Under a consent agreement announced today, the Federal Trade Commission will allow Cephalon, Inc.’s $515 million acquisition of Cima Labs, Inc., provided that Cephalon grants Barr Laboratories, Inc. a fully paid-up, irrevocable license to manufacture and sell a generic formulation of Cephalon’s breakthrough cancer pain (BTCP) drug Actiq in the United States.
The order, which conditionally allows the acquisition, remedies the anticompetitive concerns raised by Cephalon’s acquisition of a BTCP drug in development. Cephalon is currently the only company selling a BTCP drug in the United States. Cima is best positioned to be the next entrant into the market. The proposed acquisition would have allowed Cephalon to continue its monopoly of the U.S. BTCP drug market.
“The importance of this order is to provide consumers of BTCP drugs with a lower-priced alternative at the time that Cima’s product would enter the market,” said Susan Creighton, Director of the FTC’s Bureau of Competition. “Cima is clearly poised to become Cephalon’s major competitor in this market in the next few years, and this order ensures that the competition that would have been created by Cima’s product will not be lost.”
Headquartered in West Chester, Pennsylvania, Cephalon develops and markets pharmaceutical products, including three in the United States – Actiq for BTCP, Provigil for narcolepsy and in development for attention deficit disorder, and Gabitril for partial seizures associated with epilepsy – and 20 products internationally. Cephalon has approximately 1,400 employees at its facilities in Salt Lake City, Utah, and in France. In 2003, the company reported more than $714 million in annual revenues, with net income of $83.9 million.
Cima, headquartered in Eden Prairie, Minnesota, specializes in fast-dissolve drug delivery technology. The company researches, develops, and manufactures both prescription and over-the-counter (OTC) products, managing a patent portfolio consisting of 75 issued or pending patents. Cima currently manufactures six products developed for six different pharmaceutical company partners, including three branded prescription drugs and three OTC products.
Under an agreement dated November 3, 2003, Cephalon proposed to acquire all of the issued and outstanding shares of Cima in a stock-for-stock transaction valued at approximately $515 million.
The relevant market for examining the proposed transaction is the U.S. market for BTCP drugs,
which help to reduce or eliminate the spikes of severe pain that chronic cancer patients experience. BTCP drugs provide a faster onset of pain relief than other treatments and can be self-administered in convenient and portable dosages, which is important because many BTCP patients are not in hospitals. The annual sales of BTCP drugs in the United States total more than $200 million, and the market is growing rapidly.
The market for drugs used to treat BTCP is a monopoly, with Cephalon marketing Actiq, the only product approved by the U.S. Food and Drug Administration (FDA) for such use. Actiq is a fentanyl-containing, berry-flavored lollipop. Cephalon also is developing a sugar-free Actiq formulation, which it expects to launch in 2005. Cima is currently developing OraVescent fentanyl (OVF), and intends to seek FDA approval by the end of 2004 or early 2005. OVF is a fast-dissolving, effervescent, fentanyl tablet that is expected to enter the U.S. market in either 2006 or 2007 and is the BTCP drug best-positioned to compete with Cephalon’s Actiq. Both Actiq and OVF are formulations of the same readily-available, non-patented active ingredient, fentanyl.
According to the FTC’s complaint, the proposed acquisition would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended, because it would cause significant anticompetitive harm in the U.S. market for BTCP products. The FTC contends that with only one firm – Cephalon – currently marketing a BTCP drug to U.S. consumers, Cima’s entry likely would increase competition. Accordingly, allowing Cephalon to control both Actiq and OVF would reduce the number of future competitors from two to one, and likely would result in consumers having to pay higher prices for BTCP medication. Further, Cephalon’s ownership of both products would allow it to undermine generic Actiq entry by shifting patients to the patent-protected OVF product prior to generic launch, thereby depriving consumers of the full benefits of generic competition.
The FTC’s complaint also states that both branded entry and generic entry into the market for BTCP products are difficult, time consuming, and costly, and therefore unlikely to be able to offset the alleged anticompetitive impacts of the acquisition as proposed. Such entry, in fact, is unlikely to occur until 2008 or later, according to the FTC.
The consent order remedies the allegedly anticompetitive impact of Cephalon’s acquisition of Cima in the U.S. market for BTCP drugs. Specifically, it requires Cephalon to grant a third-party company, Barr, a fully paid, irrevocable license to make and sell a generic equivalent of Actiq in the United States that will be launched as soon as the FDA approves OVF, and in any event no later than February 2007. While Barr has been selected as an up-front buyer of these assets, if the FTC determines that Barr is not an acceptable purchaser, or the manner of the licence is not acceptable, the parties must rescind the transaction with Barr and sell the assets to another approved buyer within six months after the order becomes final.
In addition, the order contains several provisions designed to ensure that the license is successful and that Barr is able to compete aggressively with Cephalon in the BTCP market. First, Cephalon must transfer the know-how and intellectual property related to both the sugar and sugar-free versions of Actiq to Barr immediately, in accordance with a licensing and supply agreement. Second, if Barr is unable to manufacture an FDA-approved version of Actiq by the date the licenses take effect, Cephalon would be required to supply Barr with a version of Actiq that it can market in generic form. Finally, the remedy prohibits Cephalon from making certain regulatory filings that would delay FDA approval of Barr’s generic Actiq to ensure that Barr will be in a position to launch its generic no later than Cephalon’s launch of Cima’s OVF.
The Commission vote to accept the consent order was 3-1-1, with Commissioner Pamela Jones Harbor recused, and Commissioner Mozelle W. Thompson voting no and issuing a separate statement. The Commission majority issued a statement, and both statements can be found as links to this press release on the Commission’s Web site.
In its statement, the Commission wrote that the transfer of a license and all technological know-how for Actiq to Barr “will significantly expedite the entry of a generic BTCP product,” that such entry “will provide a substantially lower-priced alternative to consumers and thereby significantly lower the average price of BTCP medication.” The availability of a substantially lower-priced BTCP medication, the Commission said, “will be particularly important for patients on limited budgets or without insurance.”
The Commission explained that the evidence was not clear that consumers who would purchase a branded BTCP product would face higher prices. “In this case . . . the facts showed that an important anticompetitive effect of the merger was to defeat generic competition. The facts further showed that there is not likely to be any further innovation competition between Cephalon and Cima for BTCP products because, among other things, Actiq is near the end of its patent life and neither Cephalon nor Cima has any other BTCP products in the pipeline. Moreover, Actiq and OVF are both formulations of fentanyl, a readily-available, non-patented active ingredient.” Further, according to the statement, “The earlier entry of lower-priced generic Actiq, made possible through the remedy, will more than restore any loss in brand-to-brand price competition that would have occurred between Cepahlon and Cima. . . .[t]he consent order ensures that the competition between Actiq and its generic equivalent will be robust. The Commission . . . has recognized the net benefits that arise from the entry of generic pharmaceutical products and consequently has devoted substantial resources to identify and prohibit anticompetitive practices that have made the entry of generic products more difficult. . . . [t]he underlying rationale for the relief mandated in this case is supported by unanimous Commission precedent.”
In his statement, Thompson said that, “I must dissent from the Commission’s acceptance of the unprecedented proposed remedy because neither the merging parties nor the investigation have demonstrated that the remedy would substantially restore the lost competition between Cephalon and Cima. I strongly concur with the allegations in the Commission’s complaint, which correctly alleges that Cephalon is a monopolist in the BTCP drug market.” If “‘every order in a merger case has the same goal: to preserve fully the existing competition in the relevant market or markets,’” Thompson said, “the proposed settlement in this case – which seeks to restore the lost branded competition from Cima by facilitating the entry of a generic product – fails because it cannot meet this goal. Accordingly, the Commission should have rejected the proposed settlement. Further, because the Cephalon/Cima merger in substance appears to be for the primary purpose of allowing Cephalon to gain control of Cima’s new BTCP product, I believe that the Commission should have sought to block this merger in court.”
Commissioner Thompson further stated that, “In reading the majority’s statement, I observe though that the majority unfortunately compares market outcomes in its statement instead of evaluating the Commission’s appropriate role in providing antitrust protection in American markets. Our Clayton Act, Section 7 mandate is simple: protect markets so that the competitive process provides the market outcomes, such as quantity produced, prices charged, and who wins and loses financially. I disagree with a merger remedy policy that instead embraces manipulating the structure of market competition and trades off recognized (or probable) benefits for one segment of consumers for recognized (or probable) harm to another.”
Commissioner Thompson concluded, “Accordingly, I believe that the Commission should have rejected the proposed settlement and challenged the transaction in order to protect fully consumers in the BTCP drug market and to signal the Commission’s antitrust resolve in both challenging anticompetitive mergers and only accepting remedies that minimize consumer exposure to anticompetitive risk.”
The order will be subject to public comment for 30 days, until September 8, 2004, after which the Commission will decide whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
Copies of the complaint, consent order, and an analysis to aid public comment are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: firstname.lastname@example.org; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
(FTC File No.: 041-0025)