Antitrust

Shearman & Sterling Antitrust Annual Report 2019

Shearman & Sterling LLP

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S H E A R M A N & S T E R L I N G L L P | 4 5 I N T H E U . S . , M E R G I N G PA R T I E S S H O U L D C O N S I D E R T H E L I K E L I H O O D O F F U T U R E E N T R Y A N D T H E P O S S I B I L I T Y F O R S M A L L E R P L A Y E R S T O I N N O V A T E A N D D I S R U P T M A R K E T S product markets but also the possible effects of the merger on innovation at the industry level. The EC found that the merging parties were competing closely on innovation in certain narrow segments. Most significantly, the EC found that the merging parties were two of only five companies with sufficient R&D capabilities worldwide, and therefore, concerns on innovation exist at an industry-wide level, irrespective of particular product markets. The competitive rivalry between them was an important driver of innovation across the industry. In 2018, the EC applied a similar theory of harm in M.8084 Bayer/Monsanto. The EC identified concerns in relation to various markets in seeds and traits, pesticides and digital agriculture, and concluded "the transaction as notified would have significantly reduced competition on price and innovation in Europe and globally on a number of different markets." A remedy package in excess of €6 billion was agreed. This included divestments to address specific product concerns as well as the concentration of global R&D activities at a wider, industry level. For example, the parties agreed to divest Bayer's entire vegetable seed business, including R&D, to ensure the number of global vegetable seed R&D players remained the same. One uncertainty is how robust the evidence needs to be for the EC to justify intervention. Merger control reviews are by their nature forward-looking, but future innovation is manifestly uncertain. In pharmaceuticals, billions of dollars are spent each year on products that don't make it to market. It is crucial for regulators to determine at what point an innovation theory or pipeline product is sufficiently certain to reach the downstream market. Even the prospect of success of third-stage pipeline pharmaceutical products is far from guaranteed. In Dow/DuPont and again in Bayer/ Monsanto, the EC took the view that the concentration of two significant innovators could ultimately have a negative impact on R&D and therefore impede future competition even without identifying concern regarding a particular product in development. To date, the EC has applied these theories primarily in markets characterized by high barriers to entry, and a relatively small number of firms pursuing innovation in a particular space; however, it is reasonable to expect the EC to push this theory beyond the agrochemical and pharmaceutical sectors to wherever the EC thinks innovation is an important competitive parameter and could be affected by the proposed merger. The EC will pay particular attention to industries where innovation is concentrated and will be prepared to look at innovation across the industry as a whole, not just in relation to particular product markets in which the merging parties overlap. The EC has slightly more room to maneuver in this regard since its decisions are automatically binding. Parties must appeal to the European courts in order to test the EC's standard of proof. By contrast, in the U.S. the DOJ/ FTC must justify intervention in court at the outset, which is likely to make them more reluctant to intervene on an innovation theory of harm. CONCLUSION Increasingly, the mere analysis of price effects based on traditional antitrust metrics may be insufficient to gauge competitive risk in merger and conduct cases. Particularly in the U.S., merging parties should consider the likelihood of future entry and the possibility for smaller players to innovate and disrupt markets. The agencies are seeking to more aggressively protect upstart nascent competitors even with marginal market shares where a reasonable probability of expansion and serious future competition is possible. In Europe, the EC has shown a willingness to challenge mergers on the basis of a loss of potential future competition towards the goal of preserving innovation and continued research and development in high-technology markets. On the pharmaceutical side, the EC has made clear that it will challenge mergers or require strategic divestitures to cure acquisitions even if the drug competition it is protecting has a low probability of ever coming to fruition.

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