The Federal Trade Commission (“FTC”) has challenged some proposed and completed acquisitions of interest this summer, three of which have resulted in the abandonment of the proposed mergers.
Lundbeck, Inc. (Pharmaceutical Drugs)
The FTC defeated a motion for summary judgment in a case in which the defendant Lundbeck, Inc. (“Lundbeck”) had acquired the rights to two drugs used to treat patent ductus arteriosus (“PDA”)1, Indocin and NeoProfen, which were alleged to be the only drug therapies available for such treatment in the United States.2 On July 21, 2009, the federal district court in Minnesota denied Lundbeck’s motion for summary judgment which sought to dismiss the FTC’s claims that Lundbeck violated § 7 of the Clayton Act3 and the FTC Act4 by acquiring the only drugs used to treat PDA.
The facts were as follows: Over an eight month period, Lundbeck had acquired both Indocin and NeoProfen. In August 2005, Lundbeck acquired Indocin (an injectable indomethacin), which at the time was the only drug available for the treatment of PDA in the United States. Lundbeck immediately raised the price from $26 per vial to $36 per vial. Four months later, Lundbeck acquired the rights to NeoProfen, an injectable ibuprofen which had been used to treat PDA in Europe, but was not yet FDA-approved for treatment of PDA in the United States. Two days later, Lundbeck raised the price of Indocin to $500 per vial, and a few months thereafter (in April 2006), NeoProfen became FDA-approved for the treatment of PDA in the United States. After FDA approval, Lundbeck offered NeoProfen for sale at $483 per vial.
The FTC noted that despite Lundbeck’s price increases for Indocin, no generics had entered the market for injectable indomethacin. Further, NeoProfen is an Orphan Drug—i.e., a drug that treats rare medical indications that impact only a small population.5 The Orphan Drug Act entitles the manufacturer of an Orphan Drug to a seven-year period of marketing exclusivity, thereby ensuring that NeoProfen would be protected against generic entry for at least seven years.6 The FTC asserted that Lundbeck violated the Clayton Act and the FTC Act by acquiring the rights to NeoProfen and willfully maintaining a monopoly in the market for drugs that treat PDA.
In its motion for summary judgment, Lundbeck first asserted that NeoProfen and Indocin are not in the same market because doctors do not consider them to be interchangeable—they distinguish the drugs based on clinical and safety attributes— and argued that doctors do not switch between the drugs based on price.7 The FTC countered that the differences between the drugs are minor, both treat the same condition, and hospitals typically carry only one, but not both, of the drugs on their formularies. Lundbeck next asserted that it lacked market power because generic entry is imminent, pointing to one manufacturer that had a generic version of Indocin, but had not entered the market because of issues regarding the “way the drug looks.”8 However, no generic equivalent had actually entered the market, and the court concluded that there were issues of fact regarding whether barriers to entry (such as regulatory barriers) prevented imminent entry. Therefore, the court denied summary judgment. As of the date that this article has gone to press, Lundbeck has continued to defend against the FTC’s claims.
Carilion Clinic (Outpatient Clinics)
The FTC historically has sought to block acquisitions of hospitals by other hospitals, where the result would be to reduce competition and raise health care costs. With a renewed focus on reducing health care costs, however, the FTC appears to have successfully challenged a hospital’s consummated acquisition of two outpatient clinics. This is only the second time that the FTC has issued an administrative complaint challenging a hospital’s acquisition of an outpatient clinic; the other time was in 1994 when the FTC challenged a similar acquisition in Alaska.9
On July 23, 2009, the FTC filed an administrative complaint against Carilion Clinic, a hospital system in Southwest Virginia seeking to reverse the August 2008 acquisitions of two outpatient clinics—the Center for Advanced Imaging (“CAI”) and the Center for Surgical Excellence (“CSE”)—which provided advanced outpatient imaging services (i.e., MRIs, CT scans, etc.) and outpatient surgical services, respectively, in Roanoke, Virginia.10 According to the administrative complaint, Carilion controlled approximately 80% of the hospital beds in the Roanoke area.11 At the time of the acquisitions, CAI allegedly had been in operation as an advanced imaging center for five years, offering fast scheduling, extended hours of operation and fast turnaround time for reporting to referring physicians. Prior to the acquisitions, Carilion allegedly had resisted the increasing competition from CAI and CSE by opposing CAI’s state application for additional MRI equipment and CSE’s request for a Certificate of Public Need (“COPN”) to offer outpatient surgical services. According to the complaint, Carilion had itself grown substantially since 1990, largely by acquiring competitors and physician practices. The FTC alleged that Carilion’s acquisitions of CAI and CSE left it with only one competitor in the relevant market for imaging services, which the FTC defined as extending 15–20 miles around Roanoke and Salem, Va.
The FTC asserted that the acquisitions violated the antitrust laws, would lead to higher health care costs and reduced incentives to maintain and improve service and quality of care in Roanoke. The FTC alleged that independent clinics, such as CAI and CSE, compete with Carilion for inclusion in health insurance plans, for patients, and for referring physicians by offering lower prices and better service. Carilion allegedly had improved service at its outpatient facility as a result of competition from CSE. Further, after the acquisition, Carilion allegedly increased its fee structure for various services, including increasing the out-of-pocket cost for a brain MRI by 900% (from $40 to $350). The FTC alleged that entry barriers prevented competition because of the need to obtain state approval for a COPN, which could take as much as two years. The FTC noted that Carilion and its sole existing competitor, HCA, routinely had opposed applications for COPNs, further prolonging the process and decreasing the likelihood of approval. In its complaint, the FTC sought divestiture of CAI and CSE.
Carilion apparently has decided not to litigate the dispute; two weeks after the FTC issued its complaint, the FTC and Carilion began settlement negotiations. According to a joint motion to withdraw the matter from adjudication, Carilion agreed to enter into a consent order that “contemplates a remedy that completely restores the competition that was alleged to have been eliminated by the acquisition.”12
Thoratec Corporation (Medical Device)
The FTC has successfully thwarted the proposed $282 million merger of Thoratec Corporation (“Thoratec”) and HeartWare International, Inc. (“HeartWare”). On July 28, 2009, the FTC issued its administrative complaint challenging the merger. Thoratec is the sole provider of left ventricular devices (“LVADs”), lifesustaining treatment for patients who are either awaiting a heart transplant, or do not qualify for a heart transplant.13 LVADs are surgically implanted heart pumps that support and sustain patients with end-stage heart failure, which typically is a fatal condition. Thoratec sells two LVADs, which are the only LVADs approved by the FDA for commercial sale in the United States. HeartWare is a small company that had been developing an LVAD, called the HVAD, which is still in clinical trials, but is expected to become FDA-approved by 2012. There are a few other small companies developing LVADs, but they are significantly behind HeartWare in development and are not likely to be FDA-approved before 2012. The FTC alleged that Thoratec’s acquisition of HeartWare would stifle competition and innovation, noting that Thoratec had already improved its product in response to HeartWare’s HVAD. In a July 30, 2009 press release, the FTC stressed that there cannot be health care reform without competition, particularly with respect to medical devices that are life-saving.14 The next day, on July 31, 2009, Thoratec and HeartWare announced that they would terminate the proposed transaction.15
CSL Limited (Plasma-Derivative Proteins)
The FTC also was successful in blocking the $1.3 billion acquisition of Talecris Biotherapeutics Holdings Corporation (“Talecris”), the third largest supplier of plasma derivative protein therapies, by CSL Limited, the world’s second largest supplier. According to the FTC complaint, the merger would reduce the number of competitors from three to two for plasma products (Baxter is the other supplier), and from five to four for other plasma products in what is already a consolidating industry.16 Following the acquisition, CSL allegedly would have more than 50% of the market for certain plasma proteins and more than 80% for others. The FTC complaint notes that the plasma industry has been consolidating substantially since the early 1990s, when there were 13 producers of plasma-derivative products; today there are only five such producers, and two allegedly hold market shares only in the single digits and have a limited ability to expand. Barriers to entry allegedly exist because of the need for significant up-front investment, the need for lengthy regulatory approvals and intellectual property relating to purification and safety. Rather than defend the transaction, CSL and Talecris announced on June 8, 2009 that they would terminate the merger agreement.