FTC Challenges Terms of Watson Pharmaceuticals Acquisition of Andrx

The Federal Trade Commission today announced its decision to challenge the terms of Watson Pharmaceuticals, Inc.’s proposed $1.9 billion acquisition of Andrx Corporation, a deal that would have led to competitive problems in the markets for 13 generic drug products. In allowing the deal to proceed while addressing these competitive problems, the Commission has ensured the maintenance of competition that otherwise would have been lost through the acquisition, and protected consumers from likely higher prices for the drugs.

“For the second time in a week, the Commission has taken a strong step to protect competition and consumers in markets for important generic drugs,” said Jeffrey Schmidt, Director of the FTC’s Bureau of Competition. “Following closely on the consent order resolving charges that Barr Laboratories’ proposed acquisition of Pliva would have been anticompetitive in several product markets, this order again makes it clear that the FTC is committed to protecting consumers from deals that would otherwise be likely to lead to higher generic drug prices.”

Under the consent order settling the FTC complaint, Watson and Andrx will: 1) end Watson’s marketing agreement with Interpham Holdings, Inc. (Interpham) and return all rights and agreements necessary to market generic hydrocodone bitartate/ibuprofen tablets back to Interpharm; 2) assign and divest the Andrx right necessary to develop, make, and market generic extended release glipizide (glipizide ER) tablets to Actavis Elizabeth, LLC, a subsidiary of The Actavis Group hf. (Actavis); and 3) sell Andrx’s rights and assets needed to develop and market eleven generic oral contraceptive products to Teva Pharmaceutical Industries, Inc. (Teva).

The Commission’s Complaint: According to the Commission’s complaint, the acquisition as proposed would violate Section 7 of the Clayton Act and Section 5 of the FTC Act, as amended, by eliminating competition in the markets for the manufacture and sale of the following generic drug products, each of which is described below: 1) hydrocodone bitartrate/ibuprofen tablets; 2) glipizide ER tablets; and 3) 11 oral contraceptive drugs. The consent agreement will remedy the alleged violations by maintaining the competition that would otherwise be lost in each of these markets as a result of Watson’s proposed acquisition of Andrx.

Hydrocodone bitartrate/ibuprofen is a combination of an opiate-based analgesic agent and a nonsteroidal anti-inflammatory drug (NSAID) ibuprofen. It is a generic version of Abbott Laboratories Inc.’s Vicoprofen and is used for the short-term management of acute pain. Only three companies compete in the generic market for the drug: Watson, Andrx, and Teva. Teva is the market leader, with about 62 percent of sales. After the acquisition as proposed, Watson’s market share would increase from 12 percent to 39 percent, with Teva its only remaining competitor.

Glipizide ER is the generic version of Pfizer’s Glucotrol XL. It corrects the effects of type 2 diabetes by stimulating the release of insulin in the pancreas, thereby reducing sugar levels in the body. Only two firms, Andrx and Greenstone Ltd. (Greenstone) compete with Watson, the leading supplier of the generic version of the drug in the United States. Andrx and Greenstone have market shares of about 35 and 20 percent, respectively. After the acquisition as proposed, Watson’s market share would increase to 80 percent, with Greenstone the only remaining competitor.

Oral contraceptives are taken by mouth to prevent ovulation and pregnancy. They are the most commonly used type of reversible birth control, and are taken by 82 percent of women in the United States at some time during their reproductive years. Such contraceptives contain various formulations of synthetic estrogen and progestin, which are chemical equivalents of natural female hormones. The 11 drugs addressed by the consent order are the following: the generic formulations of Johnson & Johnson’s Ortho-Cyclen and Ortho Tri-Cyclen – among the best-selling oral contraceptives – and the generic equivalents of Ortho-cept, Triphasil 28, Alesse, Ortho-Novum 1/35, Ortho-Novum 7/7/7, Loestrin FE (1 mg/0.020 mg), Loestrin FE (1.5 mg/.030 mg), Mircette, and Ovcon 35.

In each of these markets, the complaint states that the transaction as proposed would reduce the number of competing generic drug suppliers. The number of generic suppliers has a direct and substantial effect on generic pricing, as each new generic supplier can have a competitive impact on the market. As there are multiple generic equivalents for each of the relevant drugs, the branded versions do not significantly constrain the price of the generic versions.

According to the FTC, the proposed acquisition would eliminate direct and substantial competition between Watson and Andrx in the relevant markets, increasing the likelihood that Watson will be able to exercise unilateral market power, increasing the possibility of coordination among competitors, as well as the possibility that consumers will be faced with higher prices for these drugs. Finally, the complaint states that entry into these markets is unlikely to be timely or sufficient to offset the alleged anticompetitive impacts of the acquisition.

The analysis to aid public comment for this matter contains detailed market share and sales information for each of these drugs and provides further information on the alleged anticompetitive impacts of the proposed acquisition with regard to each product.

Terms of the Order: The FTC’s consent order is designed to remedy the competitive harm resulting from Watson’s proposed acquisition of Andrx. Under its terms, the companies must divest certain rights and assets related to the overlapping products to an FTC-approved acquirer no later than 10 days after the acquisition. Specifically, the order requires that: 1) Watson end its marketing agreement with Interpham, returning all of its rights to generic hydrocodone bitartrate/ibuprofen back to Interpham; 2) Andrx divest its rights and assets to generic glipizide ER to Actavis, including assigning its supply agreement with Pfizer; and 3) Andrx divest its rights and assets related to the 11 generic oral contraceptives to Teva and supply Teva with the products for five years to provide Teva with the time needed to gain FDA approvals to manufacture and sell the drugs independently. The analysis to aid public comment for this matter contains a full description of each of the Commission-approved acquirers and how the FTC determined they are appropriate in each instance.

If the Commission determines that either Interpharm or Actavis is not an acceptable purchaser, or that the manner of the divestitures to Interpharm, Actavis, or Teva is not acceptable, the order would require the parties to unwind the relevant sale within six months of its approval and find another Commission-approved buyer. If they cannot do so within six months, the FTC an appoint a trustee to sell the assets. The order also contains provisions to ensure the divestitures are successful, including the requirement that Watson and Andrx provide transitional services to enable the acquiring companies to get all necessary FDA approvals. Finally, the Commission has appointed Francis J. Civille as an interim monitor to oversee the transfer of assets and ensure the companies’ compliance with the order.

The Commission vote to approve the consent order and place a copy on the public record was 4-0, with Commissioner J. Thomas Rosch recused. The order will be subject to public comment for 30 days, until November 29, 2006, 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 Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; 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. 061-0139)