In an unexpected about face, the US Federal Trade Commission has thrown in the proverbial towel and decided not to pursue a US Supreme Court review of a contentious case against Lundbeck, which was charged with antitrust violations for cornering the market for drugs used to treat a fatal birth defect and then raising prices by a huge amount.
The FTC decision ends what some believed was an opportunity for the Supreme Court to review antitrust merger doctrine. Why? The FTC argued the case was obvious: Lundbeck monopolized a market in order to reap windfall profits. Moreover, there was no apparent benefit to consumers. About 30,000 newborns each year are treated with medication, by the way, to treat the affliction.
The Lundbeck case "could provide the opportunity for the court to reconsider its earlier jurisprudence in light of developments," former FTC Commissioner William Kovacic told The Deal last year. More recently, though, the agency suffered a string of setbacks before a federal appeals court and, in frustration, has now given up. "We... intend to forgo further review in this case, and turn our energies to other enforcement priorities," three FTC commissioners said in a statement.
Some background: In 2006, Lundbeck bought NeoProfen, which is used to treat the potentially fatal infant disorder called patent ductus arteriosus, or PDA. The med was still being studied, but was the only potential rival to its own Indocin IV. And so Lundbeck raised the price of a three-dose regimen of Indocin IV to $1,500 from $120. Later, when NeoProfen was approved, its price was... $1,449.
And so, the FTC filed its lawsuit. However, after a federal district court judge dismissed the case, the agency insisted the judge misread facts and inappropriately applied economic standards that did not take into account the realities of the marketplace. The agency appealed, but a three-judge panel denied the appeal. The agency then sought a rehearing before the full court, which was also denied.
"Lundbeck priced them near parity in order to eliminate price as a competitive variable," the FTC wrote in a brief last October in hopes of convincing the entire US Court of Appeals for the Eighth Circuit to rehear its argument. "...this case raises questions of exceptional importance concerning basic principles of antitrust market definition" (here is the brief).
In particular, the agency cited a decision by the district court judge to rely on testimony about cross-price elasticity, which measures the rate of response of demand for one product, due to a price change in another product. Basically, the judge ruled there was no antitrust case because hospital doctors would not have considered the initial pricing for Indocin. The FTC had argued that US District Court Judge Joan Ericksen failed to consider that the two drugs compete in the marketplace.
"The result in this case was profoundly wrong, reflecting a serious misunderstanding by the District Court of the dynamics of this market and of the competitive consequences of an acquisition that allowed one company to control the only two pharmaceutical treatments for a life-threatening medical condition and raise prices by nearly 1300 percent," the trio of FTC commissioners wrote in their announcement that the case was being dropped. "The Court of Appeals’ opinion unfortunately upheld that result. But it did so on narrow grounds, emphasizing the narrow standard of review that it applies to issues it views as factual in nature."
In fact, one member of the three-judge panel acknowledged that the decision by the district court judge relied on unusual logic. "The district court relied heavily upon the testimony of doctors that they would use Indocin or NeoProfen without regard to price. Admittedly, those doctors had no responsibility to pay for the drugs or otherwise concern themselves with cost. Thus, the doctors had scant incentive to conserve the scarce resources that would be devoted to paying for the medication," wrote appeals court judge Richard Kopf (read here).
"Why the able and experienced trial judge relied upon the doctors’ testimony so heavily is perplexing. In an antitrust case, it seems odd to define a product market based upon the actions of actors who eschew rational economic considerations," wrote "...That oddity seems especially strange where, as here, there is no real dispute that both drugs are effective when used to treat the illness about which the doctors testified and internal records from the defendant raise an odor of predation."
In decrying the decision to abandon the case, FTC Commissioner J. Thomas Rosch issued his own statement, which passionately argued for pressing onward. "There are many reasons for seeking Supreme Court review of the Eighth Circuit’s panel and en banc decisions in the Lundbeck case, which blessed the district court’s decision. To begin with, those decisions are about as erroneous as any merger decisions can get."
He chastised the courts for not recognizing that the two drugs compete with one another and focusing only one the notion that "customers would switch from one product to the other based on price considerations alone." In doing so, he maintained, the courts "failed to embrace the basic legal (and economic) principle that crosselasticity of demand includes non-price considerations as well."
"The Commission should not be afraid of losing," he urged. "Whatever the result ultimately turns out to be in Lundbeck, we would not jeopardize review of our pending, non-merger decisions, and we would clarify merger law through Supreme Court review instead of just through the Horizontal Merger Guidelines, which, as courts have observed, do not have the force of law" (here is his complete statement).