Archived — Johnson & Johnson's Acquisition of the Consumer Healthcare Business of Pfizer Inc.

Technical Backgrounder

April 2005

This technical backgrounder is intended to summarize the main findings of the Competition Bureau’s (“Bureau”) review of Johnson & Johnson's acquisition of the consumer healthcare business of Pfizer Inc. (“Pfizer”).

Readers are advised to exercise caution in interpreting the Bureau's assessment of this transaction. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner of Competition (the “Commissioner”). The legal requirements of section 29 of the Competition Act and the Bureau's policies and practices regarding the treatment of confidential information limit the Bureau's ability to disclose certain information obtained during the course of a merger review. Moreover, limited portions of the Consent Agreement (the “Agreement”) entered into by Johnson & Johnson and the Commissioner are confidential.


On June 26, 2006, the parties announced that Johnson & Johnson would acquire the consumer healthcare business of Pfizer (the “transaction”) which includes brands such as Listerine®, Nicorette®, Rolaids®, Sudafed®, Benadryl® and Visine®. The transaction was reviewed by competition authorities in Canada, the US, Europe, Australia, Korea, Brazil and other countries. The parties made submissions to the Bureau and responded to additional information requests. Further, the Bureau conducted interviews and reviewed information submissions from various stakeholders, including competitors, major retailers, pharmacies and distributors. Over the course of the examination, the Bureau consulted with the United States Federal Trade Commission and the Directorate-General for Competition of the European Commission.

As a result of the review, the Bureau concluded that the transaction would likely prevent or lessen competition substantially in Canada for the supply of only one product, zinc oxide-based diaper rash ointment . On December 19, 2006, Johnson & Johnson and the Commissioner reached an Agreement pursuant to section 105 of the Competition Act to resolve these concerns. The Agreement requires Johnson & Johnson Inc. to divest the Zincofax® brand of diaper rash ointment and related assets. On December 20, 2006, the Agreement was registered with the Competition Tribunal.

The Parties

Johnson & Johnson is a publicly traded company, headquartered in New Jersey, U.S. In 2006, Johnson & Johnson had worldwide sales of US$53.3 billion. Globally, Johnson & Johnson divides its operations into three business segments: (i) medical devices and diagnostics; (ii) pharmaceutical products; and (iii) consumer products.

Johnson & Johnson’s consumer products segment manufactures and markets a broad range of products used in baby and child care, skin care, oral and wound care, and women’s healthcare, as well as nutritional and over-the-counter (“OTC”) pharmaceutical products. These products are available without prescription and are marketed to the general public. Johnson & Johnson sells its consumer products to wholesalers and directly to independent and chain retail outlets throughout the world.

Pfizer is a research-based global pharmaceutical company based in the U.S. that is primarily engaged in the discovery, development, manufacture and sale of prescription medicines for humans and animals. Prior to the acquisition, Pfizer operated in three business segments: (i) human health; (ii) animal health; and (iii) consumer healthcare.

Pfizer’s consumer healthcare division produced and marketed non-prescription and prescription1 consumer health products used for oral care, upper respiratory health, tobacco dependence, gastrointestinal health, skin care, eye care and hair growth. These products were marketed principally to the general public and were sold to both wholesalers and retailers.

Competitive Overlap

In Canada, while there were 34 distinct product markets for which at least one of these two parties supplied products, there were only eight in which there was overlap. Following a thorough review, the Bureau concluded that the transaction would likely result in a substantial lessening of competition in only one of these product markets: diaper rash ointment. In the other seven markets, the merger did not raise significant competition concerns.

Product Market

Diaper rash ointment consists of a medicated ointment or cream containing the active ingredient, zinc oxide. The major properties are: reducing itching, a mild antiseptic to prevent infection and an effective barrier for pain and discomfort. Diaper rash ointments create a barrier between a baby's skin and the infant’s diaper, with the goal of preventing and/or treating skin irritation. Diaper rash ointments contain various concentrations of the medicinal ingredient (zinc oxide) as well as non-medicinal ingredients. In this category, Johnson & Johnson Inc. products are: Aveeno Baby®, Johnson's Baby® and Penaten®. Pfizer’s products were: Desitin® and Zincofax.

Geographic Market

The relevant geographic market for consumer healthcare products and, in particular, diaper rash ointment, is Canada. Among the relevant factors considered by the Bureau were the following:

  1. The parties produce or source their products to customers across Canada from one location. From the perspective of the buyers, they purchase for a retail chain or buying group and supply these products to their retail outlets wherever they are located in Canada without being significantly constrained by transportation cost;
  2. The parties’ brands are national; they do not have any brands that are sold only in a particular region or province of Canada;
  3. There are no significant regulatory or legal barriers to distributing consumer healthcare products across Canada from the one location. There are no known inter-provincial trade barriers.

As to consideration of a broader geographic market, there are regulatory barriers imposed by Health Canada that limit entry of OTC products from abroad. Among other Canadian requirements, Health Canada requires that OTC and vitamin products sold in Canada have a Drug Identification Number (“DIN number”), indicating that the product has been approved for sale in Canada. In addition, bilingual packaging and labelling as well as instructions are required for all pharmaceuticals sold in Canada. This requires a special production run to package the product in order to meet Canadian regulatory standards. This allows manufacturers to segment the Canadian and U.S. markets and to charge different prices in each market. The net effect is not insignificant barriers to entry from the U.S. Further, with the exception of one brand, Desitin, the leading brands in Canada and the U.S. are different. The number two and three brands of diaper rash ointment in the U.S. (A&D and Balmex) are not sold in Canada. Even the Desitin brand is packaged differently in the U.S.

For all these reasons, the Bureau concluded that the relevant geographic market for OTC pharmaceuticals products and, in particular, diaper rash ointment, is Canada.

Market Shares

The market shares were calculated using the latest reported quantity of sales data from AC Nielsen Canada for a 52-week period. The AC Nielsen data was the most accurate third party data that the Bureau was able to access with respect to Canadian OTC retail sales.

In markets where the merging parties’ shares were found to be well under the 35% threshold specified in the Merger Enforcement Guidelines (the “MEGs”), the Bureau concluded that there was no likelihood that competition would be prevented or lessened substantially2. For those markets where the 35% threshold was exceeded, the Bureau undertook a detailed analysis to determine whether the transaction would likely lessen or prevent competition substantially. As indicated above, the Bureau determined that it was appropriate to focus on only one of these product markets - diaper rash ointment.

Barriers to Entry

Generally, it takes 5 to 10 years before a new OTC product reaches the market. Beyond the normal research and development process involved in developing any new consumer product, a new entrant must follow a regulatory process administered by Health Canada3. While the regulatory approval process for OTC products is less stringent than for prescription pharmaceuticals and has become more streamlined, it is not insignificant. Since most OTC products are not new drugs, it is not necessary to apply for a notice of compliance; however, any new OTC product must be registered with Health Canada via a DIN application. A DIN is necessary if the OTC product is to be distributed through pharmacies, and the process for securing one can be quite lengthy. Permission must also be obtained from Health Canada if the manufacturer proposes to switch the product from prescription to OTC status.

In addition, a new entrant would have to invest a significant amount of time and money to achieve any meaningful competitive presence in this market. There are high sunk costs for, among other things, advertising and promotional funding to establish a strong brand name. A new entrant also faces the task of convincing retailers to carry its products, which can be challenging owing to the fact of limited shelf space. Another important barrier is the reputation element. Faced with these barriers, it is unlikely that a new entrant could enter the market and achieve any significant market impact within two years.

Market contacts advised that brand reputation rests with the brand rather than the marketer or manufacturer, and significant advertising expenditures and promotional activities directed to pediatricians, general practitioners, etc. over a prolonged period of time are necessary to increase market share. There is no recent history of a new brand achieving market share greater than 6%. In contrast, several brands that have attempted to expand their reach by significant investment have achieved only 1-2% of the market.

Private Label Competition

Private label products account for approximately 17% of all consumer healthcare sales in Canada4. The Bureau explored the question of whether private label competition in diaper rash ointment, considered to be in the same product market, would pose an effective constraint on price in the event of a significant price increase for diaper rash ointment. Market contacts indicated that, as a general proposition, the extent to which private label products provide effective competition to brand name products varies greatly depending on the product category. One indicator of the extent of competition is price spread. The price differential between brand name and private label products can vary significantly across product categories. Where the price differential is large, this can indicate a reduced ability of private label products to discipline the branded products.

With respect to diaper rash ointment, the price spread between the private label and the major brands is quite significant. This large price spread strongly suggests that private label brands do not constrain the price of the leading brands.

Acceptable Substitutes

Petroleum jelly can be considered a substitute where a rash has not yet developed. It can be used to prevent diaper rash, but it is not considered a diaper rash treatment. Petroleum jelly has no medicinal effect, no effect on the blistering process and is not absorbed by the skin. It is not marketed as a treatment for diaper rash and is usually located in a separate section of retail shelf space.

In severe cases, a physician may prescribe a cream containing a small amount of hydrocortisone. This alternative is not only differentiated by requiring a prescription but, among other features, is considerably more expensive.

Countervailing Power

The Bureau had multiple discussions with Canada’s large retail mass merchandisers. These retailers account for close to 70% of all sales of diaper rash ointment in Canada. It should be emphasized that diaper rash ointments typically occupy a limited amount of retail shelf space, and that this category is considered to have limited sales potential. Had this transaction proceeded without a remedy, the merged entity would have owned 4 of the top 5 brands in Canada; in such circumstances, retailers would have been very limited in their ability to constrain the merged entity from exercising market power.

Removal of a Vigorous and Effective Competitor

The transaction would have eliminated competition between the two leading suppliers in Canada in this one product market. It would also have significantly increased concentration in that same market, leaving Johnson & Johnson Inc. as the dominant supplier. Information collected suggested that demand for diaper rash ointment is highly inelastic, and the transaction was likely to result in higher prices. Johnson & Johnson Inc. and Pfizer Canada Inc., respectively, have historically maintained their strong market positions by targeting their promotional activities to those who influence the purchasing decision, i.e., physicians (especially pediatricians and general practitioners), mid-wives, hospitals, public health nurses, etc. Both companies have distributed coupons and promoted their products in store flyers. They had also competed by giving out samples in baby packs through hospitals. Furthermore, post-merger, there would have been a reduced incentive to innovate.


The Bureau found that, without a remedy, Johnson & Johnson Inc. would have had a very high post acquisition market share in diaper rash ointment in the Canadian market. Indeed, the merged entity would have owned 4 of the top 5 brands in Canada. Neither the 5th brand nor private label brands would appear to pose an effective competitive constraint on the merged entity. Based on the evidence collected, it was concluded that, post acquisition, there would be no effective constraint on Johnson & Johnson Inc.’s ability to increase prices.

In response to the Bureau’s conclusions as to a likely substantial lessening of competition, Johnson & Johnson committed in an Agreement executed between Johnson & Johnson and the Commissioner to divesting the Zincofax brand. Without this divestiture, Johnson & Johnson Inc.'s market share would have been close to 60%. By divesting this brand, Johnson & Johnson's market share will drop to the mid 30's. This figure is slightly above Johnson & Johnson's pre-merger market share.

The Bureau is satisfied that, with the implementation of the divestiture required by the Consent Agreement, the transaction is not likely to result in a substantial lessening or prevention of competition in the Canadian market for diaper rash ointment.


1 There are only three prescription products sold by Pfizer’s consumer healthcare division in Canada: Reactine 20mg, Anusol-HC and Anugesic-HC.

2 The Commissioner will not generally challenge a merger on the basis of a concern related to a unilateral exercise of market power when the post-merger market share of the merged entity would be less than 35%. Merger Enforcement Guidelines (September 2004) at paragraph 4.12.

3 If the OTC product has been approved in the U.S., the Health Canada approval process is somewhat abbreviated.

4 AC Nielson data, National All Channels combined rolling 52 weeks to March 18, 2006.

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