Antitrust Lawyer Blog Commentary on Current Developments

FTC Challenges Terms of Watson Pharmaceuticals’ Acquisition of Andrx

On October 31, the Federal Trade Commission announced its decision to challenge the terms of Watson Pharmaceuticals, Inc.’s proposed $1.9 billion acquisition of Andrx Corporation, a deal that would have led to competitive problems in the markets for 13 generic drug products. In allowing the deal to proceed while addressing these competitive problems, the Commission has ensured the maintenance of competition that otherwise would have been lost through the acquisition, and protected consumers from likely higher prices for the drugs.
Under the consent order settling the FTC complaint, Watson and Andrx will: 1) end Watson’s marketing agreement with Interpham Holdings, Inc. (Interpham) and return all rights and agreements necessary to market generic hydrocodone bitartate/ibuprofen tablets back to Interpharm; 2) assign and divest the Andrx right necessary to develop, make, and market generic extended release glipizide (glipizide ER) tablets to Actavis Elizabeth, LLC, a subsidiary of The Actavis Group hf. (Actavis); and 3) sell Andrx’s rights and assets needed to develop and market eleven generic oral contraceptive products to Teva Pharmaceutical Industries, Inc. (Teva).

Hydrocodone bitartrate/ibuprofen is a combination of an opiate-based analgesic agent and a nonsteroidal anti-inflammatory drug (NSAID) ibuprofen. It is a generic version of Abbott Laboratories Inc.’s Vicoprofen and is used for the short-term management of acute pain. Only three companies compete in the generic market for the drug: Watson, Andrx, and Teva. Teva is the market leader, with about 62 percent of sales. After the acquisition as proposed, Watson’s market share would increase from 12 percent to 39 percent, with Teva its only remaining competitor.

Glipizide ER is the generic version of Pfizer’s Glucotrol XL. It corrects the effects of type 2 diabetes by stimulating the release of insulin in the pancreas, thereby reducing sugar levels in the body. Only two firms, Andrx and Greenstone Ltd. (Greenstone) compete with Watson, the leading supplier of the generic version of the drug in the United States. Andrx and Greenstone have market shares of about 35 and 20 percent, respectively. After the acquisition as proposed, Watson’s market share would increase to 80 percent, with Greenstone the only remaining competitor.

Oral contraceptives are taken by mouth to prevent ovulation and pregnancy. They are the most commonly used type of reversible birth control, and are taken by 82 percent of women in the United States at some time during their reproductive years. Such contraceptives contain various formulations of synthetic estrogen and progestin, which are chemical equivalents of natural female hormones. The 11 drugs addressed by the consent order are the following: the generic formulations of Johnson & Johnson’s Ortho-Cyclen and Ortho Tri-Cyclen – among the best-selling oral contraceptives – and the generic equivalents of Ortho-cept, Triphasil 28, Alesse, Ortho-Novum 1/35, Ortho-Novum 7/7/7, Loestrin FE (1 mg/0.020 mg), Loestrin FE (1.5 mg/.030 mg), Mircette, and Ovcon 35.

In each of these markets, the complaint states that the transaction as proposed would reduce the number of competing generic drug suppliers. The number of generic suppliers has a direct and substantial effect on generic pricing, as each new generic supplier can have a competitive impact on the market. As there are multiple generic equivalents for each of the relevant drugs, the branded versions do not significantly constrain the price of the generic versions.

The proposed acquisition would eliminate direct and substantial competition between Watson and Andrx in the relevant markets, increasing the likelihood that Watson will be able to exercise unilateral market power, increasing the possibility of coordination among competitors, as well as the possibility that consumers will be faced with higher prices for these drugs. Finally, the complaint states that entry into these markets is unlikely to be timely or sufficient to offset the alleged anticompetitive impacts of the acquisition.

The FTC’s consent order is designed to remedy the competitive harm resulting from Watson’s proposed acquisition of Andrx. Under its terms, the companies must divest certain rights and assets related to the overlapping products to an FTC-approved acquirer no later than 10 days after the acquisition. Specifically, the order requires that: 1) Watson end its marketing agreement with Interpham, returning all of its rights to generic hydrocodone bitartrate/ibuprofen back to Interpham; 2) Andrx divest its rights and assets to generic glipizide ER to Actavis, including assigning its supply agreement with Pfizer; and 3) Andrx divest its rights and assets related to the 11 generic oral contraceptives to Teva and supply Teva with the products for five years to provide Teva with the time needed to gain FDA approvals to manufacture and sell the drugs independently.

If the Commission determines that either Interpharm or Actavis is not an acceptable purchaser, or that the manner of the divestitures to Interpharm, Actavis, or Teva is not acceptable, the order would require the parties to unwind the relevant sale within six months of its approval and find another Commission-approved buyer. If they cannot do so within six months, the FTC can appoint a trustee to sell the assets. The order also contains provisions to ensure the divestitures are successful, including the requirement that Watson and Andrx provide transitional services to enable the acquiring companies to get all necessary FDA approvals. Finally, the Commission has appointed Francis J. Civille as an interim monitor to oversee the transfer of assets and ensure the companies’ compliance with the order.

The Commission vote to approve the consent order and place a copy on the public record was 4-0, with Commissioner J. Thomas Rosch recused.

Authored by

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