Antitrust Lawyer Blog Commentary on Current Developments

FTC Loses Merger Trial Because Of Market Definition

The Federal Trade Commission (“FTC”) lost its challenge to Ovation Pharmaceutical Inc.’s (“Ovation Pharmaceutical” now Lundbeck Inc.) acquisition of the pediatric heart drugs Indocin and NeoProfen. While the FTC claimed that the combination was a merger to monopoly resulting in anticompetitive price increases, the Federal District Court in Minnesota decided that Lundbeck (formerly “Ovation Pharmaceutical”) did not violate federal or state antitrust laws when it combined Indocin IV and NeoProfen, the only two FDA-approved drugs for treatment of patent ductus arteriosus (“PDA”). The primary reason for Judge Joan N. Erikson’s decision was that she did not believe that the FTC established that the drugs were in the same product market. FTC v. Lundbeck, Inc., No. 08-6379 and Minnesota v. Lundbeck, Inc., No. 08-6381 (D. Minn. August 31, 2010).

Background

Indocin and NeoProfen are pediatric heart drugs used to treat PDA, a potentially fatal heart condition that primarily affects premature babies. Surgery or pharmaceutical drugs are both treatment options for PDA, however, due to the health risks and high costs of surgery, use of drugs is a more favorable treatment.

In 2005, Ovation acquired patent rights to Indocin from Merck & Co., when Indocin was the only FDA-approved drug to treat PDA and it cost approximately $26 per vial. Upon acquiring Indocin from Merck, Ovation raised the price of Indocin to $36 per vial. Shortly after, in January 2006, Ovation acquired the patent rights to NeoProfen from Abbott Laboratories Inc. in a transaction that fell below the then $53.1 million Hart-Scott-Rodino reporting thresholds, thus escaping pre-closing review by the antitrust agencies. NoeProfen was still awaiting FDA’s approval at the time of this transaction. Two days after acquiring rights to NeoProfen, Ovation raised the price of Indocin by about 1300% to $500 per vial. The FDA then approved NeoProfen as a treatment for PDA in April 2006. Ovation launched NeoProfen as its second PDA drug in July 2006, at a price slightly below the price of Indocin, at about $480 per vial.

In December 2008, the FTC and the State of Minnesota filed a complaint against Ovation Pharmaceuticals (now Lundbeck Inc.) at the U.S. District Court for the District of Minnesota, alleging the company with substantially lessening competition and creating monopoly in violation of Section 7 of the Clayton Act, as well as FTC Act Section 5, and willfully maintaining its monopoly power in violation of Sherman Act Section 2. The FTC asked the district court to compel the divestiture of NeoProfen and disgorge all excessive profits of Ovation.

The Court’s Ruling

Judge Erikson dismissed FTC’s action against Lundbeck with prejudice, reasoning that plaintiffs did not satisfy their burden of demonstrating that NeoProfen and Indocin are in the same product market. To reach this conclusion, Judge Erikson accepted defendants’ argument that in this case, neonatologists and not hospitals are the consumers and according to the testimony of most neonatologists, who were defendant’s witnesses, there is low cross-elasticity of demand between the two drugs.

This conclusion is incorrect for several reasons:

First, Judge Erikson did not consider the realities of our health care system, in which the consumer is a composite of groups of decision makers. In any hospital, a committee including practitioners, administrators, and nurses decides what drugs should be placed on the hospital’s formulary, which is a continually updated list of medications from which doctors of that specific hospital order the drugs. In updating a formulary, doctors’ opinions are heavily weighed, but are not the only factor. Hospitals may try to control the price within their formulary. When two or more sellers of clinically substitutable drugs compete for inclusion in a formulary, a hospital may use its bargaining power to negotiate the price. In this case, the FTC and the State of Minnesota argued that hospitals are the customers of Indocin and NeoProfen and if these two drugs belonged to two different suppliers who could compete and offer lower prices, given the similar functionality of the drugs, hospitals would have chosen the less expensive option. However, since Lundbeck was the only supplier of these drugs, it could keep the prices artificially high without allowing any competition in the market. Lundbeck, on the other hand, argued that neonatologists—not the hospitals that actually purchase the drugs—are the relevant consumers of Indocin and NeoProfen because they ultimately determine which drug is used to treat PDA. Neonatologists testified that their selection between Indocin or NeoProfen is contingent on the presence or lack of long-term clinical studies or safety perceptions, but not on price differences. Judge Erikson credited Lundbeck’s argument and concluded that because there is no cross-elasticity of demand between the two drugs, then they’re not competitive and no anticompetitive effect can exist by joining two products that are not competing in the same market.

The problem with accepting this argument is that it considers doctors as the sole consumers of the drug and considers price as the sole competing factor. If such an assumption is valid, no antitrust suit could be brought against any pharmaceutical company, when a company acquires an exclusive right to a directly competing drug and increases the price. If, as the court found, hospitals do not exert veto power of the doctors’ recommendations, then cross-elasticity of demand is going to be low regardless of whether the products are in the same market, because even if they compete, they don’t compete on price. It appears that the Judge missed the point that in the pharmaceutical field price is not the only factor rather how a drug is promoted is a primary way of competing. Here, the evidence does not exist because competition was thwarted before it started so two drugs that would have been promoted against each other never occurred.

Second, of equal significance in reaching this conclusion is Judge Erikson’s picking and choosing of the facts. She ignores the fact that neonatologists accounted for about 45% of the Lundbeck’s targeted customers for marketing its products. Hospital formularies, clinical pharmacists, and neonatal nurses accounted for the other 55%. But, Judge Erikson decided to only choose neonatologists as the customers. Even from testimony of neonatologists, Judge Erikson only based her conclusion on the testimony that directly supported Lundbeck’s position. In fact, there was testimony of neonatologists that argued the opposite. For instance, Dr. Jeffrey Gerdes testified that despite the fact that NeoProfen is a safer drug, since both drugs are compatible (including the price), he still prescribes Indocin, because he has worked with Indocin for a longer period. This testimony was contrary to other neonatologists who had claimed drugs’ safety as the main reason for prescribing it. Judge Erikson found Dr. Gerdes’ opinion unpersuasive, citing Cf. Clastetter v. Novartis Pharm. Corp., 252 F.3d 986, 990 (8th Cir. 2001), “[i]ndeed, we regard the experts’ claims with some suspicion since one leading treatise on medical toxicology concludes that bromocriptine has no vasoconstrictive properties.” In another instance, Dr. Nathaniel Payne testified that the Minnesota Neonatal Physicians group decided not to use NeoProfen because, “we didn’t see any real advantage or differences [between the two drugs] … and we felt it is in everybody’s best interest … to stay with what we were familiar with.” After admitting that he didn’t know enough about NeoProfen, Dr. Payne continued, “I think if the drugs appeared to be the same, if they had similar effect and one was ten times more expensive than the other, I’d probably [be] interested in thinking about it.” Judge Erikson only mentions this part of the testimony in the final judgment without giving it any weight in her conclusion.

Third, it seems that both the Court and Lundbeck focused on the FTC and Minnesota’s unhappiness with the high price of the drugs. The first footnote of Judge Erikson’s opinion reads, “[t]he FTC and Minnesota began their closing argument by disclaiming the notion that these cases were “about unhappiness about the high price of Indocin.”” There is nothing wrong with the FTC being unhappy about the high price of a product and bringing a suit about it, when there is strong evidence that such a high price is the result of violating the antitrust laws. Lundbeck’s lead counsel claims that “[t]he FTC was upset about the fact that the company raised prices, but [the agency] didn’t really engage in economic analysis to see if this was in any way wrongful … Price alone is not really a barometer of antitrust conduct.” Again, this claim misrepresents the FTC’s arguments that offered overwhelming evidence to show the existence of competition between Indocin and NeoProfen and Lundbeck’s anticompetitive practices in marketing these products. The Court’s ruling itself, acknowledges the following:

– Finding 14: FDA has approved both Indocin and NeoProfen for treatment of PDA

– Finding 21: published clinical studies indicate that both Indocin and NeoProfen are “equally efficacious” in PDA treatment

– Finding 78: Lundbeck had two different strategies for pricing and marketing of Indocin, based on whether or not Lundbeck could acquire NeoProfen. Lundbeck sought to position NeoProfen as the first-line pharmaceutical treatment for PDA and instructed its sales representatives to focus on Indocin’s weaknesses relative to NeoProfen’s anticipated benefits. NeoProfen was priced competitively with Indocin

– Finding 79: Lundbeck’s its own internal document states, “[w]hen approved, NeoProfen will offer meaningful safety advantages when compared to Indocin. We estimate that NeoProfen will capture a significant portion of the pharmaceutical PDA market at the expense of Indocin… Acquiring NeoProfen will allow us to cannibalize our Indocin sales in a controlled manner, retain sales for both products and continue to grow total company sales in the PDA market with an exclusivity protected product.”

– Finding 80: another Lundbeck’s internal document states, “[w]e estimate that NeoProfen will capture a significant portion of the pharmacotherapy PDA market at the expense of Indocin.”

– Finding 94: many doctors switched from Indocin to NeoProfen, once it became available, to treat PDA in part because Lundbeck took steps to convert accounts from Indocin (which faced generic entry) to NeoProfen.

– Finding 58: Lundbeck knew that it was facing competition from NeoProfen. That’s why despite the company’s willingness to increase Indocin’s price in 2004, it waited until 2006 or shortly after acquiring the rights to NeoProfen, its only potential competitor, before it hiked the prices to extraordinary levels.

Despite this evidence, Judge Erikson decided to stick to Lundbeck’s expert economic witness who testified that the cross-price elasticity between NeoProfen and Indocin is very low. Judge Erikson, furthermore, concluded that regardless of all of the above mentioned evidence, the FTC has not provided any cross-elasticity analysis, therefore, NeoProfen and Indocin are not in the same product market. Interestingly, Judge Erikson never provides any reasoning as to what persuades her about one argument versus the other. She only chooses testimony and arguments that support Lundbeck’s position, even if that requires her to ignore some of Lundbeck’s own witnesses’ testimony.

The FTC has not yet announced whether it will appeal the decision. The deadline for the appeal is November 1, 2010. We believe that the FTC should appeal this decision, otherwise, it will set a very bad precedent. It suggests to pharmaceutical companies an anticompetitive plan to acquire a competing pipeline drug with the purpose of raising prices in the future can be successful even if the FTC finds out about it later and takes them to court. First, the firm would need to acquire potentially competing pipeline drugs without HSR review to avoid an initial antitrust investigation. Second, after gaining control of the only other potentially competing product, the pharmaceutical company can raise price. Third, pharmaceutical companies can then rely on the fact that no evidence of competition exists because they can use doctors as their main customers to show low cost-elasticity of demand. This seems absurd but Judge Erikson bought it and some other judge may as well.

FTC’s Dilemma

In the 1992 Horizontal Merger Guidelines, the FTC itself states that “market definition” is the first step in an analytical process to evaluate the competitive effects of mergers. After a number of defeats based on their perceived inability to properly define the relevant product markets, the FTC and the DOJ realized that judges have taken too restrictive of a view of the 1992 Guidelines and have used the Guidelines against the antitrust agencies. In an effort to broaden that view, on August 19, 2010, FTC and DOJ released new Horizontal Merger Guidelines that has a more flexible approach, does not require market definition, and focuses on actual competitive effects. Here, the FTC believed that significant price increases after Ovation bought the first drug from Merck and exorbitant price increases after acquiring the rights to the second drug combined with evidence in the form of company documents that explain how Ovation would price and position the drugs if it only acquired one or both of the competing drugs would be sufficient to establish an antitrust violation. Despite post-merger effects, the FTC lost. The Lundbeck decision was announced shortly after the release of the new Guidelines but after they were released for public comment. The decision suggests that the agencies may need to wait longer until the new Guidelines gain acceptance by the courts. The decision reinforces that courts will continue to focus on product market definition, and that while the new Guidelines may allow the antitrust agencies to focus less on market definition and more on competitive effects, the antitrust agencies will face substantial obstacles in federal courts if they ignore market definition.

Parva Fattahi
(202) 589-1834
pfattahi@dbmlawgroup.com


Andre Barlow

(202) 589-1834
abarlow@dbmlawgroup.com