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The Federal Trade Commission will require generic drug manufacturers Perrigo Company and Paddock Laboratories, Inc. to sell six generic drugs under a proposed settlement resolving charges that Perrigo’s proposed $540 million acquisition of Paddock would be anticompetitive. The proposed settlement also contains provisions to ensure future competition in the market for generic testosterone gel products.

The case is the most recent example of the FTC’s ongoing effort to promote competition in the health care sectors, which benefits U.S. consumers by keeping prices low and quality and choice of products and services high.

The FTC’s complaint alleges that the transaction would reduce the number of manufacturers for four products used to treat conditions such as skin disorders, allergic reactions, and nausea. It also charges that the deal would eliminate future competition for two other products, a generic topical steroid and a generic anti-inflammatory drug. Each product market is described below:

Ammonium lactate cream and ammonium lactate lotion are prescription moisturizers used to treat dry, scaly skin conditions, and help relieve itching. The same firms – Perrigo, Paddock, and Taro Pharmaceuticals Industries Ltd. – compete in both markets, although Paddock has temporarily withdrawn its products from the U.S. market. After the acquisition, the combined Perrigo-Paddock would control 87 percent of the ammonium lactate cream market. After the acquisition, the combined firm would control 93 percent of the ammonium lactate lotion market.

Ciclopirox shampoo is a prescription product used to treat seborrheic dermatitis, an inflammatory condition that causes flaky scales and patches on the scalp. Paddock is the leading manufacturer of this shampoo, with about 83 percent of the U.S. market. Perrigo is the second largest supplier in the U.S. market with a 16 percent share. A combined Perrigo-Paddock would control 99 percent of the market.

Promethazine suppositories are used to treat allergic reactions, prevent and control motion sickness, and relieve nausea and vomiting associated with surgery. Perrigo, Paddock, and G&W Laboratories, Inc. are the only U.S. suppliers of the 12.5 mg and 25 mg strengths of the product. Following the acquisition, the combined firm would have 34 percent of the market for the 12.5 mg strength and 35 percent of the market for the 25 mg strength.

Perrigo’s acquisition of Paddock allegedly would also illegally reduce future competition in the markets for generic clobestasol spray, a topical steroid used to treat moderate psoriasis in adults, and for generic diclofenac solution, a non-steroidal anti-inflammatory drug used to treat osteoarthritis of the knee. As Perrigo and Paddock are among a limited number of suppliers capable of entering these markets, the FTC’s complaint alleges that the acquisition would eliminate important future competition for these products, resulting in higher prices for U.S. consumers.

The complaint further alleges that the transaction could harm future competition in the generic testosterone gel market. Testosterone gel is used by men with testosterone deficiencies.

The Proposed Settlement Order. In the six generic drug markets, the proposed settlement order requires the combined Perrigo-Paddock to sell all Perrigo or Paddock assets related to these products to Watson Pharmaceuticals, Inc. within 10 days of the acquisition. The FTC has determined that Watson has the necessary experience in developing, manufacturing, and distributing generic drugs to replace the competition that the acquisition otherwise would have eliminated in these markets. The proposed order also requires the combined firm to provide Watson with the transitional services it needs to manufacture and sell the divested products successfully. The FTC has appointed an interim monitor to oversee the transfer of the assets to Watson.

To preserve competition in the testosterone gel market, the proposed settlement order prohibits Perrigo from accepting certain payments from Abbott Laboratories, the seller of branded testosterone gel (Androgel), which could give Perrigo incentive to slow the entry of its generic product into the market. The proposed settlement order also prohibits Perrigo from entering into any “pay-for-delay” arrangements with Abbott. When payments are made from a branded drug firm to its generic competitor to settle pending patent litigation and delay generic entry, they are known as “pay-for-delay” payments. The FTC has consistently opposed such payments as anticompetitive.

The Commission vote approving the complaint and proposed consent order was 5-0. The proposed order will be published in the Federal Register and subject to public comment for 30 days, until August 26, 2011, after which the Commission will decide whether to make it final. Comments can be submitted electronically here.

NOTE: The Commission issues a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The issuance of a complaint is not a finding or ruling that the respondent has violated the law. A consent order is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $16,000. 

Copies of the complaint, consent order, and an analysis to aid public comment are available from the FTC’s website at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail toantitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook and follow us on Twitter.