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.
FTC Commissioner McSweeny
The dual risks of limiting competitiveness and restraining innovation have caused the Federal Trade Commission to announce a probe of patent trolls.
FTC Chairwoman Edith Ramirez is planning to wield the agency’s subpoena power to launch a 6(b) investigation** into the trolls’, or so-called Patent Assertion Entities’ (PAE), litigation strategies and business methods, as they “raise red flags for competition and consumers.” FOSSpatents reported on the webcast of the announcement here.
This sounds very much like my first post on this blog, in which I discussed affirmative, strategic discovery steps a defendant facing an NPE/PAE/troll should take to defend vigorously against unfounded infringement claims that are designed solely to extract a nuisance-value settlement, as litigation would not be cost-effective. Maybe Chairwoman Ramirez read my piece? Maybe not, but FTC staff certainly reviewed the EFF’s public comment on curbing PAE/troll activity, in which the Electronic Frontier Foundation demanded:
“The FTC should consider deploying its investigatory and enforcement powers against PAEs. EFF believes that at least some PAE litigation, especially that brought against end-users, seriously harms consumers and may not be entitled to Noerr-Pennington immunity.”
enforcement investigative effort (the FTC acknowledges that it may lack proper jurisdiction over the patent-related portions and may leave actual enforcement to other branches of the federal government) comes on top of the legislative initiatives and bills discussed previously on this blog.
** A so-called 6(b) request involves Section 6 of the FTC Act, 15 U.S.C. Sec. 46. Its sub-section 6(b) empowers the Commission to require the filing of “annual or special … reports or answers in writing to specific questions” for the purpose of obtaining information about “the organization, business, conduct, practices, management, and relation to other corporations, partnerships, and individuals” of the entities to whom the inquiry is addressed. Recipients of a 6(b) order may file a petition to limit or quash, and the Commission may seek a court order requiring compliance. In addition, the Commission may commence suit in Federal court under Section 10 of the FTC Act, 15 U.S.C. Sec. 50, against any party who fails to comply with a 6(b) order after receiving a notice of default from the Commission. After expiration of a thirty-day grace period, the defaulting party is liable for daily penalties, each day of noncompliance.