On September 15, 2008, the Federal Trade Commission (FTC) announced that it accepted a consent agreement related to Fresenius Medical Care Ag & Co. KGaA’s (Fresenius’) proposed acquisition of an exclusive sublicense from Luitpold Pharmaceuticals, Inc. (Luitpold), a wholly owned U.S. subsidiary of the Japanese firm Daiichi Sankyo Company, Ltd. Fresenius is a leading supplier of end-stage renal disease (ESRD) dialysis services in the United States. Under the acquired sublicense, Fresenius would manufacture and supply the intravenous iron drug Venofer to dialysis clinics in the United States. This marks one of the few recent challenges the FTC has made based on a theory of harm in a vertical context, and is also unusual because it implicated the Medicare reimbursement system.
Venofer is an intravenously administered iron sucrose preparation used primarily to treat irondeficiency anemia in patients undergoing dialysis due to chronic kidney disease. In the US, Watson Pharmaceuticals Inc. (Watson) sells Ferrlecit, which is the other commonly used iron sucrose preparation. The FTC’s complaint charges that the market for these IV iron drugs is highly concentrated, and entry would not be timely, likely, or sufficient to deter or counteract the alleged anticompetitive effects of the proposed transaction. The FTC suggests that the sublicense would enable Fresenius to increase Medicare reimbursement payments for Venofer. Specifically, the complaint alleges that the acquisition will enable Fresenius to report higher prices for Venofer used in its own clinics to the Center for Medicare & Medicaid Services (CMS), because the price will not be determined by the competitive market, but will instead be an internal transfer price. The result could be a higher average selling price and therefore a higher Medicare reimbursement rate for Venofer.
The consent agreement addresses the Commission’s concerns by preventing Fresenius from reporting intra-company transfer prices higher than certain levels that are derived from current market prices and specified in the order. The agreement also provides that if a generic Venofer product enters the market, Fresenius would be required to report its intra-company transfer price at the lower of the level set forth in the order or the lowest price at which Fresenius sells Venofer to any customer until December 31, 2011. The FTC noted that, “[t]hese provisions are designed to ensure that the price Fresenius reports to CMS is in line with current market conditions, including potential generic entry. The order also provides that if CMS implements regulations that eliminate the potential anticompetitive harm from this transaction, those regulations will supersede the order.” The consent agreement also prohibits Luitpold and Fresenius from sharing confidential business information related to the manufacture, sale, or distribution of Venofer and requires the parties to provide notice to the FTC before modifying the license agreement. In addition, the Commission can appoint a monitor trustee to oversee the arrangement.
This is an unusual challenge and consent agreement for a number of reasons. First, it involves the acquisition of a sublicense between two parties that are not horizontal competitors, but instead in a vertical relationship. Rarely has the FTC challenged such arrangements. Second, it involves a product, Venofer, the payment rate for which is set for Medicare dialysis patients (which are the vast majority of patients using such dialysis) by CMS. The current statutory methodology for setting the payment rate for Venofer is based on the manufacturer’s Average Sales Price, which is reported quarterly. At the heart of the FTC concern is not a true “market price,” but rather the reimbursement rate that CMS will pay pursuant to a statutory scheme which is supposed to be tied to competitive conditions, but which might be distorted due to transfer pricing enabled by the acquisition. Finally, it involves what could be characterized as a highly regulatory remedy, with the FTC setting the internal transfer price of Venofer, although the agency notes it will utilize “market prices” because it requires Fresenius to charge the lower of either the price set in the order, or the price set for a Fresenius customer. The consent proscribes this method of setting the internal transfer price until 2012, when there will be a change to the method for calculating the price.. At that point, the lowest-price restriction is eliminated, but the price will continue to be set per the FTC’s consent. Also, the consent indicates that if CMS institutes regulations that eliminates the alleged potential anticompetitive harm from the transaction, such regulations will supersede the FTC’s order.