FTC Challenges Kyphons Acquisition of Disc-O-Tech

The Federal Trade Commission today announced a complaint challenging Kyphon, Inc.’s (Kyphon) proposed acquisition of the spinal assets of Disc-O-Tech Medical Technologies, Ltd. and Discotech Orthopedic Technologies, Inc. (collectively Disc-O-Tech) as anticompetitive in the U.S. market for minimally invasive vertebral compression fracture (MIVCF) treatment products. Under the terms of a consent order allowing the transaction to proceed, the parties are required to divest Disc-O-Tech’s Confidence product lines – a brand of MIVCF treatment product – to an FTC-approved buyer within 60 days.

“Without the Commission’s action today, the acquisition by Kyphon of Disc-O-Tech’s Confidence product would have deprived Americans suffering from vertebral compression fractures, including the elderly, of the benefits of competition for these vital products,” said Jeffrey Schmidt, Director of the FTC’s Bureau of Competition. “The Commission’s order contains strong relief that will preserve competition, ensuring that these products will be provided at lower prices and higher quality.”

The Transaction and Relevant Product Market

In October 2006, Kyphon agreed to acquire certain spinal assets from Disc-O-Tech, including the intellectual property and assets related to the latter’s B-Twin, SKy Bone Expander, and Confidence product lines for approximately $220 million. According to the FTC, the competitive overlap between the two companies is in the U.S. market for MIVCF treatment products. These products are used to treat vertebral compression fractures (VCFs), which can cause extreme debilitating pain for some patients. VCFs can occur when one or more vertebrae collapse and are commonly caused by osteoporosis.

In the past, doctors typically treated VCFs with vertebroplasty, the first MIVCF treatment to be introduced. While it effectively relieves pain, many doctors have safety concerns about the liquid bone cement used in the procedure. In 1999, Kyphon introduced kyphoplasty, which is similar to vertebroplasty but uses a technology that reduces the chance of bone cement leakage. Because of its safety advantages and other factors, kyphoplasty is now the most widely used MIVCF treatment product in the United States. Disc-O-Tech’s Confidence system competes directly with Kyphon’s higher-priced kyphoplasty product and uses a highly viscous cement that makes it a safer alternative to vertebroplasty. Accordingly, it has become a closer substitute for Kyphon’s product than other vertebroplasty products. While other companies are attempting to enter the MIVCF product treatment market, none of their products has the Confidence system’s immediate prospects of success or ability to compete effectively with kyphoplasty.

The Commission’s Complaint

According to the Commission’s complaint, Kyphon’s acquisition of Disc-O-Tech as proposed would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended, by causing significant competitive harm in the market for MIVCF treatment products. The complaint alleges that Confidence is Kyphon’s main competitive threat and, absent the acquisition, would make significant inroads into Kyphon’s near-monopoly position in this market. Kyphon’s acquisition of Confidence appears to have been motivated, in part, by its desire to keep those assets out of the hands of other major medical equipment companies that had the sales and marketing know-how to capitalize on those assets. Kyphon’s acquisition of Confidence would have allowed it to avoid the competition that another acquirer would have brought to the MIVCF treatment product market.

The FTC contends that entry by another competitor is unlikely to be either timely or sufficient to offset the alleged anticompetitive effects of the proposed acquisition. Entry is limited by the need for U.S. Food and Drug Administration clearances and approvals, the substantial intellectual property positions of Kyphon, Disc-O-Tech and other market participants, and the difficulty of establishing a U.S. sales and marketing force for any new MIVCF treatment product.

Terms of the Consent Order

The FTC’s consent order is designed to remedy the competitive harm that otherwise would result from Kyphon’s acquisition of Disc-O-Tech’s Confidence assets. Under the terms of the order, the parties have agreed to divest these assets no later than 60 days after the consent agreement is accepted for public comment, thereby remedying the anticompetitive effects in the MIVCF treatment product market. Specifically, the order requires the parties to divest all assets related to the Confidence system, including tangible and intellectual property, as well as any permits and licences needed to make, distribute, and sell the Confidence system. The parties also must divest rights to certain of Disc-O-Tech’s development efforts related to the system. If the acquirer requires additional assets not included in the divestiture package, the order would require Kyphon to provide a license to any other assets acquired from Disc-O-Tech to enable the acquirer to immediately enter the MIVCF treatment product market as a viable competitor.

In addition, the order contains several provisions designed to ensure that the divestiture is successful. First, the FTC will evaluate possible buyers to ensure that they are able to restore competition that would have been lost through the acquisition. If the parties do not divest the assets within the time required, the Commission can appoint a divestiture trustee to oversee their sale. Next, Disc-O-Tech is required to provide transitional services to the buyer approved by the FTC to ensure a smooth transition to the buyer and to ensure continued uninterrupted service to customers during the transition. To ensure that Kyphon does not interfere with the acquirer’s freedom to compete in the MIVCF treatment product market, the order would bar Kyphon from suing the buyer for infringing on any intellectual property rights acquired from Disc-O-Tech.

Finally, the consent order contains an order that requires Disc-O-Tech to maintain the viability of the assets to be divested until they have been transferred to a Commission-approved buyer. The Order to Hold Separate and Maintain Assets also prohibits Kyphon from offering jobs to Disc-O-Tech employees involved in the Confidence system before the assets are divested.

The Commission vote approving the issuance of the complaint and consent order was 3-0-2, with Commissioners Pamela Jones Harbour and William Kovacic recused. The order will be subject to public comment for 30 days, until November 8, 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.

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.