On October 9, 2007, the Federal Trade Commission (FTC) issued a complaint alleging that Kyphon’s acquisition of the spinal assets of Disc-O-Tech Medical Technologies, Ltd. and Discotech Orthopedic Technologies, Inc. (Disc-O-Tech) would lead to anticompetitive effects in the U.S. market for minimally invasive vertebral compression fracture (MIVCF) treatment products. To settle the charges, Kyphon agreed to divest Disc-O-Tech’s Confidence product lines – a brand of MIVCF treatment product – to an FTC-approved buyer within 60 days. The Commission action ends a year-long investigation – the deal was first announced in October 2006.
According to the FTC complaint, the competitive overlap between the two companies is in the U.S. market for MIVCF treatment products. These products are used to treat vertebral compression fractures (VCFs), which can cause extreme debilitating pain for some patients. The complaint alleged that Disc-O-Tech’s Confidence product is Kyphon’s main competitive threat and, absent the acquisition, it would have made significant inroads into Kyphon’s near-monopoly position in this market. The complaint further alleged that Kyphon’s acquisition of Confidence was motivated, in part, by its desire to keep those assets out of the hands of other major medical equipment companies that had the sales and marketing know-how to capitalize on those assets.
The FTC contended that entry by another competitor is unlikely to be either timely or sufficient to offset the alleged anticompetitive effects of the proposed acquisition. The FTC alleged that entry is limited by the need for U.S. Food and Drug Administration clearances and approvals, the substantial intellectual property positions of Kyphon, Disc-O-Tech and other market participants, and the difficulty of establishing a U.S. sales and marketing force for any new MIVCF treatment product.
The FTC’s consent order requires the parties to divest all assets related to the Confidence system no later than 60 days after the consent agreement is accepted for public comment. Specifically, the order also requires the parties to divest tangible and intellectual property, as well as any permits and licenses needed to make, distribute, and sell the Confidence system. The parties also must divest rights to certain of Disc-O-Tech’s development efforts related to the system.
On November 9, Kyphon filed a petition requesting approval to divest the Confidence Assets to DePuy Spine, Inc., a Johnson & Johnson company.
The FTC’s supporting papers in this case indicated a concern with what it perceived to be a strategic acquisition designed to keep potentially significant assets away from a more formidable competitor. Counsel for firms considering strategic acquisitions should be mindful of what their business people set forth in their documents as rationales for a transaction that might later be interpreted negatively by staff at the antitrust agencies.