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The settlement of Federal Trade Commission objections to Cephalon Inc.’s $515 million acquisition of Cima Labs Inc. may serve as a road map for drug companies seeking antitrust approval for controversial mergers. The consent order — which the FTC accepted on a 3 to 1 vote, with Commissioner Mozelle Thompson dissenting — requires Cephalon to help Barr Laboratories Inc. become a generic manufacturer of Actiq, a drug used to treat severe cancer pain. In exchange, Cephalon gets Cima and its OraVescent fentanyl cancer pain drug, which is in the final stages of obtaining Food and Drug Administration approval. Antitrust experts said the order is significant because it shows that the FTC is willing to sacrifice expected competition between two brand-name products to expedite entry into the market of a generic version of a drug. “That appears to contradict commission policy,” said Michael Cowie, a partner at law firm Howrey Simon Arnold & White and a former head of the FTC’s merger litigation task force. The agency historically resolves anti-competitive mergers by requiring the buyer to divest its product, he said. In this case, however, Cephalon is not required to sell anything. Rather, it must license the right to produce a version of a drug that it continues to develop. David Balto, a partner at Robins, Kaplan, Miller & Ciresi in Washington, said the FTC is opening the door to more dealmaking by finding a creative way to let the drug merger proceed. “It shows a significant degree of flexibility by the commission to crafting remedies,” he said. Under this view, drug companies no longer would have to weigh the lost revenue from a divestiture in determining whether to proceed with a deal. That means markets with only three or four competitors, a situation where a company typically would have to make a costly divestiture, could be ripe for consolidation. “Firms might feel more at liberty to try four-to-three or three-to-two mergers where they have a creative licensing remedy,” Cowie said. In his dissent, Thompson warned that the FTC order establishes a dangerous precedent that other drug companies will use to justify anti-competitive mergers. For the first time, the FTC is sacrificing the economic interests of consumers who want brand-name drugs for the benefit of those who are willing to accept generic pharmaceuticals, Thompson wrote. “While generic products and branded products are interchangeable to some extent, they are not necessarily considered reasonable substitutes by a significant segment of consumers in the typical pharmaceutical market,” he said. “As a result, the commission historically has been unwilling to trade away a branded product for a generic one.” Accepting such tradeoffs is especially dangerous because the drug industry has recently undergone a reorganization, Thompson wrote. Major drug companies no longer develop most of their products in-house. Instead, they purchase biotech startups engaged in advanced research to build up a portfolio of future drug treatments. “I fear the commission today may be signaling the industry that dominant firms in pharmaceutical markets now have the antitrust ‘green light’ to acquire competitors and potential entrants,” Thompson wrote. Yet the majority said in a statement that the agency has long held that generic drug entry offers major benefit to consumers. It also said Actiq users would likely have faced higher prices regardless of the merger because companies typically raise prices once a drug goes off patent, as Actiq will in 2006. “The benefits that earlier generic entry will bring to consumers of [advanced cancer pain] treatment in terms of lower average prices greatly exceed any price increase to less price-sensitive patients who may continue to choose branded products,” the majority wrote. Balto said the FTC’s explanation does not address Thompson’s view that the order represents an unprecedented accommodation to facilitate a merger. “Commissioner Thompson’s comments seem right on point,” Balto said. “If the competitive impact seemed so strong and the efficiencies were so lacking, it’s hard to see why the FTC should have developed such a unique settlement rather than simply challenging the deal.” American Antitrust Institute president Bert Foer said the case reflects a clash of two different views of mergers and antitrust law. One side, represented by the majority, assumes mergers are beneficial and that the antitrust agencies should work to try to clear them. The other view, advocated by Thompson, holds that mergers in already concentrated markets are suspect and should be cleared only if there is a good reason. “At what point should the government just say no rather than manipulating the market to make mergers OK?” Foer asks. The Cephalon-Cima deal is likely to be the final major merger clash between FTC Chairman Timothy Muris and Thompson, who have been at odds on several merger matters. President Bush has used recess appointments to install replacements for both of them. Copyright �2004 TDD, LLC. All rights reserved.

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