Ciba-Geigy Limited, et al.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 961-0055]

Ciba-Geigy Limited, et al.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would permit, among other things, the $63 billion

merger of Ciba-Geigy Limited and Sandoz Ltd., two leading commercial

developers of gene therapy products, so long as the companies carry out

the divestiture, licensing and certain other requirements. If the

divestiture is not completed on time, the consent agreement would

permit the Commission to appoint a trustee to complete the transaction.

DATES: Comments must be received on or before March 4, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

William Baer or George Cary, FTC/H-374, Washington, D.C. 20580. (202)

326-2932 or 326-3741.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home page,

on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A

paper copy can be obtained from the FTC Public Reference Room, Room H-

130, Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C.

20580, either in person or by calling (202) 326-3627. Public comment is

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Section 4.9(b)(6)(ii) of the Commission's

Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission (``Commission'') has accepted, subject

to final approval, an agreement containing a proposed Consent Order

(``Order'') to resolve anticompetitive concerns raised by the proposed

merger of Ciba-Geigy Limited (``Ciba'') and Sandoz Ltd. (``Sandoz'')

into a new entity, Novartis AG (``Novartis''). The agreement is between

the Commission and Ciba, Sandoz, and Chiron Corporation (``Chiron'').

Ciba, which owned 46.5% of Chiron's voting stock as of September 30,

1996, participates in the field of gene therapy through Chiron. Under

the proposed Order, the companies have agreed to license certain Sandoz

and Chiron gene therapy technologies, to divest Sandoz' corn herbicide

business, and to divest Sandoz' United States and Canadian flea control

business. In addition, the parties have entered into an Agreement to

Hold Separate Sandoz's agricultural chemicals business, including

herbicides and other pesticides, and Sandoz's flea control business

until the required divestitures have been accomplished.

The proposed Order has been placed on the public record for sixty

(60) days for reception of comments by interested persons. Comments

received during this period will become part of the public record.

After sixty (60) days, the Commission will review the agreement and the

comments received and will decide whether it should withdraw from the

government or make final the agreement's proposed Order.

On March 6, 1996, Ciba and Sandoz signed a merger agreement

providing that both companies will merge to form Novartis AG

(``Novartis''). The total value of the stock involved in the

transaction is in excess of $63 billion. The merged entity, Novartis,

will control worldwide assets valued at approximately $80 billion.

The proposed complaint alleges that the merger violates Section 7

of the Clayton Act, as amended, 15 U.S.C. Sec. 18, and Section 5 of the

FTC Act, as amended, 15 U.S.C. Sec. 45, by lessening competition or

tending to create a

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monopoly in markets involving three general areas: (1) gene therapy

research and development; (2) corn herbicides; and (3) flea control

products. According to the complaint, the merger will increase the

level of concentration and increase barriers to entry in each of the

relevant markets and eliminate Ciba and Sandoz as substantial,

independent competitors both for currently marketed products as well as

products that are under development.

According to the proposed complaint, entry into the relevant

markets would not be timely, likely, or sufficient in its magnitude,

character, and scope to deter or counteract anticompetitive effects of

the merger. Regulations by the Food and Drug Administration (``FDA'')

covering gene therapy products and systemic flea control products, and

by the Environmental Protection Agency (``EPA'') covering corn

herbicides and externally applied flea control products, create long

lead times for the introduction of new products. Additionally, patents

and other intellectual property create large and potentially

insurmountable barriers to entry.

Gene Therapy Research and Development

The proposed complaint alleges that therapy technology and the

research and development of gene therapies constitute relevant markets

in which to analyze the effects of the proposed merger. The proposed

complaint also alleges that there are four specific gene therapy closet

to market use retroviral vectors, the delivery vehicle for genes, to

place an HSV-tk gene into the cancerous cells and are anticipated to

have sales exceeding $600 million by 2002. HSV-tk gene therapy is also

expected to be used to treat graft versus host disease, an acute,

chronic and sometimes fatal complication occurring in a significant

percentage of all bone marrow transplantations. Gene therapy treatments

for hemophilia A are likely to be used prophylactically for many

sufferers; in cases of trauma, gene therapy products would likely be

used in combination with recombinant and purified Factor VIII proteins.

Cancer patients could benefit significantly from gene therapy for

chemoresistance by providing protection to patients' blood systems and

allowing higher, more effective doses of cancer chemotherapy to be

administered. If chemoresistance gene therapy research is successful,

sales are projected to exceed $1 billion by 2004.

The complaint alleges that each of the gene therapy markets is

highly concentrated and that Ciba/Chiron and Sandoz are two of only a

few entities capable of commercially developing a broad range of gene

therapy products. Ciba/Chiron and Sandoz control crucial inputs into

the development of gene therapy products and the merger creates an

unmatchable portfolio of intellectual property assets that are

necessary to commercialize gene therapy products. In addition, they

both posses the technological, manufacturing, clinical, and regulatory

expertise and manufacturing capability to commercially develop gene

therapy products. A substantial number of other companies are able to

conduct gene therapy research. Without licenses to crucial intellectual

property held by Ciba/Chiron and Sandoz, however, these other

researchers would not be likely to continue development. The critical

intellectual property rights for gene therapy held by Ciba/Chiron and

Sandoz include a broad patent covering all ex vivo approaches product

markets. These are the markets for the research, development,

manufacture and sale of: (1) herpes simplex virus-thymidine kinase

(``HSV-tk'') gene therapy for the treatment of cancer; (2) HSV-tk gene

therapy for the treatment of graft versus host disease; (3) gene

therapy for the treatment of hemophilia A; and (4) chemoresistance gene

therapy. Sandoz and Ciba/Chiron are two of only a very small number of

entities capable of commercially developing gene therapy products. They

posses the intellectual property, the technological, manufacturing,

clinical, and regulatory expertise, and the manufacturing assets to

commercially develop gene therapy products.

Gene therapy involves treating diseases or medical conditions by

modifying genes and then inserting the modified genes into a patient's

cells. Patients' genes may be altered using one of two broad

approaches: ex vivo, outside the body, for subsequent administration

into the patient; or in vivo, inside the body, by gene therapy products

that are given directly to the patients. Gene therapy research today

targets fatal or disabling diseases such as cancer for which there are

no current effective treatments and for which no drugs are in advanced

development.

While no gene therapy product has yet been approved by the FDA for

commercial sale, gene therapy treatments now in clinical trials offer

patients the prospect of significant medical improvements or cures for

diseases, particularly in oncology, transplantation and central nervous

system diseases. Gene therapy may be useful in treating a wide array of

diseases and conditions. Sales of all gene therapy products are

projected to reach up to $45 billion by 2010.

The first regulatory approvals for commercial sales of gene therapy

products, expected by the year 2000, will most likely be in the area of

cancer treatment of brain tumors. Gene therapy offers brain cancer

patients their first hope of a real cure. The brain cancer gene therapy

products used in gene therapy and the use of cytokines, a protein

necessary for many ex vivo gene therapy applications that is used to

increase the number of cells taken from a patient. The parties also

have vital intellectual property rights in retroviral vectors, the only

delivery vehicle for gene therapy that has been proven safe and

relatively effective.

The complaint alleges that only two companies, Ciba/Chiron and

Sandoz, are capable of commercially developing HSV-tk gene therapy

products with retroviral vectors and are either in clinical development

or near clinical development to treat cancer and to treat graft versus

host disease. Similarly, these two companies are the most advanced of

all companies capable of commercially developing viral vectors using

the Factor VIII gene for the treatment of hemophilia A and using the

MDR-1 gene and the MRP gene for the treatment of chemoresistance. In

each instance, Ciba/Chiron and Sandoz are either in clinical

development or near clinical development for the treatment of these

diseases, are the leading commercial developers of these gene therapy

technologies and control critical proprietary intellectual property

portfolios, including patents, patent applications, and know-how. For

example, with respect to the HSV-tk gene therapy products, both Ciba/

Chiron and Sandoz control intellectual property portfolios sufficient

to make it likely that they could market HSV-tk gene therapy products

in competition with one another. The merger would eliminate that

competition, and because of the parties' patent portfolios, it is

extremely unlikely that any other firm would be able to enter to

replace that lost competition.

The complaint alleges that entry into the gene therapy markets

requires lengthy FDA approved clinical trials, data collection and

analysis, and expenditures of significant resources over may years. No

company may reach advanced stages of development in the relevant gene

therapy markets without: (1) clinical gene therapy expertise; (2)

scientific research that requires years to complete; (3) patent rights

to all the necessary proprietary inputs into the gene therapy product

sufficient to provide the company with reasonable

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assurances of freedom to operate; and (4) clinical grade product

manufacturing expertise, regulatory approvals and capacity to complete

clinical development. The necessary proprietary inputs may include

genes, vectors and vector manufacturing technology, and cytokines.

Ciba/Chiron and Sandoz each possess virtually all of the gene

therapy intellectual property needed to ensure their ability to

independently perform gene therapy development. Through the merger, the

companies' alternative competing gene therapy technologies will be

combined, reducing innovation competition. That combination changes the

competitive incentives of the merged entity. It will likely lead to a

reduction in development of gene therapy products, as the parties

combine their research and development pipelines and eliminate or slow

down their parallel development projects.

In addition, Novartis, the merged firm, will have a disincentive to

license intellectual property rights to or collaborate with other

companies as compared to the pre-merger incentives of the independent

competitors, Ciba/Chiron and Sandoz. Although Ciba/Chiron and Sandoz

had substantial individual intellectual property portfolios pre-merger,

they had the incentive and did act as rival centers from which others

could obtain needed intellectual property rights. Ciba/Chiron and

Sandoz would grant limited intellectual property rights to other

developers and researchers in return for receiving marketing or other

valuable rights back from them. Consequently, as the complaint alleges,

the merger may heighten barriers to entry by resulting in one entity

holding so extensive a portfolio of patents and patent applications, of

uncertain breadth and validity, as to diminish its incentives to

license, thus impeding the ability of other gene therapy researchers

and developers to continue developing their products.

To remedy the alleged competitive harm, the proposed Order provides

for a set of patent licenses to allow other companies to replace the

competition otherwise lost due to the merger. The Commission believes

that licensing, rather than divestiture of assets, is sufficient

because access to certain key intellectual property rights held by the

merged firm is a crucial component of successful commercialization of

many potential gene therapy products. Competitors already have (to

varying degrees) the hard assets, e.g., production facilities,

researchers and scientists, needed to compete. Rivals and other

scientists confirm that licensing would enable them to develop gene

therapy products and replace the competition lost due to the merger.

Further, an asset divestiture might create substantial disruption in

the parties' research and development efforts. In this case, therefore,

a licensing remedy appears to be the preferred approach to restoring

the competition lost by the merger.

The proposed Order includes the following remedy provisions. First,

in the research, development, manufacture, and sale of gene therapy,

the proposed Order would require Sandoz and Chiron to provide to all

gene therapy researchers and developers non-exclusive licenses or

sublicenses to certain proprietary and patented technologies essential

for the competitive development and commercialization of gene therapy

products. In the United States, Chiron owns the rights to commercialize

cytokine Interleukin 2 (``IL-2''), and Sandoz has exclusive rights to

the Anderson ex vivo patent, and claims arising there-under, and owns

the rights to cytokines Interleukin 3 (``IL-3'') and Interleukin 6

(``IL-6''). Within thirty (30 days of the date the Order becomes final,

the companies are required to grant to other gene therapy researchers

non-exclusive licenses to each of these essential gene therapy

technologies. In addition, each licensee must be given access to drug

master files, the data filed with the FDA establishing the safety and

purity of these cytokines. These licensing arrangements will remedy the

reduction in competition in research and development of gene therapy

caused by the merger.

As detailed in the Order, the IL-2, IL-3 and IL-6 cytokines and the

Anderson ex vivo patent licenses include a right to a royalty payment

at low rates (based upon net sales with no minimum amount). In the

past, the Commission has had concerns with royalty payments in

connection with licenses that are meant to restore competition

eliminated by a merger. This is because continuing entanglements

between the divesting company and the acquirer might provide

opportunities for information exchange between competitors and

interfere with their economic incentives to compete vigorously. These

risks are relatively slight under the terms of the proposed Order,

particularly because of the low royalties and potential number of non-

exclusive licenses to the industry required under the proposed Order.

In addition, to minimize further the financial relationships and the

exchange of competitively sensitive information among Novartis, Chiron

and potential competitor-licensees, an independent auditor will be

appointed to collect and aggregate the royalty payments. Sandoz, Ciba,

Chiron, and Novartis will be prohibited from gaining access to this

confidential sales information. Each license will also include a

binding arbitration clause to resolve disputes regarding the royalties

or any other terms, a provision that further insulates Sandoz, Ciba,

Chiron, and Novartis from interactions with the potential licensees.

Second, the proposed Order provides for further remedies regarding

the anticompetitive harm alleged with respect to the HSV-tk product

markets. Both Sandoz and Ciba/Chiron are developing HSV-tk gene

therapies for cancer and graft versus host disease. After the merger,

Ciba/Chiron and Sandoz would control dominating intellectual property

portfolios for HSV-tk gene therapy. The proposed Order restores the pe-

merger incentives for research, development, manufacture and sale of

HSV-tk gene therapy products for cancer and graft versus host disease

by requiring licensing of the Sandoz' and Chiron's worldwide HSV-tk

patent rights, including rights relating to vectors. By September 1,

1997, Sandoz and Chiron each are required to grant a non-exclusive

license to Rhone-Poulenc Rorer (``RPR''), with whom Ciba, Sandoz and

Chiron have entered into a letter of intent for this purpose. If the

agreement between RPR and Ciba, Sandoz, and Chiron were to fall

through, Ciba, Sandoz and Chiron would be required to license these

assets to another licensee who has received Commission approval by

September 1, 1997. Under the terms of the proposed Order, the license

granted to RPR, or an alternative licensee, must include the right to

sublicense in fields that are not developed by RPR or the licensee, as

well as a technology transfer from Sandoz of necessary HSV-tk know-how,

including know-how relating to vectors, within one year of execution of

the license.

Third, to ensure the continued research, development, manufacture

and sale of Factor VIII gene therapy products for the treatment of

hemophilia A, the proposed Order requires that by September 1, 1997,

Sandoz shall either: (1) convert its exclusive license for the use in

gene therapy of the partial Factor VIII gene to a non-exclusive

license; or (2) grant to RPR a sublicense to those gene therapy Factor

VIII rights. At the option of the sublicensee, Sandoz may be required

to provide technical information and know-how relating to Factor VIII

gene therapy products.

Finally, to ensure the continued research, development, manufacture

and sale of chemoresistance gene

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therapy products in the United States, the proposed Order requires that

neither Ciba, Chiron, Sandoz nor Novartis shall acquire exclusive

rights in intellectual property and technology related to the MDR-1

and/or MRP genes. With exclusive rights to the genes necessary for this

treatment area, both parties would have potentially dominating

intellectual property rights for the use of the MDR-1 or MRP

chemoresistance genes in gene therapy. The merger combines the parties'

two competing chemoresistance gene therapy programs and potentially

concentrates the important intellectual property rights for these

genes. Thus, the proposed restriction on exclusive licensing of the

MDR-1 and MRP genes will ensure access to the chemoresistance genes to

at least one other competing company.

The proposed Order also provides for the appointment of a trustee

if Novartis and/or Chiron fail to grant any of these licenses within

the appropriate time period. In that event, the trustee is authorized

to divest either Sandoz' or Chiron's HSV-tk businesses in their

entirety.

Corn Herbicides

According to the Commission's proposed complaint, the merger of

Ciba and Sandoz into Novartis, absent relief, would have adverse

effects on various markets for corn herbicide. United States sales of

corn herbicides--chemical products designed to kill or control weeds

that interfere with corn production--totaled $1.4 billion in 1995.

According to the proposed complaint, the markets for corn herbicide are

distinguished by the types of weeds--broadleaf or grass--against which

the herbicide is chemically effective as well as by the stage of growth

of the corn crop or weed--pre-emergent or post-emergent--at which the

herbicide is safe for us on the corn crop and chemically effective

against the weeds to be controlled.

The Commission's proposed complaint alleges that Ciba's metolachlor

herbicides, sold under the brands Dual and Bicep,

are the leading corn herbicides for pre-emergent control of grasses.

The complaint alleges that Sandoz' recently introduced dimenthenamid

grass herbicides, sold under the brands Frontier and

Guardsman, are gaining share against Ciba's metolachlor grass

herbicides.

The complaint also alleges that Sandoz' dicamba herbicides, sold

under the brands Banvel, Marksman, and

Clarity, are the leading corn herbicides for post-emergent

control of broadleaf weeds. According to the complaint Ciba's recently

introduced sulfonyl urea broadleaf herbicide, sold under the bran

Exceed, is rapidly gaining share against Sandoz' dicamba

broadleaf herbicides, and Ciba and Sandoz recognize that current users

of Sandoz' dicamba herbicides are the principal target for expected

market share gain by Ciba's Exceed herbicide. Ciba is also

the dominant supplier of atrazine, a broadleaf weed control product

that is widely used as a component in premixed herbicide formulations

sold by Ciba, Sandoz and their competitors.

According to the complaint, each of the corn herbicide markets is

highly concentrated, as measured by the Herfindahl-Hirschman Index

(``HHI'') and other measures of concentration. Ciba accounts for over

35 percent of corn herbicide sales in the United States and over 40

percent of treated acres, while Sandoz has approximately a 10 percent

share by either measure. Further, the complaint alleges that the

proposed merger would increase concentration, as measured by the HHI,

by approximately 700 points for dollar sales, and by approximately 1000

points for treated acres, to approximately 3000 for sales and

approximately 3300 for treated acres.

In the market for pre-emergent treatment of corn acres for grasses,

the complaint alleges that Ciba products accounted for over 40 percent

and that Sandoz accounted for approximately 3 percent in 1995. The

proposed merger would increase concentration in that market, as

measured by the HHI, by aprpoximately 300 points to approximately 3400.

In addition, in the market for post-emergent treatment of corn acres

for broadleaf weeds, the complaint alleges that Sandoz products

accounted for over 30 percent and that Ciba's Exceed brand

accounted for approximately 5 percent in 1995. Combining

Exceed and other Ciba products with Sandoz' products, the

proposed merger would increase concentration in that market, as

measured by the HHI, by approximately 1900 points to over 4000.

The complaint alleges that entry into the corn herbicide markets

requires over a decade for chemical synthesis; laboratory and

greenhouse testing; formulation; process development; pilot production;

pilot trials; field trials; testing for acute, subchronic and chronic

toxicity, possible carcinogenic and mutagenic effects and effects on

prenatal deformation; environmental toxicology testing; measurement of

plant, animal, soil, water and air residues and testing of degradation

of plant, animal, soil, and water environment; data collection; product

registration and EPA review; construction of production facilities; and

use optimization. Further, according to the complaint, once a product

is introduced to the market, several years are often required to gain

customer acceptance through demonstrated safety, performance and

reliability, over a variety of weather conditions.

Additionally, the complaint alleges that, despite the expiration of

United States patents on dicamba and metolachlor, post-patent

strategies pursued by Ciba and Sandoz, including product reformulation,

distribution agreements, purchase and supply contracts with

manufacturers, and joint product development agreements, have limited

entry of generic competition to Ciba's leading pre-emergent grass

herbicides and Sandoz' leading post-emergent broadleaf herbicides.

Further, according to the complaint, supply agreements, joint

product development agreements, and joint marketing agreements among

producers of corn herbicide increase coordinated interaction and the

recognition of mutual interdependence among competitors in each of the

relevant markets for corn herbicide.

The complaint further alleges that the proposed merger of Ciba and

Sandoz would eliminate Ciba and Sandoz as substantial, independent

competitors; eliminate actual, direct, and substantial competition

between Ciba and Sandoz, including the reduction in, delay of or

redirection of research and development projects; eliminate the

potential for increased actual, direct and substantial price

competition and cause consumers to pay higher prices for corn

herbicides; increase barriers to entry; increase the level of

concentration in the corn herbicide markets; increase the merged firm's

ability unilaterally to exercise market power in the market for corn

herbicide for post-emergent control of broadleaf weeds by combining the

two closest substitutes in the market; and increase the likelihood and

degree of coordinated interaction between or among competitors in the

market for corn herbicide for pre-emergent control of grasses.

The Order accepted for public comment contains provisions that

would require Sandoz to divest its corn herbicide business, including

Sandoz' dicamba and dimethenamid plants in Beaumont, Texas, and United

States and Canadian assets to BASF Aktiengesellschaft (``BASF''), no

later than ten days after the Order becomes final, pursuant to an

agreement between Sandoz and BASF for approximately $780 million. If,

through no fault of Sandoz, BASF fails to acquire the

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business, the Order requires Sandoz to divest its corn herbicide

business, within sixty days after the Order becomes final, to an

alternative acquirer approved by the Commission and in a manner that

receives the approval of the Commission, and to divest such additional

ancillary assets and businesses and effect such arrangements as are

necessary to assure the marketability, independence, viability and

competiveness of the divested business. The Order further provides for

appointment of a trustee to divest Sandoz' agricultural chemicals

business, including herbicides and other pesticides, in the event

Sandoz is unable to complete the required corn herbicide divestiture

within the specified period.

Flea Control Products

According to the proposed complaint, the proposed merger will have

anticompetitive effects in the market for the research, development,

manufacture and sale of flea control products in the United States.

Flea control products are chemical products designed to treat and

prevent flea infestation in cats and dogs. They are sold in various

forms, including pills, collars, shampoos, sprays, and foggers and are

sold through various channels of distribution: veterinarians, pet

specialty stores, lawn and garden centers, mass merchandisers, and

grocery stores. The complaint alleges that there are no economic

substitutes for flea control products for the treatment and prevention

of flea infestation in cats and dogs.

The complaint further alleges that the flea control products market

is a very highly concentrated market that had sales in the U.S. of

approximately $400 million in 1995. Ciba is the leading developer,

manufacturer and seller of flea control products, and Ciba's market

share is approximately 50 percent. Ciba's Program brand flea

control products have a dominant share of the flea control products

market. Sandoz ranks second in flea control products sales from sales

of its flea control products, under the Vetkem and

Zodiac brands, and from sales of the active ingredient,

methoprene, used by other companies in flea control products. The

complaint also alleges that, prior to the merger, Sandoz and Ciba were

both developing additional flea control products, which likely would be

in direct and substantial competition with each others' products.

The proposed complaint alleges that entry into the flea control

products market requires over a decade for chemical synthesis, lengthy

clinical trials, data collection and analysis, and expenditures of

significant resources over many years as well as qualified

manufacturing facilities in Order to achieve the required EPA or FDA

approvals for commercial sale of these products. Once a product is

introduced to the market, extensive sunk costs must be incurred for

advertising and promotion to gain significant customer and pet owner

acceptance. Despite the expiration of United States patents on

methoprene, the base active ingredient used in Sandoz' second

generation flea control products, the EPA registrations and proprietary

technology involved in the production of methoprene have prevented

entry of generic competition to Sandoz' flea control products.

The complaint further alleges that the proposed merger of Ciba and

Sandoz would increase the merged firm's ability unilaterally to

exercise market power in the flea control products market by combining

the two closest substitutes in the market. According to the complaint,

the proposed merger would increase the likelihood of coordinated

interaction between or among competitors in the flea control products

market and eliminate the potential for actual, direct and substantial

price competition between them. Consumers would then pay higher prices

for flea control products and would not receive the benefits of

innovation competition among producers of flea control products.

The proposed Order seeks to remedy the anticompetitive effects of

the proposed merger by requiring Sandoz to divest its flea control

business for the United States and Canada. Under the Order, the Sandoz

flea control business and the Sandoz Dallas facility, which is largely

devoted to production of flea control products for the United States

and Canada, must be sold to Central Garden and Pet Supply (``Central

Garden'') within thirty days after the Order becomes final pursuant to

an agreement between Central Garden and Sandoz that will be modified to

conform to the terms of the consent Order. Alternatively, Novartis is

required by the Order to divest the assets to an alternative acquirer

that has received Commission approval, within ninety days after the

Order is final. The Order further provides for appointment of a trustee

to divest these assets in the vent Sandoz is unable to complete the

required divestiture within the specified period. Ciba, Sandoz, and

Novartis have entered into an agreement to hold these assets separate

from the rest of Ciba, Sandoz, and Novartis pending completion of the

divestiture.

The proposed Order also includes a technology transfer agreement to

enable the acquirer to produce its own methoprene, the principal active

ingredient in the products to be sold pursuant to the Order, as well as

a temporary supply agreement to provide methoprene to the acquirer

until its own manufacturing capability has achieved necessary

government approvals. Some products currently produced at the Dallas

facility that are manufactured for sale outside the United States and

Canada may continue to be manufactured for Sandoz on behalf of the

acquirer for two years.

To ensure the viability of the flea products acquirer, Novartis is

prohibited from re-entering the U.S. market with a methoprene-based

flea control product for six years. In addition, Novartis is required

under the proposed Order to notify the Commission if it plans to

acquire flea control assets in the U.S. during the next ten years.

The purpose of this analysis is to facilitate public comment on the

proposed Order, and it is not intended to constitute an official

interpretation of the agreement and proposed Order or to modify in any

way its terms.

Benjamin I. Berman,

Acting Secretary.

Separate Statement of Commissioner Mary L. Azcuenaga in Ciba Geigy

Limited, File No. 961-0055

The Commission today accepts a proposed consent order for public

comment to settle allegations that the planned merger of Ciba Geigy

Ltd. and Sandoz Ltd. would violate Section 7 of the Clayton Act in

certain agricultural chemical, pet flea control and gene therapy

markets.

There appears to be reason to believe that the proposed merger

would be unlawful in the corn herbicide and flea control markets

identified in the complaint and that divestiture in each market is the

appropriate remedy. Because BASF makes and sells a specialized corn

herbicide, the proposed divestiture of Sandoz's corn herbicide business

to BASF would not entirely restore pre-merger conditions, but BASF's

product is sufficiently differentiated from the divested assets that

the minor overlap does not appear to be significant.

It is premature, in my view, to select Central Garden and Pet

Supply to acquire Sandoz's flea control business, because the

Commission has virtually no information about Central beyond that

contained in the proposed order and the Analysis To Aid Public Comment.

While the early identification of a candidate to acquire assets to be

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divested under an order is to be preferred in order to restore

competition quickly, the Commission does not yet have the information

to evaluate the competitive implications of a proposed divestiture to

Central Garden and Pet Supply.

The alleged gene therapy markets involve products now in clinical

trials and others that appear to be more distant in time and perhaps

more speculative. The proposed complaint also alleges a technology

market, comprising the technology that firms use to develop gene

therapies. The theory is that the post-merger combination of Sandoz and

Ciba Geigy will control such a critical mass of proprietary information

that its incentives to cross license will be diminished, either

deterring entry or raising the price of it. I would be interested in

public comment on these allegations.

Assuming a violation, it is not entirely clear that the proposed

licensing relief is preferable or adequate. A divestiture is the

preferred remedy in a Section 7 case. The proposed order, among other

things, requires a license of the ex vivo patent, also called the

Anderson patent, which was licensed to Sandoz by the National

Institutes of Health. The merger does not add to the scope of the

patent monopoly, and I see no basis in the proposed complaint for this

aspect of the relief. Nor is there any apparent reason why a

divestiture in these markets could not be accomplished. I look forward

to reviewing the comments on this issue as well.

[FR Doc. 97-5 Filed 1-2-97; 8:45 am]

BILLING CODE 6750-01-P