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Before approving the merger between Swiss biopharma Novartis (NYSE: NVS) and eye-products company Alcon (NYSE: ALC), China’s Ministry of Commerce has ordered two major divestitures, which the Ministry maintains are necessary to preserve competition in China’s eyecare sector. The MoC said Novartis-Alcon together enjoy a 55% stake in the affected markets worldwide and a 60% share in China.

The MoC told Novartis it must suspend its partnership with contact lens manufacturer Ginko International within 12 months. In 2008, the Novartis subsidiary CibaVision became a strategic investor in Ginko. Ginko is a Taiwanese company and listed on the Taiwan stock exchange, though it sells its products mainly in the PRC and has a manufacturing facility in Danyang, a center for eyeglass production in mainland China. Ginko is the largest seller of contact lenses in the PRC.

After the investment, Ginko became the exclusive distributor of CibaVision’s products in China and also assumed the duty of manufacturing CibaVision’s products for the China market. One of Ginko’s two divisions, Hydron Contact Lens Co., was tasked with responsibility for producing the products.

Also, under conditions of the approval, Novartis must stop selling its anti-infection eyecare products in China for a period of five years. Although Novartis does not have much of a position in the sector, Alcon is dominant. The MoC commented that Novartis can claim only 1% of the market.

The MoC is ordering the conditions under a two-year-old law aimed at encouraging competition. Critics charge that, so far, the divestiture provisions have been employed only when foreign companies ask for merger approval, but they are never a problem for intra-PRC transactions.

In the US, Novartis and Alcon are being required to divest products given to cataract surgery patients to prevent infection. The two companies are the only ones producing a class of drugs known as injectable miotics.

Novartis is seeking approval to buy the remaining 23% of Alcon it does not already own. Earlier this year, it bought Nestle's (OTCPK:NSRGY) 52% stake, which took its holdings in Alcon up to 77%. Novartis is now offering stock to Alcon’s minority shareholders that is currently worth about $141 per Alcon share, even though it paid Nestle $168 per Alcon share and the current price of an Alcon share is $156.

Disclosure: none.

Source: China Orders Major Divestitures Before Novartis-Alcon Merger