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Mergers on the Examining Table: The FTC Ratchets up Antitrust Enforcement in the Healthcare Sector

If you have picked up a newspaper or turned on the television recently, you probably noticed that the healthcare industry is under the microscope.  “Reform” is the watchword of the day, with President Obama’s plan to overhaul the healthcare system representing one of the most controversial and ambitious agenda items of his young presidency.  While it is difficult to predict whether or when reform legislation will be enacted, it is reasonably clear that the relentless debate over “ObamaCare” will not subside anytime soon.

Against this political backdrop, it is perhaps not surprising that the antitrust enforcement agencies – the Federal Trade Commission (“FTC”), in particular – have been active in the healthcare sector.  In the past six months, there have been at least three significant healthcare-related mergers and acquisitions in which the parties – faced with the prospects of a protracted battle with the FTC – opted to walk away from their respective transactions. In some respects, these enforcement actions are consistent with the heightened scrutiny the agencies applied to healthcare transactions in the waning days of the Bush administration.  See, e.g., In the Matter of Inova Health System and Prince William Health System, Inc., FTC Docket No. 9339. Nevertheless, the emphasis that President Obama has placed on healthcare reform suggests that the federal antitrust agencies will continue to be enforcement-heavy in this arena.  In that vein, the following is a brief synopsis of three recent FTC enforcement actions in the healthcare sector: Carilion Clinic, Thoratec Corporation, and CSL Limited.

I. Carilion Clinic

Carilion Clinic (“Carilion”) is the largest hospital system in southwest Virginia, holding an ownership interest in eight acute care hospitals and various other healthcare facilities. Through its holdings, Carilion controls approximately 80% of the hospital beds in Roanoke, Virginia. Carilion provides outpatient imaging services at three of its locations and outpatient surgery services at four of its locations.  On Aug. 22, 2008, Carilion acquired the Center for Advanced Imaging (“CAI”) and the Center for Surgical Excellence (“CSE”), the only independent providers of advanced outpatient imaging and surgical services, respectively, in the Roanoke area.  The acquisition carried a reported purchase price of $20 million.  As a result of the acquisition, the number of imaging and surgical services providers in the area decreased from three to two, with HCA Lewis-Gale placing the only competitive constraint on Carilion. 
 
On July 23, 2009 – nearly one year after the acquisition was consummated – the FTC issued an Administrative Complaint challenging the transaction. Complaint, In the Matter of Carilion Clinic, Docket No. 9338, at http://www.ftc.gov/os/adjpro/d9338/090724carilioncmpt.pdf. According to the FTC, Carilion’s acquisition “significantly reduced competition in the two affected markets, and will result in higher prices and reduced non-price competition for these services.”  Compl. at 2.  The relevant product markets were defined as (1) “advanced outpatient imaging services sold to private payors, including commercial health plans”; and (2) “outpatient surgical services.”  Compl. at 4.  The relevant geographic market was defined as “the Roanoke area, which includes the Counties and Cities of Roanoke and Salem, Virginia.”  Compl. at 4.  The FTC alleged that the transaction would lead to numerous anticompetitive effects, including an increase in patients’ out-of-pocket expenses by 900% for some services and would create a disincentive for Carilion and HCA to aggressively compete on a going-forward basis.  Compl. at 7.  The primary relief sought by the FTC was Carilion’s divesture of the facilities in question. Compl. at 9.
 
In light of this challenge, Carilion agreed to unwind the transaction by selling CAI and CSE within three months to a buyer approved by the FTC.  Carilion also agreed to several measures aimed at restoring competition, such as a six-month prohibition on soliciting for employment any physician who had referred patients to the CAI since Jan. 1, 2008.  This measure, according to the FTC, will allow CAI’s new owner to develop and reestablish its referral base.  See Federal Trade Commission Press Release, Commission Order Restores Competition Eliminated by Carilion Clinic’s Acquisition of Two Outpatient Clinics (Oct. 7, 2009), at http://ftc.gov/opa/2009/10/carilion.shtm
 
One significant aspect of the Carilion matter is that the transaction in question – with a relatively low acquisition price of $20 million – did not require premerger notification under the Hart-Scott-Rodino Act (“HSR”).  The fact that the FTC nevertheless saw fit to challenge the transaction underscores the notion that it is focusing not only on large mergers and acquisitions, but also on those smaller transactions that otherwise fly below the HSR radar.

II. Thoratec Corporation

 Thoratec Corporation (“Thoratec”), headquartered in Pleasanton, California, is a producer of medical devices used to sustain end-stage heart failure patients, known as left ventricular assist devices (“LVAD”). LVADs are surgically-implanted and assist such patients by mechanically pumping blood into the patient’s native heart. LVADs are commonly used in two clinical settings: (1) to assist patients on a short-term basis while they are awaiting heart transplants, i.e., “bridge to transplant therapy”; and (2) as a long-term alternative for patients who – because of advanced age or other medical conditions – are not suitable transplantation candidates, i.e., “destination therapy.”  Thoratec’s HeartMate II and HeartMate XVE are the only LVADs currently approved by the U.S. Food and Drug Administration (“FDA”) for commercial sale.
 
Massachusetts-based HeartWare International, Inc. (“HeartWare”) is one of a handful of companies that is currently developing LVADs.  HeartWare is permitted to sell limited quantities of its LVAD – known as HVAD – in connection with its participation in ongoing FDA clinical trials. If these trials are successful, HeartWare could receive FDA approval and eventually compete directly with Thoratec in the LVAD market. 
 
On Feb. 12, 2009, Thoratec and HeartWare entered into an Agreement and Plan of Merger, pursuant to which Thoratec proposed to acquire 100% of HeartWare’s voting securities. The cash and stock transaction was valued at approximately $282 million, thus triggering HSR’s premerger notification requirements.
 
On July 28, 2009, the FTC filed an Administrative Complaint challenging the transaction. Complaint, In the Matter of Thoratec Corporation and HeartWare International, Inc., Docket No. 9339, at http://www.ftc.gov/os/adjpro/d9339/090730thorateadminccmpt.pdf.  The complaint characterized Thoratec as a monopolist in three relevant product markets: (1) LVADs; (2) LVADs as a bridge to transplant therapy; and (3) LVADs as a destination therapy. Compl. at 3. The relevant geographic market was defined as the United States. Id. The FTC alleged that a variety of anticompetitive effects would flow from the merger, including the elimination of current and future competition between the firms and the increased likelihood that Thoratec would collude with other LVAD manufacturers. Id. at 4.  On July 31, 2009, the parties announced that they were abandoning the transaction. 
 
The FTC’s predominant competitive theory in the Thoratec case was the elimination of potential competition.  This is due to the fact that HeartWare – with its LVAD currently the subject of clinical trials – has not fully entered the relevant product markets. The “potential competition” theory has been utilized by the FTC in prior enforcement actions, see, e.g., Cephalon, Inc., 138 F.T.C. 583, 635-36 (2004), but it creates a complex proof structure that makes the prosecution of such claims particularly thorny.  It is therefore difficult to determine whether the facts of the Thoratec case were especially well-suited for this competitive theory, or whether one should expect an increase in enforcement actions based on the alleged loss of potential competition. 

III. CSL Limited

Plasma-derivative protein products are essential for treating a host of rare and life threatening medical conditions, such as autoimmune and coagulation diseases. Patients dependent on such therapy can spend in excess of $90,000 per year on these products. CSL Limited (“CSL”) is the second largest supplier of plasma-derivative protein therapies in the world.  Talecris Biotherapeutics Holdings Corporation (“Talecris”) is a wholly-owned subsidiary of Cerberus-Plasma Holdings, LLC (“Cerberus”).  Talecris is the third-largest producer of plasma-derivative protein therapies in the world.  CSL and Talecris are both vertically integrated, owning and operating plasma collection and manufacturing facilities across the United States. 
 
On Aug. 12, 2008, CSL entered into an Agreement and Plan of Merger to acquire Talecris from Cerberus.  
The transaction was valued at approximately $3.1 billion, easily triggering HSR premerger reporting requirements.  Pursuant to applicable HSR provisions and a timing agreement entered into between the parties and the FTC staff, the acquisition could have been consummated on or after May 29, 2009.  On May 27, 2009, the FTC challenged the transaction, filing an Administrative Complaint.  Complaint, In the Matter of CSL Limited and Cerberus-Plasma Holdings, LLC, Docket No. 9337, at http://www.ftc.gov/os/adjpro/d9337/090527cslcmpt.pdf.
 
The Complaint alleged four separate relevant product markets: (1) immune globulin, commonly known as “Ig”; (2) albumin; (3) alpha-1; and (4) Rho-D. Compl. at 8.  The relevant geographic market was defined as the United States. Compl. at 10.  According to the FTC, the transaction would constitute a three-to-two or a five-to-four merger, depending on the product market in question.  Compl. at 2.  Additionally, CSL’s post-merger market share would range from 42% to 82% in these various product markets.  Compl. at 10.
 
While the FTC alleged that the merger would result in the aggrandizement of market share in the relevant product markets, its chief competitive concern rested on the notion that, post-merger, CSL could impermissibly coordinate with its remaining competitors.  This is due largely to the fact that the industry has traditionally operated as a “tight oligopoly.”  Compl. at 2.  According to the FTC, there is a history of competing firms “closely monitor[ing] each other, collecting and cataloging an extraordinary wealth of timely competitive information, to ensure that all are engaged in desired ‘rational’ and ‘disciplined’ behavior.”  Id.  Furthermore, a spate of industry consolidation in recent years has resulted in greater market concentration, tighter supply, and higher prices for many plasma-derivative protein products.  Compl. at 6-7.  In the FTC’s view, “Talecris is the one firm in the industry that can thwart the prevailing restrained, oligopolistic approach.”  Compl. at 8.  Although the parties initially signaled that they would oppose the FTC’s challenge, CSL announced on June 8, 2009 that it would not proceed with the acquisition. http://www.ftc.gov/opa/2009/06/csl.shtm.
 
While the FTC’s competitive theories focused on the peculiarities of the plasma-derivative protein products industry, there is nonetheless at least one take-away that applies to virtually all enforcement actions: In evaluating the competitive impact of a transaction, the antitrust enforcement agencies frequently gather industry information from a variety of extraneous sources.  Here, for instance, the FTC’s view of the oligopolistic nature of the industry was reinforced by comments made by a competitor’s Chief Financial Officer during a conference call with investors. Compl. at 7.  This underscores the importance of carefully evaluating not only a firm’s internal “deal-related” documents, but other information available in the public domain, when developing an antitrust rationale in support of a transaction. 

IV. Conclusion

In light of these enforcement actions, one might assume that those in the healthcare industry – hospital systems in particular – are losing an appetite for mergers and acquisitions. To the contrary, in the past several months, there has been a marked uptick in announced transactions.  This proliferation is likely due to several factors, including (1) the tightening of the credit markets over the past two years, which has left smaller, stand-alone hospitals cash-strapped; and (2) the general sense among industry experts that national healthcare reform will result in lower reimbursement. See Vince Gallaro, Urge to Merge, Modern Healthcare, Aug. 17, 2009 at 6-7, 16.
 
It is highly likely that, with an increase in healthcare-related transactions, there will be a commensurate increase in enforcement activity.  Tighter enforcement would seemingly be consistent with the current administration’s focus on healthcare reform. The Carilion, Thoratec, and CSL Limited cases demonstrate that the FTC is prone to employ a variety of competitive theories as the basis for an antitrust challenge, may take enforcement actions after a transaction has been consummated, and may challenge those transactions falling below HSR reporting thresholds. Faced with such challenges, some firms may conclude that abandoning a transaction is more appealing than waging a time-consuming and costly war with an antitrust enforcement agency.
 
This article originally appeared in the December 2009 issue of Antitrust News, the newsletter published by the Antitrust & Trade Regulation Law Section of the North Carolina Bar Association. (Volume 20, No. 1). Reprinted with permission, all rights reserved.
Copyright © 2004-2010 Womble Carlyle Sandridge & Rice, PLLC. Reprinted with permission Antitrust & Trade Regulation Law Section of the North Carolina Bar Association.

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About this Author

Brian A. Hayles, Womble Carlyle, Antitrust Attorney, Trade Regulation Lawyer, North Carolina
Partner

Brian's primary practice area is antitrust and trade regulation, with a particular focus on the health care industry. His practice includes counseling in the context of mergers, joint ventures, and other forms of competitive collaborations; antitrust-related litigation; and representation before the United States Department of Justice and Federal Trade Commission related to merger activity.

Brian’s practice area is antitrust and trade regulation, with a particular focus on complex transactions, antitrust counseling, and antitrust-related litigation. Brian regularly represents...

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