Thursday, October 29, 2009

FTC Legal Analysis Spells Trouble for Next Step: Intervet to New Merial

While it is likely that the reverse merger will close in a few weeks (or perhaps, days') time, now, the 100 day call option in favor of Sanofi looks to face some tough sledding at the FTC. Recall that Merck gave Sanofi-Aventis a call option on all the Old Schering Intervet businesses.

Look at what appears in the US FTC Analysis Memo (PDF file), clearing the Merck-Schering deal, this evening:

. . . .In addition to these commonly used vaccines, there are a number of other vaccines that are used in poultry operations to a lesser degree that would be affected by the proposed transaction. These include vaccines for infectious bursal disease, reovirus, infectious laryngotracheitis, coccidiosis, fowl pox, avian encephalomyelitis, and infectious tenosynovitis.

Even though they are not used as universally as the core vaccines, these more minor vaccines play an important role in many poultry operations, as an outbreak of the disease can have equally disastrous economic consequences for poultry producers. Because of the unique characteristics of live and killed versions of poultry vaccines, they are not considered substitutes for each other.

The anticompetitive implications of eliminating one of the two leading suppliers of poultry vaccines in the United States are significant. Poultry producers have benefitted from direct competition between Merial and Schering-Plough, which has resulted in, among other things, steeper discounts and lower prices for customers. The remaining three market participants are smaller than either Merial or Schering-Plough, and do not have the capacity that either of these firms currently enjoys. As a result, these other firms would not be able to replace the competition that the proposed Acquisition would eliminate. In addition, because of research, development and regulatory barriers, entry sufficient to deter or counteract the competitive effects of the proposed transaction is unlikely to occur within two years.

The proposed transaction is also likely to result in anticompetitive harm in the market for cattle gonadotropins. These products are used to treat follicular cysts in cattle and to synchronize the reproductive cycles of cattle undergoing artificial insemination. Although there are other reproductive products on the market, these other products are used in combination with, and not as substitutes for, cattle gonadotropins in order to achieve reproductive synchronization. The combination of Merial and Schering-Plough would result in a duopoly in the market for cattle gonadotropins leaving only Wyeth to compete with the combined firm.

Thus, the proposed merger would eliminate a significant competitor in the U.S. market for cattle gonadotropins, and absent a remedy, customers would likely pay higher prices for these drugs. . . .

At the time the parties entered into an agreement to divest Merck’s shares in Merial to Sanofi-Aventis, they also entered into a call option agreement (“Call Option”) granting Sanofi-Aventis the right to combine the animal health businesses of Merial and Schering-Plough after the Acquisition is consummated and to recreate the 50/50 joint venture between Merck and Sanofi-Aventis. The effect of the Call Option, if exercised, would be to reverse the animal health remedy required by the Order. Consistent with Commission policy, the Order contains a prior approval provision to address the credible risk (here, the high likelihood) that the combined Merck/Schering-Plough and Sanofi-Aventis would combine their animal health businesses after the divestiture. The call option was entered into with the expectation that it is likely to be exercised, and the firms have publicly identified the advantages of such a combination. As a result, Merck is prohibited from acquiring any of Merial’s animal health assets, or in any way combining the animal health businesses of Merck and Sanofi-Aventis without the prior approval of the Commission. . . .


Anonymous said...

If FTC only requires divestiture of poultry and cattle gonadatropins then both Merck and Sanofi would take that in a heartbeat. Everyone always knew that one of the poultry businesses would need to be divested, and cattle gonadotropins just isn't a big business driver. Heck, that would be a cleaner transaction than Pfizer Animal Health/Fort Dodge.

Bottom line, if FTC approved Pfizer/Wyeth with only approx. 10% of animal health being divested, then the chances that the Sanofi call option will be denied are extremely small.

Condor said...

The FTC Consent Order actually requires much more, anon., thus:

". . . .Merck is prohibited from acquiring any of Merial’s animal health assets, or in any way combining the animal health businesses of Merck and Sanofi-Aventis without the prior approval of the Commission. . . ."

I think the required divestitures will be more significant, especially in Europe.

But we shall see.


Anonymous said...

Item #3 leads me to believe that a Meriel/Intervet Dual ownership LLC side-project type thing won't happen.

Day one is day one, not day 100.

Anonymous said...

Why? Combining Intervet into Merial would require FTC approval anyway.

Anonymous said...

I thought FTC would put up much of an obejction than they did based on what is in the complaint. I agree with one Anon. on this site: Based on this meager FTC response Merial and Intervet combo is much more likely to happen than not.

Condor said...

What FTC has really said is that it will decide about Merial-Intervet once Sanofi exercises its call option.

That, coupled with the fact that the order specifically prohibits any move to actually close on the call option, should mean that the FTC may simply dictate its own terms, here -- or else, there will be no deal.

Now, my personal belief is that while some form of the Merial-Intervet deal will clear the ECC and FTC, it will not be an easy path. Too many competitors have disappeared in the AH arena.

Thanks for the great dialogue here, do stop back.