FTC Accord in Ciba-Geigy/Sandoz Merger To Prevent Slowdown in Gene Therapy Development & Preserve Competition in Corn Herbicides, Flea-Control Markets

The Federal Trade Commission said today it has reached a settlement agreement with the parties to the $63 billion merger of the Swiss pharmaceutical giants Ciba-Geigy Limited and Sandoz Ltd. that is designed to protect competition for the development and commercialization of gene therapy treatments. Ciba and Sandoz are the two leading commercial developers of gene therapy products, which are expected to begin offering significant improvements in the treatment of cancer and other diseases and medical conditions by the year 2000. Working to ensure that the merger does not slow research and development or raise prices for gene therapy products closest to marketability, or slow innovation toward future products, the FTC proposed today to require, among other things, the licensing of specified gene therapy technology and patent rights to Rhône-Poulenc Rorer Inc. The goal, the FTC said, is to put Rhône-Poulenc in a position to compete against the combined firm, thereby resolving the agency’s antitrust concerns.

Gene therapy is a new and unique means of treating diseases or medical conditions by modifying genes in patients’ cells. Gene therapy research targets fatal or disabling diseases such as cancers for which there are no current effective treatments, the FTC said. For example, gene therapy offers brain cancer patients their first real hope of a cure.

"This case is about saving lives," said William J. Baer, Director of the FTC’s Bureau of Competition. "Today there are two firms racing to develop new gene therapies to combat deadly diseases. This deal threatened to eliminate that competition. Our order ensures that this sprint to the finish line will continue."

The FTC settlement also includes divestiture requirements designed to resolve allegations that the combination of Ciba-Geigy and Sandoz would substantially reduce competition and likely raise prices in the $1.4 billion U.S. market for herbicides used in corn production and the $400 million U.S. market for pet flea-control products. Sandoz has agreed to divest its U.S. and Canadian corn herbicide business to BASF for approximately $780 million, and its flea control business to Central Garden & Pet Company. The corn herbicide divestiture would be one of the largest divestitures ever required under an FTC order.

The American subsidiaries of Ciba and Sandoz are Ciba-Geigy Corporation, of Tarrytown, New York, and Sandoz Corporation, of New York City, respectively. The parent companies are based in Basel, Switzerland, as will be the combined firm, Novartis AG. As a result of the deal, Novartis will control worldwide assets valued at approximately $80 billion.

The FTC complaint detailing the charges in the case alleges that the merger would eliminate competition between Ciba and Sandoz and increase the barriers to new entry by other firms in each of the markets at issue. The settlement announced today for public comments would permit the deal to go through, so long as the companies carry out the divestiture, licensing and other requirements it contains.

The Gene Therapy Market

Ciba, through its 46.5 percent ownership of Emeryville, California-based Chiron Corporation, and Sandoz are two of only a few entities capable of commercially developing a broad range of gene therapy products, the FTC alleged. While no gene therapy product is sold on the market today, gene therapy treatments now in clinical trials offer the promise of significant improvement in the treatment of cancer, hemophilia and transplantation complications. The market for all gene therapy products is expected to reach upwards of $45 billion by 2010, following introduction of the first gene therapy products, expected by the year 2000.

According to the FTC complaint, competition in the United States gene therapy market as a whole is at risk from the merger, as is competition for four specific gene therapy products -- herpes simplex virus-thymidine kinase ("HSV-tk") for the treatment of cancer; HSV-tk for the treatment of graft versus host disease, a complication occurring in many bone marrow transplantations; Factor VIII gene therapy products for the treatment of hemophilia; and chemo resistance gene therapy, which could allow for higher, more effective doses of cancer chemotherapy.

Entry into the gene therapy market can extend up to 12 years, the FTC said, adding that, given the combination of the Ciba and Sandoz patent portfolios, it is extremely unlikely that any other firm would be able to enter the market to replace competition lost through the merger. While there are other firms capable of competing in the research and development of gene therapy products, the FTC said, they lack the intellectual property rights for commercialization that this merger would put exclusively in the hands of the merged firm.

The proposed consent agreement would resolve these competitive concerns in the relevant markets as follows:

• in the market for HSV-tk gene therapy products, Ciba, Sandoz and Chiron would be required to grant a non-exclusive license for their worldwide HSV-tk patent rights to Rhône-Poulenc Rorer (a Collegeville, Pennsylvania-based firm) by Sept. 1, 1997, and if that is not accomplished by that date, a trustee may divest the HSV-tk assets;
• in the market for hemophilia gene therapy products, Sandoz would be required either to convert its exclusive license for the Factor VIII gene to a non-exclusive license or to grant Rhône-Poulenc Rorer a sublicense to those rights, by Sept. 1, 1997;
• in the market for chemoresistance gene therapy products, the order would bar Ciba, Chiron and Sandoz from acquiring exclusive rights in intellectual property and technology related to the use of specified genes in this type of gene therapy; and
• in the broad gene therapy market, Novartis and Chiron would be required to grant licenses at low royalties to the "Anderson ex vivo patent" and patents for cytokines used in ex vivo gene therapy, to any entity that requests such a license. The Anderson patent covers the entire category of gene therapy treatment involving cell modification that takes place outside the body, the most advanced area of commercial development. Absent the settlement, these patents would be solely under the merged firm’s control.

The Corn Herbicide Market

According to the FTC complaint Ciba is the leading manufacturer of corn herbicides in the United States, controlling more than 35 percent of the sales, and Sandoz has approximately 10 percent of sales. Used for killing or controlling weeds in corn production, the introduction of new corn herbicides requires more than a decade of development and testing, and even then, it may take several years to gain customer acceptance that the product is safe and effective. Moreover, despite the expiration of U.S. patents on categories of herbicides sold by the firms, both are pursuing strategies that have limited entry of generic competition. The result of the merger would be to eliminate competition between Sandoz and Ciba and raise prices for corn herbicides, the FTC alleged. The proposed complaint alleges that prices are likely to rise for herbicides used to kill both broadleaf weeds and grasses which interfere with corn production.

The proposed consent agreement would address these allegations by requiring Sandoz to divest its corn herbicide business, including its plants in Beaumont, Texas, to BASF Aktien gesellschaft, within 10 days after the FTC settlement order becomes final, pursuant to a $780 million deal between the two firms. (If that deal falls through, the settlement would require Sandoz to come up with a new buyer and get Commission approval so that the divestiture could be completed within 60 days.) If the divesture is not completed on time, the settlement would permit the Commission to appoint a trustee who could divest Sandoz’s entire agricultural chemicals business, including herbicides and other pesticides. Sandoz’s agricultural chemicals business will be held separate from the rest of Sandoz, and from Ciba and Novartis, pending the required divestiture.

The Market for Flea Control Products

This $400 million annual market includes pills, collars, shampoos, sprays and foggers used to treat and prevent flea infestations in cats and dogs. Ciba and Sandoz are the leading sellers of these products, the complaint states. Combining the two firms could result in higher prices for consumers and reduced innovation in new products.

The proposed consent agreement would require Sandoz to divest its flea control business in the United States and Canada, including its Dallas, Texas, production facility, to Central Garden and Pet Supply, of Lafayette, California, within 30 days after the Commission finalizes the settlement order. Alternatively, Novartis could divest the assets to another Commission- approved buyer within 90 days. These assets will be held separate from the rest of Ciba, Sandoz and Novartis, pending divestiture.

The proposed order also contains a technology transfer agreement that would enable the acquirer to produce its own methoprene, the active ingredient in flea control products. The order would also include provisions requiring Novartis, for 10 years, to notify the Commission before acquiring any flea control assets in the United States, and barring the firm from re-entering the U.S. market for methoprene-based flea control products for six years.

The Commission vote to announce this proposed consent agreement for a 60-day public comment period was 5-0. Commissioner Mary L. Azcuenaga, in a separate statement, invited public comments on the alleged gene therapy innovation and technology markets and, assuming a violation, the appropriateness of licensing rather than divestiture as a remedy in these markets.

A summary of the agreement will be published in the Federal Register shortly. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent agreement, and an analysis of the agreement to assist the public in commenting are available on the FTC’s web site at http://www.ftc.gov and also from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. Consent agreements subject to public comments also are available by calling 202-326-2637. To find out the latest FTC news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 961 0055)