FTC Challenges Terms of Johnson & Johnsons Proposed Acquisition of Pfizers Consumer Healthcare Business To Protect Competition

The Federal Trade Commission today announced its decision to challenge the terms of Johnson & Johnson’s (J&J) proposed $16.6 billion acquisition of Pfizer Inc.’s (Pfizer) Consumer Healthcare business. The FTC’s complaint alleges that the transaction as originally proposed would reduce competition in the U.S. markets for over-the-counter (OTC) H-2 blockers used to prevent and relieve heartburn, OTC hydrocortisone anti-itch products, OTC night-time sleep aids, and OTC diaper rash treatments.

In settling the Commission’s charges, the companies have agreed to sell Pfizer’s Zantac H-2 blocker business to Boehringer Ingelheim Pharmaceuticals Inc. (Boehringer), and Pfizer’s Cortizone hydrocortisone anti-itch business, Pfizer’s Unisom night-time sleep aid business, and J&J’s Balmex diaper rash treatment business to Chattem, Inc.

“All of the products addressed by the consent order are important and used regularly by millions of consumers across the country,” said Jeffrey Schmidt, Director of the FTC’s Bureau of Competition. “The order’s terms will ensure that competition will be maintained after the transaction is completed, and that consumers will be protected from paying higher prices.”

The Commission’s Complaint: On June 25, 2006, J&J entered into an agreement to buy Pfizer’s Consumer Healthcare business for approximately $16.6 billion. According to the FTC, the transaction as originally structured would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by lessening competition in the U.S. markets for the research, development, manufacture, distribution, and sale of the following OTC medications: 1) H-2 blockers, 2) hydrocortisone anti-itch products, 3) night-time sleep aids, and 4) diaper rash treatments.

According to the Commission’s complaint, in each of the product markets, the proposed acquisition would increase market concentration significantly and eliminate substantial competition between leading suppliers in the United States. Further, the Commission contends that without the remedies put in place by the consent order, in each market the transaction likely would cause significant anticompetitive harm by enabling J&J to profit by raising prices above pre-merger levels, as well as by reducing J&J’s incentives to innovate and develop new products. Finally, the complaint states that any entry into the relevant markets by new competitors is unlikely to counteract the likely anticompetitive impacts of the transaction.

The Relevant Product Markets: H-2 Blockers. OTC H-2 blockers are a class of drugs designed to prevent and relieve heartburn associated with acid indigestion. They act differently in the body than antacid tablets, liquids, and other products, and consumers typically do not substitute one for the other. The $360 million U.S. market for OTC H-2 blockers is highly concentrated. J&J and Pfizer are the largest U.S. suppliers, and after the transaction as proposed, J&J would have over 70 percent of all OTC H-2 blocker sales in the country.

Hydrocortisone Anti-itch Products. Designed to reduce inflamation, redness, and swelling, OTC hydrocortisone anti-itch products are used topically to treat minor skin irritations. The U.S. market for such product is highly concentrated. Pfizer’s Cortizone products and J&J’s Cortaid products are the two leading brands in the $120 million U.S. market.

Night-time Sleep Aids. OTC night-time sleep aids are non-prescription drugs that are used solely for the relief of occasional sleeplessness. The U.S. market for such products is highly concentrated, and J&J and Pfizer are the two largest manufacturers and suppliers. Pfizer, which sells Unisom, is the leading supplier and J&J, which sells Simply Sleep, is the second-leading supplier in the $100 million nationwide market.

Diaper Rash Treatments. OTC diaper rash treatments are used to prevent and treat diaper rash and to protect sore or chafed skin from moisture and irritation. The U.S. market for such products is highly concentrated, with Pfizer’s Desitin, Schering-Plough’s A&D, and J&J’s Balmex comprising 70 percent of all sales in the approximately $84 million market. Absent the consent order, after the transaction, J&J would have nearly half of all U.S. OTC diaper rash treatment sales.

Terms of the Order: The FTC’s consent order is designed to remedy the competitive harm that would have resulted from J&J’s acquisition of Pfizer Consumer Healthcare, as proposed. The consent agreement preserves competition in these markets by requiring the divestiture of all assets related to: 1) Zantac H-2 blockers to Boehringer; and 2) Cortizone hydrocortisone anti-itch products, Unisom sleep-aids, and Balmex diaper rash treatment products to Chattem. The parties must divest the products within 15 days after the acquisition is closed, or January 2, 2007, whichever is later. The Commission is satisfied that both Boehringer and Chattem are well-qualified to take over the respective businesses and maintain them in a competitive manner.

The order contains several provisions that are designed to ensure the divestitures are successful. First, with regard to Zantac, the order requires J&J to provide Boehringer with all relevant research and development, intellectual property, and customer and supply contracts for the divested assets. It also requires J&J and Pfizer to take all steps necessary to ensure that J&J will not get or use any confidential business information related to Zantac, that Boehringer will have the opportunity to enter into employment contracts with certain key people who have experience related to Zantac, and that certain Pfizer managers who were involved in Zantac research and marketing be precluded from working on competing H-2 blocker products at J&J for two years. The order contains similar provisions related to the divestitures of the Cortizone, Unisom, and Balmex assets to Chattem.

Finally, the consent order requires J&J and Pfizer to maintain the viability of the divested assets pending their transfer to Boehringer and Chattem, and stating that they must be held separate before they are transferred. The FTC has appointed David Painter of LECG as interim monitor to oversee the transfer of the assets and to establish firewalls to ensure confidential business information is not shared. The companies also must file reports after the order is approved to ensure that their compliance with its terms.

The Commission vote to approve the consent order was 2-0, with Commissioners Pamela Jones Harbour, William E. Kovacic, and J. Thomas Rosch recused. The order will be subject to public comment for 30 days, until January 11, 2007, 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.