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Ottawa, July 14, 2020 – The Competition Bureau announced today that it has entered into a Consent Agreement with Elanco Animal Health Incorporated ("Elanco") that resolves the Commissioner's competition concerns related to Elanco's proposed acquisition of Bayer Animal Health ("BAH"), a business unit of Bayer AG ("Bayer").
Elanco and BAH are multinational suppliers of animal health products for both companion animals and farm animals. Concurrent with the merger with BAH, Elanco also proposed to enter into a distribution agreement with Bayer to acquire Bayer's rights to sell and market several poultry insecticides (the BAH merger and distribution agreement are together referred to as the "Proposed Transaction"). The Bureau determined that the Proposed Transaction would result in a substantial lessening of competition in three Canadian markets: the supply of low dose canine otitis treatments, feline dewormers that include tapeworm coverage, and poultry insecticides that include darkling beetle coverage.
The consent agreement requires the sale of Elanco's canine otitis product Osurnia and BAH's feline dewormer Profender. The Commissioner has approved Dechra Limited and Dechra Veterinary Products LLC ("Dechra") as an acceptable buyer of Elanco's Osurnia. To resolve competition concerns with respect to poultry insecticides, Elanco has committed to forego acquiring Bayer's Canadian distribution rights to Tempo, Credo, QuickBayt and Annihilator Polyzone; rather, the distribution rights to these insecticide products in Canada will be retained by Bayer's CropScience division.
Throughout its review, the Bureau cooperated with its counterparts in other jurisdictions, including the U.S. Federal Trade Commission, the European Commission and the Australian Competition and Consumer Commission.
The Bureau's investigation relied on information obtained from Elanco, Bayer, and numerous other stakeholders including customers and competitors.
On November 22, 2019, the Bureau was notified of Elanco's asset and share purchase agreement with Bayer regarding BAH. The Proposed Transaction is valued at approximately US$7.6 billion. Elanco is headquartered in Greenfield, Indiana and Bayer is headquartered in Monheim, Germany.
The sale of animal health prescription medication in Canada by suppliers like Elanco and BAH involves significant regulatory oversight by the Veterinary Drug Directorate ("VDD") of Health Canada. For a prescription medication to be registered with the VDD and assigned a Drug Identification Number a supplier must successfully demonstrate compliance with all requisite manufacturing, quality control, efficacy, as well as human and animal safety standards.
In Canada, Elanco and BAH (the "Parties") sell companion animal prescription medication to veterinary buying groups, with only a small amount of sales going to pet specialty retail stores. The buying groups are responsible for distribution to individual clinics and additionally support veterinarians with back office services. The Parties sell farm animal products either directly to clinics that specialize in the treatment of farm animals, to farm animal producers, or to third-party distributors.
Competitive dynamics in Canada for the supply of animal health products are different compared to other jurisdictions. For example, the relatively small size of the market from a revenue perspective, the prevalence of specific diseases, and the need for regulatory approval from the VDD all serve to distinguish the Canadian market. For this reason, the Bureau concluded that the relevant market to assess competitive effects is likely not any broader than Canada.
Suppliers of animal health products in Canada compete through product differentiation, innovation, and prices, including product-specific rewards programs directly marketed to individual veterinary clinics. From a product differentiation perspective, animal health products have distinct characteristics and applications that serve to limit their substitutability. These include properties which influence drug efficacy such as active pharmaceutical ingredients ("API") and indicated spectrum of activity (e.g. activity against specific parasites or bacteria), as well as properties which influence ease of administration such as dosage frequency and dosage form (e.g., topical cream, tablet, injectable, etc.).
The Bureau used a product's indicated spectrum of activity as an initial screen to identify relevant overlaps between the Parties' in Canada. Then to assess closeness of competition between the Parties, and the extent to which effective competition remained, the Bureau analyzed the level of substitution with products with narrower or broader spectrums of activity, as well as those with alternative dosage frequencies or dosage forms.
The Bureau concluded that low dose canine otitis treatments, feline dewormers with tapeworm coverage, and poultry insecticides with darkling beetle coverage are each distinct relevant product markets in Canada. The Bureau further concluded that the Parties are each other's closest competitor and that there is a limited presence of effective remaining competition in each of these three markets. The timelines, costs and uncertainty associated with gaining access to API supply, completing formula development, and testing for safety and efficacy make timely entry or expansion unlikely. For these reasons, the Bureau concluded that the Proposed Transaction would likely result in a substantial lessening of competition in each of these markets.
In order to remedy the Commissioner's competition concerns, the consent agreement registered with the Competition Tribunal requires Elanco to divest its low dose canine otitis product Osurnia, as well as BAH's feline dewormer Profender. The consent agreement notes Elanco's commitment to forego acquiring the Canadian distribution rights to Tempo, Credo, QuickBayt and Annihilator Polyzone. Rather, these poultry insecticide products are to be retained by Bayer's CropScience division. The consent agreement also prevents Elanco, without the Commissioner's approval, from acquiring Bayer's retained poultry insecticides with darkling beetle coverage for a period of 10 years and from acquiring a significant interest in any poultry insecticides with darkling beetle coverage for a period of 2 years without providing advance notice to the Bureau and waiting a prescribed period of time to complete the acquisition.
The divestiture of Osurnia involves worldwide sales and marketing rights as well as all relevant supply chain assets. The Commissioner has approved Dechra as an acceptable buyer of Osurnia. The Bureau concluded that Dechra has the financial, operational and managerial capabilities to operate the divested business in Canada, intends to vigorously compete against Elanco in Canada post-divestiture, and the combination of Osurnia with Dechra's existing product portfolio does not raise competition concerns in Canada. The divestiture to Dechra is expected expeditiously following completion of Elanco's acquisition of BAH.
The Bureau is satisfied that the consent agreement, including Elanco's commitments related to poultry insecticides, will address its competition concerns in Canada in the markets for the supply of low dose canine otitis treatments, feline dewormers that include tapeworm coverage, and poultry insecticides that include darkling beetle coverage.
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The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.