The FTC concluded that the proposed acquisition would have reduced competition in three markets where both Amneal and Impax competed: (1) generic desipramine hydrochloride tablets; (2) generic ezetimibe and simvastatin immediate release (“IR”) tablets; and (3) generic felbamate tablets.

The FTC also concluded that the proposed acquisition would reduce future competition in seven markets where Amneal or Impax is a current competitor and the other would have been likely to enter the market absent the acquisition: (1) generic aspirin and dipyridamole extended release (“ER”) capsules; (2) generic azelastine nasal spray; (3) generic diclofenac sodium and misoprostol delayed release (“DR”) tablets; (4) generic erythromycin tablets; (5) generic fluocinonide-E cream; (6) generic methylphenidate hydrochloride ER tablets; and (7) generic olopatadine hydrochloride nasal spray.

Under the terms of the proposed settlement, ANI Pharmaceuticals, Inc. will acquire seven products (or in some cases the pipeline assets).  The FTC specifically noted “ANI’s track record in developing and bringing to market pipeline products suggests that the divested products will be placed in the hands of a firm with the same ability and incentive to bring the products to market.”  Perrigo Company plc will acquire Impax’s rights to two products that it had partnered with Impax to develop, manufacture, and sell.  And G&W Laboratories (“G&W”) will acquire Impax’s marketing rights to one product that G&W manufactures for Impax.

The FTC’s Analysis to Aid Public Comment provides further insight on how the FTC determined which of the merging parties’ products should be divested.  The FTC pointed to The FTC Merger Remedies Study, which states that “products made at third-party manufacturing sites are easier to divest and involve less risk than the technology transfer from in-house manufacturing to a new facility.”  The FTC’s goal is to ensure the success of divestitures so if one of the products is developed or manufactured by a third party, the FTC would rather that product be divested to the actual manufacturer.  The FTC also pointed out that “in mergers involving complex pharmaceutical products that are difficult to manufacture, the Commission generally will require the divestiture of an on-market product over a pipeline product to place the greater risk on the merging parties rather than the public, with exceptions for compelling and fact-specific reasons.”

The FTC applied the “easier-to-divest” principle where Impax sold products in partnership with a third party. Impax partnered with Perrigo to sell generic azelastine nasal spray and generic olopatadine hydrochloride nasal spray products and partnered with G&W to sell generic fluocinonide -E cream. Perrigo and G&W also were the Abbreviated New Drug Application (“ANDA”) owners for these products. The FTC also required Impax to return the rights and assets relating to Impax’s third-party partnership products to Perrigo and G&W.

While the FTC’s general rule is to require divestitures of manufactured products over pipeline products, the FTC carved out exceptions for compelling and fact-specific reasons during this merger review.  The FTC found exceptions in four product markets. In four overlap markets in which Amneal has an on-market product and Impax has a product in development, Impax will divest its rights and assets to ANI rather than requiring Amneal to divest its on-market, in-house manufactured products.  The FTC said that each product market had specific facts that warrant the divestiture of the Impax rights and assets rather than the Amneal product.

• For generic aspirin and dipyridamole ER capsules, Amneal is the only manufacturer with a marketed product. Impax received FDA approval for its ANDA in 2017, but had not yet launched a product. Because Amneal had the only generic product on the market, the FTC thought it was less risky for Impax to assign its manufacturing contract to ANI than to transfer technology from Amneal to another buyer for such a complex product.
• For generic methylphenidate hydrochloride ER tablets, the FTC applied the “easier-to-divest” Both Amneal and Impax had approved ANDAs. While Impax had not launched its product yet, the FTC required divestiture of Impax’s product because the ER tablets are complex products, and it would be less risky for Impax to assign its manufacturing contract to ANI than for Amneal to transfer technology to ANI.
• For erythromycin tablets, Amneal recently launched a product and it competed with one other player. Impax was developing erythromycin tablets. The FTC allowed Amneal to keep the marketed product to ensure an “ongoing and viable competitor to Arbor,” the only other competitor with a marketed product.
• For generic diclofenac sodium and misoprostol DR tablets, Amneal has an on-market in-house manufactured product, and Impax is partnered with Micro Labs to commercialize a competing product. Impax holds only marketing rights to the product; Micro Labs is responsible for development and manufacturing. Impax will transfer its marketing agreement with Micro Labs to ANI, and Micro Labs will manufacture the product for ANI for the current contract term.

 Observations:

The FTC’s enforcement action demonstrates that the FTC is being very thoughtful in its decisions regarding divestiture remedies in the pharmaceutical industry.  A couple of months ago, the FTC seemed to setting a hard and fast rule, but there does not appear to be any such thing.  In pharmaceutical mergers in which one party manufactures a pharmaceutical product that is difficult and complex to manufacture and the other party has a similar product in the research and development pipeline, there is a strong presumption that the FTC will require a divestiture of the product already being manufactured rather than the one in development.  The FTC will also require merging parties to divest the product that is easier to divest.  That being said, there will always be exceptions.  Before making any decisions, the FTC will examine the competitive landscape, the complexity in transferring technology, as well as the capabilities of third-party manufacturers or third-party partners.  The FTC’s goal is to make sure that the divested product or pipeline assets will be as competitive in the hands of the divestiture buyer as it would have been absent the deal so the FTC will have an open mind and use a fact specific approach when negotiating divestitures.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

The past history of problems with divestitures in this area indicated to the FTC that divesting ongoing manufacturing assets rather than pipeline assets that have not come to market places greater risk of failure on the merging firms rather than consumers.  Accordingly, in situations in which the parties to the transaction own both an established inhalant or injectable that is currently being manufactured and an overlapping pipeline inhalant or injectable, the FTC will seek a divestiture of the manufactured product that is already on the market.  The FTC, for example, may require the divestiture of contract manufacturing capabilities rather than other assets, such as research and development assets.

The FTC is taking the stance because of an internal study that revealed that the rate of failure for divestitures of complex pipeline products was “startlingly high”.  Apparently, divestiture buyers have had difficulty in actually getting the complex pipeline assets to market. Not surprisingly, a divestiture buyer could struggle to reliably manufacture a complex pharmaceutical product, which harms its ability to ultimately bring the product to market.  Indeed, all kinds of things can go wrong when trying to launch a complex pharmaceutical product.  For instance, the divestiture buyer of pipeline assets could have difficulty obtaining final FDA approvals including the OK to actually manufacture the product.

Observations:

A new administration is entitled to change its merger enforcement priorities and how it remedies problematic mergers.  Here, the FTC is making a change to how it resolves anticompetitive pharmaceutical mergers.  In pharmaceutical mergers in which one party manufactures a pharmaceutical product that is difficult and complex to manufacture and the other party has a similar product in the research and development pipeline, there is a strong presumption that the FTC will require a divestiture of the product already being manufactured rather than the one in development.  The FTC believes that the risk of failure is dramatically less for a divestiture buyer if it is acquiring a product that is already on the market as opposed to acquiring a product under development, which is subject to risks that it might not obtain approval to manufacture the newly competitive product.  The new policy on complex pipeline pharmaceutical products makes sense as it should improve the success rate of divestiture remedies. The goal is to minimize the potential that a remedy fails. Given the high failure rate for pipeline divestitures, the FTC’s requirement of divesting the manufactured product shifts the risk of failure to the merging parties. Indeed, why should consumers take all the risk when crafting merger remedies?  While Hoffman’s speech focused on inhalants and injectables as products that are complex to manufacture, other products that are difficult and complex to manufacture could be added to the FTC’s list. Moreover, these same principles could be applied in other situations where merging parties may be forced to divest actual products instead of pipeline assets.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Background

On October 13, 2014, Steris, headquartered in Mentor, Ohio, announced its intention to acquire Synergy, headquartered in the United Kingdom.  On January 9, 2015, the parties received request for additional information and documentary material (“second requests”).  On April 30, 2015, the parties announced that they certified compliance and entered into a timing agreement where they agreed to close the combination before June 2, 2015, unless the FTC closes the investigation before June 2nd.

On May 29, 2015, the companies issued a press release stating that they had been informed about the FTC’s intention to file a lawsuit to block the deal and they “welcome a full judicial review of the competitive effects of the combination”.   The parties “continue to believe that the combination is precompetitive”.  Walt Rosebrough, President and CEO of Steris further stated that “we have worked diligently to address the FTC’s concerns and to avoid litigation, but we will now focus our efforts on prevailing in court.”  The statement further indicates that the parties intend to extend the long-stop date for completion of the combination to December 31, 2015 so that they can defend against the FTC’s action.

All five commissioners voted in favor of issuing an administrative complaint and to authorize the staff to seek a temporary restraining order and preliminary injunction in federal district court.  While the administrative trial is scheduled to begin on October 28, 2015, the parties and the FTC will meet each other in federal court very shortly.  The FTC will have to convince a federal judge that a temporary restraining order and preliminary injunction is warranted under these set of facts and anticompetitive theory of the case.

FTC’s Case 

According to the FTC’s press release, Steris and Synergy both provide contract sterilization services for companies that need to ensure their products are free of unwanted microorganisms before they reach customers. Implanted medical devices and human tissue products, for example, must meet stringent requirements for sterilization.  For most companies, in-house sterilization is not a viable alternative.  Instead, these customers bring their products to sterilization service facilities on a contract basis, typically within 500 miles of the companies’ manufacturing or distribution facilities to minimize shipping costs.  Therefore, the geographic markets are local not national.

The FTC further stated that “today, gamma radiation, generated by the radioactive isotope Cobalt 60, is considered the only feasible method of sterilizing large volumes of dense and heterogeneously packaged products.”  The FTC openly acknowledges that Steris and one other company, Sterigenics, are the only two companies that provide contract gamma sterilization services in the United States.  Publicly available information suggests that Steris and Synergenics are the two largest players in the United States.

Steris and Synergy maintain that the combination is procompetitive as it merges complementary assets and geographic locations.  Indeed, Synergy does not provide contract gamma sterilization services in the United States so there is no actual overlap between the two firms.

The FTC’s concern, however, is not about any actual overlap in the United States.  Rather, the FTC’s concern relates to Synergy’s entry and expansion plans.  Synergy is a global company with plans to expand in the United States.  According to the FTC, at the time the proposed merger was announced, Synergy was implementing a strategy to open new plants that would provide contract x-ray sterilization services.  The FTC alleges that contract x-ray sterilization services, which currently are not available in the United States, would provide a competitive alternative to gamma radiation.

The FTC’s allegation is that the Steris/Synergy combination would eliminate likely future competition between Steris’s gamma sterilization facilities and Synergy’s planned x-ray sterilization facilities in the United States.

Lessons Learned

While this matter is far from over given that Steris and Synergy will fight the FTC’s challenge in federal court, there are a number of lessons learned from the FTC’s challenge of Steris’ acquisition of Synergy.  First, corporate and antitrust counsel of companies contemplating a merger must be aware that the FTC not only evaluates actual product and service overlaps when conducting a competition analysis, but the FTC will also examine the companies’ future plans.  Second, antitrust counsel must consider and assess as part of its competition analysis, potential anticompetitive effects related to the loss of future competition.  Third, the FTC will examine industry structure and internal strategic company documents that discuss current and future entry and expansion plans to determine anticompetitive effects.  Fourth, it may be difficult to craft a remedy to resolve future competition concerns.  Indeed, future competition concerns present unique challenges that are more complex than simply divesting existing business and product lines or facilities to a buyer because the FTC needs assurances that the buyer has the same wherewithal and incentive to succeed.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Background

On September 24, 2013, AMAT and TEL announced a definitive agreement to merge via an all-stock combination, which valued the new combined company at approximately $29 billion.  The companies claimed that securing regulatory clearances should not be a problem because their product offerings were highly complementary with few overlaps.  Indeed, AMAT was strong in markets where Tokyo Electron was not and vice versa.  In areas, where they directly competed, the combined shares were low.  Nevertheless, the transaction would have combined AMAT, the largest semiconductor equipment supplier in the world, with TEL, the third largest equipment supplier.

It was widely known that AMAT’s scale and resources gave AMAT advantages in competing with smaller chip equipment firms, in areas ranging from research and development (“R&D”) to marketing as well as service and support.  As the standard in the chip equipment space, AMAT has a massive installed base of tools and engineers in nearly every chip-manufacturing facility in the world.  AMAT developed close relationships with major chipmakers.  AMAT has scale and resources that are unmatched and invests heavily in R&D.

Yet, AMAT/TEL believed they would be able to obtain regulatory approvals because they were relying on the outcome of past merger reviews.  Indeed, the DOJ previously analyzed consolidated and highly concentrated semiconductor markets, including AMAT’s acquisition of Varian in 2011; ASML’s acquisition of Cymer in 2013, and Advantest’s acquisition of Verigy in 2011.  In each of these situations the mergers combined complementary offerings where the actual or pipeline products were not directly substitutable.  In AMAT/Varian, the DOJ focused on R&D and innovation concerns.  In ASML/Cymer, the DOJ focused on vertical concerns.  In Advantest/Verigy, both companies were in the business of supplying semiconductor companies with semiconductor components and automated test systems.  The transaction left only one other significant player in the market.  While the DOJ demonstrated an interest in each of these highly concentrated markets by issuing second requests and conducting thorough merger investigations, the DOJ allowed these transactions to close without requiring any conditions.

Moreover, traditional antitrust analysis is generally concerned about the merged firm’s ability to raise prices, reduce output, or exclude competitors.  The antitrust agencies are normally focused on whether the combination of two competitors will substantially lessen competition such that the combined firm can illegally raise prices or exclude rivals.  But in this merger, the firms were not direct competitors in any of each other’s core products.  There was very little direct overlap and where there was, the market shares were low, so no head-to-head history of price competition.  Besides the argument that the two firms do not directly complete with regards to price, the merging firms believed that large sophisticated customers such as Intel and Samsung have the ability to sponsor entry and control pricing.  Therefore, based on past precedent and traditional merger analysis, AMAT and TEL were under the impression that merging two firms with complementary offerings even in a highly concentrated technology industry would be approved.

The DOJ, however, took a tough stance against AMAT’s proposed acquisition of TEL because they were two of a very small number of R&D leaders in their industry.  Given the DOJ’s position, AMAT and TEL determined that there was no “realistic prospect for completion of the merger”.  AMAT offered a divestiture package of assets along with a proposed buyer, but the Antitrust Division was not satisfied.  Indeed, Renata Hesse, the Acting Assistant Attorney General explained that AMAT’s “proposed remedy would not have replaced the competition eliminated by the merger, particularly with respect to the development of equipment for next-generation semiconductors.”  Ms. Hesse further stated “the proposed merger of Applied Materials and Tokyo Electron would have combined the two largest competitors with the necessary know-how, resources and ability to develop and supply high-volume non-lithography semiconductor manufacturing equipment.”  Clearly, the DOJ was concerned not about the reduction of competition for any actual product but about the loss of future head to head R&D competition.

DOJ’s Focus on Future Competition is Not New

The antitrust agencies have always been concerned about future competition concerns in merger reviews.  Indeed, the 2010 FTC/DOJ Horizontal Merger Guidelines (“Merger Guidelines”) discuss the importance of evaluating effects to innovation in merger reviews.  The Merger Guidelines state that enhanced market power can be “manifested in non-price terms and conditions that adversely affect customers, including reduced product quality, reduced product variety, reduced service, or diminished innovation.”  Moreover, under the Merger Guidelines the Antitrust Division is to “consider whether a merger will diminish innovation competition by combining two of a very small number of firms with the strongest capabilities to successfully innovate in a specific direction.”

Lessons Learned

There are a number of lessons learned from the DOJ’s recent stance against AMAT that corporate and antitrust counsel of companies contemplating a merger of firms involved in R&D competition should consider going forward.

First, when the Antitrust Division evaluates the competitive effects of a merger, it is not simply focused on actual product or service overlaps in highly concentrated markets.  The Antitrust Division does not need evidence of price effects or a long history of price competition to challenge a merger.

Second, the Antitrust Division will examine a combination for its potential impact on innovation especially in an industry where a small number of firms are driving R&D efforts to develop new products or solutions.  Therefore, when two innovative firms are merging, antitrust counsel must consider and assess as part of its competition analysis, potential anticompetitive effects related to the loss of future competition.  The analysis is difficult because innovation effects are more difficult to quantify than price effects.

Third, antitrust and corporate counsel must be prepared for a long investigation if the combination raises innovation concerns.  The AMAT investigation took 18 months.  The Antitrust Division will examine other evidence such as industry structure, internal company documents, history of innovation, and strategic documents discussing current and future R&D plans to determine anticompetitive effects.  Therefore, when evaluating the antitrust concerns of a combination of innovative firms, antitrust counsel must be ready to explain not only how the firms do not compete on actual products but also be prepared to explain how their current and future R&D plans are complementary and not competitive with each other.

Fourth, it may be difficult to craft a remedy to resolve innovation concerns as they present unique challenges that are more complex than simply divesting existing business and product lines.  The Antitrust Division will intensely scrutinize upfront buyers.  Not only must the buyer obtain existing business lines, products, and all of the assets necessary to transfer the technical know how to allow the new entrant to step into the place of the lost innovation, but the buyer must also be able to demonstrate that it has the incentive and the wherewithal to be successful in future R&D efforts.

Fifth, the Antitrust Division is serious about taking action against mega-mergers in highly concentrated industries.  While the Antitrust Division may have analyzed previous mergers within a certain industry in a particular way, the antitrust agencies are not obligated to use the same analysis in the next transaction within the same industry.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com