be passed on to

suppliers of the merged entity.

102

2.4 Remedies

Remedies should eliminate the competition concerns identified by

the Commission entirely. To do so, the Commission accepts

proposals that resolve the issues on a lasting basis, and this is

why structural divestments of activities as a going concern to

suitable buyers are the preferred option.

103

Given the importance

of non-price competition, the Commission makes sure that all

relevant assets are included in the divestment, in particular R&D

and pipeline projects, so that it will continue its activities and

development as envisaged absent the merger. The Commission

therefore must ensure that the buyer will have the ability and

incentives to continue investing in ongoing projects. Non-price

competition, including digitalisation, also raises certain theories

of harm related to interoperability and data for which non-

structural remedies exceptionally may appear as equally

effective as

104

- and potentially more appropriate than - a

divestment, with the objective to open markets on a lasting basis.

R&D and pipeline projects. When divesting a business, the

assets should comprise on-going pipelines or R&D projects. The

commitments generally specify that all know-how, patents, IP,

materials, data, documentation and proprietary information be

101

Cases M.10896 Orange/MásMóvil, M.6497 Hutchison 3G

Austria/Orange Austria; M. 6992 Hutchison 3G UK/Telefónica Ireland;

M.7018 Telefónica Deutschland/E-Plus; M.7612 Hutchison 3G

UK/Telefónica UK.

102

M.9409 Aurubis/Metallo, paragraphs 831 and ff. See also the

Competition Merger Brief, Issue 02/2023 – September, which provides

more details on the Commission’s assessment of the efficiencies

submitted in M.9409 Aurubis/Metallo.

103

Commission Notice on Remedies, paragraphs 10 and 15.

104

Commission Notice on Remedies, paragraphs 17 and 61.

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included.

105

To ensure that the purchaser will have the ability and

financial incentives to pursue the ongoing projects, the

Commission ensures that the divestment will be supported by

sufficient expertise – including by requiring the purchaser to be

already active in the sector

106

-, as well as sufficient staff – via

possible secondment of personnel or new hires as needed – and

funds.

107

The commitments may also foresee a temporary

obligation from the merged entity to provide transitional support

to the purchaser.

108

Importantly, considering that R&D and

pipelines are typically developed at global level, the

commitments may need to include the global R&D organisation,

either because the theories of harm relate to global R&D

markets, as was the case in Dow/Dupont, or because global R&D

is necessary to ensure the viability and competitiveness of the

divestment business going forward. Thus, in Sika/MBCC, while the

relevant problematic markets for the supply of chemical

admixtures were national in scope, the divestment of MBCC’s

business included all global R&D assets, sites, personnel, IP, and

other relevant assets to fully address the Commission’s concerns

in the EEA, and make sure the divestment business would

continue developing innovation contributing to reducing CO

emissions.

In cases where products are co-developed, the commitments may

also consist in giving more rights to the partner.

109

On the other

hand, commitments falling short of a transfer such as providing

only licenses on R&D and pipeline projects to the remedy taker

are typically rejected considering that competition will not be

preserved on a lasting basis.

110

By allowing the preservation of innovation competition, merger

remedies may even have positive effects beyond what the

divestment business had planned to develop and invest in absent

the merger. For example, in General Electric/Alstom, the remedy

constituted of a divestiture of the main, technologically most

advanced parts of Alstom’s heavy duty gas turbines business,

including pipeline technology. The remedy package thus equipped

105

See for example in the pharmaceutical industry, M.7746 -

Teva/Allergan Generics; and M.7559 – Pfizer/Hospira; and M.7917 –

Boehringer Ingelheim/Sanofi animal health business.

106

See for example M.10506 - Parker/Meggitt where the purchaser

needed to be an existing manufacturer of aerospace components; and

M.10560 Sika/MBCC where the purchaser needed to demonstrate its

proven incentive to continue investing in the R&D activities of the

Divestment Business globally.

107

See for example on staff, M.10506 - Parker/Meggitt, and M.11043 -

Novozymes/Chr Hansen Holding, and on financing, M.8401

J&J/Actelion. See also commitments foreseeing a CAPEX escrow

account to be funded by the merged entity to make sure the envisaged

investment projects – including into plants – will be continued by the

buyer, for example M.10702 KPS Capital Partners/Real Alloy Europe.

108

See for example. M.7559 – Pfizer/Hospira.

109

In Novartis/GSK Oncology Business, the Commission accepted the

remedies proposed by the parties, whereby Novartis committed to fully

return one of the treatments where the Commission raised competition

concerns to its owner and licensor Array BioPharma Inc. (Array) and to

divest the other treatment of concern to Array. See also for example

M.8401 J&J/Actelion whereby J&J granted new rights to its partner

Minerva over the global development of a pipeline product.

110

See for example M.10188 – Illumina/GRAIL.

the remedy taker to successfully finalise the development of

Alstom’s highly efficient gas turbines. Moreover, using its know-

how and capabilities, Ansaldo (the remedy taker) was in fact able

to go even further in innovating those turbines by using hydrogen

as a fuel, which can significantly decrease CO

emissions. Thus,

the remedy package in the hands of a suitable purchaser led to

positive effects on the environment by ensuring continued

innovation in energy efficient electricity generation.

Access and interoperability. When mergers raise non-

horizontal competition issues related to degradation of

interoperability or access to data, the Commission accepted in the

past, exceptionally, non-structural remedies. The objective is to

ensure that the markets will remain open and competitive in the

long run, and that the ability and incentives of competitors to

develop their products and compete effectively are preserved.

While the assessment is very case specific, certain factors are

typically relevant to decide whether non-structural remedies

would be appropriate in a specific case, including that (i) the likely

problematic conducts are well-identified, (ii) the number of

access or interoperability seekers is reasonable and (iii) standard

terms of access or interoperability can be defined. In previous

cases, the merged entity committed to make – or continue

making - its product interoperable with competitors’ products.

For example, in Siemens Healthineers/Varian Medical Systems,

Siemens committed to adhere to industry-wide interoperability

standards and make its medical imaging and radiotherapy

solutions compatible with rivals’ radiotherapy and imaging

solutions, including by providing the relevant information and

technical assistance to third parties and customers. In other

cases, the merged entity committed to make – or continue

making - certain data available to competitors. For example, in

Google/Fitbit, Google committed to maintain access to users’

health and fitness data to software applications, and to continue

licensing public web Application Programming Interfaces (APIs) to

ensure that wrist-worn devices will interoperate with Android

smartphones.

111

More recently in BroadCom/VMWare, BroadCom

committed to ensure interoperability of competitors’ products

with its server virtualisation software, and provide competitors

access to relevant information, including the source code.

112

To consider those remedies suitable in specific cases, the

Commission also needs to conclude that there are effective

monitoring mechanisms. In the past, the Commission did not

accept non-structural remedies considering that they were not

removing the competitive concerns entirely, especially as they

could not be properly and effectively monitored. Recently, in

Illumina/Grail, the Commission rejected the proposed

111

Google also committed not to use the users’ health and fitness data

collected from wrist-worn wearable devices via sensors for Google Ads

(search ads, display ads, ads intermediation) and to maintain technical

separation. The data will be stored in a “data silo” which will be

separate from any other dataset maintained by Google and available

for advertising.

112

See also M.10262 - Meta/Kustomer.

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commitment by Illumina to give access to rivals to its next-

generation sequencing systems as (i) they did not effectively

address all the possible foreclosure strategies that Illumina could

engage in; (ii) it would have been easy for Illumina to circumvent

its obligations and grant preferential treatment to GRAIL, and (iii)

it would have been difficult to monitor them due to their

complexity and the fact that GRAIL's rivals would hardly have

been able to detect breaches.

2.5 Suitability of referrals

The Commission recently evaluated the effectiveness of its

turnover-based jurisdictional thresholds, considering that the

sales generated by a company may not fully reflect its

competitive potential.

113

This is typically the case due to non-

price competition, with high-value digital or biotech companies

being acquired by large firms even if they generate little to no

turnover (yet). Following this evaluation process, the Commission

concluded that this “jurisdictional gap” could be addressed

effectively by inviting Member States to refer potentially

problematic cases falling below national or EU notification

thresholds to the Commission, using the powers under Article 22

of the EUMR.

114

As per the Commission’s guidance,

115

EU Member

States are able to refer to the Commission acquisitions or merger

cases below EU or national thresholds when the turnover of at

least one of the undertakings concerned does not reflect its

actual or future competitive potential.

116

As a consequence, non-price elements such as innovation or data

play a decisive role in the assessment on whether a merger case

is a suitable candidate for a referral. By way of examples, a

referral would be appropriate in cases where the undertaking at

issue is (i) a start-up or recent entrant with significant

competitive potential that has yet to develop or implement a

business model generating significant revenues (or is still in the

initial phase of implementing such business model); (ii) is an

important innovator or is conducting potentially important

research; (iii) is an actual or potential important competitive force

or (iv) has access to competitively significant assets (such as for

instance data or intellectual property rights).

113

Commission Staff Working Document, Evaluation of procedural and

jurisdictional aspects of EU merger control; 26 March 2021.

114

This approach was endorsed by the General Court in T-227/21,

Illumina v Commission.

115

Commission Guidance on the application of the referral mechanism

set out in Article 22 of the Merger Regulation to certain categories of

cases, paragraph 19.

116

Commission Guidance on the application of the referral mechanism

set out in Article 22 of the Merger Regulation to certain categories of

cases, paragraph 19.

In two of the three referrals which the Commission accepted

under its revised approach to Article 22 EUMR to date, innovation

aspects played an important role. In Illumina/GRAIL, the

Commission accepted the referral request because of concerns

that the transaction could result in a discontinuation of the

access to Illumina’s products for GRAIL’s competitors and thus

impede the innovation efforts of GRAIL’s rivals. The other referral

case, Qualcomm/Autotalks,

117

concerns the development of

vehicles-to-everything communication (V2X) technology, which is

key to improving road safety, traffic management and reducing

emissions as well as for the deployment of autonomous

vehicles.

Conclusion

In pursuit of its goal, preventing competitive harm to consumers,

the Commission uses several competition parameters in

assessing mergers. While price will continue to play a pivotal role,

other parameters of competition have played an increasingly

important role in recent years, such as quality, innovation, data

protection and privacy. Among the newer developments is

sustainability.

All these parameters of competition can play a decisive role at

every stage of the Commission’s decision-making process, from

market definition to the competitive assessment., efficiency

claims and remedies.

In its assessment, the Commission applies its consumer welfare

standard approach, which includes intervention in cases which

would otherwise do harm to the competitive process, covering all

parameters of competition, in order to contribute to a strong and

vibrant European economy, to the EU consumers’ benefit.

The Commission continues refining its assessment and is keen to

ensure that consumers are not denied non-price benefits of

competition in reflection of market changes and realities.

117

M.11212 Qualcomm/Autotalks, see European Commission, Daily News

18 August 2023 (accessible via

https://ec.europa.eu/commission/presscorner/detail/en/mex_23_4201).

The content of this article does not necessarily reflect the

official position of the European Commission. Responsibility

for the information and views expressed lies entirely with

the authors.

In a nutshell

Innovation in the

pharmaceutical sector is

essential to having new and

competitively priced medical

products.

The EU framework for

merger control empowers the

Commission to assess the

impact of pharmaceutical

mergers on innovation. The

Commission’s assessment is

carried out on a case-by-case

basis – where early-stage

pipelines may merit close

scrutiny and issues on

innovation spaces are

assessed.

The issues are often global,

and the Commission

regularly cooperates closely

with other agencies.

Competition Policy Brief

Assessing Innovation Competition in

Pharma Mergers

Vasiliki Dolka, Susanna Kärkelä, Aiste Slezeviciute, Zsolt Vertessy

Introduction

The review of mergers and acquisitions in the pharmaceutical

industry is a high-stakes endeavour presenting unique challenges.

Merger control ensures that consolidation does not lead to higher

prices for patients and health systems. In parallel, competition

agencies must also assess the impact on innovation.

This

assessment is crucial so that pharma companies continue to be

incentivised to tackle public health challenges by researching,

developing, and commercialising promising new products. Not

only are there persisting unmet medical needs, but the nature of

threats to health also changes due to the emergence of new

diseases (such as Covid-19), as well as a reduction in the efficacy

of existing products, for instance through antimicrobial

resistance. Innovation is key to tackling evolving and unmet

medical threats.

The commercial reward for successful innovation in the

pharmaceutical sector is a de facto monopoly through the patent

system. This results in high rewards during the period of

protection which can bear a direct relationship to M&A strategies

in the sector. Large pharmaceutical companies facing the

expiration of the main patents covering their blockbuster drugs in

the coming years may turn to acquisitions of promising pipelines

still benefitting from patent protection to help safeguard their

future growth.

Other companies have amassed major cash

The benefits of innovation for competition are discussed in detail in the

Commission’s Competition Policy Brief of April 2016, available at

https://op.europa.eu/en/publication-detail/-/publication/764b96c6-9a82-

11e6-9bca-01aa75ed71a1/language-en/format-PDF/source-

195709315.

Patent expiries are being estimated to result in a 46% decline in

revenues for the 10 largest global pharmaceutical companies by 2030.

For instance, 2023 saw the end of exclusivity in the US for AbbVie’s

Humira, the best-selling drug worldwide with global revenues of USD

21 billion in 2022. AbbVie’s CEO indicated in early 2023 that investors

should “expect us to act” on M&A opportunities if the right one should

arise (AbbVie Q4 2022 Earnings Call). This has played out with its

(proposed) acquisitions of Immunogen (USD 10 billion), Cerevel (USD

8.7 billion). Likewise, Merck is also preparing for the expiry in 2028 of

patents for Keytruda, which accounted for more than a third of its

sales in 2022, by acquiring other promising treatments to strengthen

its product pipeline

reserves during the

pandemic which can now

be used to fuel M&A.

These acquisitions may

result in the purchaser

entering new markets but

may also result in

competitive overlaps

between the purchaser and

the target with products at

the same or different

stages of the product

lifecycle. Any competitive

assessment needs to be

tailored taking these

dynamics into account.

In this context, the

Commission continues to

apply merger control rules

vigorously and rigorously in

the pharmaceutical sector

to ensure that innovation

and competition on the

merits is preserved, and in

turn preserving choice and

quality at competitive

prices. This Brief aims to

summarise the key

developments and recent

experiences in the

European Commission's extensive practice of reviewing

pharmaceutical mergers, with a focus on innovation.

This Brief will firstly summarise the Commission's well-

established framework for defining markets in pharmaceutical

cases. A vast range of different treatments may target the same

disease while being highly differentiated. Thus, the task of

establishing the boundaries of the market can be complex, but

nevertheless remains an essential one to ensure that the merger

(https://www.economist.com/business/2023/04/20/big-pharmas-patent-

cliff-is-fast-approaching).

Pfizer’s sales of its Covid vaccines drove it to record a record revenue

of USD 100.3 billion in 2022, while engaging in a number of high-

profile acquisitions during 2022-23 (inter alia, it acquired Global Blood

Therapeutics for USD 4.7 billion, Biohaven for USD 11 billion and

Seagen for USD 43 billion).

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

review can capture the dynamics of the market. The

pharmaceutical sector is highly regulated, including pricing and

reimbursement schemes at national level, which drives a

delineation of relevant geographic markets for marketed drugs

along national borders, while at the innovation or development

stage competition is often far wider, potentially at least EEA-

wide, or global.

In the second and third sections, this Brief will focus on the

substantive assessment of horizontal and non-horizontal effects

in pharmaceutical mergers with particular focus on their impact

on innovation. Given the high risk / high reward nature of

pharmaceutical research and development (“R&D”) and the

transparency regarding pharmaceutical pipeline products years

before they reach the market,

a transaction’s rationale may give

important insights into the parties’ expectations regarding their

future potential and the development of the competitive

landscape. A “big pharma” company buying a start-up may grant

the target the financial and operational capability to effectively

bring a product to market, with pro-competitive effect. However,

this ability to identify the new drugs’ characteristics, prospects

and target market also means that, in some cases, there is a risk

that the impact of the deal could be less positive. In the presence

of horizontal overlaps, the transaction could result in a

concentration of market power in the purchaser’s hands by

combining competing marketed (or soon-to-be marketed)

products, leading to higher prices or reduced quality. Alternatively,

the result of the acquisition could be that the purchaser

discontinues its own or the target’s R&D efforts, which can lead

to price increases or reduced choice. Indeed, academic studies

have suggested that some pharmaceutical companies may use

early-stage acquisitions as a way to ‘kill’ potential competitive

threats that may emerge in future.

Even if the target does not

compete with the purchaser in the same market, non-horizontal

concerns may arise: the combination of the merging parties may

enable the merged entity to foreclose rivals and capture a

greater market share once its product reaches the market.

Given the high stakes for patients and health systems, it is

imperative that competition concerns be resolved in a way that

ensures a competitive market structure on a lasting basis. In view

of this, the Commission's remedies policy in pharmaceutical

mergers is outlined in the fourth section.

The fifth section summarises the recent evolution of the

Commission's approach to jurisdiction. An unusual feature of

In the pharmaceutical industry, pipeline drugs go through several

development stages, starting with preclinical trials in laboratories on

animals, and later moving on to clinical trials on humans. Clinical trials

in humans (so called “Phase I”, “Phase II” and “Phase III” clinical trials,

see further footnote 16) are strictly regulated to ensure the protection

of trial subjects and the reliability of the results. The results of these

trials are published.

See, for example, Cunningham, C., Ederer, F. and Ma, Song, Killer

Acquisitions, J. of Political Econ., (Mar. 2021), vol. 129, no. 3: 649–702.

The Commission has commissioned an ex post evaluation to assess the

prevalence of killer acquisitions in the pharmaceutical industry and

determine what are the key features of such killer acquisitions – this

study is in progress. The risk that M&A can result in the discontinuation

of pipelines is also identified in European Commission, Directorate-

General for Research and Innovation, Pang, T., Folwell, B., Osborne, A. et

al., Study on the impact of mergers and acquisitions on innovation in

the pharmaceutical sector, Publications Office of the European Union,

2020, https://data.europa.eu/doi/10.2777/323819.

pharmaceutical transactions is the lengthy development process

for medicines – on average, it takes 12-15 years from discovery

to bring a drug to market.

However, the promise and potential of

new medicines is at times clear at an early stage in this process,

meaning that even years before a product has been launched, a

start-up can be valued in the billions. The potential competitive

impact is therefore reflected in a target’s valuation by the

purchaser but not in its revenues, which is the metric used for the

notification thresholds set out in the EU Merger Regulation

(“EUMR”). This fifth section outlines the Commission's recalibrated

approach to referrals pursuant to Article 22 of the EUMR, which

enables it, in cooperation with EU Member States, to ensure that

transactions involving low-turnover but highly innovative targets

do not escape review.

Finally, in the sixth section, this Brief highlights the importance of

international cooperation and dialogue. Given that blockbuster

medicines are developed and commercialised at global scale,

competition agencies should ensure a consistent and coherent

approach to examining pharmaceutical mergers. Notably, the

sixth section outlines the recent conclusions of the inter-agency

working group between the Commission and the Canadian, UK

and US competition authorities.

1. Market definition

Whilst market definition in pharmaceutical mergers for marketed

drugs follows a well-established framework, the assessment of

innovation elements is more complicated because the precise

features of pipeline products may not yet be realised.

For commercialised products, in line with the Market Definition

Notice,

the Commission assesses substitutability from the

demand and supply sides. The general starting point for

pharmaceutical products is the Anatomical Therapeutic Chemical

(ATC) Classification System devised by the European

Pharmaceutical Market Research Association (“EphMRA”).

From

this starting point, the Commission assesses further whether it is

appropriate to distinguish between over-the-counter (“OTC”) and

prescription (“Rx”) medicines, indication denoted by the ATC 3

level,

the mode of action (such as topical or systemic), the mode

of delivery (such as oral or injectable) and, where relevant, the

OECD, Pharmaceutical Innovation and Access to Medicines (2018).

Commission Notice on the definition of the relevant market for the

purposes of Union competition law (OJ C 1645, 22.02.2024), “Market

Definition Notice”.

The ATC system is a hierarchical and coded four-level system which

classifies medicinal products by class according to their indication,

therapeutic use, composition, and mode of action. In the first and

broadest level (ATC 1), medicinal products are divided into the 16

anatomical main groups. The second level (ATC 2) is either a

pharmacological or therapeutic group. The third level (ATC 3) further

groups medicinal products by their specific therapeutic indications.

Finally, the ATC 4 level is the most detailed one (not available for all

ATC 3) and refers for instance to the mode of action (e.g. distinction of

some ATC 3 classes into topical and systemic depending on their way

of action) or any other subdivision of the group. Medicinal products are

classified according to the ATC system in the IMS Midas data base.

For OTC-sold drugs, the Commission may also use the Consumer

Health Classification (“CHC”, administered by IQVIA, an American

multinational company serving the combined industries of health

information technology and clinical research), which is equivalent to

ATC. See, e.g., Commission decision of 22 October 2021 in Case

M.10247 CVC/Cooper.

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

line of treatment.

This assessment is informed by the views

expressed by so-called “key opinions leaders” in the medical field,

submissions from the merging parties and other evidence on the

file, such as the parties’ internal documents.

However, these elements are less likely to be known when a

merger assessment is required either for pipeline products or for

new or nascent markets. For pipeline products, the further the

development cycle of a product is advanced, the more can be

known about the product’s features and the more certain the

assessment can be about market definition. For example, the ATC

3 code and mode of action will normally be clear from the outset

of clinical trials but only by Phase III or later will the line of

treatment be known. In this case, the market definition cannot

assess whether a segmentation of that market by line of

treatment would be relevant. Earlier in the development cycle, it

may not be known for which applications the pipeline product

may succeed, and in turn whether it will replace or compete with

any existing products or create new demand.

The assessment of market definition is more complicated when it

comes to products in development that do not fall within the

established ‘pipeline’ assessment, but rather concern innovation

and development in entirely new or nascent markets.

For example, in the recent Illumina/GRAIL

case, the Commission

found that GRAIL and its rivals were engaged in an innovation

race to develop and commercialise early cancer detection tests.

The Commission concluded that while there was still uncertainty

about the exact results of this innovation race and the future

shape of the market for early cancer detection tests, protecting

current innovation competition was crucial to ensure that early

cancer detection tests with different features and price points

would come to the market. As such, the product market definition

assessment focused on the innovation race. The relevant

question in defining the market in such cases is whether there is

a meaningful competition between the companies engaged in

R&D at the development stage of the product. Such competition

may take place for funding or resources, and is evidenced by the

product’s ‘race towards commercialisation’ (for example

evidenced by various ‘prelaunch activities’, such as regulatory

filings, clinical trials, engagement with the health care systems,

etc.). The exact nature of the product and parameters of

competition at the commercialisation stage may not yet be

determined at the development stage. As such, product market

definition at the development and commercialisation stages

differs.

In terms of geographic scope, medical products are generally sold

in accordance with the national regulatory and reimbursement

regimes and the relevant markets are deemed national in scope.

Innovation markets on the other hand are generally found to be

wider than national and may be at least EEA-wide or even global.

In past decisions, the Commission found that, when innovating in

drug pipelines and medical devices, companies tend to track their

Line of treatment refers to the setting for which a specific drug is

indicated. For example, a drug indicated for second-line treatment

should be used only after another therapy (the first-line treatment) has

proven ineffective or if this other therapy cannot be prescribed to a

specific patient.

Case M.10188 – Illumina/GRAIL. See press release:

https://ec.europa.eu/commission/presscorner/detail/en/IP_22_5364.

competition globally or EEA-wide and may compete on a

worldwide basis for funding opportunities and talent.

2. Horizontal mergers: assessment of

innovation competition

The Horizontal Merger Guidelines

recognize “the effect on

innovation” as one of the elements to be assessed, equating the

potential competitive harm that may be caused by a reduction of

innovation with price increases and reduction of output, choice or

quality of goods and services. The Horizontal Merger Guidelines

specify that a merger between important innovators, for instance

between two companies with pipeline products related to a

specific product market can eliminate an important competitive

force and thus lead to a significant impediment to effective

competition.

Given that the pharmaceutical sector is driven by

innovation, it has always been important to identify and intervene

against pharmaceutical mergers that have the potential to

compromise R&D efforts and hamper the launch of innovative

new products. The Commission applies a four-layer competitive

assessment framework,

with the aim of ensuring that all

potential effects of pharmaceutical mergers, and especially

innovation effects, are carefully scrutinised.

The first layer takes into account actual competition, assessing

the overlaps between the parties’ existing marketed products. The

second layer considers potential competition assessing the

overlaps between: (i) the parties’ existing marketed and pipeline

products at advanced stages of development; and (ii) the parties’

pipeline products at advanced stages of development.

The

For example, M.9461 AbbVie/Allergan, Commission decision of 10

January 2020, paragraph 13. M.9294 BMS/Celgene, Commission

decision of 29 July 2019, paragraph 8.

Guidelines on the assessment of horizontal mergers under the Council

Regulation on the control of concentrations between undertakings,

Official Journal C 31, 5.2.2004. p. 5-18.

Horizontal Merger Guidelines, para. 38.

This framework was first introduced in cases involving the agricultural

sector (M.7932 Dow/Du Pont, Commission decision of 27 March 2017;

M.8084 Bayer/Monsanto, Commission decision of 21 March 2018),

before being applied to the pharmaceutical sector too (e.g. in M.7275

Novartis/GSK Oncology, Commission decision of 28 January 2015;

M.9294 BMS/Celgene, Commission decision of 29 July 2019 as well as

in M.8084 Bayer/Monsanto, Commission decision of 21 March 2018

and M.7932 Dow/Dupont, Commission decision of 27 March 2017).

The phases of clinical development for pipeline products can be

described as follows. Phase I starts with the initial administration of a

new drug into humans, with trials carried out on a small number of

people. The focus of Phase I trials is to confirm that the drug is safe to

use in humans and to identify the appropriate dosage and exposure-

response relationship. Phase II usually starts with the initiation of

studies to explore therapeutic efficacy in patients. Studies in Phase II

are typically conducted on a small group of patients that are selected

based on stricter criteria for indications. Phase III trials aim to

demonstrate or confirm therapeutic benefit in a larger group of

patients (Phase III trials will typically have hundreds of patients and

may have over a thousand, for example for autoimmune diseases).

Studies in Phase III are designed to confirm the preliminary evidence

accumulated in Phase II that a drug is safe and effective for use in the

intended indication and recipient population. Phase IV begins after drug

approval to monitor possible adverse reactions and/or new side effects

over time.

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

third layer consists of an analysis of innovation competition in

relation to the parties’ ongoing pipeline products, assessing the

risk of significant loss of innovation competition resulting from

the discontinuation, delay or redirection of the overlapping

pipelines (including early stage pipelines). The fourth layer takes

into account innovation competition in relation to the capability to

innovate in certain innovation spaces, assessing the risk of a

significant loss of innovation competition resulting from a

structural reduction in the overall level of innovation.

Innovation competition involving late-stage

pipelines

Overlaps involving late-stage pipelines (in Phase III clinical trials

or later), are assessed under the second layer of the

Commission’s framework. This involves investigating the overlap

between one party’s advanced pipeline(s) with the other party’s

existing or advanced pipeline product(s) (“pipeline-to-marketed”

and “pipeline-to-pipeline” overlaps, respectively). At this late

stage of development, it is usually possible to identify the

specific product market within which these pipeline drugs will

compete. The assessment of such cases takes into account the

effects on potential competition by considering: (i) the potential

adverse effects on future prices that may occur even if the

merged entity would bring all of the potentially competing

pipeline products to market; and (ii) the likelihood of

discontinuation of a pipeline product that could lead to the

reduction of product choice and higher future prices.

This approach can be seen more recently in the cases of

Abbvie/Allergan

and Takeda/Shire,

both concerning biologic

medicines

for inflammatory bowel disease. In Takeda/Shire, the

Commission assessed the pipeline-to-marketed overlap between

Takeda’s leading biologic treatment for IBD, which was the only

product available in the EEA at the time, and Shire’s pipeline

biological product for the treatment of IBD, which was expected

to launch prior to the patent expiry of Takeda’s product. The

Commission focused its analysis on the potential loss of

innovation and future competition in case Takeda were to stop

developing Shire’s new treatment post-Transaction, ultimately

finding that Takeda would be unlikely to continue developing

Shire’s new IBD treatment, as it would compete closely with

Takeda’s biologic treatment for IBD. Similarly, when assessing a

pipeline-to-pipeline overlap in Abbvie/Allergan, the Commission

found that brazikumab, a treatment for IBD that Allergan was

developing was likely to compete closely with a product Abbvie

was developing (risankizumab), as both products had the same

mode of action and line of treatment and were in the late stages

of development. The Commission thus found that AbbVie would

For pharmaceutical products, the Commission in principle considers

programmes in Phase III clinical trials as being at an advanced stage of

development.

M.9461 AbbVie/Allergan, Commission decision of 10 January 2020.

M.8955 Takeda/Shire, Commission decision of 20 November 2018.

Biologics refer to any type of medical therapy that is derived from

living organisms such as humans, animals, or microorganisms.

be likely to discontinue the development of Allergan’s pipeline

product post-transaction. The Commission’s investigation

revealed that the merger would likely lead to a loss of innovation

for the relevant treatments, as both products were part of a

promising class of biologics for which only two other competing

pipeline products existed. The transaction would likely have had

the effect of preventing a promising drug from reaching the

market, which could have led to the reduction of choice on the

market, and price increases for patients and healthcare systems.

Innovation competition involving early-stage

pipelines

The third layer involves evaluating the competitive effects of

transactions involving pipeline products in the early stages of

development.

In AstraZeneca/Alexion Pharmaceuticals,

the

Commission conducted a comprehensive competitive analysis of

horizontal overlaps between the parties’ pipeline drugs for the

treatment of lupus nephritis, follicular lymphoma, and peripheral

T-cell lymphoma, many of which were in Phase I and early Phase

II clinical trials. It concluded that no competition concerns were

likely to arise because the parties’ pipeline products were

expected to be sufficiently differentiated such that effective

competition would remain in the market post-transaction.

Similarly, in BMS/Celgene,

the Commission considered the

horizontal overlap between Celgene’s already marketed drug

Otezla and BMS’ pipeline treatments, one in Phase III and one in

Phase I clinical trials for the treatment of severe psoriasis and

psoriasis arthritis. Prompted by concerns from competitors, the

Commission went even further to assess an overlap involving a

drug in preclinical stage (in which Celgene had a financial option)

with a Phase III pipeline held by BMS. The Commission carefully

considered whether the parties’ pipeline products (as well as

products in preclinical stages i.e. before human clinical trials)

could replace existing treatments or generate new demand and

concluded that the merged entity would have no incentive to

disrupt the development of BMS’s pipeline treatments especially

because the parties’ drugs were sufficiently differentiated.

While in this case the Commission undertook a very thorough

analysis of the potential competitive constraints between BMS’

Phase III pipeline and Celgene’s preclinical stage programme

because of the concerns raised in the market investigation, in

most cases potential competitive constraints exerted by drugs in

preclinical stages are only exceptionally assessed. This is because

at a very early stage the indication and therapeutic use of the

pipeline may still be undetermined, and it may be difficult to

predict the competitive interaction between the various drugs.

M.7275 Novartis/GSK Oncology, Commission decision of 28 January

2018, where the Commission assessed for the first time all phases of

clinical research being carried out, including those concerning drugs in

early stages of development.

M.10165 AstraZeneca/Alexion Pharmaceuticals, Commission decision of

5 July 2021.

M.9294 BMS/Celgene, Commission decision of 29 July 2019.

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

Both cases affirm the importance of analysing innovation

competition and simultaneously reveal the underlying difficulties

of evaluating early-stage pipelines, as often the exact profiles

and prospects of these drugs remain speculative due to their

early stage of development and the limited availability of data.

Innovation spaces

With the fourth and final layer of assessment, the Commission

broadens the analytical scope by introducing the notion of

competition over innovation spaces.

This assessment goes

beyond examining specific potential products; it considers early

stage R&D efforts in relation to ideas or products which are

undefined or are years away from reaching the market.

In each

innovation space the Commission assesses overlaps between the

merging parties’ lines of research (encompassing the set of

scientists, patents, assets and equipment which are dedicated to

a given discovery target) and early and late stage pipeline

products.

This assessment usually takes into account the

parties’ and their competitors’ general innovation capabilities

beyond the competitive situation of specific marketed and

pipeline products. The Commission seeks to avoid a reduction in

innovation competition, for example if the merger results in there

being: (i) less competitive pressure between the players

remaining in the market, which therefore have a reduced

incentive to invest in or prioritise R&D; or (ii) the merged entity’s

innovation capabilities attaining such a size and strength that its

rivals could no longer effectively compete.

This framework of assessment has been applied in animal

healthcare and pharmaceuticals cases. In Elanco Animal

Health/Bayer Animal Health Division,

which concerned

pharmaceutical products for pets and livestock, the Commission

considered whether the transaction could lead to a reduction in

competition in certain innovation spaces but concluded that the

transaction would not result in a significant reduction in

innovation competition, as the parties were not considered to be

particularly strong innovators in the animal health space,

especially in comparison to their competitors.

AstraZeneca/Alexion Pharmaceuticals,

the Commission

considered that the transaction was unlikely to raise competition

concerns in this respect because the parties were not active in

For instance, in M.7932 Dow/Dupont, Commission decision of 27 March

2017, the Commission found that the transaction would be likely to

significantly impede effective competition as regards innovation both

in innovation spaces where the parties’ lines of research and early

pipeline products were overlapping and overall in innovation in the crop

protection industry. In order to conduct this assessment, the

Commission looked at the parties’ lines of research and early pipeline

products.

M.8084 Bayer/Monsanto, Commission decision of 21 March 2018,

footnote 23. As the Commission has explained R&D players do not

innovate for all the product markets composing a sector at the same

time, but tend to target specific spaces within that sector (“discovery

targets”).

M.7932 Dow/Dupont, Commission decision of 27 March 2017; M.8084

Bayer/Monsanto, Commission decision of 21 March 2018.

M.8084 Bayer/Monsanto, Commission decision of 21 March 2018.

M.9554 Elanco Animal Health/Bayer Animal Health Division,

Commission decision of 8 June 2020.

M.9554 Elanco Animal Health/Bayer Animal Health Division,

Commission decision of 8 June 2020, paragraphs 315-321.

M.10165 AstraZeneca/Alexion Pharmaceuticals, Commission decision of

5 July 2021, footnote 15.

the same R&D spaces, as Alexion’s R&D mainly focused on rare

diseases, which were outside the scope of the main drug portfolio

of AstraZeneca.

In Pfizer/Seagen,

the Commission found that

the transaction would not lead to a loss of innovation in the field

of oncology in general and in antibody drug conjugates (“ADCs”)

in particular,

given that a significant number of players

engaged in R&D activities would remain in the market.

3. Non-horizontal mergers: assessment

of innovation effects

Non-horizontal pharmaceutical mergers may raise competitive

concerns from the viewpoint of innovation by creating the ability

and incentive for the merged entity to engage in foreclosure

strategies that hinder innovation post-transaction. For instance,

the vertical link could enable the acquirer to profitably foreclose

competitors’ access to an important input, thereby reducing their

ability to develop a new downstream product.

This was the case in Illumina/GRAIL,

which the Commission

blocked for innovation-related vertical competition concerns. The

Commission concluded that the acquisition of GRAIL, a

development company that uses Illumina’s next generation

sequencing (“NGS”) systems to develop its innovative and

promising cancer detection tests, would enable and incentivise

Illumina, the unrivalled supplier of NGS systems, to engage in

foreclosure strategies against GRAIL’s rivals with a consequence

of hindering the development and commercialisation of early

cancer detection tests to the detriment of competition in the

internal market. As Illumina’s NGS technology was found to be a

“must-have” input on which GRAIL and its rivals depended, the

transaction would have allowed Illumina to cut GRAIL's rivals

access to the technology, or to increase prices, degrade quality or

delay supplies of its systems. These actions would have allowed

GRAIL’s product to reach the market first, thereby boosting its

competitive position to the detriment of its rivals.

Although Illumina would benefit from its anticompetitive

behaviour only at a later stage following the commercialisation

of GRAIL’s cancer detection tests, the Commission found that the

significant market potential and the ongoing innovation race in

the development and commercialisation of early cancer detection

tests gave Illumina an incentive to foreclose already at the time

of the transaction. In the absence of suitable remedies to ensure

that early cancer detection tests with different features and price

See also similar analysis in M.9294 BMS/Celgene, Commission decision

of 29 July 2019, footnote 28.

M.11177 Pfizer/Seagen, Commission decision of 19 October 2023 (not

yet published).

ADCs are a class of biopharmaceutical drugs designed as a targeted

therapy for treating cancer. They are made up of a monoclonal

antibody chemically linked to a cytotoxic agent (the payload), enabling

the payload to target specific cancer cells whose receptors or proteins

bind with that antibody.

M.10188 Illumina/GRAIL, Commission decision of 6 September 2022

(not yet published). While this case is not strictly in the pharmaceutical

sector, rather relating to medical devices and diagnostic tools, the

assessment is nevertheless of interest in the pharmaceutical context

too.

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

points would come to the market, the Commission prohibited the

transaction.

4. Remedies

The Commission’s remedies practice in the pharmaceutical sector

follows the principles of the Commission Remedies Notice. The

Notice specifies that structural commitments, such as the

divestment of a self-standing business unit, are typically

preferable to meet the objective of preventing a significant

impediment to effective competition by eliminating the concerns

entirely in a comprehensive and effective manner.

Nevertheless, non-structural remedies may be appropriate in

specific cases, provided they achieve this objective, are capable

of effective implementation and monitoring, and are not so

extensive and complex that it cannot be determined with the

requisite degree of certainty that they will be fully implemented

and are likely to maintain effective competition.

Regardless of

the type of remedy, its suitability must be examined on a case-

by-case basis, having regard to the structure and characteristics

of the market to assess whether they meet the basic aim of

ensuring a competitive market structure post-transaction.

In the Commission’s practice, structural remedies have been the

most common means to prevent problematic pharmaceutical

mergers from giving rise to a significant impediment to effective

competition. Since 2015, all conditional clearance decisions of

pharmaceutical transactions have involved a structural

component (whether a divestment or other arrangement to

terminate structural or licensing links), and in the vast majority of

cases a divestment of existing or pipeline pharmaceuticals was

the only commitment necessary to remove the concerns.

This

reflects the fact that divestitures are the best way to eliminate

concerns.

The fundamental importance of innovation in the pharmaceutical

industry is a key aspect that influences the Commission’s

remedies practice. In several cases, the commitment accepted

was not the divestment of an existing business generating sales,

but rather of a drug development pipeline. For example, having

found that Allergan’s IBD treatment in development was likely to

compete closely with AbbVie’s marketed treatment for IBD (see

further the paragraphs under the heading “Innovation competition

involving late-stage pipelines” above), the Commission’s

Appeal pending at the EU General Court under Case T-709/22 Illumina

v Commission.

See Commission notice on remedies acceptable under Council

Regulation (EC) No 139/2004 and under Commission Regulation (EC)

No 802/2004, (2008/C 267/01) “Commission Remedies Notice”),

paragraphs 10, 15 and 17.

Commission Remedies Notice, paragraphs 13-14.

Beyond the pharmaceutical sector, the Commission’s interventions in

healthcare related mergers have involved non-divestiture remedies,

such as in the field of medical imaging (M.9945 Siemens

Healthineers/Varian Medical Systems, Commission decision of 19

February 2021) or dental equipment (M.7822 Dentsply/Sirona,

Commission Decision of 25 February 2016).

Commission Remedies Notice, paragraph 17.

clearance was conditioned on the divestment of the global rights

to develop, manufacture and market Allergan’s pipeline product.

However, development cycles for innovative drugs are long, risky

and require substantial investment before pipeline products are

brought to market and begin to turn a profit. Even for more

advanced drug development projects, the risk of failure in phase

III clinical trials was reported to be around 45% across all

pipelines in 2011-2020 (and over 50% for oncology trials).

This

means that finding a suitable and motivated purchaser for a

divested pipeline can be challenging. There are several

safeguards that can maximise the prospects of success. Firstly,

the parties can mitigate the implementation risk of the

divestment by including a so-called upfront buyer clause, as was

done in the AbbVie/Allergan case, to ensure that the main

transaction can only be implemented once the parties have found

and proposed a suitable purchaser for the pipeline and the

Commission has approved this purchaser.

Secondly, the

Commission routinely finds that specific purchaser criteria are

necessary to ensure that the buyer of pharmaceutical assets has

the capabilities to develop, obtain approvals for and

commercialise the products successfully.

Thirdly, as in other

sectors, the Commission places considerable weight on a robust

market test of a proposed remedy, to capitalise on pharma

stakeholders’ expertise to identify the remedy’s prospects of

effectively resolving the concerns, as well as potential

shortcomings.

Another particularity of the sector is the prevalence of

partnerships, which have led to less traditional structural

remedies. Pharmaceutical partnerships take various forms, such

as co-development, co-marketing, or licensing agreements, which

enable pharmaceutical companies to share the risks and costs of

R&D (knowing that only a small proportion of candidate drugs

will ultimately reach the market) as well as to maximise sales by

relying on the global or regional distribution capabilities of others.

In some merger cases, such competitive links gave rise to

horizontal overlaps that carried the risk that the merged entity

may compete less vigorously with its partner, or vice versa. To

resolve these concerns, the Commission has in the past accepted

remedies to prevent the merged entity from having the ability or

incentive to discontinue its own pipelines or projects with its

partners. For example, in Novartis/GSK Oncology, Novartis had

exclusively licensed the right to develop a particular pipeline from

Array, which was in phase III clinical trials and overlapped with

GSK’s marketed drug. The Commission found that this overlap

was likely to lead to discontinuation of the pipeline, so Novartis

committed to return these rights to Array (as well as divesting an

M.9461 AbbVie/Allergan, Commission decision of 10 January 2020.

‘Clinical Development Success Rates and Contributing Factors 2011–

2020’, joint report by BIO, Informa, QLS dated 17 February 2021.

See, for example, M.9461 AbbVie/Allergan, Commission decision of 10

January 2020.

See, for example, M.9274 GlaxoSmithKline/Pfizer Consumer Healthcare

Business, Commission decision of 10 July 2019 and M.9461

AbbVie/Allergan, Commission decision of 10 January 2020.

Commission Remedies Notice, paragraphs 12, 15-16.

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

additional Novartis pipeline that was being developed as a

combination treatment with Array’s pipeline).

Similarly, in

J&J/Actelion, the commitments required the merged entity to

divest its minority shareholding in a partner company whose

activities overlapped with those of the merged entity, as well as

restricting the parties’ access to competitively sensitive

information from this partner. The parties also committed to

waive the merged entity’s royalty rights over a pipeline run by the

partner company.

This removed the merged entity’s influence

over its partners’ strategic decisions, as well as its incentive to

negatively influence the development of its own research

programmes, thereby avoiding the risk of discontinuation of the

merged entity’s or its rivals’ pipelines.

The above safeguards mean that the remedies accepted by the

Commission in pharmaceutical cases are robust. Nevertheless,

the inherent uncertainties in the multi-year, multi-million (or

billion) euro process of developing new pipelines means that

unforeseen circumstances can arise. Pharmaceutical mergers are

therefore one field where the Commission has had to resort in

exceptional circumstances to the flexibility of the review clause

to waive, modify or substitute the commitments.

Such waivers

are exceptional and must only be accepted if market

circumstances have changed significantly and permanently.

This was the case following the Commission’s conditional

approval of the Takeda/Shire deal.

To resolve the identified

concerns, Takeda committed to divest Shire’s pipeline for treating

ulcerative colitis and Crohn’s disease, including the right to

develop and commercialise the product. The market test indicated

that there was strong interest in acquiring the pipeline and

confirmed its viability and competitiveness. However, shortly

after the conditional clearance decision, the pipeline faced major

setbacks including significant challenges in recruiting patients for

the planned clinical trials, problematic results from clinical trials

that indicated higher than foreseen risks in certain patient

populations and the emergence of a novel and more promising

treatment pipeline. These issues meant that the product would

reach the market many years later than anticipated, likely in a

very different competitive landscape and would compete less

closely with Takeda’s product than anticipated in the decision.

These issues also significantly diminished any interest from

potential purchasers. These factors, which only developed after

the conditional clearance decision, cumulatively meant there was

a significant and permanent change in the market, which could

not have been foreseen at the time of the approval and which

removed the serious doubts the Commission had regarding the

transaction. Accordingly, the Commission waived the commitment

M.7275 Novartis/GSK Oncology, Commission decision of 28 January

2015. The commitments were conditional on Array entering a

cooperation agreement with a suitable partner that would assist it to

finalise the development and roll out the global marketing of the

products in question, otherwise a divestiture trustee would sell the

assets to an alternative suitable purchaser.

M.8401 J&J/Actelion, Commission decision of 9 June 2017.

See further Commission Remedies Notice, paragraphs 71-76.

M.8955 Takeda/Shire, Commission decision of 20 November 2018.

to divest the product and the merged entity discontinued the

product, while making its trial data and biosamples publicly

available to promote R&D. This reflects that pharmaceutical drug

development does carry risk, a fact which is reflected in the

safeguards adopted by the Commission, and its pragmatic

approach to addressing unforeseeable market changes following

its decisions.

Finally, it must be noted that while the Commission’s practice for

remedies in the pharmaceutical sector is well-established, it is

essential that each case and proposed remedy be assessed on its

own merits. While the time-to-market for pharmaceutical

products is long, the pace of medical innovation and new

discovery is rapid and investment in the sector is high. As a result,

there can be many promising pipelines and shifts in the prospects

of treating particular diseases. Proposed remedies must therefore

be assessed with care and with specific regard to the prevailing

medical and commercial wisdom, in view of the evidence and the

feedback provided by informed market participants, to prevent

competitive harm. This was well illustrated in the Illumina/GRAIL

case, where the proposed behavioural remedies (consisting of an

attempt to enable upstream entry and provide non-discriminatory

treatment for downstream rivals) were found insufficient to

address the competition concerns and avoid the competitive

harm arising from the transaction, resulting in its prohibition.

5. Jurisdictional aspects in pharma

mergers

Undertakings must notify concentrations that meet the EUMR’s

turnover thresholds to the Commission prior to their

implementation. This normally applies to concentrations in the

pharmaceutical sector where parties have both marketed drugs

generating turnover, in addition to any pipeline developments.

However, acquisitions of companies that do not yet have any

turnover but may in fact have (potentially competing) pipeline

products would not be caught by the turnover-based thresholds,

and as such, a potential enforcement gap was identified.

In 2016, the Commission launched an evaluation on the

functioning of certain procedural and jurisdictional aspects of EU

merger control, covering inter alia the effectiveness of the

turnover based notification thresholds. The Commission found

that while, on the whole, the existing thresholds work well, there

has been an increasing phenomenon of concentrations involving

firms that generate little or no turnover at the time of the

transaction but that already play or may develop into a

significant competitive role on the market. These mergers would

not be captured by the existing notification thresholds but could

have a significant impact on competition. This is particularly

relevant for the pharmaceutical sector, where innovation is a key

parameter of competition and so targets with promising drug

pipelines can have high valuations and significant competitive

potential, even if they do not generate any turnover at the time

M.10188 Illumina/GRAIL, Commission decision of 6 September 2022

(not yet published).

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

of the transaction and therefore fall below the relevant merger

control thresholds.

In light of these findings, the Commission revised its approach to

requests for case referrals under Article 22 EUMR. This provision

empowers Member States to request that the Commission

examine any concentration that lacks an EU dimension and is

therefore not directly notifiable to the Commission, provided that

it: (i) affects trade between Member States; and (ii) threatens to

significantly affect competition within the territory of the Member

State making the referral request. Other EU Member States and

EEA EFTA States may then join the initial referral request.

The

Commission’s jurisdiction under Article 22 is limited to examining

the effects of the transaction in the referring Member States. In

the past, the Commission had discouraged Member States from

requesting referrals in cases where they do not themselves have

jurisdiction, as it was considered, based on experience at the

time, that the national thresholds, often turnover-based, captured

all transactions that could materially impact the internal market.

However, following the results of the evaluation, the Commission

considered that referrals by Member States were an appropriate

and proportionate tool to capture below-threshold transactions

that could give rise to competition issues of the nature identified

in the consultation. Accordingly, in September 2020 the Executive

Vice-President for Competition announced that the Commission

was revising its approach, such that, in appropriate

circumstances, the Commission would henceforth encourage

Member States to refer certain cases to it even where the

transaction was not notifiable to the Member State(s) in

question.

Following the publication of its evaluation of procedural and

jurisdictional aspects of EU merger control identifying a potential

enforcement gap,

in March 2021 the Commission adopted a

guidance paper introducing a reappraisal of the application of

Article 22 to ensure that certain categories of cross-border

transactions with potentially significant impact on competition in

the internal market are appropriately examined.

Under this

guidance, the Commission intends to encourage and accept

referrals of transactions: (i) over which the referring Member

State does not have initial jurisdiction; and (ii) which involve firms

that play or may develop into playing a significant competitive

See Communication from the Commission - Guidance on the

application of the referral mechanism set out in Article 22 of the EU

Merger Regulation to certain categories of cases, 26 March 2022,

C(2021) 1959 final, paragraphs 9-12.

According to Article 6(3) of Protocol 24 of the EEA Agreement, one or

more EEA EFTA States (i.e., Iceland, Liechtenstein and Norway) may join

a request for referral made by a Member State under Article 22 if the

concentration affects trade between one or more EU Member States

and one or more EEA EFTA States and threatens to significantly affect

competition within the territory of the EEA ETFA State joining the

request.

See Speech by EVP Vestager, “The future of EU merger control”, 11

September 2020, SPEECH/20/2884.

Evaluation of procedural and jurisdictional aspects of EU merger

control, SWD(2021) 66 final, 26.3.2021.

Guidance on the application of the referral mechanism set out in

Article 22 of the Merger Regulation to certain categories of cases

(2021/C 113/01), (“Article 22 Guidance” or “Guidance”).

role on the market(s) at stake despite generating little or no

turnover at the time of the concentration.

This approach has been confirmed by the EU General Court

concerning the Illumina/GRAIL decision

by which the

Commission accepted Article 22 referrals from six EEA States

regarding a concentration that was not notifiable at national level

in any EEA State.

The General Court’s judgment is under appeal

before the European Court of Justice.

Even when a referral

request fulfils the substantive and procedural

conditions of

Article 22, the Commission has discretion to accept or reject the

referral request. The Commission exercises this discretion based

on the principles of the Referral Notice

and the more recent

Article 22 Guidance.

As explained in the Commission’s Referral Notice, when

considering whether to accept a referral request, the Commission

will consider, e.g., the need to ensure effective protection of

competition in all markets affected by the concentration.

The Article 22 Guidance complements the Referral Notice and

adds a new category of cases generally deemed most

appropriate for an Article 22 referral. These are concentrations

where the turnover of at least one of the undertakings concerned

does not reflect its actual or future competitive potential, for

instance because the target is a start-up or recent entrant with

significant competitive potential or an important innovator or has

access to competitive significant assets such as raw materials,

infrastructure, data or intellectual property rights.

The Guidance

foresees that the recalibrated approach to Article 22 could be of

particular relevance to the pharmaceutical sector, due to the

importance of innovation as a parameter of competition.

Accordingly, the Guidance provides hypothetical examples of

transactions that could be considered as suitable candidates for

Case T-227/21 Illumina v Commission, EU:T:2022:447, judgment of

13 July 2022, paragraphs 85-184. Appeal of the judgment is pending

before the European Court of Justice, Case C-611/22 P Illumina v

Commission.

While only EU Member States can make the initial referral request

under Article 22 EUMR, EEA EFTA States may join the initial request.

See footnote 51 above.

M.10188 Illumina/GRAIL, Commission decisions of 19 April 2021

pursuant to Article 22(3) (not yet published). The initial referral by

France was joined by Belgium, Greece, Iceland, the Netherlands, and

Norway.

Case C-611/22 P, Illumina v Commission.

Referral requests are to be submitted within a period of 15 working

days of the date on which the concentration was either notified; or if it

was not notifiable nationally, otherwise made known to the Member

State concerned. In Illumina/GRAIL, the General Court confirmed the

Commission approach that “made known” should be understood to

imply an “active transmission of information” to the Member State

concerned to enable a preliminary assessment as to the existence of

the criteria relevant for the assessment of the referral. See Case T-

227/21 Illumina v Commission, paragraphs 200-213.

Commission Notice on Case Referral in respect of concentrations

(2005/C 56/02) (“Referral Notice”).

See fn. [54] above.

Article 22 Guidance, paragraphs 19-20. See also Practical information

on implementation of the “Guidance on the application of the referral

mechanism set out in Article 22 of the Merger Regulation to certain

categories of cases”, Frequently Asked Questions and Answers (Q&A),

available on the Commission’s website at: https://competition-

policy.ec.europa.eu/system/files/2022-

12/article22_recalibrated_approach_QandA.pdf.

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

an Article 22 referral. These include an acquisition by an active

pharmaceutical player of an innovative pharmaceutical company

with no actual revenues but an advanced pipeline project which

could target the same disease and have a comparable mode of

action as an already commercialised drug of the acquirer.

Other factors that the Commission may consider under the

recalibrated approach to Article 22 include whether the

consideration paid by the purchaser is particularly high compared

to the target’s current turnover – which could indicate that it does

not reflect its actual or future competitive potential; potential

ongoing/parallel reviews by Member States – which may

undermine the ‘one-stop-shop’ principle; and potential period of

time elapsed since the implementation of the transaction.

The Commission applied this approach for the first time to the

Illumina/GRAIL transaction which, due to the target being a start-

up, did not trigger a notification anywhere in the EEA. The

Commission accepted an initial referral request from France and

joining referrals from five other EU/EEA countries, none of which

had jurisdiction to review the transaction based on their national

legislation.

In addition to finding that the referrals met the legal

criteria of Article 22, the Commission considered a set of

additional factors in favour of accepting the referrals. These

included: (i) the fact that the value of the deal was particularly

high compared to the turnover of the target at the time of the

transaction; (ii) the fact that, while the target did not generate

revenues from the sale of products, one of its products in

development was expected to capture a significant share of the

addressable market; and (iii) the consideration that an EU-level

coordination of investigative efforts was desirable given that the

transaction concerned cancer detection, a priority of the

Commission in the area of health.

Finally, although pharmaceutical mergers are a key target area

for the recalibrated application of Article 22, EU Member States

retain discretion in deciding what concentrations they may refer

to the Commission. The aim of the current approach is to permit

EU Member States and the Commission to ensure that

transactions that merit review under the EUMR are examined by

the Commission, without imposing a notification obligation on

transactions that would not warrant such review. In order to

achieve this aim, the Commission is actively monitoring

transactions in the pharmaceutical sector in order to consider

their suitability for referral under Article 22 by sending requests

for information to and receiving briefing papers from the parties

to transactions that may warrant a review by the Commission on

that basis and encouraging companies to actively reach out to

request a consultation in case of doubt.

The recalibrated Article 22 policy has proven to be a necessary

and effective mechanism, working as a safety net in permitting

the Commission to screen concentrations which are likely to

significantly impede effective competition in the internal market

Practical information on implementation of the “Guidance on the

application of the referral mechanism set out in Article 22 of the

Merger Regulation to certain categories of cases”, Frequently Asked

Questions and Answers (Q&A), available on the Commission’s website

at: https://competition-policy.ec.europa.eu/system/files/2022-

12/article22_recalibrated_approach_QandA.pdf.

Article 22 Guidance, paragraphs 21-22.

See fn. [57] above.

Ibid.

and which, because the turnover thresholds have not been met,

could otherwise escape a review by the Commission and Member

States.

More generally, referral mechanisms of the EUMR may be

relevant to merger enforcement in the pharmaceutical sector, as

the existence of EEA-wide or global markets for pipeline products

may speak in favour of a review by the Commission. By way of

example, in 2019, the Commission accepted referrals to review

the proposed acquisition by J&J of Tachosil, a competing provider

of certain haemostatic and tissue sealing products

. The

Commission’s review raised concerns that although Johnson &

Johnson did not sell the overlapping products (dual haemostatic

patches) in the EEA at the time of the transaction, it had done so

until 2017 and at the time of the transaction sold them outside

the EEA. The Commission's investigation revealed that absent the

transaction, Johnson & Johnson would have had strong incentives

to enter EEA markets either with the product it was marketing

outside the EEA or with new product that it might have developed

absent the transaction. The Commission initiated an in-depth

investigation, and the parties abandoned the transaction before

the Commission could reach its final decision.

More recently,

Pfizer/Seagen

was referred to the Commission under

Article 4(5) EUMR.

6. International cooperation

Taking into account the global nature of large pharmaceutical

mergers and the fact that innovation markets are often deemed

to be global, cooperation between the competition enforcers is of

paramount importance when assessing mergers with innovation

elements. Such cooperation is conducted on a case-by-case basis

for investigations where multiple competition authorities are

involved and the merging parties have provided a waiver allowing

authorities to discuss confidential information. Allowing for

cooperation between the authorities often leads to positive

outcomes for the parties as investigations may be more aligned

in terms of timing and, where relevant, remedies. In March 2021,

at policy level, the Commission, together with the Canadian

Competition Bureau, the UK's Competition and Markets Authority,

the U.S. Federal Trade Commission (FTC), U.S. Department of

Justice, and three U.S. Offices of Attorneys General launched a

multilateral working group to analyse the effects of mergers in

the pharmaceutical sector. The working group was initiated by the

FTC and is in line with close cooperation between national

competition authorities.

The working group’s efforts culminated

in a workshop on 14-15 June 2022, in which the participating

competition authorities and sector experts contributed their

experiences, views and approaches to pharmaceutical merger

enforcement, focusing on innovation aspects of pharmaceutical

mergers, amongst other issues, such as price competition and

remedies.

M.9547 Johnson & Johnson / Tachosil (withdrawn on 8 April 2020).

Withdrawal of notification of a concentration (Case M.9547 – Johnson

& Johnson/Tachosil) 2020/C 124/01.

M.11177 Pfizer/Seagen, Commission decision of 19 October 2023 (not

yet published).

See Commission press release:

https://ec.europa.eu/commission/presscorner/detail/en/IP_21_1203.

See FTC-DOJ Workshop Summary: The Future of Pharma (ftc.gov).

Assessing Innovation Competition in Pharma Mergers | Competition Policy Brief No 1/2024

Conclusion

The pharmaceutical industry is innovative by nature. Accordingly,

innovation plays a key role in merger reviews in the

pharmaceutical sector, as it is relevant not only for the

substantive assessment but is also a relevant parameter when

considering jurisdiction.

The Commission has developed its analytical approach to

innovation in pharmaceutical cases over time, applying its

assessment framework in multiple decisions. This framework

gives certainty over the analytical approach the Commission will

use, while allowing for the necessary flexibility required to assess

complex innovation theories of harm and potentially remedies

based on the relevant facts of each case. The work of the

multilateral working group focusing on pharma indicates that

competition agencies globally are seeking to develop and improve

assessment of innovation aspects of pharmaceutical mergers.