United States: FTC Seeks Divestiture And Disgorgement In Challenge To Consummated Acquisition

On December 16, the Federal Trade Commission filed a complaint in federal district court challenging Ovation Pharmaceutical's completed acquisition of NeoProfen, a drug used to treat patent ductus arteriosus (PDA), a potentially deadly congenital heart defect affecting low birth weight premature infants. The complaint seeks both divestiture and disgorgement. (FTC v. Ovation Pharmaceuticals Inc., No. 08-cv-06379 (D. Minn., 12/16/08)). The same day, the State of Minnesota filed a nearly identical action against Ovation. (Minnesota v. Ovation Pharmaceuticals Inc., No. 08-cv-06381-JRT-FLN (D. Minn., 12/16/08). This challenge highlights the FTC's willingness to review consummated combinations and reach for new remedies, and the concurrence of one commissioner presents a novel theory for challenging mergers.

Both complaints charge that Ovation's January 2006 acquisition of NeoProfen foreclosed competition in the treatment of PDA because, at the time it acquired NeoProfen, Ovation already held the rights to the only other drug used to treat the disorder, Indocin I.V. Ovation had purchased the rights to Indocin from Merck & Co. in August 2005, when NeoProfen still was awaiting FDA approval. According to the FTC's complaint, Ovation anticipated that NeoProfen's eventual approval would reduce sales of Indocin and that this threat prompted Ovation also to acquire NeoProfen from Abbott Laboratories.

The FTC's complaint alleges that, immediately after acquiring NeoProfen, Ovation raised the price of Indocin nearly 1300 percent, from $36 to nearly $500 a vial. Upon launching NeoProfen in July 2006, Ovation set a virtually identical price for that drug. The FTC alleges that the purchasers of NeoProfen (hospitals, individuals, government payors, and other public and private purchasers) are forced to pay Ovation's monopoly price because no other drugs are available to treat PDA. The FTC charges that Ovation's acquisition of NeoProfen "substantially reduced competition in violation of Section 7 of the Clayton Act, and illegally maintained the company's monopoly of drug treatments...in violation of Section 5(a) of the FTC Act." The Commission is seeking an order from the court requiring Ovation both to divest one of the drugs and to disgorge allegedly unlawfully obtained profits from Ovation's sales of Indocin and NeoProfen.

The Commission voted unanimously to approve the complaint. Commissioners Leibowitz and Rosch issued separate concurring statements. Both concurrences assert that the Commission should also have challenged Ovation's earlier acquisition of Indocin from Merck, because that transaction alone enabled Ovation to exercise monopoly power.

Of particular note is Commissioner Rosch's concurrence, which presents a novel theory of antitrust liability. Commissioner Rosch essentially argues that conduct that amounts to "evading a pricing constraint" is enough to incur liability for "tending to create a monopoly." He argues that, when Merck owned Indocin, Merck may have been constrained in its pricing of Indocin by its concern that "the sale of Indocin at a monopoly price would damage [Merck's] reputation and sales of more profitable products." Ovation's purchase of Indocin "had the effect of enabling Ovation to exercise monopoly power in its pricing of Indocin, which Merck could not profitably do prior to the transaction." According to Commissioner Rosch, this amounts to a violation of the Clayton Act because it enabled Ovation to impose a monopoly price for Indocin that could not previously be exercised for this drug (even though that acquisition alone did not result in a reduction in the number of suppliers of PDA treatments). He argues that Ovation's acquisition of Indocin "changed the competitive dynamic of the market and created a situation that allowed competition to be further reduced."

The FTC's suit against Ovation is noteworthy for several reasons.

• First, it reflects the antitrust agencies' increasing willingness to challenge consummated transactions. Just two days after the Ovation action was filed, the Justice Department challenged the completed combination of electronic components (as discussed in our Alert on the Microsemi/Semicoa transaction).
• Second, the value of the NeoProfen transaction fell below the threshold for reporting acquisitions to the federal antitrust agencies, and the FTC's subsequent challenge is an important reminder that even deals exempt from antitrust reporting requirements are not safe from later review and challenge.
• Third, Ovation demonstrates that today's FTC is willing to exercise its statutory powers beyond the boundaries observed in the Bush and Clinton Administrations, seeking disgorgement of "ill gotten gains" obtained from post-acquisition price increases.
• Finally, Commissioner Rosch's concurrence is notable for its broad reading of the scope of Section 7 of the Clayton Act. Despite the absence of competition between Ovation and Merck at the time of the first acquisition, Commissioner Rosch identifies a potential violation from the fact Ovation may not have faced the same constraints on pricing as Merck did. The concurrence raises questions. If this theory were accepted by a majority of the Commission, could other, nonhorizontal acquisitions be open to similar challenge? Might this theory be applied to exclusive licenses granted by nonprofit institutions (like universities) to for-profit companies? And could Commissioner Rosch's reasoning be utilized by merger parties in the reverse situation, such as where a larger pharmaceutical company with a broad portfolio argues it would be motivated to maintain lower prices in the wake of an acquisition?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.