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EC review of Novozymes and Chr. Hansen tie-up likely time-consuming, with verticals and innovation in the mix

Novozymes [CPH:NZYM-B] and Chr. Hansen [CPH:CHR] will need to factor in considerable time in explaining product areas and potential overlaps to the European Commission (EC), which could zoom in on vertical and conglomerate effects and potentially innovation, a source familiar with the agency and uninvolved competition lawyers said.

The two Danish companies announced a tie-up on 12 December to create “global biosolutions partner”, with the transaction expected to close in the final quarter of 2023 or the first quarter of 2024. Novozymes, which is offering 1.5326 shares per Chr. Hansen share, has seen its stock shed about 16% since deal announcement until today (2 February) amidst reports that the merger could face close scrutiny by competition authorities.

Speaking at an investor call on 26 January, Novozymes’ CEO said the companies were getting ready for filings in the US, Europe, China, Brazil, South Korea and Turkey. This news service reported that an EC filing would be likely.

The case is yet to be flagged to EC officials, according to a source familiar with the agency. These talks can last several months, especially for complex cases, so parties generally approach the agency when the deal is announced or, at times, before that. According to one of the lawyers, the delay at this stage is not particularly noteworthy, as it may mean that the parties are simply getting their preliminary work done.

Cases in this space can be time-consuming as the parties generally have a myriad of products and the EC really looks at everything, the source familiar said. A second lawyer added that it will take time for the companies to explain the products to the competition agencies.

Chr. Hansen is a leading manufacturer of microbial solutions for a range of applications including food and beverage (F&B), human and animal nutrition, agriculture, and pharmaceuticals, noted Smriti Sharma, Program Manager – Chemicals, Materials & Nutrition at Frost & Sullivan.

Novozymes, on the other hand, is the largest producer of industrial enzymes and microbial technologies. The company offers a vast portfolio of enzymes for a diversified base of customers across 30 industries.

The EC generally looks at these markets segmenting them by intended use of a product, said a third lawyer, who has worked on previous sector cases. The agency would look at any overlaps in products with the same intended use, he said.

In a deal presentation, the parties flagged that both have offerings in dairy enzymes, while in microbials they both cover food & beverages, dietary supplements and agriculture, animal health and nutrition. 

The EC touched upon some of these markets in its 2019 review of International Flavors & Fragrances’ (IFF) [NYSE: IFF] merger with DuPont’s Nutrition & Biosciences Business. At that time the EC went into great detail in its investigation, and also examined potential conglomerate effects, as reported.

In precedents in this space the EC cast its eye on potential vertical and conglomerate effects, noted the source, but ultimately found no concerns. The EC’s focus has been on the parties’ ability to bundle their offerings, e.g. certain molecules, in ‘systems’, for example preparations for certain types of food, explained the source. The risk is that competitors losing access to a certain molecule or enzyme are foreclosed from creating their own competing systems, the source added.

In essence, the two players have a very complementary business offering and expertise, with Chr. Hansen being a leader in microbial solutions and probiotics and Novozymes being a leader with its enzyme portfolio and technologies, said Sharma.

However, these companies compete with respect to their probiotic offerings for human and animal nutrition applications. Also, Chr Hansen offers F&B processing enzymes, and though its offerings are primarily focused on dairy applications, due to its strong customer base in Europe and globally the company is one of the key competitors in the F&B enzymes space. The two are also rivals in the agriculture biologicals space as they both offer biological crop inputs primarily biostimulants, the analyst said.

Competitors would vary based on end-use sectors. In the agriculture sector, both have some stiff competition from big brands like FMC, Valagro (recently acquired by Syngenta), Marrone Bio Innovations, and UPL, among others, according to Sharma. In the Food cultures and Probiotics space, key competitors are IFF (DuPont Nutrition & Biosciences), Lallemand, Kerry (Ganeden), Probi, Gnosis by Lesaffre, ADM and DSM among others. In the Food Enzymes space, key companies are DSM, IFF (DuPont Nutrition & Biosciences), AB Enzymes, Kerry, and BASF, among others. Almost all these players have global offerings, but there are regional players like Amano Enzymes, Sunson Industry Group Co., Ltd (Sunsonzymes), and Biocatalysts Limited, which are active in specific regions.

Innovation and R&D

It would not be surprising if the EC pursued an innovation theory of harm, the first lawyer said, noting that the parties are big R&D spenders. Ever since Dow/DuPont the EC has scrutinised overlaps in parties’ R&D capacity carefully, even when these do not immediately translate in pipeline or marketed products.

Novozymes spent roughly 12% – 13% of its annual revenue on R&D projects in 2021, which is “significantly high”, Sharma said. The primary focus of Novozymes’ R&D has been on identifying more sustainable solutions such as exploring novel biological crop inputs, for which the company entered into a research collaboration with FMC to develop first of its kind enzyme-based crop protection solution.

The company is also developing enzyme solutions to ensure higher biofuel production efficiency while reducing carbon emissions. From a human nutrition standpoint, the company is investing in developing advanced protein solutions. The company has also focused on expanding its BioHealth business with acquisitions like PrecisionBiotics Group and Microbiome Labs, said the analyst.

Chr. Hansen spent roughly 8.1% of its annual revenue on R&D in 2021, which per industry standards is still higher than many of its competitors, the analyst added. The company’s core focus has been on expanding its production capacities and investment in the R&D of innovative Food Culture solutions. The company has also been expanding its focus on agriculture solutions and entered into a research collaboration with UPL and developed microbial solutions for sustainable agriculture, and expanded its portfolio and capacity to build its HMO business, which was acquired last year, the analyst said.

Both companies are global in their offerings and offer most of their products globally with strong penetration in Europe and North America. As per Novozymes’ 2021 annual report, Europe, the Middle East & Africa together accounted for a share of 38% of the total sales, followed by North America (31% of sales), APAC (20% of sales), and Latin America (11% of sales). Similarly, Chr Hansen’s 2021 annual report indicates a strong penetration in the European market with EMEA holding a share of 37% of the total sales followed by NA (33% of sales), APAC (19% of sales) and Latin America (11% of sales).

This transaction has not been formally notified to the Commission, an EC spokesperson said, and added: “If a transaction has an EU dimension, it is always up to the companies to notify it to the Commission”. A spokesperson for the Danish competition agency declined to comment on any potential involvement or referral request in an upcoming deal review.

Chr. Hansen and Novozymes did not return requests for comment by the time of publication.