BRUSSELS, Belgium - Hoffmann-La Roche Ltd.'s DNA probes business was subjected to some tough conditions when the Swiss group won regulatory approval for its takeover of Boehringer Mannheim GmbH earlier this year. The precise nature of those conditions has just been made clear by the European Commission, the European Union's (EU) competition and antitrust watchdog, which vetted the proposed acquisition closely before authorizing it in February.
In a just-published issue of the EU official journal, the commission sets forth its decision in 25 pages of detail, and the reasoning behind it. Because the deal involved overlapping business activities by the two groups in in vitro diagnostics and pharmaceutical products, the possible implications for competition were thoroughly investigated. The commission's conclusion was that, while in most product markets there would be little or no competitive problem (because total market share would be below 25 percent and there are strong international competitors), the takeover would in particular boost Basel, Switzerland-based Roche's dominant position in DNA probes across Europe, and lead to “the creation or strengthening of a dominant position as a result of which effective competition would be significantly impeded.“
Binding License Agreements Required
As a result, Roche had to undertake to give access to its PCR technology for all in vitro diagnostic applications to all interested market participants. Four different types of licenses will be offered, tailored to the needs of prospective licensees, on non-discriminatory terms, and each including a “most-favored customer“ clause. In addition, a trustee - approved by the commission - will be appointed to ensure compliance with the principle of non-discrimination.
And, to make sure these conditions did not remain purely academic, Roche had to agree to conclude a certain number of binding license agreements within a set period. Furthermore, Roche is prevented from gaining immediate access to sensitive business information on the activities of its licensees. Instead, for calculating royalty payments, the licensees will report to an independent auditor approved by the commission and under obligation not to disclose figures to Roche until after a stipulated time period.
The commission decided that “the undertaking to license the PCR technology to all interested competitors should ensure that there will be several entries from large in vitro diagnostics (IVD) producers into this market. These companies, which have already . . . expressed their interest in obtaining a commercial PCR license, have the same incentives to enter this high-growth market within the IVD industry as Boehringer Mannheim [of Mannheim, Germany] had prior to the merger.“ The availability of a range of different types of license “should also ensure that not only large companies will enter this market, but also small companies that have an interest in a specific disease with as-yet-unmet medical needs, but who do not have an interest in the full breadth of PCR applications.“
Until Roche began this undertaking, the small companies active in the research and development of new tests using a research license from Roche could not market these tests themselves; they had to sell their development results to Roche or another company with a commercial PCR license.
Roche's Market Position 'Secure'
The undertakings mean that broad licenses will be given to suppliers which are already active in the IVD industry, so “any concern about Roche's ability to bundle DNA probes with other IVD products will also be removed.“ Licensees “will be in a similar competitive position as regards the ability to offer DNA probes combined with other IVD products.“ As a result of all these commitments from Roche, the reinforcement of a dominant position in DNA probes “will effectively be removed,“ the commission concluded.
What concerned the commission particularly was that Roche already had a share of more than 70 percent of the European market for DNA probes in the principal categories of HIV, hepatitis C, myobacterium tuberculosis and sexually transmitted diseases. This, in combination with the weakness of all alternative DNA probe technologies, gave Roche a dominant market position, which would only be strengthened by the link to Boehringer Mannheim and the additional market access this would bring. This risk could be compounded by the commission's prediction that “Roche's market position will continue to be secure,“ since most of the research on DNA probes is done on Roche's PCR technology, which has “become the industry standard.“ The commission cites estimates that the market share of PCR technology will grow to 75 percent by 2002, and to 80 percent by 2005.
The commission estimated the 1996 EU market for DNA probes at around US$80 million, up 42 percent since 1995; and in the same period, it says, Roche's sales in this sector doubled, with sales of HIV and tests up 400 percent.
“The loss of Boehringer Mannheim as the most likely potential competitor of Roche on the DNA probe market in the EU would serve to consolidate and strengthen Roche's dominant position,“ the commission decided. Its investigation revealed that Boehringer Mannheim had itself invested substantial efforts in positioning itself in this market, including the acquisition of at least 126 patents relating to the DNA probe market, and collaboration agreements on research and application of DNA probe products and on instruments.
No other companies “are currently able to produce DNA probe products equivalent to those produced by Roche . . . They offer only a limited number of tests and the alternative technologies used by them are regarded by most industry observers as inferior to the PCR technology,“ the commission found. And while Emeryville, Calif.-based Chiron Corp. holds about a quarter of the European market for HIV and hepatitis C, “it has a serious disadvantage in that it does not have an instrument for the automated operation of its tests,“ the commission said.
In February, the U.S. Federal Trade Commission (FTC) gave Hoffmann-La Roche its go-ahead to acquire Corange Ltd., of Hamilton, Bermuda, the parent company of Boehringer Mannheim and DuPuy Inc., of Warsaw, Ind. The FTC approved the deal on the condition that Roche not acquire a dominant position in the thrombolytics market. The acquisition was first made public in May 1997. *
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