FTC Challenges Vertical Agreement Between Fresenius and Daiichi Sankyo

The Federal Trade Commission today announced a complaint challenging Fresenius Medical Care Ag & Co. KGaA’s (Fresenius) proposed acquisition of an exclusive sublicense from Luitpold Pharmaceuticals, Inc. (Luitpold), a wholly owned U.S. subsidiary of the Japanese firm Daiichi Sankyo Company, Ltd.  Under the sublicense, Fresenius would manufacture and supply the intravenous iron drug Venofer to dialysis clinics in the United States. 

The FTC’s complaint charges that the proposed vertical agreement would provide Fresenius, the largest provider of end-stage renal disease (ESRD) dialysis services in the United States, with the ability to increase Medicare reimbursement payments for Venofer. This is possible because after the transaction, the competitive market will no longer determine the price that Fresenius’ clinics will pay for intravenous (IV) iron. That amount will instead become an internal transfer price reported by Fresenius to the Center for Medicare & Medicaid Services (CMS).

A consent order settling the Commission’s charges and allowing the companies to consummate the transaction will prevent Fresenius from reporting intra-company transfer prices higher than certain levels specified in the order. Those levels are derived from current market prices.

“Each year Medicare pays hundreds of millions of dollars for intravenous iron products used in kidney dialysis centers across the country,” said David P. Wales, Acting Director of the FTC’s Bureau of Competition. “The Commission’s action today will ensure that the transaction will not increase the prices for this life-saving drug.”

Intravenous Venofer

Venofer is an intravenously administered iron sucrose preparation used primarily to treat iron-deficiency anemia in patients with chronic kidney disease that are undergoing dialysis. Without IV iron treatments, patients on dialysis would suffer from significantly higher death rates and a lower quality of life.

In the United States, Luitpold sells Venofer and Watson Pharmaceuticals Inc. (Watson) sells Ferrlecit. These are the two most commonly used IV iron products used to treat iron deficiency in patients undergoing kidney dialysis. Earlier-generation IV iron products are rarely used due to significant and dangerous side effects. According to the Commission’s complaint, the market for these IV iron drugs is highly concentrated, and entry into the market would not be timely, likely, or sufficient to deter or counteract the alleged anticompetitive effects of the proposed transaction.

Agreement Background

Under the terms of a licence, distribution, manufacturing, and supply agreement, dated July 8, 2008, Luitpold and Vifor (International) Inc. agreed to grant Fresenius an exclusive sublicense to distribute, manufacture, and sell Venofer to independent outpatient dialysis clinics in the United States for 10 years, with an option to extend the deal for another 10 years. Under the agreement, Luitpold retains the exclusive right to sell Venofer in the United States to any other customer, including hospitals, doctors’ offices, and hospital-based dialysis clinics.

The Commission’s Complaint

According to the FTC’s complaint, Fresenius’ proposed transaction with Luitpold and Vifor, if consummated, would violate Section 7 of the Clayton Act and Section 5 of the FTC Act, as amended, by enabling Fresenius to report higher prices for Venofer used in its own clinics to CMS, resulting in a higher average selling price (ASP) and therefore a higher Medicare reimbursement rate for Venofer.

Specifically, the Commission’s complaint states that the proposed agreement would give Fresenius, the largest provider of ESRD dialysis services in the nation, the ability and incentive to increase Medicare reimbursement payments for Venofer. This is because Medicare reimburses dialysis clinics for Venofer (a so-called Part-B drug) at the manufacturer’s ASP, plus six percent. Because the current CMS reimbursement system does not address the reporting of intra-company sales, the proposed agreement would provide Fresenius with the means and incentive to file with CMS inflated intra-company price reports for Venofer used in its clinics. Such artificially inflated prices could rapidly increase the manufacturer’s ASP for Venofer, and CMS would be forced to pay higher prices for Venofer administered to dialysis patients covered by Medicare.

Terms of the Consent Order

The Commission’s consent order settling the complaint resolves the anticompetitive issues raised by the proposed transaction by preventing Fresenius from reporting an intra-company transfer price to CMS for Venofer that is higher than the level set forth in the order. The level in the order is derived from current market prices. The order further provides that if a generic Venofer product enters the market, Fresenius would be required to report its intra-company transfer price at the lower of the level set forth in the order or the lowest price at which Fresenius sells Venofer to any customer until December 31, 2011. These provisions are designed to ensure that the price Fresenius reports to CMS is in line with current market conditions, including potential generic entry. The order also provides that if CMS implements regulations that eliminate the potential anticompetitive harm from this transaction, those regulations will supersede the order.

The order prohibits Luitpold and Fresenius from sharing confidential business information related to the manufacture, sale, or distribution of Venofer and requires the parties to provide notice to the FTC before modifying the licence agreement. It also allows the Commission to appoint a monitor trustee, but one has not yet been appointed.

The Commission vote to approve the complaint and consent order and place copies on the public record was 4-0. The order will be subject to public comment for 30 days, until October 13, 2008, 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 documents related to this matter are available from the FTC's Web site at http://www.ftc.gov and the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.

(Fresenius.final)
(FTC File No. 081-0146)