Hoechst and Rhone-Poulenc Settle FTC Charges that Merger Would Violate Antitrust Laws

The Federal Trade Commission today announced the proposed settlement of antitrust charges that the merger of Hoechst AG and Rhone-Poulenc S.A. would violate federal law. Under a proposed merger agreement Hoechst and Rhone-Poulenc would combine most of their respective businesses. The merged entity would be renamed Aventis S.A. In order to settle the FTC's concerns, Hoechst and Rhone-Poulenc would be required: (1) to divest its interest in Rhodia, its speciality chemicals subsidiary that produces cellulose acetate, to a level of five percent or less and to sequester that interest pending its divestiture, thereby preserving competition in the manufacture, marketing and sale of cellulose acetate thermoplastics; and (2) to divest the assets relating to Rhone-Poulenc's direct thrombin inhibitor drug Revasc.

"This settlement is structured to support and complement the relief obtained by the Commission of the European Communities, thus ensuring preservation of vigorous competition in the market for cellulose acetate in the United States," said Richard G. Parker, Director of the FTC's Bureau of Competition. "The consent agreement also serves to ensure continued innovation in the small but growing market for a new type of drug used to treat blood-clotting diseases."

The complaint outlining the charges against Hoechst and Rhone-Poulenc alleges that the proposed merger, if consummated, would constitute a violation of federal antitrust statutes in the market for: (1) cellulose acetate; and (2) direct thrombin inhibitors.

Cellulose Acetate

Cellulose acetate is a thermoplastic used to produce, among other products, cigarette filters, tool handles, tapes and films. In applications where it is used, there are no cost-effective substitutes. U.S. consumers purchase approximately $1 billion worth of cellulose acetate yearly.

According to the Commission, the market for cellulose acetate is highly concentrated. Three companies currently produce cellulose acetate in the United States: (1) Eastman Chemical Company; (2) Primester, a joint venture, the shares of which are owned by Eastman and Rhodia, a specialty chemicals company subsidiary; and (3) Celanese Limited, until recently a wholly-owned subsidiary of Hoechst. Celanese controls approximately 46 percent of U.S. production capacity. Eastman owns approximately 44 percent of U.S. production capacity, and Primester holds the remaining 10 percent. Rhodia currently sells cellulose acetate only outside the United States; thus, Celanese and Eastman are the only companies currently selling cellulose acetate in the United States.

There are significant barriers to entry into the cellulose acetate market, the FTC said.

To enter the market, a firm must incur substantial sunk costs to build a dedicated production facility. Moreover, reductions in the demand for this material and its limited growth potential create disincentives to new entry.

The agency further alleged that the merger of Rhone-Poulenc and Hoechst will increase the likelihood of coordinated interaction in the market for cellulose acetate. The Kuwait Petroleum Company (KPC) will hold a significant interest in Celanese and Aventis after the merger. The shareholdings could permit KPC to coordinate the activities of Celanese and, through Aventis, Rhodia and Primester after the merger. In addition, Aventis's indirect holding, through Rhodia, of 50 percent of the Primester joint venture with Eastman, may facilitate coordination between the KPC-controlled entities and Eastman following the merger, the agency said.

Pursuant to the European Commission's competitive concerns, Hoechst spun off Celanese to Hoechst shareholders and Rhone-Poulenc will have to divest its holding in Rhodia.

The proposed consent order would preserve competition among Celanese, Rhodia and Eastman in the cellulose acetate market in the United States pending Aventis's divestiture of Rhodia. The proposed order would require the parties to divest their holding of Rhodia to a level of five percent or less of total outstanding shares within three months of the date the consent agreement is accepted by the Commission for public comment. The proposed order also would require the parties to refrain from participating in or influencing the decisions or conduct of Rhodia. The proposed order also would prohibit the parties from receiving confidential business information concerning Rhodia's cellulose acetate business.

Direct Thrombin Inhibitors

Direct thrombin inhibitors are used in the treatment of various blood-clotting diseases. While other products may be used for the treatment of blood clotting diseases, direct thrombin inhibitors are both more effective and safer than any available alternatives for indications that have received FDA approval.

According to the FTC, Hoechst sells Refludan, the only direct thrombin inhibitor currently on the U.S. market. Rhone-Poulenc is in the final stages of developing its direct thrombin inhibitor, Revasc, which it licensed from Novartis in 1998. Available evidence indicates that Rhone-Poulenc and Hoechst are likely to be each other's closest competitors in the direct thrombin inhibitor market, the FTC said.

The complaint outlining the charges alleges that the planned merger is likely to create anticompetitive effects in the direct thrombin inhibitor market by eliminating the competition between Hoechst and Rhone-Poulenc that would otherwise continue to exist. In addition, the agency said, the proposed transaction would reduce potential competition and innovation competition among researchers and developers of direct thrombin inhibitor products by eliminating a significant competitor and increasing the barriers to entry to others, by combining Rhone-Poulenc and Hoechst's portfolios of patents and patent applications.

The proposed consent order would resolve these concerns by transferring all of Rhone- Poulenc's rights in the direct thrombin inhibitor Revasc to Novartis or an independent third party. The proposed order would also require the parties to enter into a short-term service contract with the acquirer of the Revasc rights in order to ensure the continued performance of development work on Revasc. The proposed order would allow the Commission to appoint a trustee to divest either Rhone-Poulenc's Revasc assets or the North American rights to Hoechst's own drug, Refludan. The proposed order also would provide for the immediate involvement of an interim trustee to ensure the continued development and viability of Revasc as an independent competitor to Hoechst's Refludan.

The Commission vote to approve the proposed consent order was 5-0.

An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until January 6, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 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 proposed consent order to aid public comment are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. Consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 991 0071)