Protecting Competition, the Federal Trade Commission Approves Novartis AGs Acquisition of Eon Labs

Preserving competition in U.S. markets for three generic pharmaceuticals, the Federal Trade Commission today approved Novartis AG’s (Novartis) $1.72 billion acquisition of Eon Labs, Inc. (Eon), provided Novartis divests three overlapping drugs to Amide Pharmaceutical, Inc. (Amide).

Under the terms of a proposed consent order with the Commission, Novartis is required to divest all the assets necessary to manufacture and market generic desipramine hydrochloride tablets, orphenadrine citrate extended release (ER) tablets, and rifampin oral capsules in the United States to Amide within 10 days of Novartis’s acquisition of Eon. Further, Novartis, through its Sandoz generic pharmaceuticals division, will supply Amide with orphenadrine citrate ER and desipramide hydrochloride tablets until Amide obtains Food and Drug Administration (FDA) approval to manufacture the products itself, and will assist Amide in obtaining all necessary FDA approvals.

“The proposed acquisition would cause significant anticompetitive harm to U.S. consumers in the markets for these three generic drugs,” said Susan Creighton, Director of the FTC’s Bureau of Competition. “The Commission’s order effectively remedies this problem by requiring divestitures, to a well-established company, that provide the competition Eon otherwise would have provided.”

Desipramine hydrochloride is a tricyclic antidepressant, with annual U.S. generic sales of approximately $6 million. Orphenadrine citrate ER, a muscle relaxant, has annual U.S. generic sales of approximately $10 million, while rifampin, a drug used in the treatment of tuberculosis, has annual U.S. generic sales of approximately $14 million. The average price of each of these three branded drugs is more than twice the average price of their generic equivalents.

Thus, it is competition among producers of each of the generics that has a direct and substantial effect on the pricing of that generic. As a result, the Commission concluded that the generic forms of these drugs constitute appropriate antitrust markets in which to analyze the effects of the transaction.

The transaction threatened competition in each of the three generic markets. In all three markets, Novartis and Eon are significant competitors. Further, in all of the markets of concern there is only one other competitor. In the generic desipramine hydrochloride market, the only other competitor is Watson Pharmaceuticals, which manufactures only three of the six strengths of the drug, and accounts for a minuscule share of the market. Likewise, in the orphenadrine citrate ER and rifampin markets, Impax Laboratories and VersaPharm, respectively, are the only other generic competitors, and in both markets, the combined Novartis/Eon would account for about 70 percent of generic sales. The Commission therefore has concluded that, unremedied, the Novartis-Eon deal would be likely to result in higher prices and other anticompetitive effects in each of these generic markets.

The Commission’s Complaint

According to the Commission’s complaint, the transaction as proposed would be anticompetitive and in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended. Absent relief, the acquisition would eliminate actual, direct, and substantial competition between Novartis and Eon within the U.S. markets for generic desipramine hydrochloride tablets, orphenadrine citrate ER tablets, and rifampin oral capsules. In addition, the acquisition would increase the likelihood that Novartis could exercise unilateral market power, as well as the likelihood and degree of coordinated interaction between the remaining producers, either of which would likely lead to consumers paying higher prices for each of the three generic drugs.

In its complaint, the Commission further contends that due to regulatory requirements and other constraints, entry into the market for each drug would not be timely, likely, or sufficient to offset the alleged anticompetitive impacts of the transaction as proposed.

The Consent Order

The Commission’s consent order is designed to remedy the alleged anticompetitive impacts of Novartis’s acquisition of Eon by requiring Novartis to divest to Amide the Eon assets necessary to manufacture and market generic desipramine hydrochloride and the Sandoz assets needed to manufacture and market orphenadrine citrate ER tablets and rifampin oral capsules in the United States, no later than 10 days after Novartis acquires Eon. The Commission believes that Amide is well-suited to acquire the relevant drug assets and compete against Novartis.

In addition, the consent order requires Novartis, through Sandoz, to enter into a supply agreement with Amide to enable Amide to market desipramine hydrochloride and orphenadrine citrate ER immediately following the divestitures and until it gains FDA approval to manufacture the products on its own. Novartis also must provide the technology assistance necessary to enable Amide to obtain FDA approval as quickly as possible for the two drugs. Because Amide currently contract manufactures rifampin oral capsules for Novartis, and has done so for several years, no technology transfer or supply obligation for rifampin is necessary.

If the Commission determines that Amide is not an acceptable buyer, or that the manner of the divestiture is not acceptable, Novartis must rescind the transaction with Amide and sell the assets to a Commission-approved buyer within six months. If Novartis fails to divest within six months, the Commission may appoint a trustee to divest the assets.

Other Terms of the Order

The order also provides for the appointment of an interim trustee to oversee the transfer of technology and to assist Amide and the FTC if supply difficulties or approval delays are encountered. Under the order, Novartis must provide the trustee with all of the powers needed to satisfy his responsibilities to ensure the successful divestiture of the desipramine hydrochloride, rifampin, and orphenadrine citrate assets. The FTC has selected Francis J. Civille, who is experienced in obtaining regulatory approval and the manufacture of pharmaceuticals, to be the interim monitor, and Amide has agreed to his appointment.

Parties to the Transaction

Headquartered in Basel, Switzerland, Novartis is a world leader in pharmaceutical and consumer health products, employing approximately 81,400 individuals in 140 countries worldwide. It is ranked fifth in global pharmaceutical sales. In 2004, Novartis generated global sales of $28.2 billion and net income of $5.8 billion. Sandoz (formerly Geneva) is Novartis’s subsidiary responsible for generic retail pharmaceuticals. Sandoz is headquartered in Vienna, Austria, and employs about 13,400 people in 110 countries. In 2004, Sandoz generated sales of $3.0 billion, placing Sandoz fifth among U.S. generic drug companies.

Based in Laurelton, New Jersey, Eon is the ninth largest supplier of generic drugs in the United States. In 2003, Eon generated sales of $330 million. Eon operates two sites in the United States: one in Laurelton (headquarters, manufacturing, sales, and distribution) and one in Wilson, North Carolina (research and development, manufacturing, and distribution). Eon has 531 employees in the United States.

Pursuant to an Agreement for Purchase and Sale of Stock dated February 20, 2005, Novartis agreed to purchase 60 million shares of Eon from Santo Holding AG for $1.72 billion in cash. These shares represent approximately 67 percent of the outstanding stock of Eon. Further, Novartis has made a definitive agreement, approved by the Eon Board of Directors, to offer to acquire the remaining fully diluted shares of Eon for approximately $897 million.

The Commission vote to approve the complaint, consent order, and interim monitor agreement and to appoint the interim monitor was 4-0. The FTC is accepting public comments on the order for 30 days, until August 18, 2005, after which it 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, interim monitor agreement, 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. 051-0106)