Competition Law Articles 101-102 TFEU Q&A
The Competition Law Articles 101-102 TFEU Q&A series provides optimal preparation for addressing test questions. This collection of EU law notes examines questions and answers related to Competition Law Articles 101-102 TFEU.
Problem Question
One of the main strengths of the European Union (EU) is its pharmaceuticals industry. The four major EU pharmaceuticals firms are Alfa, Bravo, Charlie, and Delta. All four firms produce a significant portfolio of pharmaceutical products, own an array of intellectual property (“IP”) rights covering chemical compounds and processes, engage in significant research and development, have factories in many EU Member States, and market their products all around the world. New pharmaceuticals firms must go through a complex, lengthy, and expensive regulatory procedure for authorisation to sell their products in the EU: Alfa, Bravo, Charlie, and Delta are currently the only firms that hold such authorisation, which prevents products from other global pharmaceutical companies from being sold in the EU.
Advise Alfa as to both a) AND b).
a) Panacea is a drug manufactured by Alfa. There is no alternative which is as fast-acting and effective as Panacea for addressing the symptoms of influenza. Its main purchasers are nationalised healthcare systems across Europe. Panacea was developed by Alfa in the 1990s, requiring significant investment in research and clinical testing. Alfa’s IP rights for Panacea, which grant Alfa the exclusive right to manufacture it, are in effect until January 2021. There have, however, been rumours that Alfa’s IP rights would actually have expired in January 2020, had it not supplied misleading information to the authorities.
Alfa also produces Tonic, a drug prescribed for general tiredness. The intellectual property rights for Tonic expired many decades ago, with all four major firms manufacturing rival brands. In January 2019, the market shares for Tonic were 45% for Alfa, 25% for Bravo, 25% for Charlie, and 5% for Delta. Throughout 2019, Alfa adopted a two-part strategy to improve its position in the market for Tonic:
1) Purchasers who require Panacea from Alfa must also commit to buy only Alfa’s brand of Tonic. Alfa markets the joint offering of Panacea and Tonic as a single “winter-wellness” treatment. It also suggests that the joint usage of both Alfa drugs protects against negative side-effects; this could not be guaranteed if Panacea were taken with Bravo, Charlie, or Delta’s rival brands of Tonic.
2) Purchasers who do not require Panacea but only wish to source Tonic will receive a 10% discount for buying 85% of their annual demand for Tonic from Alfa.
Since this strategy was introduced, Delta has exited the Tonic market, with its market share split between the remaining three firms. Alfa believes Delta’s exit was inevitable: it was too small to realise economies of scale and its factories were too old to match modern pharmaceutical production techniques.
Advise Alfa as to whether any of its conduct may constitute an abuse of dominance.
b) Following the exit of Delta, the shares on the Tonic market in March 2020 are 47% for Alfa, 27% for Bravo, and 26% for Charlie. They each sell Tonic at roughly the same price and customer demand has been relatively stable. Through all negotiating with the same large customers – national healthcare services – Alfa, Bravo, and Charlie are aware of each other’s prices and commercial strategies.
Elixir is a chemical necessary for the manufacture of Tonic; it cannot be used for any other purposes. All three firms source Elixir from Echo, a global chemicals company headquartered in London, which supplies 95% of the EU demand of Alfa, Bravo, and Charlie (the remaining 5% comes from Golf, which only has a very small chemical plant). Alfa wishes to build closer commercial relations with Echo. Alfa’s proposal is to purchase 48% of the shares and voting rights in Echo. The remaining 52% will be held by 5,200 individual shareholders who rarely appear at important strategic meetings. Alfa’s intention is to guarantee its own supply of Elixir for the production of Tonic, but also to use its expertise in pharmaceuticals to research whether Elixir could also be used in other products. Bravo and Charlie are concerned that they will lose access to Elixir for producing Tonic. Alfa however claims that this future course of action would make no commercial sense: given the very small profit margins on Tonic, Echo currently makes three times more profit from the sale of Elixir to Bravo and Charlie than Alfa would as the sole manufacturer of Tonic.
Alfa’s accountants are certain that the proposed acquisition of Echo would have a “Community dimension”, surpassing the turnover thresholds set out in Article 1 of the EU Merger Regulation (Council Regulation 139/2004). Alfa is unsure whether the European Commission will prohibit or permit the proposal. Given its eagerness to acquire Echo, Alfa is willing to offer remedies to secure its approval.
Advise Alfa as to the likely compatibility of the proposed acquisition with Regulation 139/2004, including any remedial commitments that might secure the approval of the European Commission.
