The United States Court of Appeals for the Eighth Circuit recently handed the Federal Trade Commission (FTC) a significant loss as it rejected the agency's contention that an acquisition of two drugs used to treat a similar heart condition was anticompetitive because the drugs were part of the same relevant product market, over which the acquirer had gained a putative monopoly. While the case specifically involved health care markets, the decision means that both regulatory agencies and private plaintiffs will have to have price-based proof of relevant product markets in order to pursue claims of monopolization or related unilateral conduct antitrust violations.
In 2008, the FTC, along with the Minnesota Attorney General, filed suit against Lundbeck, Inc. (Lundbeck), alleging federal antitrust violations arising out of Lundbeck's acquisition of two drugs that treat patent ductus arteriosus (PDA) and their subsequent triple-digit price increase. See FTC v. Lundbeck, Inc., Nos. 08-6379, 08-6381, 2010 WL 3810015 (D. Minn. Aug. 31, 2010). PDA is a life-threatening heart condition that primarily affects babies with low birth weight and can be treated surgically or pharmacologically. Drug treatment is more economical, and nearly 30,000 PDA patients receive drug treatment in the United States each year. At the commencement of the Lundbeck lawsuit, there were only two FDA-approved drugs for PDA: Indocin IV and NeoProfen. Although both drugs are effective, they are not bioequivalent compounds. Between 2005 and 2006, Lundbeck acquired the rights to Indocin IV (approved by the FDA in 1985) and NeoProfen (approved by the FDA in 2006). After the purchases, Lundbeck increased the price per treatment of Indocin IV thirteen-fold—from $77.77 to $1614.44—and set the price per treatment of newly FDA-approved NeoProfen at $1522.50.
To succeed on its federal antitrust claims, the FTC had to demonstrate that the relevant product market consisted of FDA-approved drugs to treat PDA. During the bench trial, numerous pharmacists and neonatologists testified regarding the effect of price on doctor preference and on the decision to use one drug instead of the other. Noting that "[t]he outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it," the district court ultimately found that there was a low cross-elasticity of demand between Indocin IV and NeoProfen due to the preferences of neonatologists based on perceived differences in side effects and safety, and ruled that the FTC had failed to identify the relevant product market needed to assert antitrust claims. See id. at *19-21 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962)).
On appeal, the FTC challenged the district court's determination that it failed to prove that Indocin IV and NeoProfen were in the same product market. See FTC v. Lundbeck, Inc., No. 10-3458/3459 (8th Cir. Aug. 19, 2011). Although the determination of the relevant market is an issue for the trier of fact and thus subject to the clearly erroneous standard of review, the FTC argued for a de novo review, claiming that the district court applied an incorrect legal standard because it failed to examine all the pertinent factors. The Eighth Circuit Court of Appeals, however, found that "the FTC really challenges the district court's weighing of the relevant market factors" and affirmed the district court's finding of low cross-elasticity of demand between the drugs as not clearly erroneous. Id. at 4.
In a majority opinion authored by Judge William Duane Benton, the Lundbeck court rejected the FTC's arguments that the two drugs were "practicable alternatives" and noted that "functionally similar products may be in separate product markets, depending on the facts of the case." Id. at 7-9. After all, as the fact-finder, the district court was entitled to rely (and had relied) upon the testimony of neonatologists who preferred one treatment over the other without regard to cost and the testimony of Lundbeck's expert who stated that the number of neonatologists willing to switch between the drugs based on cost was insufficient to constrain prices. And, even though Lundbeck's documents revealed a business strategy to abandon efforts to promote Indocin IV due to the risk of attracting generic competitors and to increase the market share of NeoProfen, the court noted that this strategy could "be interpreted to mean that while Indocin IV was vulnerable to generics, NeoProfen was not, and thus the products are not interchangeable." Id. at 9.
In a short concurring opinion, Judge Richard G. Kopf—U.S. District Court Judge for the District of Nebraska, sitting by designation—questioned the district court's reliance upon the testimony of doctors who used the drugs without regard to price but ultimately were not responsible for paying for the drugs, in considering cross-elasticity. Despite having some misgivings about "defin[ing] a product market based upon the actions of actors who eschew rational economic considerations," the judge "fully" concurred with the majority opinion because "the standard of review carries the day in this case as it does in so many others." Id. at 10.
Lundbeck continues a long string of FTC losses at the Eighth Circuit on health care cases, and merger cases generally. The Court continues to put the agency on notice that it is reluctant to entertain antitrust-based challenges in a field whose participants often exhibit few of the indicators of market-based decision making.