Antitrust Lawyer Blog Commentary on Current Developments

FTC Challenges Terms of Johnson & Johnson’s Proposed Acquisition of Pfizer’s Consumer Healthcare Business To Protect Competition

On December 12, the Federal Trade Commission announced its decision to challenge the terms of Johnson & Johnson’s (J&J) proposed $16.6 billion acquisition of Pfizer Inc.’s (Pfizer) Consumer Healthcare business. The FTC’s complaint alleged that the transaction as originally proposed would reduce competition in the U.S. markets for over-the-counter (OTC) H-2 blockers used to prevent and relieve heartburn, OTC hydrocortisone anti-itch products, OTC night-time sleep aids, and OTC diaper rash treatments.
In settling the Commission’s charges, the companies agreed to sell Pfizer’s Zantac H-2 blocker business to Boehringer Ingelheim Pharmaceuticals Inc. (Boehringer), and Pfizer’s Cortizone hydrocortisone anti-itch business, Pfizer’s Unisom night-time sleep aid business, and J&J’s Balmex diaper rash treatment business to Chattem, Inc.

On June 25, 2006, J&J entered into an agreement to buy Pfizer’s Consumer Healthcare business for approximately $16.6 billion. According to the FTC, the transaction as originally structured would have violated Section 7 of the Clayton Act and Section 5 of the FTC Act by lessening competition in the U.S. markets for the research, development, manufacture, distribution, and sale of the following OTC medications: 1) H-2 blockers, 2) hydrocortisone anti-itch products, 3) night-time sleep aids, and 4) diaper rash treatments.

According to the Commission’s complaint, in each of the product markets, the proposed acquisition would have increased market concentration significantly and eliminated substantial competition between leading suppliers in the United States. Further, the Commission contended that without the remedies put in place by the consent order, in each market the transaction likely would have caused significant anticompetitive harm by enabling J&J to profit by raising prices above pre-merger levels, as well as by reducing J&J’s incentives to innovate and develop new products. Finally, the complaint stated that any entry into the relevant markets by new competitors is unlikely to counteract the likely anticompetitive impacts of the transaction.

OTC H-2 blockers are a class of drugs designed to prevent and relieve heartburn associated with acid indigestion. They act differently in the body than antacid tablets, liquids, and other products, and consumers typically do not substitute one for the other. The $360 million U.S. market for OTC H-2 blockers is highly concentrated. J&J and Pfizer are the largest U.S. suppliers, and after the transaction as proposed, J&J would have over 70 percent of all OTC H-2 blocker sales in the country.

Designed to reduce inflamation, redness, and swelling, OTC hydrocortisone anti-itch products are used topically to treat minor skin irritations. The U.S. market for such product is highly concentrated. Pfizer’s Cortizone products and J&J’s Cortaid products are the two leading brands in the $120 million U.S. market.

OTC night-time sleep aids are non-prescription drugs that are used solely for the relief of occasional sleeplessness. The U.S. market for such products is highly concentrated, and J&J and Pfizer are the two largest manufacturers and suppliers. Pfizer, which sells Unisom, is the leading supplier and J&J, which sells Simply Sleep, is the second-leading supplier in the $100 million nationwide market.

OTC diaper rash treatments are used to prevent and treat diaper rash and to protect sore or chafed skin from moisture and irritation. The U.S. market for such products is highly concentrated, with Pfizer’s Desitin, Schering-Plough’s A&D, and J&J’s Balmex comprising 70 percent of all sales in the approximately $84 million market. Absent the consent order, after the transaction, J&J would have nearly half of all U.S. OTC diaper rash treatment sales.

The FTC’s consent order is designed to remedy the competitive harm that would have resulted from J&J’s acquisition of Pfizer Consumer Healthcare, as proposed. The consent agreement preserves competition in these markets by requiring the divestiture of all assets related to: 1) Zantac H-2 blockers to Boehringer; and 2) Cortizone hydrocortisone anti-itch products, Unisom sleep-aids, and Balmex diaper rash treatment products to Chattem.

The order contains several provisions designed to ensure the divestitures are successful. First, with regard to Zantac, the order requires J&J to provide Boehringer with all relevant research and development, intellectual property, and customer and supply contracts for the divested assets. It also requires J&J and Pfizer to take all steps necessary to ensure that J&J will not get or use any confidential business information related to Zantac, that Boehringer will have the opportunity to enter into employment contracts with certain key people who have experience related to Zantac, and that certain Pfizer managers who were involved in Zantac research and marketing be precluded from working on competing H-2 blocker products at J&J for two years. The order contains similar provisions related to the divestitures of the Cortizone, Unisom, and Balmex assets to Chattem.

Finally, the consent order requires J&J and Pfizer to maintain the viability of the divested assets pending their transfer to Boehringer and Chattem, and stating that they must be held separate before they are transferred. The FTC has appointed David Painter of LECG as interim monitor to oversee the transfer of the assets and to establish firewalls to ensure confidential business information is not shared. The companies also must file reports after the order is approved to ensure compliance with its terms.
The Commission vote to approve the consent order was 2-0, with Commissioners Pamela Jones Harbour, William E. Kovacic, and J. Thomas Rosch recused.

Authored by

Robert W. Doyle, Jr.

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