FTC Files Antitrust Suit Against Ovation: The Government Seeks Divestiture and Disgorgement of Profits

On December 16, 2008, the FTC and the Minnesota Attorney General each filed complaints in Minnesota federal district court against Ovation Pharmaceuticals, Inc., in connection with the company's January 2006 acquisition of Neoprofen - a drug used to treat heart defects in premature infants. Each complaint alleges that the acquisition gave a monopoly to Ovation which it used to raise prices almost 1,300 percent.

Neoprofen is used to treat a potentially life-threatening heart defect affecting more than 30,000 premature infants in the United States each year. Only one other brand name drug has been approved by the FDA to treat this condition: Indocin, which Ovation acquired from Merck in 2005. Although the FDA also recently approved a generic version of Indocin, the generic product is not yet available in the market.

According to the complaints, Ovation acquired Neoprofen while the drug was in development in order to eliminate the competitive threat that it posed to Ovation's sales of Indocin. Once Ovation owned both drugs, it raised the price of Indocin from approximately $36 per vial to approximately $500 per vial - an increase of nearly 1,300 percent. The company later launched Neoprofen at a similarly high price (i.e., approximately $483 per vial). With no generic alternatives yet available in the market, the government alleges that Ovation has monopolized these drug treatments and deprived consumers of the benefits of lower prices associated with competition.

The FTC and the Minnesota Attorney General seek both to "un-do" the acquisition and the competitive harm by forcing Ovation both to divest Neoprofen and to "disgorge" the illegally obtained monopoly profits from the sale of both drugs. This stringent remedy is almost without precedent. There is only one prior federal merger enforcement action - the FTC's 2001 action against Hearst - in which the enforcement agencies have sought both divestiture and disgorgement. FTC v. The Hearst Trust/The Hearst Corp., Civ. No. 01-CV-00734 (D.D.C. 2001). In that case, the Hearst Corp. agreed to disgorge $19 million in illegal profits resulting from its 1998 acquisition of a drug database business and also to divest the unlawfully acquired business. Id.

This action follows closely on the heels of several other enforcement actions involving consummated mergers and illustrates the government's attentiveness to post-closing anticompetitive effects.¹ In addition, the concurring statement of Commissioner Leibowitz explicitly warns that the FTC may look for other opportunities to obtain disgorgement in antitrust cases. According to the Commissioner, the FTC should "use disgorgement in antitrust cases more often."

Another aspect of the concurring statements of both Commissioners Leibowitz and Rosch suggests that the Commissioners are willing to be quite aggressive in pursuing theories of antitrust liability that may not "reflect current economic thinking." In particular, both Commissioners express the view that the FTC should also have sought to force Ovation to divest Indocin. Commissioner Rosch explains that Merck historically had sold Indocin at a reasonable price because the company feared that its reputation - and the rest of its vast portfolio of profitable drugs - could be greatly harmed by charging high prices for a drug used for very sick, and often very poor, infants. As a smaller company, Ovation had no such "reputational" constraints on its pricing of Indocin. Its acquisition of the drug therefore enabled Ovation to unlawfully exercise monopoly power in the pricing of the drug, he suggested.

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¹ Earlier this year, the FTC challenged the consummated merger of battery separators. See In the Matter of Polypore Int'l, Inc., FTC No. 9327. In 2006, the FTC challenged a transaction in the breast cancer screening and diagnosis market: In the Matter of Hologic, Inc., FTC No. 051-0263. In 2004, the FTC challenged the consummated merger of two Evanston, Ill. hospitals: In the Matter of Evanston Northwestern Healthcare Corporation and ENH Medical Group, Inc., FTC Docket No. 9315. In 2003, the agencies challenged two consummated transactions: United States v. Dairy Farmers of America, Inc., No. 6:03-206 (E.D. Ky. filed April 24, 2003) (school milk sales); In the Matter of Aspen Technology, Inc., FTC No. 9310 (engineering simulation software). In 2001, the FTC challenged four consummated mergers: In the Matter of Chicago Bridge & Iron Company N.V., Chicago Bridge & Iron Company, and Pitt-Des Moines, Inc., FTC Docket No. 9300 (industrial storage tanks); In the Matter of Airgas, Inc. FTC No. 001-0040 (nitrous oxide); In the Matter of Hearst Trust/Hearst Corp., Civ. No. 01-CV-00734 (drug database); and In the Matter of MSC Software Corp., FTC Docket No. 9299.