Teva, Allergan Generics: FTC Worried About A Multitude Of Markets, Not A Behemoth

Record-setting divestment order driven by sheer number of products where firms competed, not size of company that would result from acquisition.

The US Federal Trade Commission's record-setting divestment order in Teva Pharmaceutical Industries Ltd.'s purchase of Allergan PLC's generic unit was driven by the sheer number of products where the firms competed, not size of the company that would result from the acquisition.

Indeed, FTC – which approved the $40.5bn transaction on July 27 – appears to have concluded that size alone is not a major determinate of a firm's success in the generic market place. "Although both Teva and Allergan have broad generic drug portfolios today, the evidence did not show that the breadth of their portfolios significantly affects their ability to win business in individual drug product markets," the Commission said.

That conclusion didn't stop FTC from ordering substantial divestments, including the sale of 79 pharmaceutical products to 11 different firms, which constitutes the largest drug divestiture ever ordered by the Commission in a pharmaceutical merger review. It was a lot more than Teva expected (see related story in Scrip).

But many of the divestments had been previously announced, and Teva had been anticipating FTC's approval shortly. (Also see "Teva, Allergan Probably Won't Need More Divestments To Get FTC Approval" - Pink Sheet, 13 Jul, 2016.)

The merger would combine the leading generic company in the US – Teva, with a 13% share – and the third largest – Allergan, which has 9% of the market. Despite the huge divestitures, the combined firm is still expected to have a 22% market share. But "the generic pharmaceutical industry as a whole remains relatively unconcentrated," FTC said. "Over 200 firms sell generic drugs in the United States and the five largest suppliers account only for about half of overall generic sales."

The diffuse nature of the industry might be one reason that Teva and Allergan haven't been able "to use their portfolios to foreclose smaller competitors," FTC said.

Smaller Portfolios Complete Well

"Even with one of the broadest generic product portfolios in the industry, Teva’s overall share of US generic prescriptions has steadily declined from 2010 to 2015, and the share of total prescriptions filled by the five largest generic suppliers has similarly fallen during this period," FTC noted.

"Generic sales occur at the individual product level, and customers sometimes even break up purchases by specific strengths to obtain more favorable pricing. As a result, smaller firms with much smaller portfolios compete head-to-head against larger generic firms and are the leading suppliers in the markets for many individual generic treatments. Additionally, purchasers actively seek to diversify their supplier base by sourcing from smaller suppliers," FTC noted.

The value of a widely diverse supply base was also likely the driver of FTC's divestiture orders in several other recent generic mergers where up to five competitors in a category would have existed even after the merger. (Also see "FTC's Generic Market Analysis Forcing Divestures Even In Diverse Categories" - Pink Sheet, 26 Feb, 2016.)

The Commission's investigation of Teva-Allergan deal "included the review of extensive documents from the merging parties and other industry players as well as interviews with dozens of customers and more than 50 competitors. … We concluded that anticompetitive effects arising from the merged company’s portfolio of products are unlikely to occur," FTC said.

FTC's analysis of markets extended into product production. "Teva and Allergan also sell active pharmaceutical ingredients (API) to many third-party drug manufacturers, including parties that will now compete with the merged entity," the agency noted. "Where the number of competitors in the finished product market is limited, the Commission determined that this vertical relationship could raise competitive concerns in markets for finished drug products by creating the incentive and ability for Teva to raise prices or withhold supply where third parties source from the merged firm."

Minimizing 'Potential Risks'

To address these concerns, Teva must offer affected customers the option of long-term API supply contracts "to ensure that they have an adequate supply of API until they are able to qualify alternative suppliers," FTC said

FTC emphasized the "safeguards" that the consent order contains "to help achieve our remedial goals." Companies that acquired the divested assets were "closely vetted and approved" and "where at least one dosage strength raised a competitive concern, we required Teva to divest all strengths."

The settlement relied on "the Commission’s extensive experience with divestitures in the pharmaceutical industry, including prior divestitures involving Teva and Allergan," and divestitures were structured "in a way to minimize potential risks."

That de-risking included "breaking the divested products into smaller packages to ease the load on any single buyer and requiring Teva to divest the easier-to-divest product of the overlapping products whenever possible," FTC said.

Vetting of the buyers of the divested assets insured they have "the resources they need to compete successfully in the relevant markets. The buyers have identified third-party contract research organizations or contract manufacturers they intend to use and provided us with executed contracts," FTC said.

FTC "involved interim monitors early in the divestiture negotiation process to ensure a smooth divestiture process and harmonize Teva’s technological transfer plans with those of the acquirers. … And we are requiring Teva to dedicate a full-time organization to implement the technology transfers and other measures necessary to effectuate the divestitures," the Commission noted.