Analysis of the Complaint and Proposed Consent Order to Aid Public Comment

I. Introduction

The Federal Trade Commission ("Commission") has accepted for public comment an Agreement Containing Consent Order ("proposed order") with Novartis AG ("Novartis") and AstraZeneca PLC ("Zeneca"). The proposed order seeks to remedy the anticompetitive effects of the combination of Novartis's and Zeneca's agricultural chemical businesses. The proposed order requires Novartis to divest its worldwide fungicide business based on the strobilurin chemical class to Bayer AG and requires Zeneca to divest its worldwide corn herbicide business based on the active chemical ingredient acetochlor to Dow Agrosciences LLC.

II. Description of the Parties and the Proposed Merger

Novartis, a Swiss company, is engaged in the discovery, development, manufacture and sale of crop protection chemicals, seeds, proprietary and generic pharmaceutical products, and human and animal health products. Novartis operates its crop protection and seed businesses in the United States through a variety of subsidiaries, including Novartis US Co., Novartis Agribusiness Biotechnology Research, Inc., Novartis BCM North America, Inc., Novartis Crop Protection, Inc., Novartis Seeds, Inc., Novartis Specialty Crops, Inc., and Wilson Genetics, LLC.

Zeneca is headquartered in the United Kingdom and is also engaged in the discovery, development, manufacture and sale of crop protection chemicals and proprietary and generic pharmaceutical products. Zeneca operates its crop protection business in the United States through several subsidiaries, including Zeneca Holdings, Inc., and Zeneca Ag Products, Inc.

Pursuant to an agreement, Novartis will contribute its agricultural chemical and seed businesses and Zeneca will contribute its agricultural chemical business to a newly-formed Swiss company, Syngenta AG. The merger of these businesses will result in Syngenta having approximately $8 billion in worldwide sales. Novartis's shareholders will own 61 percent of Syngenta and Zeneca's shareholders will own 39 percent. Syngenta will be organized and will do business under the laws of Switzerland.

III. The Proposed Complaint

The proposed complaint alleges that there are several relevant lines of commerce (i.e., product markets) in which to analyze this transaction: 1) the research, development, manufacture, and sale of herbicides applied before weed emergence ("pre-emergent herbicides") for control of grassy weeds in corn; and 2) the research, development, manufacture, and sale of foliar fungicides for the treatment of diseases in cereal, citrus, cotton, peanuts, potatoes, rice, vegetables, and turf. The proposed complaint alleges that the United States is the appropriate geographic market to analyze the effects of the combination of Zeneca and Novartis' agricultural chemical businesses. United States law requires that herbicides and fungicides undergo a rigorous registration process with the U.S. Environmental Protection Agency ("EPA") before they may be used or sold in this country.

Corn Herbicides

Most pre-emergent herbicides used by corn growers to control grassy weeds belong to a class of chemicals known as acetanilides. The major active ingredients within this class are metolachlor, acetochlor, and dimenthenamid. These products are used by growers because preventing early competition between the growing corn and grassy weeds for water and nutrients is essential to the economic production of corn. Failure to reduce weeds can significantly reduce the volume of corn produced per acre (yield) and farmers have no economic substitutes for acetanilide herbicides.

Novartis's metolachlor-based herbicides are sold under the brand names Dual and Bicep. Zeneca sells an acetochlor-based herbicide under the brand names Fultime, Surpass, Doubleplay, and TopNotch. Zeneca obtains its acetochlor for these products from a Monsanto facility in Muscatine, Iowa, pursuant to a production and registration joint venture between Zeneca and Monsanto.

Novartis is the leading developer, manufacturer, and seller of corn herbicides for pre-emergent control of grasses in the United States. Novartis has a market share of about 50 percent. Zeneca has approximately 15 percent of sales in this market. The proposed merger would increase concentration, as measured by the HHI, by nearly 1400 points to over 4600.


Foliar fungicides, which are applied predominantly to the foliage of plants, contain active chemical ingredients that kill or inhibit the growth of organisms that cause disease. Each crop has an EPA approved fungicide and label restrictions on the fungicide for one crop prohibit its use on another. Therefore, a grower with a disease problem on rice cannot turn to a fungicide labeled only for use on peanuts.

The most significant recent development in foliar fungicides has been the introduction of a new class of fungicides known as strobilurins. Fungicides of this class are effective against a broad spectrum of diseases on a wide variety of crops and are more environmentally friendly than most traditional fungicides. The effectiveness and environmental profile of strobilurin fungicides have created strong demand for the products among growers. Strobilurins introduced to the market have quickly achieved significant market share and have taken sales away from traditional foliar fungicides. Zeneca's azoxystrobin fungicides and Novartis's trifloxystrobin fungicides are both strobilurins and are in direct competition.

Novartis obtained U.S. registration for its trifloxystrobin fungicides in 2000. They are sold under the brands Flint and Compass. In addition, Novartis sells a combination product of propiconazole and trifloxystrobin under the brand Stratego. Zeneca's azoxystrobin fungicides, which were registered in the U.S. in 1997, are sold under the brands Abound, Heritage, and Quadris.

Zeneca and Novartis, along with BASF Corporation, are the only companies with strobilurin fungicides registered for sale in the United States. No company other than Zeneca, Novartis, or BASF is likely to introduce a new strobilurin fungicide into the U.S. market within the next three or four years.

Novartis and Zeneca are the leading sellers of foliar fungicides in the U.S. market, and account for a combined total of approximately 40% of yearly sales. Typically, for a given plant, there are only two or three significant sellers of these fungicides. In cereals, peanuts, potatoes, rice, and turf, sales by the top two or three fungicide sellers range from nearly 70% to more than 90% of all sales. In vegetables, the top five account for 70%.

According to the Commission's 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. The need for extensive research and development and registration requirements create long lead times for the introduction of new products. Developing a new herbicide or fungicide can take six to ten years from the time when a potentially attractive active ingredient is identified. Extensive testing in the field is necessary to evaluate efficacy and use requirements. In addition, several years of testing for negative environmental and toxicological impact is necessary to achieve registration. Finally, patents and other intellectual property create large and potentially insurmountable barriers to entry.

The complaint alleges that if the proposed transaction were consummated, it may substantially lessen competition or tend to create a monopoly in the relevant markets in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C.  18, and Section 5 of the FTC Act, as amended, 15 U.S.C. 45. Specifically the merger will in both relevant markets:

a. eliminate Zeneca and Novartis as substantial, independent competitors;
b. eliminate actual, direct, and substantial competition between Zeneca and Novartis;
c. reduce innovation competition among researchers and developers of herbicides and fungicides, including the reduction in, delay of, or redirection of research and development projects;
d. increase the level of concentration in the relevant markets;
e. increase barriers to entry into the relevant markets;
f. increase the merged firm's ability to exercise market power unilaterally by combining two of the three closest substitutes in each of the markets; and
g. increase the likelihood and degree of coordinated interaction between or among competitors in the markets.

IV. Terms of the Agreement Containing Consent Order

The proposed order is designed to remedy the alleged anticompetitive effects of the proposed merger. Under the terms of the proposed order, Proposed Respondent Zeneca will divest its worldwide acetochlor herbicide business to Dow AgroSciences LLC, a wholly-owned subsidiary of Dow Chemical Company. Specifically, Zeneca will divest to Dow Agro the intellectual property, know-how, registrations, trademarks, rights to technical assistance, and rights under the joint venture contracts with Monsanto that are necessary to the manufacture and sale of acetochlor-based corn herbicides. Zeneca is also required to provide certain services and inputs on a transitional basis.

Dow Agro is a Delaware corporation with its principal place of business in Indianapolis, Indiana. Dow Agro provides pest management, agricultural, and biotechnology products worldwide and had 1999 sales of more than $2 billion. Dow Agro sells numerous herbicides, but it does not produce a product with acetochlor as an active ingredient.

Proposed Respondent Novartis will divest its worldwide strobilurin fungicide business to Bayer AG. Specifically, Novartis will divest its trifloxystrobin production facilities in Muttenz, Switzerland, and intellectual property, know-how, and registrations, and trademarks necessary to manufacture the divested strobilurin fungicides. Novartis is required to provide certain services and inputs on a transitional basis.

Bayer is organized and based in Germany. Bayer is a global company that operates in four business segments: healthcare, agriculture, polymers, and chemicals. In 1999, it had sales of over $20 billion. Bayer does not sell or produce a strobilurin fungicide approved by the EPA.

The order requires both Zeneca and Novartis to provide opportunities for Dow Agro and Bayer to enter into employment contracts with the individuals that are key to the operation of the divested businesses and must remove any contractual limits to deter these individuals from accepting employment with Bayer or Dow Agro. Zeneca and Novartis are also prohibited from making employment offers to these employees for a period of one year.

Proposed Respondents must divest the assets no later than ten business days after the formation of Syngenta or ten days after gaining necessary foreign governmental approvals for the transfer of the divested assets. The order requires, however, that the divestitures must be made within six months from the date the Commission places the proposed order on the public record for comment. The Commission has issued an Order to Maintain Assets that requires Zeneca, Novartis, and Syngenta to preserve the assets as an ongoing business pending the divestitures.

To ensure that Proposed Respondents expeditiously and completely divest their respective businesses to Dow Agro and Bayer and maintain the assets pending divestiture, the Commission is allowed to appoint a trustee. The trustee will report to the Commission on Proposed Respondents' compliance with their obligations under the Order and the Order to Maintain Assets every sixty days for a period of six months from the date Respondents sign the consent agreement and annually until expiration of the initial term for the supply agreements.

Proposed Respondents must provide the Commission with a report of compliance with the proposed order within sixty days after the proposed order becomes final and every ninety days thereafter until they have complied with their divestiture obligations. Respondents are also required to provide annual reports during the term of the proposed order.

In the event that Proposed Respondents fail to divest the assets within the time allotted, the proposed order enables the Commission to appoint a trustee to divest any assets necessary to satisfy the requirements of the proposed order. Appointment of a trustee is in addition to civil penalties and other relief available from Proposed Respondents for non-compliance with any provision of the proposed order.

V. Opportunity for Public Comment

The proposed order has been placed on the public record for thirty days for receipt of comments by interested persons. Comments received during this period will become part of the public record. After thirty days, the Commission will again review the proposed order and the comments received and will decide whether it should withdraw from the proposed order or make it final. By accepting the proposed order subject to final approval, the Commission anticipates that the competitive problems alleged in the proposed complaint will be resolved. The purpose of this analysis is to invite public comment on the proposed order, including the proposed divestitures, to aid the Commission in its determination of whether to make the proposed order final. This analysis is not intended to constitute an official interpretation of the proposed order, nor is it intended to modify the terms of the proposed order in any way.