AUGUST 24, 2009

The federal antitrust regulators, the Federal Trade Commission ("FTC") and the Antitrust Division of the Department of Justice (“DOJ”) continue to focus their enforcement efforts on the healthcare industry. Below are several recent developments of note in this area.

FTC Issues Statements on Termination of Endocare/Galil Transaction

On June 8, 2009, the FTC issued two statements expressing opposing views as to Endocare, Inc.’s announcement that its proposed merger with Galil Medical, Ltd. had been terminated “as a result of” the FTC’s ongoing investigation.  The proposed merger between the medical device companies, both of which develop prostate and renal cancer therapies, was too small to be reportable under the Hart-Scott-Rodino Act.

The FTC investigation began in late 2008, more than six months prior to the company’s announcement.  According to the statement of Commissioner J. Thomas Rosch, the parties had produced several boxes of hard-copy documents, but declined to produce additional documents requested on the grounds that the burden would be too great on the small companies’ “severely limited resources.”  In a harsh rebuke of the FTC, Commissioner Rosch argued that the case “represents a ‘poster child’ for how protracted investigation of a transaction or practice can result in the Commission failing to determine in a timely fashion whether there is a ‘reason to believe’ that a transaction or practice will violate the antitrust laws and the public interest.”  He blamed the lengthy investigation on the Commission’s own failure to apply remedies available to it to enforce the subpoena, and emphasized the public policy reasons weighing in favor of the merger, including the “very small and diminishing share of the market” for the particular type of therapy the proposed merger was intended to develop.

In a joint statement, FTC Chairman Jon Leibowitz, Commissioner Pamela Jones Harbour, and Commissioner William E. Kovacic expressed their sharp disagreement with Commissioner Rosch’s portrayal of the investigation and downplayed these policy arguments, emphasizing that a small company’s claim of limited resources will not serve as an exemption from full compliance with a second request: “No special rule or Section 7 principle . . . exempts two small companies with small scientific/engineering staffs and limited resources from meaningful antitrust review, even when the companies claim that their proposed transaction will enable them to conduct additional research and development relating to a socially significant product.”  The Commissioners instead blamed the lengthy investigation on the parties’ failure to provide a complete record or to negotiate the scope of the subpoena, and noted that “even the parties’ self-selected documents were insufficient to substantiate the parties’ purported efficiencies claims.” 

The joint statement suggests that the FTC has no intention of bending for small companies planning to merge – even when those companies face severe resource constraints.  Though less focus was paid to the issue by Chairman Leibowitz and Commissioners Jones Harbour and Kovacic, the joint statement may also indicate that the Commission is defining markets for the treatment of specific diseases very narrowly.

Links to the statements are available at: http://www.ftc.gov/opa/2009/06/endocare.shtm.

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FTC Challenges 2008 Acquisition of Outpatient Medical Clinics

On July 23, 2009, the FTC filed an administrative complaint seeking to unwind Carilion Clinic’s $20 million acquisition of two outpatient clinics in the Roanoke, Virginia area – the Center for Advanced Imaging (“CAI”) and the Center for Surgical Excellence (“CSE”).  The acquisition, which was consummated in 2008, fell below the reporting thresholds for the Hart-Scott-Rodino Act and, as a result, was not reviewed by the antitrust authorities prior to closing. 

The complaint alleges that Carilion’s acquisition of CAI and CSE reduced the number of outpatient imaging and surgical services providers in the Roanoke area from three to two and eliminated competition to the detriment of patients, employers, and health plans.  As a result of the acquisition, according to the FTC, patients now must choose to purchase outpatient services from either Carilion, the “dominant hospital system in Southwest Virginia,” or its only remaining competitor, HCA Lewis-Gale.  The FTC predicted that the elimination of the lower cost providers CAI and CSE will increase prices dramatically – including a nearly 900% increase in out-of-pocket expense for a brain MRI.  The complaint seeks divestiture by Carilion of both CAI and CSE.

Challenges to transactions valued below the minimum HSR Act threshold, though historically rare, seem to have become commonplace in the last year. Since December 2008, the antitrust agencies have challenged five such transactions, four of them involving some aspect of the healthcare industry, including pharmaceuticals, medical diagnostics, and medical devices.  This most recent challenge provides a reminder – perhaps most directly to health care providers – that transactions not subject to HSR reporting still may be challenged, even after they are consummated.

Links to the press release and complaint are available at: http://www.ftc.gov/opa/2009/07/carilion.shtm

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Developments in “Reverse Payments” Patent Litigation

On June 22, the U.S. Supreme Court denied the petition for writ of certiorari in the “reverse payments” antitrust lawsuit of Arkansas Carpenters Health and Welfare Fund et al. v. Bayer AG and Bayer Corp et al. (In re Ciprofloxacin). This case involved antitrust claims related to Bayer AG’s (“Bayer”) payments to Barr Laboratories, Inc. (“Barr”), among others, for settlement of patent infringement litigation related to Bayer’s brand-name antibiotic drug Ciprofloxacin.

The U.S. District Court of the Eastern District of New York had dismissed claims alleging that the settlement payments resulted in an unlawful restraint on trade. In October 2008, the Federal Circuit affirmed the lower court’s dismissal, holding that the settlement did not constitute an antitrust violation because (1) the patent litigation was not a sham or otherwise baseless; and (2) the settlement did not impose restrictions on the alleged infringers beyond the scope of the patent.

Notably, the Supreme Court did not seek the views of the Solicitor General in this matter. On advice from the Solicitor General, the Supreme Court had denied a similar petition for writ of certiorari at the end of its 2007 term in Joblove v. Barr Laboratories, Inc. That case also involved an antitrust challenge to a “reverse payment” settlement of patent infringement litigation between pharmaceutical companies AstraZeneca and Barr over the breast cancer drug tamoxifen. Davis Polk represented AstraZeneca throughout that case.

A portion of the case presently is proceeding before the Second Circuit, which did seek the views of the Solicitor General. On July 6, the Solicitor General submitted a brief in response to the appellate court’s request, arguing that “reverse payment” agreements that delay market entry by a potential generic competitor in exchange for a payment from a branded drug manufacturer with market power are presumptively unlawful. This filing brought the views of the DOJ in line with those of the FTC, which agency, under Chairman Leibowitz, has consistently and categorically opposed “reverse payment” patent settlements.

The enforcement agencies now appear to take the same position on “reverse payment” settlements. The proposed Protecting Consumer Access to Generic Drugs Act of 2009, H.R. 1706, would prohibit settlements in which a drug company challenging a patent agrees to delay its challenge in exchange for a settlement with the patent-holding company.

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FTC Issues Interim Report on Authorized Generics

Finally, on June 24, the FTC issued an Interim Report on Authorized Generics, continuing its campaign against “reverse payment” patent settlements.

An authorized generic (“AG”) is a drug approved by the Food & Drug Administration as a branded drug but sold by the branded drug company, or licensed to another, as a generic version. The Report focused on the competitive effects of an AG in the market during the 180-day exclusivity period afforded to the first approved generic entrant, i.e., the generic company with the first filed and approved Abbreviated New Drug Application (“ANDA”) by the Hatch-Waxman Act. According to the Report, the presence of an AG benefits consumers by leading to greater discounting because, essentially, there are two generic options instead of one.

The FTC opined that the sharp decline in revenues of an ANDA first-filer caused by the presence of an AG provides an incentive, in the context of patent cases, for the ANDA filer to agree to delay entry in exchange for a promise by the branded company not to launch an AG during the exclusivity window. According to the FTC, such agreements, which have become increasingly common, harm consumers by delaying competition twice – first by delaying generic entry and then by delaying the entry of a second generic (i.e., the AG) to compete with the first. The Report concluded that “agreements not to compete with authorized generics have a significant potential for use as exclusion payments in patent settlement agreements, [and] any restrictions on pay-for-delay agreements should account for all viable forms of brand-generic payments to delay entry, including an agreement not to compete with an AG.”

Chairman Leibowitz, who has made it clear that “reverse payment” settlements are among his top priorities, issued a concurring statement, opining that a restriction on reverse payment settlements would result in cost savings to consumers of more than $35 billion over ten years, including $12 billion in savings to the federal government. Commissioner Rosch concurred with the conclusions of the Report but stated that it conflated what, in his view, were independent issues: the merits of an agreement that an AG will not compete and the merits of “reverse payment” settlements. He argued that although “reverse payment” settlements may be problematic, the Report did not show that, by themselves, agreements that an AG will not compete cause any substantial harm to consumers.

Given the differing views within the FTC regarding agreements not to compete with AGs, it is unclear to what extent such agreements will be challenged.

Links to the report and statements are available at: http://www.ftc.gov/os/2009/06/index.shtm#24.

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If you have any questions, please contact any of the lawyers listed below or your regular Davis Polk contact.

Arthur F. Golden, Partner
212 450 4388 | arthur.golden@davispolk.com

Paul W. Bartel, II, Partner
212 450 4760 | paul.bartel@davispolk.com

Arthur J. Burke, Partner
212 450 4352 | arthur.burke@davispolk.com
650 752 2005

Joel M. Cohen, Partner
212 450 4592 | joel.cohen@davispolk.com

Ronan P. Harty, Partner
212 450 4870 | ronan.harty@davispolk.com

Christopher B. Hockett, Partner
650 752 2009 | chris.hockett@davispolk.com

Stephen M. Pepper, Counsel
212 450 4108 | stephen.pepper@davispolk.com