[Bhawna Lakhina is a third-year student of National Law Institute University, Bhopal]
Research and development (“R&D”) constitutes a significant factor driving competition in the current market scenario. Companies constantly strive to innovate newer and better products as well as technologies to enhance their position in the market. This is particularly evident in markets like pharmaceuticals, agrochemicals and information technology. There has been an increase in mergers and acquisitions (“M&A”) in such R&D extensive markets as a means for companies to scale up their innovation efforts. This post seeks to analyse the implications that such M&A can have on the overall competition in the market and how the Competition Commission of India ( “CCI”) can conduct a competition assessment of the same.
Potential Anti-competitive Implications
Section 6 of the Competition Act, 2002 renders void any combination that causes or has a likelihood of causing an appreciable adverse effect on competition (“AAEC”) in the market. The factors to determine AAEC are provided under section 20(4), which primarily includes entry barriers in the market, substitutability, elimination of existing or potential competitors and innovation prospects, among other anti-competitive effects that can result from a merger.
The R&D market is characterised by significant entry barriers in the form of substantial investments required to formulate any innovative product or technology as well as the requisite expertise in the field. Consequently, any new company cannot easily enter and compete with the existing players in an R&D extensive market. For this reason, very few market players have the necessary capacity and resources to engage in R&D. This means that only some companies can effectively compete in the market owing to low R&D capabilities and/or investments. Considering these factors, any combination in the innovation market is likely to invite scrutiny for the reason that the same would involve an M&A of rival R&D competitors resulting in elimination of a significant competitive constraint.
The competition concerns arising out of such M&As in the innovation based markets was dealt with by the European Commission (“EC”) in the landmark case concerning the combination of two competitive agrochemical companies, Dow and DuPont. The EC observed that a combination of rival innovators has the potential to impede overall innovation prospects in the industry as a whole. This is because such combinations involve companies that have overlapping lines of R&D as well as similar existing and pipeline products. The products of such companies are, therefore, largely substitutable. In such a situation, an M&A involving them can be seen as a measure by one R&D player to secure its market by eliminating an existing or potential competitor.
A report by CCI’s member, Augustine Peter, Re-imagining Competition Policy and Law in the Era of Disruptions, highlights a similar concern and postulates a deeper enquiry into such R&D intensive companies indulging in M&A. This is because such combinations not only affect the current competition in R&D but also harm future innovation efforts by eliminating a significant player from the market. The Report explicitly states that “if the merging firms are each other’s next best substitute or the merger is likely to affect choice for consumers by eliminating an independent innovator, it may be challenged by the competition authority”.
A recent landmark case which dealt with the anti-competitive effects that can arise due to a combination of two rival R&D players in the industry was that of Bayer and Monsanto. These are two competitive companies which were actively involved in R&D. The CCI, while conducting the competition assessment of the combination, observed that Bayer was one of the few alternatives to Monsanto. Any combination between these two companies would, therefore, eliminate existing as well as potential competition for the products of Monsanto. Thus, the CCI held that the combination was likely to result in significant AAEC and needed modifications to be made before it could get approval.
On this basis, it can be said that M&A in the R&D market has the potential to significantly affect innovation as well as competition in the market in an adverse manner. The resultant entity can emerge dominant in the absence of a significant competitor getting the power to engage in unilateral actions, including price rise to maximise profits, ignoring interests of the consumers. This defeats the objectives of fair competition and consumer welfare, which are laid down in the Preamble of the Competition Act.
Efficiencies in the Form of Synergies
Besides anti-competitive effects, efficiencies also constitute an important factor in the competition assessment conducted by the CCI. Section 20(4) lists the efficiencies that are considered to determine the overall implications of a combination on the market. The CCI makes its decision pertaining to a particular combination by weighing the adverse competitive effects against the consequential efficiencies arising out of any combination. Accordingly, the efficiencies should exceed the anti-competitive effects, if any, for a particular M&A to get approval.
It is important to note that significant efficiencies can arise out of M&A in the innovation market. To appreciate the same, it is essential to understand the peculiarities of the industries extensive in R&D. Such markets involve significant costs to be incurred in the form of huge investments in R&D, technology, resources, as well as registration complexities. M&A provides a mechanism through which R&D companies can consolidate their resources as well as expertise in the field to develop newer products by reducing overall production costs. These are dynamic efficiencies in the form of production synergies created out of such combinations of R&D players.
The OECD Policy Roundtable on Dynamic Efficiencies in Merger Analysis has also recognised the efficiencies that can arise out of such M&A in R&D-extensive markets. These can be in the form of combining complementary research as well as resources of companies. This, in turn, prevents duplication of complementary assets, helps achieve economies of scale, and enables better investments in R&D projects. This can enhance the R&D prospects and chances of success of the companies involved in M&A in the long run. The same is beneficial for consumers due to lower prices and better products and technologies which can be a resultant implication out of M&A in the innovation industry.
There are various such success stories of M&A in the innovation industry. The acquisition of Agraquest by Bayer created crucial synergies and resulted in a manifold increase in R&D prospects of the companies. The same was in the case of Sumito Chemical and Excel Crop Care Ltd. wherein the product profile of the companies improved with the combined entity leveraging products of both companies following the M&A. Thus, combinations in the R&D intensive sectors have the potential to lead to an influx of more and better products in the market, which is in the interests of the consumers who benefit from newer and advanced technologies.
The innovation industry has peculiar characteristics, which need to be considered while making any competition assessment. There can be some serious competition concerns by way of an M&A between rival innovators, which invites scrutiny of the CCI. At the same time, such M&A can have significant positive effects in the market in furtherance of consumer interest. Therefore, these efficiencies need to be given greater weightage while assessing combinations in the R&D market.
The CCI can adopt the three-pronged test as provided in the US Horizontal Merger Guidelines for examining efficiencies to ensure that any anti-competitive M&A does not obtain approval on grounds of efficiencies, which might deter innovation prospects in the future. According to the US Guidelines, any efficiency must be (a) merger-specific, (b) verifiable, and (c) capable of being passed on to consumers. This helps in preventing clearance of M&A on mere speculative or vague efficiencies on broad grounds of “synergies”. Such an approach can be useful to assess M&A in India as well as to ensure that combinations in the R&D sector lead to positive effects for the market. This would also be in line with the objectives of the Indian competition law.
– Bhawna Lakhina