GCR Guide on Life Sciences – Merger control procedural issues

Referrals under the EUMR

a. EUMR jurisdictional scope and historic referrals

Regulation (EC) No 139/2004 on the control of concentrations between undertakings (hereinafter the ‘EUMR’ or the ‘Regulation’)¹ provides the regulatory framework for the assessment of concentrations that meet prescribed turnover thresholds, such that they have a ‘Community dimension’.² A concentration occurs when a change of control occurs on a lasting basis. 

The ‘one stop shop’ principle means that transactions that fall within the scope of the EUMR are not subject to parallel merger review in the member states. Concentrations not covered by the Regulation in principle remain under the jurisdiction of the member states. However, the EUMR provides a framework for ‘referrals’ between the European Commission (EC) and member state authorities in certain circumstances:

• at the request of the parties or a MS, the EC may refer a case in whole or in part to the competent authorities of a MS (Articles 4(4) and 9 EUMR); and
• the parties may ask the EC to assume jurisdiction where at least three member states would have jurisdiction (Article 4(5) EUMR) or one or more MSs may request the Commission to examine any concentration not having a Community dimension if it affects trade between MSs and threatens to significantly affect competition within the territory of the requesting MS (Article 22 EUMR).

• The transaction was notifiable in three member states, such that review at member state level may increase legal uncertainty and lead to conflicting assessment; 
• There was a need to examine why J&J decided to exit the EEA market in 2017 for its haemostatic patch;
• The parties' competitors were active throughout the EEA and it would be more efficient to centralise contacts; and
• A coherent handling of the case in relation to potential remedies was desirable.

In contrast, the EC has only referred two cases in the sector to member states at the request of the parties (under Article 4(4) EUMR). In BOOTS/Alliance Unichem (2005)¹¹,  the relevant geographic market was limited to the UK¹²  - the parties were active in retail pharmacy in the UK, where the concentration would have given rise to one horizontally affected market (if defined on a national basis) or several horizontally affected markets (if defined on a local basis). The EC concluded that the principal impact on competition was likely to be on distinct markets in the UK, warranting referral. In Brocacef/Mediq Netherlands (2015)¹³,  the EC found that the transaction gave rise to several affected markets for wholesale medical products and the retail sale of pharmaceuticals in the Netherlands. Accordingly, the EC referred the concentration. The EC has only referred two medical instruments/devices concentrations to member states under Article 4(4). In Helios/DAMP (2012)¹⁴,  the EC found factors indicating regional or local markets for acute hospitals but also considered national markets for elderly care facilities, and concluded that the transaction may have had a significant impact on competition in a distinct market in Germany. In Fresenius/Rhön Klinikum (2012)¹⁵,  the EC also found factors indicating the existence of regional or local markets for acute hospitals, but also considered national markets. Once again, it concluded that the transaction may have had a signification impact on competition in a distinct market in Germany.

The EC has only referred two cases in the pharmaceutical sector under Article 9 EUMR. In GEHE (1996)¹⁶,  it found that the geographic market for pharmaceutical wholesaling was no wider than the UK, and could have been regional, and the geographic market for pharmaceutical retailing was local. Accordingly, the EC found that the markets were limited to the UK, and referred the concentration to the CMA. 

In Alliance Unichem (1998)¹⁷,  the EC found that the relevant market was limited to full-line distributors supplying pharmacies quickly (in a few hours) and frequently, with a legal obligation to keep a wide range of pharmaceuticals in stock. The EC concluded that the market was regional, because the regulatory regimes applicable to the distribution activity were differentiated across the EU, and because of regional demand differentiation. It referred the concentration to the Italian Competition Authority.

Article 22 EUMR, known as the ‘Dutch clause’¹⁸,  enables the EC to accept the referral of concentrations that do not have a Community dimension where the concentration involves an undertaking supplying goods/services cross border (such that it is likely to have an actual or potential effect on trade between member states) and the NCA can provide prima facie evidence of a significant adverse effect on competition in its jurisdiction.

On 26 March 2021, the EC published new guidance on Article 22 referrals (the ‘Article 22 Guidance’)¹⁹,  addressing the circumstances in which a member state may request the EC to accept referral of a concentration over which the member state does not have jurisdiction. The Article 22 Guidance reflects the EC’s view that there has been an enforcement gap in relation to transactions in certain innovative sectors (e.g., life sciences and the digital economy). 

It is intended to apply to concentrations where ‘the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential’, such as start-ups or recent entrants with significant competitive potential that have yet to generate significant revenues, that represent actual or potential important competitive forces. The EC is concerned that such companies could be acquired without scrutiny. In short, the Article 22 Guidance is intended to enable review of so-called ‘killer acquisitions’. However, the breadth of such scope for review has the potential to materially reduce transactional predictability and certainty. 

This expansive interpretation of Article 22 was first applied to Illumina’s proposed acquisition of Grail²⁰.  On 21 September 2020²¹,  the parties announced that Illumina would acquire Grail for $8bn (approx. €7.5bn). Grail is a U.S. healthcare company developing blood-based cancer tests based on genomic sequencing. It supplied no products, generated no revenue, and had not employed personnel to prepare for regulatory approvals or distribution of a product, in the EEA. 

In February 2021, the EC invited the French Competition Authority (ADC) to request the EC to accept a referral. The ADC did so, and the Dutch ACM joined the reference. The referral was challenged by the parties in both France and the Netherlands²².  Both the French²³  and Dutch²⁴  courts rejected the parties’ appeals. The French Court found that Article 22 EUMR enables NCAs to ask the EC to examine deals affecting trade between member states if they could harm competition in the requesting member state. Further, it found that the ADC’s referral could only be challenged at the end of the EC merger investigation, before the EU courts. It concluded that it was not competent to hear arguments regarding suspension of the referral. The Dutch Court considered several grounds of appeal, including whether there was conflict with the ACM‘s procedural rules, and whether the referral request (and the ACM’s decision to join the reference) had occurred outside the deadline provided in the EUMR, and rejected the appeal.

On 19 April 2021, the EC accepted the referral,  finding that the proposed transaction could affect trade within the single market and threatened to significantly affect competition within the territory of France, and that a referral was appropriate as Grail's competitive significance was not reflected in its (lack of) turnover. Illumina has sought the annulment of the EC decision to assert jurisdiction by the General Court²⁶.  The judgment is expected on 13 July 2022.

The EC opened a Phase II review on 22 July 2021²⁷,  and adopted interim measures on 29 October 2021, following Illumina's decision to close the acquisition²⁸.  In December 2021, Illumina appealed²⁹ the imposition of interim measures to the General Court, making three pleas in law: 

• The decision is outside the EC's competence because Art 7 EUMR could not apply; 
• The provisions in the decision regarding funding are disproportionate; and
• The decision is disproportionate in its treatment of Illumina’s pre-existing contractual obligations and/or the EC failed to provide adequate reasons.

The judgment is expected in the second half of 2022.

02 Reform of the EU simplified procedure rules

The EC began to review its simplified procedure rules in 2016, seeking to identify additional types of concentrations eligible for simplified review and to streamline certain procedures. For example, the proposed revisions cover transactions where two or more undertakings acquire joint control of a joint venture without current or expected turnover within the EEA, where the undertakings will not transfer assets within the EEA to the JV. In addition, the market share thresholds up to which the simplified procedure applies will be increased.

Importantly, it is proposed to provide the EC with discretion to apply the simplified procedure to concentrations that do not fall into any of the categories of concentrations eligible for review under the simplified procedure, particularly where certain markets relevant to the concentration are eligible for review under the simplified procedure, but others are not. 

New safeguards and exclusions will apply to concentrations where there are horizontal overlaps or vertical relationships between the parties to the concentration, and it cannot be excluded that the concentration will raise serious doubts as to its compatibility with the internal market. Further, the EC will have the discretion not to apply the simplified procedure where one party to a concentration has significant non-controlling shareholdings in companies active in the market(s) where another party is active.

Finally, several procedural changes are proposed, including the introduction of a ‘super simplified procedure’, enabling notification using a short Form CO without pre-notification, and formalisation of the potential for clearance in less than 25 working days for certain concentrations.

03 Developments in Germany and Austria

a. German and Austrian Value-based threshold

In Germany, even when the turnover thresholds are not met, a transaction is notifiable if the transaction value exceeds €400 million and the target has ‘significant domestic operations’. In its most recently published activity report, the Federal Cartel Office (FCO) referred to pharmaceutical cases where the value-based transaction threshold (and, as a result, the significant domestic activity concept) was considered. 

• One transaction was notifiable as a result of the target’s conduct of clinical studies and research co-operations in Germany, and the expectation that approx. 25% of the patients to be treated with the product in the future lived in Germany.³¹
• Other transactions were not notifiable, even though the targets’ lead products were in Phase III clinical trials globally (including in in Germany) and there were clinical trial sites in Germany. Where there was no research group leader in Germany and no patients enrolled in trials at the time of notification, such that no drugs had been administered, the FCO has declined jurisdiction. ³²

Between 2017 and the end of September 2020, 45% of the 31 notifications to the FCO under the value-based transaction threshold related to the pharmaceutical sector.³³

b. Revised Joint guidance - nexus criteria 

In January 2022, the German and Austrian CAs published updated joint guidance regarding transaction value thresholds (Joint Guidance)³⁶.  The ‘nexus test’ is met if the target is ‘significantly active in Germany’ or ‘to a relevant extent active in Austria’. The revised Joint Guidance makes a number of changes that are important in determining whether the “significantly active” test is met. 

The location of the target is not sufficient. Rather, the focus is on whether the asset is used in an entrepreneurial activity.  

Further, while R&D at facilities and using infrastructure in Germany can provide the nexus, the research results need not only to be marketable in principle. The products/services at issue need to be likely to be marketed in Germany, and there needs to be activity in Germany relating to either or both of market access and distribution, including the presence of personnel engaged in seeking authorisation or establishing distribution (including negotiation of distribution agreements). 

The domestic activity must also be more than marginal. For R&D, various criteria are considered to determine materiality, including the number of employees involved in R&D, the R&D budget, the number of patents or patent citations. 

c. Exclusive licensing agreements considered to be on all fours with ‘asset acquisitions’ by Joint Guidance 

The Joint Guidance brings new types of transactions within the scope of the German merger control regimes, including exclusive licences. Previously, the grant of a licence was not notifiable if it was not associated with current revenue generating activity. For example, in National Geographic I⁴⁰,  the parties had concluded a licence agreement for the initial publication of the magazine ‘National Geographic’ in the German language. The Federal Supreme Court confirmed that this agreement did not constitute a concentration because the licensors had not yet marketed the magazine in the German language, so there was no existing market position. The Joint Guidance provides that a transaction may be notifiable under the value thresholds if a future market position is acquired, including cases where the turnover potential of the target only develops after the licence is granted. 

The value of the concentration comprises all assets, including payments to the seller that are conditional on the achievement of certain turnover or profit targets in the future⁴².  In life sciences licences, payments are ordinarily a mixture of upfront and milestone payments, and royalties or a revenue share of commercialized products. The value of the transaction includes all these elements, discounted to reflect their net present value⁴³. 

In Austria, an exclusive licence must constitute a concentration to be notifiable.

d. Germany

Life- sciences transactions are potentially reviewable under the cross-sector regime applicable to operators of critical infrastructure (under the Foreign Trade and Payments Ordinance and Ordinance on the Determination of Critical Infrastructure, both adopted under the Act on the Federal Office for Security and Information Technology under the BSI Act).

UK Developments

a. Merger review

The UK share of supply test requires the merger to have a sufficient UK nexus as a result of the creation or enhancement of a share of supply of at least 25%. In several recent cases, the CMA has taken a broad view of the metrics and services that can be used to calculate shares of supply, considering services that are complementary in Roche/Spark and Sabre/Farelogix, and vertically related services in Google/Looker.  

1. Roche Spark