4-to-3 deals raise level of FTC scrutiny in generic pharma sector
In what should be of interest to pharmaceutical companies’ deal teams and in-house counsel looking for strategic expansion opportunities in the U.S., the Federal Trade Commission has shown a recent tendency of conducting rather meticulous merger reviews in the generic pharma sector, especially where the number of competitors is reduced from 3-to-2 or, occasionally, even in a 4-to-3 deal.
According to the FTC’s analysis (PDF) of the $640 million acquisition by Akorn Enterprises, Inc. (a “niche generic pharmaceutical company engaged in the development, manufacture and marketing of multi-source and branded pharmaceutical products in the areas of ophthalmology, antidotes, anti-infectives, and controlled substances for pain management and anesthesia”) of fellow generic pharmaceutical company Hi-Tech Pharmacal Co., the specialized expertise necessary to produce the generic products at issue (eye drops and creams) required a lengthy development process, thus yielding fewer competitors and potential entrants and, overall, increasing barriers to entry. The agency also relied on customer impact statements (who pointed out that the merging parties’ separate existence allowed them to play one off against the other and obtain lower prices as a result). The FTC concluded that generic pharmaceuticals markets are “commodity markets in which the number of generic suppliers has a direct impact on pricing,” and “[i]n generic pharmaceuticals markets, price is heavily influenced by the number of participants with sufficient supply.” As a result of its Akorn/Hi-Tech investigation, the FTC ordered the parties to divest five of their products, four commercialized and one under development, which will be sold to competitor and Actavis subsidiary Watson Laboratories, even though in two of the overlapping product areas, the number of competitors would only be reduced from 4 to 3.
In conclusion, even relatively low market shares around or below one-third of the overall market do not protect the parties from scrutiny, if the number of competitors is sufficiently reduced – no matter what Commissioner Wright’s dissents may say to the contrary, as the recent Senate confirmation of Terrell McSweeny as 5th Commissioner (and 3rd Democrat) only further amplifies.