Merger Remedies Study
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THE LATEST: Divestitures of Complex Pipeline Pharmaceutical Products off the Table at the FTC

WHAT HAPPENED:
  • Bruce Hoffman, acting director of the Bureau of Competition at the Federal Trade Commission (FTC), announced that the FTC will no longer accept divestitures of inhalant and injectable pipeline drugs in pharmaceutical mergers.
  • Hoffman, speaking at the Global Competition Review Seventh Annual Antitrust Law Leaders Forum on February 2, 2018, explained that divestitures of pipeline products were not working well for complex pharmaceuticals, such as inhalants and injectables.
  • Instead, in situations in which the parties to the transaction own both a successfully manufactured inhalant or injectable and an overlapping pipeline inhalant or injectable in a concentrated market, the FTC will seek a divestiture of the manufactured product.
  • An internal study at the FTC revealed that the rate of failure was “startlingly high” for divestitures of certain complex pipeline pharmaceutical products. Hoffman blamed the high failure rate on the difficulty in actually getting the complex pipeline pharmaceutical to market by a divestiture buyer. He explained that a divestiture buyer, for example, could struggle to reliably manufacture an inhalant or injectable product, frustrating its ability to ultimately bring the product to market.

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THE LATEST: Integra Forced to Divest Neurosurgical Tools to Gain FTC Clearance

WHAT HAPPENED
  • On February 14, 2017, Integra agreed to purchase Johnson & Johnson’s Codman neurosurgery business (excluding Codman’s neurovascular and drug deliver businesses) for $1.045 billion.
  • Seven months later, on September 25, 2017, the Federal Trade Commission (FTC) agreed to clear the transaction subject to the parties divesting five neurosurgical tools and associated assets including the relevant intellectual property (IP), manufacturing technology and know-how, and research & development (R&D) information related to the five tools. Additionally the buyer of the divested assets can freely negotiate to hire any employees that worked on sales, marketing, manufacturing, or R&D for the divestiture products. The parties must also supply Natus Medical Incorporated (Natus) with cranial access kits often sold with the divestiture assets until Natus can start sourcing them independently.
  • The FTC required that the parties divest the following medical devices:
    • Intracranial pressure monitoring systems, which measure pressure inside the skull. The FTC determined that Integra (68 percent) and Codman (26 percent) combined market share in the United States would be 94 percent and that only fringe competitors with limited presence would have remained.
    • Cerebrospinal fluid collections systems, which drain excess cerebrospinal fluid and monitor pressures within the fluid. The FTC found that Integra (57 percent) and Codman (14 percent) would combine for 71 percent market share in the United States and would have reduced the number of significant competitors from three to two.
    • Non-antimicrobial external ventricular drainage catheters, which funnel excess cerebrospinal fluid form the brain to cerebrospinal fluid collection systems to relieve intracranial pressure. Here, the FTC said Integra (29 percent) and Codman (17 percent) are the number two and three competitors accounting for 46 percent of the market in the United States and would have reduced the number of significant competitors from three to two.
    • Fixed pressure valve shunts, which are used to treat excessive accumulation of cerebrospinal fluid. The FTC found that Integra (23 percent) and Codman (15 percent) were the number two and three competitors would control 38 percent of the US market and, again, that the number of competitors would have been reduced from three to two.
    • Dural grafts, which are used to repair or replace the membrane that surrounds the brain and spinal cord and keep cerebrospinal fluid in place. The FTC determined that the merger would have reduced the number of significant competitors from four to three with Integra (66 percent) and Codman (nine percent) combining for 75 percent market share.
  • Under the terms of the settlement, the parties must divest within 10 days of closing to Natus, which is a global health care company with an existing neurology business including systems that are complementary to the divestiture assets.

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THE LATEST: Learnings from Merger Remedies Study Underscores FTC’s Heightened Focus on Remedy Packages and Proposed Buyers

WHAT HAPPENED:
  • In early February, the FTC released its Merger Remedies Study (the Study), which focused on transactions from 2006-2012 in which the FTC found a competitive problem that did not require a block outright, and allowed the transaction to gain clearance so long as the merging parties agreed to what the FTC determined were appropriate remedies to restore competition to the impacted market.
  • Via case study method, questionnaires and data, the FTC analyzed the outcomes of 89 remedial orders and self-critiqued its success in restoring competition and used the learnings to refine its internal best practices.
  • The report serves as an update to practitioners for understanding what is required to develop an effective remedy package, what qualities the FTC seeks in a buyer of the remedy package and how the FTC will seek to implement the remedy.
WHAT THIS MEANS:
  • On balance, the Study supported the FTC’s current practices.
  • Remedy packages consisting of an ongoing business were all successful—which confirms FTC’s long-held conviction that these kinds of divestitures are highly likely to succeed in restoring competition.
  • There will be heightened focus when the remedy package consists of selected assets (that is, not an ongoing business) and a heightened focus on the financing/funding of the divestiture buyer.
  • In these situations, merging parties should expect a fact intensive inquiry by the FTC, the potential for the FTC to seek larger asset packages that include products outside of the competitive problem area (if needed to make the proposed buyer competitive) and increased information sharing with the proposed buyer (and future competitor) to transition the business.
  • FTC has a strong preference for proposed buyers with experience and strong financial commitment to the business. These kinds of proposed buyers are more effective at securing the right personnel, understanding what’s needed to effectively compete (e.g., assets, supply agreements, production processes) and implementing the transition.



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