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Barr Pharmaceuticals’ (NYSE: BRL) proposed sale to Teva Pharmaceuticals (NASDAQ: TEVA) is likely to draw a second request by the Federal Trade Commission (FTC), several antitrust attorneys said. The USD 7.46bn sale announced last month should be less of a problem with the European Commission (EC), said the attorneys, who are not involved with the deal.
On Barr’s 2Q08 earnings call Thursday, company executives confirmed that the merging parties filed regulatory applications under Hart-Scott-Rodino last week and are working on filings for the European Commission (EC).
The antitrust attorneys surveyed on the deal’s likely regulatory outcome concurred that there will be a confluence of factors that the FTC will evaluate. They noted a number of Barr acquisitions from 2006 resulting from required disposals from the Teva/Ivax transaction as one area likely draw scrutiny.
These factors will also determine whether the deal will close in late 2008, as communicated by the company, or whether it will be delayed by several months. While outlining the complexity of the regulatory review, attorneys and industry specialists agreed that the merger would have an easier time getting the green light from the EC.
During the Teva/Ivax merger, which created the world’s largest generic pharmaceutical supplier, the FTC concluded that the deal would lead to anticompetitive effects in 15 markets. Under the terms of a proposed consent decree, the companies were required to divest products or assign rights for each market specifically to two market players: Par Pharmaceuticals (NYSE:PRX) and Barr.
The FTC, during Barr’s acquisition of Pliva in 2006, required the parties to divest the product triameterene/HCTZ because other manufactures were not considered viable competitors.
The antitrust attorneys interviewed by this news service agreed that the Teva/Ivax disposals acquired by Barr may still construe overlaps. Paul Fehlner, a partner at Baker Botts who handles intellectual property, said it might be the assumption that Teva and Barr might have to divest those products. But he said it was his expectation that there may not be as many required disposals as in the Teva/Ivax deal. ”Some of the other competitors are stronger than when Teva and Ivax merged. Also, Barr isn’t the same company that Ivax was when that merger occurred,” Fehlner said.
Martin Baker, a London-based partner at Taylor Wessing and head of Competition, Regulation & Trade, also said there is the potential that Barr, the fourth largest generic firm in the US, will need to divest at least some of the products it acquired as a result of the 2006 Teva/Ivax merger. But he said it is not guaranteed that all of the same products will be impacted as a result of this deal. ”Just because they were divested before doesn’t necessarily mean they’ll need to be divested again. Markets can change quite dramatically in a three-year period.”
There might also be more entry in those drugs, said an antitrust attorney who preferred anonymity. He said if those divestitures were relatively small, and if they are a problem today, it will be easy to get rid of them.
Teva and Ivax were leading suppliers of flutamate, a cancer product, explained Herman Saftlas, an equity analyst at Standard & Poor’s. He commented that Barr also supplies the same product, suggesting a monopoly situation could arise. But as with the unnamed antitrust attorney, Saftlas said he did not believe this product would be significant in ”the total picture.”
A second request will likely be issued and as many as 15 divestitures required, one analyst said. Antitrust attorney Bob Leibenluft, a partner at Hogan & Hartson in Washington, DC, agreed, saying there is a ”pretty high likelihood,” of a second request.
Leibenluft said a second request could extend the timeline of the deal about four to six months. He noted the possibility of 20 or more overlaps, and the need to talk to other competitors in the market, as well as back and forth conversations with Barr and Teva.
An analyst report by Sanford C. Bernstein & Co dated 18 July outlines 13 overlaps where Teva and Barr own a majority of the market. For example, Chlorzoxazone is one product where Barr owns 52% of the market share and Teva 48%, with only five total competitors. Other drugs include Tetracycline (Barr: 11%, Teva: 88%, 10 total competitors); Ethosuximide (Barr: 63%, Teva: 25%, three total competitors) and Metronidazole (Barr: 44%, Teva: 38%, 26 total competitors).
The analyst, however, who is familiar with regulatory reviews in the space, said he believed the FTC would be able to conclude its investigation before the end of the year. He said many of the relevant markets in this transaction have been examined during prior generic drug merger reviews, which include Teva and Barr acquisitions.
To further expedite the situation, the analyst remarked that the section handling this transaction at the FTC is staffed with many of the same attorneys and economists who were involved in prior genericpharmaceutical reviews.
The last four generic drug merger reviews took an average of five months to complete under a second request, with Teva’s acquisition of Ivax taking six months and the Barr/Pliva deal lasting between three to four months. The merging parties in this case will have a strong incentive to obtain clearance in 4Q. A review extending into the next US presidential administration could add months to the investigation due to turnover in the front office and staff, commented the analyst.
Fehlner of Baker Botts said the parties would likely want to get this deal done before the new administration. He said, however, that both democrats and republicans would likely share the same concerns, minimizing the actual impact of any political change. ”I don’t see a democratic administration from a political perspective having a more jaundiced view of this kind of merger than a republican party. Everyone is looking at medical costs, and if this merger is pro generic and pro competition between the generics and innovators and as a result lowers overall med costs,” he said.
Standard & Poor’s Saftlas said he was also of the opinion that although each product will be scrutinized, he did not feel there would be any major impediments stemming from the FTC’s review.
As with previous transactions, the FTC will also take a look at barriers to entry for new players in the market, noted Hogan & Hartson’s Leibenluft. A second antitrust attorney who preferred anonymity explained there are very low barriers of entry to be a generic. The approval of an Abbreviated New Drug Application (ANDA), which contains data to be approved by the FDA, generally does not take a long period of time, he added. Once approved, an applicant may manufacture and market the generic drug product.
Although the first antirust attorney agreed that barriers of entry are relatively low, the FTC would nonetheless not bring any of these cases to the fore if this was a significant argument. ”Their assumption, whether it is true or not, is that entry is often unlikely to occur in these areas because there is not enough room for four or five people to sell the same generic pill,” he said.
Saftlas also pointed out that Barr and Teva are both large manufacturers of oral contraceptives. Such drugs include Ortho Cyclen and Ortho Tri-Cyclen, where Barr, Teva and generics firm, Watson Pharmaceuticals (NYSE:WPI) are the only three key players.
Ed Thwaite, a former Roche executive and currently a consultant for the generics industry, said the possibility of oral contraceptive divestitures ”doesn’t sound right,” stating there is not much competition between Teva and Barr in this area. In addition, he said the oral contraceptives business is central to Barr’s strategy and part of the reason Teva may have been interested in the acquisition to begin with. ”It sounds to me like it would be the last thing divested,” he added.
On the EC front, Hector Armengod, an associate at Hogan & Hartson in Brussels, also not related to the transaction, commented that generics have lower penetration in Europe. ”They compete with branded products, and branded products tend to have higher market share in the EU,” Armengod said. Leibenluft said the differences between the way the FTC and the EC define product markets could mean that the deal will be easier to close in the EU or require fewer divestitures.
In January the EC launched an investigation against approximately a dozen or more branded pharmaceutical companies on their efforts to forestall generic competition, known as the ”dawn raids.” These raids looked into possible anti-competitive behavior that could prevent new drugs and cheaper generic alternatives from entering the market.
Baker explained that the investigation was primarily directed at the branded drug makers, not generics, therefore if any merger were going to be scrutinized it would be a branded one. ”It would need to have very strong evidence that there would be abuse of market power,” said Baker. Both Baker and Armengod did not believe the EC investigation into brand/generic competition will impact the transaction.
Armengod commented that the Teva/Ivax deal was approved in Europe during the first phase. As a result, he believed the EC would also not be ”strict” on the Teva/Barr deal. Fehlner said from the perspective of regulatory review in the US that the merged entity has a bigger footprint in the US than it does in Europe. He also noted there are stronger players in Europe, including Sandoz, while Saftlas added that generic drug maker Mylan (NYSE:MYL) increased its European presence by acquiring Matrix, the generics unit of German drug maker Merck KGaA (FRA:MRK).
Saftlas noted, however, that Watson is late to the party in terms of expansion. ”The others have expanded significantly in EU and are very aggressive, Watson is not,” Saftlas said.
The acquisition of Barr will strengthen Teva’s presence in the US, but also in Central and Eastern Europe, company executives said on the conference call announcing the deal. Teva now controls 18% of the US generic market, and has set a target of 30%. The acquisition will give it a 24% share of the US market and 16% of generic drug sales around the globe.
Last week, Barr’s executives confirmed the parties are preparing proxy statements and expect a shareholder vote to be early to mid December.
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