On July 29, Thoratec reported that it had been informed by the FTC that the FTC would challenge its $282 million acquisition of Heartware. The parties decided to abandon the merger two days later.
The FTC’s complaint alleged that the deal would be illegal because it would substantially reduce competition in the U.S. market for left ventricular assist devices (“LVADs”), a life-sustaining treatment for patients with advanced heart failure. The FTC’s complaint alleged that Thoratec sought to maintain its monopoly on the commercial sale of LVADs in the United States by acquiring HeartWare. The three-count complaint charges Thoratec with: 1) substantially lessening competition in violation of Section 7 of the Clayton Act; 2) illegally attempting and conspiring to maintain its monopoly; and 3) engaging in unfair methods of competition in violation of Section 5 of the FTC Act.
Thoratec currently has a monopoly position in the LVAD market with nearly 100% of the market. HeartWare does not currently sell a product rather the potential product has yet to be approved by the FDA. HeartWare is the only firm that could threaten Thoratec’s existing monopoly over LVADs. While there appears to be a number of other companies that are developing LVADs, the FTC alleges that HeartWare’s product is positioned to be the next product approved by the FDA. It offers a novel design that promises superior reliability. The FTC alleges that only HeartWare’s potential product poses a significant threat to Thoratec. The FTC further alleges that no other firm could replace the actual or potential competition that would be lost as a result of this merger.
The FTC also has evidence that competition from HeartWare has already forced Thoratec to innovate even though the HVAD is still in clinical trials. The FTC further states that this competition will intensify once HeartWare’s HVAD receives FDA approval, resulting in lower prices and enhanced features that will increase the availability and quality of these life-saving devices.
HeartWare’s LVAD device, the HVAD, is in the latter stages of clinical development and poised to be the first and most signficant threat to Thoratec’s Heartmate II when the HVAD is approved as expected in late 2011 or early 2012. The FTC acknowledges in its complaint that several other firms are working to develop LVADs. The FTC points out, however, that these firms face signifcant challenges to gaining approval and that none of them appear to have the potential to challenge Thoratec’s position as does HeartWare.
The FTC’s decision to sue is noteworthy because it indicates that the FTC is willing to block a merger based on a potential competition theory. The FTC has been reluctant to do so in the past because potential competition cases are difficult to litigate. It appears, however, that the FTC was confident that the other firms’ products in development were inferior to HeartWare’s HVAD and that they were not in a position to be approved within the next two years.