EU Commission's Draft Market Definition Notice for the Life Science Sector: Key Points and Implications

A. The European Commission may consider all potential outcomes of R&D processes

Innovation is a key competitive parameter in the life sciences sector, driving product development and creating competition for the market. The Draft Notice recognizes this and takes a broad approach to evaluating R&D to ensure that innovation remains competitive. However, determining the boundaries of innovation competition is not always straightforward, with several factors that must be considered, including the nature and scope of the innovation efforts, research objectives, team specialization, and the results of prior innovation.

For instance, in Novartis/GlaxoSmithKline Oncology Business (M.7275), the Commission evaluated the B-Raf inhibitors and MEK inhibitors under development by the parties as part of the market for targeted therapies for the treatment of advanced melanoma, taking into account existing products that had already been launched.

In cases where R&D is targeted at a specific product, and the potential market into which the product will fall can be determined, the Commission may conclude that the pipeline product falls into an existing relevant product and geographic market. However, in situations where the R&D is earlier stage and is not closely tied to a specific product, defining the product market can be useful in identifying the parameters for competition in early stage innovation. The specificity and focus of the R&D process is important in assessing the impact on competition.

Taking these factors into account enables the Commission to understand the competitive landscape and the potential impact of an organization's innovation efforts and assess the potential effects of conduct or transactions on innovation and resulting competition. 

B. Economic tools in innovative markets

Market definition can be challenging in innovative markets where traditional economic tools may be difficult to apply. The SSNIP test, for example, is often used to identify the smallest relevant market within which a hypothetical monopolist could profitably impose a price increase of 5 to 10%, but it may not be useful where companies compete on factors other than price, such as quality or innovation or where the relevant products are not yet launched.

The Draft Notice suggests a "SSNDQ" test for non-transitory quality decreases might be appropriate in this context. However, the challenges in quantifying quality and the EU General Court’s criticism raise questions how the SSNDQ will be used in practice.

In addition, the Draft Notice suggests that the Commission may consider supply-side substitution, where products produced using the same assets and processes may fall into the same relevant market if supply-side substitution across the related products has an equivalent effect as demand-side substitution. Evidence of substitution between different products, including as a result of structural changes, can also assist in identifying market boundaries. Unexpected cost shocks and new product launches can reveal shifts in supply-side conditions.

C. Market definition in the presence of price discrimination

Price discrimination is a common strategy used to maximize profits. It involves charging different prices to different customers for the same product or service based on their willingness to pay. The Draft Notice suggests that three conditions are necessary for price discrimination. First, the seller must be able to clearly identify which customer group each individual belongs to. Second, trade among customers and third-party arbitrage must be unlikely, making it difficult for customers to resell or exchange the product. Finally, the price difference between customer groups must persist over time. When these conditions are met, price discrimination can lead to a narrower market for the relevant products (e.g., different prices to hospitals, on the one hand, and out patients on the others), reflecting the fact that different customer groups are willing to pay different prices. 

The Draft Notice also notes that price discrimination based on location can mean that it is appropriate to define relevant geographic markets by reference to location, because different locations may have different levels of competition, pricing, and demand for the product, which can affect prices in the different locations.

Overall, price discrimination can have significant implications for market definition. 

D. Takeaway

The Commission's ongoing efforts to keep pace with market developments are reflected in the approach proposed in the Draft Notice, which seeks to refine the definition of relevant product and geographic markets. These changes of course continue to be applied in the context of developments in market and competitive dynamics.