Corporate & Securities Law

Odd FTC Consent in Vertical Licensing Case

The FTC announced a complaint today challenging Fresenius Medical Care AG & Co.’s proposed acquisition of an exclusive sublicense from Luitpold Pharmaceuticals, who is in turn a wholly owned subsidiary of a Japanese firm Daiichi Sankyo Company. The sublicense would allow Fresenius to manufacturer and supply the intravenous iron drug Venofer to dialysis clinics in the US. Here’s how the FTC press release describes the complaint:

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).

Here’s where things get interesting:

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.

Holding aside the underlying merits of the complaint, which I don’t know anything about, this strikes me as an unusual and highly regulatory remedy in that it includes both a price cap and a most-favored-nations (MFN) clause. How unusual is this? The criticism for imposing price controls are well known and don’t need to be rehearsed here. It should also be noted that the FTC itself has challenged MFN clauses in other settings!

Full post as published by Truth on the Market on September 17, 2008 (boomark / email).