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The Federal Trade Commission has filed a complaint against Ovation Pharmaceuticals, Inc. in the United States District Court for the District of Minnesota, challenging Ovation’s 2006 acquisition of the drug NeoProfen from Abbott Laboratories.

According to the complaint, filed in December 2008, at the time of the acquisition NeoProfen was awaiting Food and Drug Administration approval as a treatment for a potentially life-threatening congenital heart defect known as patent ductus arteriosus (PDA), an orphan disease for which some 30,000 infants are treated annually in the US. Ovation already owned the rights to Indocin I.V., the only PDA drug on the market at the time. The complaint alleges that Ovation’s acquisition of NeoProfen, while not reportable at the time under the HSR Act, unlawfully eliminated Indocin’s only viable competitor, enabling Ovation to raise the price of Indocin by approximately 1,300 percent, from $36 to $500 per vial. Approved by the FTC by a vote of 4-0, the complaint seeks divestiture of NeoProfen and disgorgement of Ovation’s profits.

Although still in the initial stages, the case appears significant in several ways. First, it is a reminder that the fact that an acquisition is not reportable under the HSR Act does not mean that it cannot be challenged under the antitrust laws. Second, it is a warning against aggressive pricing practices in the immediate aftermath of an acquisition. Third, it is a reminder that the acquisition of a potential competitor, as opposed to a current participant in the market, can raise antitrust concerns. Fourth, it is an example of the FTC’s renewed efforts to extend the reach of the FTC Act to cover “unfair methods of competition” that may be beyond the reach of the federal antitrust laws.

Perhaps foreshadowing future FTC enforcement efforts, Commissioners Jon Leibowitz and J. Thomas Rosch filed separate concurring statements in support of the complaint, arguing that the FTC should also have challenged Ovation’s earlier acquisition of Indocin from Merck & Co., Inc. and urging more frequent use of disgorgement of profits as an antitrust remedy.

Background

PDA is a disorder affecting primarily very-low-birth-weight premature babies. It prevents a blood vessel connecting the aorta and the pulmonary artery from closing soon after birth and can be fatal if not treated. According to the FTC’s complaint, the risk of serious complications from surgical intervention makes drug therapy the preferred treatment for PDA, and approximately 30,000 babies diagnosed with PDA in the US are treated annually with drugs. Indocin was approved by the FDA as a PDA treatment in 1985 and remained the only FDA-approved PDA drug on the market until 2006, when NeoProfen was approved. There are no unexpired patents on Indocin.

Ovation acquired the rights to Indocin from Merck & Co, Inc. in August 2005, when Abbott Laboratories’ NeoProfen was still awaiting FDA approval. According to the FTC’s complaint, Ovation expected that NeoProfen would be approved soon and would take a substantial portion of sales from Indocin. Ovation allegedly acquired NeoProfen from Abbott in January 2006 in order to eliminate that competitive threat. The acquisition was not reviewed by federal antitrust agencies prior to closing because its value fell below the reportability thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”). Immediately upon consummating the acquisition, Ovation raised the price of Indocin from $36 to $500 per vial. In July 2006, after receiving FDA approval, Ovation launched NeoProfen at a price of $483 per vial.

The complaint alleges a relevant product market consisting of “drugs approved by the FDA to treat PDA,” and that Ovation held 100 percent of the US market at all relevant times. The complaint also alleges the existence of significant barriers to entry, in that developing a new drug and obtaining FDA approval are costly and time-consuming, and the relatively small size and fragile nature of the patient population in this case make it unlikely that physicians will be convinced to switch to a new product in sufficient numbers to justify the up-front investment. The complaint also notes that no competing PDA drug has entered the market during the more-than-two-year period since Ovation’s acquisition of NeoProfen. Although one company (Bedford Laboratories, Inc.) allegedly obtained FDA approval for a generic version of Indocin in July 2008, it has not yet entered the market.

While the case is still in the initial stages, it appears significant in a number of ways, discussed below.

The Interplay of HSR Act Reportability and Substantive Antitrust Analysis

The Ovation case highlights the need for parties to conduct an antitrust analysis of a contemplated transaction regardless of its reportability under the HSR Act. While the HSR Act is intended to afford the federal antitrust agencies an opportunity to review certain transactions prior to closing, the fact that a transaction is not reportable under the HSR Act does not immunize it from antitrust scrutiny. The HSR Act simply prevents a transaction meeting the relevant thresholds from closing unless certain notice and waiting period requirements have been satisfied.

The legality of a transaction under the antitrust laws, however, is entirely independent from its reportability under the HSR Act. Indeed, even compliance with the HSR Act’s notice and waiting period requirements does not affect the antitrust agencies’ ability to challenge a transaction at any time before or after closing. The filing of the Ovation complaint more than two years after the subject transaction was consummated is a reminder that parties are well advised to analyze the permissibility of a contemplated transaction under the antitrust laws whether or not the transaction is reportable under the HSR Act.

Post-Closing Pricing Behavior Can Lead to Agency Challenge

The post-closing conduct of the acquiror in a corporate transaction can affect the agencies’ focus on transactions that did not receive regulatory attention prior to closing. A pre-closing challenge may fail to occur either because the transaction is not reportable under the HSR Act or because its potential anticompetitive effects are not apparent to the agencies during the HSR Act review period. As indicated above, however, the agencies’ ability to challenge a transaction after closing is unaffected by the HSR process. Indeed, a federal antitrust agency generally may challenge a transaction post-closing even if the transaction was reviewed substantively during the HSR waiting period and was allowed to close without conditions.

In this case, the public record does not disclose the specific factors that brought Ovation’s acquisition of NeoProfen to the FTC’s attention after consummation. Ovation’s alleged 1,300 percent price increase immediately after closing, however, likely played a significant role, either by attracting the agency’s attention directly, or by prompting other market participants (such as doctors, hospitals, or other customers) to bring the matter to the agency’s attention.

The pricing conduct may also play a significant role as evidence of anticompetitive effects in the FTC’s substantive case (although the weight to be accorded to post-closing-effects evidence in merger challenges is up to debate under the case law). Accordingly, parties to corporate transactions should take antitrust considerations into account when elaborating post-closing pricing projections for a particular transaction and when implementing pricing decisions after a transaction has closed.

Will a Merger Suppress Potential Competition?

Frequently, merger analysis tends to focus on the definition of the relevant product and geographic markets and the analysis of the number and significance of current participants in those markets. As a legal matter, however, it is clear that potential, as opposed to current, competition is also relevant. The 1984 Department of Justice Merger Guidelines caution that the merger of a potential entrant with a firm already in the market may affect competition adversely either by harming “perceived potential competition”—eliminating a significant present competitive threat that constrains the behavior of current competitors—or by harming “actual potential competition”—eliminating the possibility of a more procompetitive entry by the potential entrant than would be achieved through the contemplated merger. While the 1984 Merger Guidelines were superseded by the federal agencies’ 1992 Horizontal Merger Guidelines with respect to mergers between current competitors, the 1984 Guidelines’ teachings concerning mergers between potential competitors remain valid. The Ovation case reinforces the notion that, in highly concentrated markets with few other viable potential entrants, merging parties are well advised to consider harm to potential competition as part of their antitrust analysis.

The Scope of “Unfair Competition” under the FTC Act

Much has been written about the distinction between “unfair methods of competition” under Section 5 of the Federal Trade Commission Act and unlawful conduct under the federal antitrust laws—the Sherman and Clayton Acts. While courts have generally recognized that conduct that does not violate the latter may amount to unfair competition under Section 5, judicial decisions imposing liability based solely upon such circumstances are few. Even Federal Trade Commission actions in the competition field often seek relief under both Section 5—which is jurisdictional for all FTC actions—and one or more provisions of federal antitrust law.

In this case, the FTC advances two causes of action. First, the FTC claims that Ovation’s acquisition of NeoProfen had the effect of substantially lessening competition and creating or maintaining a monopoly in violation of both Section 7 of the Clayton Act and Section 5 of the FTC Act. Second, the FTC claims that Ovation willfully maintained its monopoly by engaging in practices that “are anticompetitive in nature and tendency and constitute an unfair method of competition.” As a matter of federal antitrust law, unlawful monopoly maintenance of the kind alleged in the FTC’s second claim is typically challenged under Section 2 of the Sherman Act. Indeed, in a challenge to Ovation’s acquisition of NeoProfen filed concurrently with the FTC complaint, the Minnesota Attorney General included a count for violation of Section 2 of the Sherman Act. The FTC’s complaint, however, does not allege a violation of that law. Rather, the FTC alleges monopoly maintenance in violation of Section 5 of the FTC Act only. This may reflect an effort by the FTC to use the arguably more expansive reach of Section 5 to get around the recent trend in federal jurisdprudence narrowing the circumstances under which unilateral conduct by dominant firms may violate Section 2 of the Sherman Act. If the FTC’s strategy takes hold, dominant firms may need to look beyond Section 2 jurisprudence in order to protect themselves from the risk of liability for monopolization offenses.

Concurring Statements by Commissioners Rosch and Leibowitz

Two commissioners, Jon Leibowitz and J. Thomas Rosch, issued separate statements concurring in the FTC’s unanimous decision to challenge Ovation’s acquisition of NeoProfen. Both concurring commissioners added that they would also have challenged Ovation’s original acquisition of Indocin from Merck—even though, at the time, Ovation had no products in the relevant market and was not a customer or supplier of Merck with respect to Indocin, meaning that the transaction did not raise any vertical or horizontal concentration concerns.

According to Commissioner Rosch, the acquisition nevertheless could have been found unlawful because it changed the economic incentives of Indocin’s owner. Merck, a large pharmaceutical company with a broad product portfolio and substantial sales of more profitable products than Indocin, had no incentive to risk potentially difficult public relations problems, and a decline in sales of more profitable drugs, by charging monopoly prices for an orphan drug used to treat premature babies. Because Merck did not charge monopoly prices for Indocin, it also would have lacked the incentive to acquire NeoProfen to protect its monopoly. By contrast, according to Commissioner Rosch, the much smaller Ovation lacked Merck’s reputational concerns, was therefore able to, and did, charge monopoly prices for Indocin, and consequently had the incentive to acquire NeoProfen to protect its monopoly. While Commissioner Rosch cited two 50-year-old cases in support of the proposition that a merger can be unlawful even in the absence of horizontal or vertical concerns, the theory that a shift in marketplace incentives is sufficient to invalidate a merger, if put into practice, would mark a significant departure from recent trends in merger enforcement.

In the other concurrence, Commissioner Leibowitz urged more frequent use of disgorgement of “ill-gotten gains” as an antitrust remedy. In the merger context, when the Hart-Scott-Rodino Act’s notification-and-report process generally affords the agencies an opportunity to challenge mergers before any “ill-gotten gains” have been derived, Commissioner Leibowitz’s support of disgorgement remedies could be read to signal encouragement for the agencies to review more closely transactions that do not meet the Hart-Scott-Rodino regulatory thresholds.