Edwards Lifesciences Corp. (Edwards) abandoned its $945 million acquisition of JenaValve Technology, Inc. (JenaValve) after the U.S. District Court for the District of Columbia granted the Federal Trade Commission (FTC) a preliminary injunction. The FTC alleged that, after recently acquiring JC Medical, Edwards’ subsequent acquisition of JenaValve would eliminate head-to-head competition between JC Medical and JenaValve, the only two companies developing aortic regurgitation (AR) treatment devices (TAVR-AR Devices). Relying on a traditional qualitative standard, known as Brown Shoe, the Court agreed with the FTC’s market definition focusing on an innovation market, where neither party had a product available. (See here for Freshfields’ initial analysis of the FTC’s challenge).
Edwards presents interesting issues in market definition and highlights the increasing acceptance of the 2023 Merger Guidelines (the “Guidelines”), and the ongoing reliance on the Brown Shoe factors. The Court also found unpersuasive many of the typical antitrust defenses argued by the defendants: timely entry, weakened competitor/flailing firm, and efficiencies. Finally, the case offers helpful insights on the continuing importance of ordinary course documents in agency review and the courts’ analysis. We discuss these issues below and provide several key takeaways.
Edwards Reaffirms Brown Shoe and Endorses the 2023 Merger Guidelines
The Edwards decision demonstrates that Brown Shoe still reigns with respect to market definition. Based only on a qualitative Brown Shoe analysis supported by ordinary course documents and witness testimony, the Court adopted the FTC’s product market for the research, development, and commercialization of transfemoral TAVR-AR devices—an innovation market.
Under a Brown Shoe analysis, courts define a relevant product market based on certain qualitative factors, including industry or public recognition of the product market, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, and sensitivity to price changes. In Edwards, the Court found that transfemoral TAVR-AR Devices are minimally invasive and have peculiar characteristics and uses that differentiate them from other AR treatments. Narrowing the market, the Court excluded medical management for treating AR symptoms but not the disease, TAVR-aortic stenosis (AS) Devices to treat AR off-label but which lead to poor clinical outcomes, and open-heart surgery, which is a poor option for AR patients who are inoperable or have high surgery risk. The Court also agreed with the FTC that transapical TAVR-AR Devices, which were significantly more invasive, requiring longer recoveries with worse patient outcomes (although the existing treatment paradigm), were not interchangeable with the parties’ transfemoral TAVR-AR Devices.
Notably, neither party’s transfemoral TVAR-AR devices had been commercialized, but the Court recognized the FTC’s innovation-based product market anyway. In doing so, the Edwards Court cited the analytical tools in the 2023 Merger Guidelines (§ 4.3.D.7), which note “[a]gencies may define relevant antitrust markets around the products that would result from that innovation if successful, even if those products do not yet exist,” and relied on the Fifth Circuit’s reasoning in Illumina v. FTC[1], which found a relevant market for the research, development, and commercialization of cancer-detection tests. The Court noted that a quantitative application of the Hypothetical Monopolist Test (HMT) is not required as described in Section 4.3.C of the 2023 Merger Guidelines, particularly where, as here, price data was unavailable given the pre-commercial nature of the products. This is precisely the scenario that Guideline 2 was intended to capture. The Court further relied on qualitative evidence in the record to rule out medical management, open-heart surgery, or the “off-label” use of TAVR-AS Devices as reasonable alternatives to transfemoral TAVR-AR devices.
Typical Antitrust Defenses Fail
The Court was unpersuaded by defendants’ new entry, weakened competitor/flailing firm, and efficiencies defenses.
The defendants argued that TAVR-AR Devices approved and commercialized outside of the U.S. could enter the U.S., but the Court noted that the FDA pre-market approval process, which averages eight and a half years, posed a significant barrier to entry. The Court also found that even if a domestic or foreign competitor entered the U.S. within the next year, this entry would not be timely, likely, and sufficient. Under these circumstances, to be considered timely, the competitor would need to provide a sufficient competitive constraint within the next 2-3 years. However, a new TAVR-AR competitor entering the market today would be unlikely to receive FDA pre-market approval until 2034, leaving Edwards as the only supplier of commercialized TAVR-AR Devices for at least five years.
The Court also rejected the defendants’ argument that JenaValve had no feasible alternatives to the transaction that would allow it to successfully commercialize and market its product. The Court determined JenaValve’s limitations were not so severe. In particular, the Court observed that JenaValve had been exclusively developing its TAVR-AR Device, successfully brought it just short of FDA approval on its own, and that its sales projections assume the transaction does not proceed. Contrary to the defendants’ arguments, the Court found that JenaValve would be able to raise alternative financing, if necessary, or find alternate strategic acquirors, given how close JenaValve is to commercializing the first FDA-approved TAVR-AR Device.
Finally, the Court rejected defendants’ efficiencies arguments, finding they were neither merger-specific nor verifiable. The Court noted that defendants had provided no evidence supporting their claim that the transaction would save thousands of lives and that neither Edwards’ ability to resolve a redacted regulatory issue nor improve JenaValve’s device were merger-specific. The Court also declined to accept defendants’ argument that it was not required to apply the high legal standards of the efficiencies defense because they were offering the efficiencies to rebut the FTC’s prima facie case rather than as an affirmative defense.
The Court briefly noted that divestiture was not an option. As highlighted in the FTC’s complaint, Edwards repeatedly refused the FTC’s offer to negotiate a divestiture of JC Medical, which is developing its existing TAVR-AR device, arguing that Edwards and JC Medical’s trade secrets and IP could no longer feasibly be separated. The Court applied the same logic to Edwards’ acquisition of JenaValve, concluding that if it declined to preliminarily enjoin the transaction, it would be infeasible to later separate the parties’ assets and competitively sensitive information should the FTC’s administrative proceeding find that the transaction violated Section 7 of the Clayton Act.
Ordinary Course Documents Remain Relevant
In concluding that the proposed transaction was likely to substantially lessen competition in the market for transfemoral TAVR-AR Devices, the Court cited the defendants’ internal documents analyzing the competitive landscape and pricing. For example, the Court pointed to ordinary course documents discussing the defendants’ intent to offer their TAVR-AR Devices at “premium” commercial prices, which the Court found assumed the absence of competitive pressure from non-TAVR-AR treatments, as evidence supporting the Brown Shoe “distinct pricing” factor. Likewise, the Court pointed to strategy presentations showing that the industry recognized TAVR-AR Devices as an untapped market separate from other AR treatments. The documents also demonstrated that the defendants vigorously compete head-to-head in the market, with JenaValve and JC Medical internally referring to each other as their “closest” or “main” competitor. In addition, the documents showed that competition between JenaValve and Edwards drove them to innovate, including by developing various valve size offerings, expanding treatment to more patient indications, and increasing quality of clinical outcomes. The Court found the transaction would eliminate this robust competition in the relevant market to patients’ detriment.
Key Takeaways
Brown Shoe is sufficient. The Court based its market definition analysis on the Brown Shoe “practical indicia”, finding that the FTC was likely to prevail in showing that the proposed merger would result in significant anticompetitive effects in an innovation market for transfemoral TAVR-AR Devices. Although the Court showed openness to the agency’s qualitative application of the HMT, it ultimately rejected the agency’s argument, finding that the FTC’s expert failed to consider whether a SSNIP on transfemoral TAVR-AR devices would lead doctors and patients to switch to transapical TAVR-AR devices. Despite this rejection, the Court still agreed with the FTC based only on Brown Shoe, citing evidence in ordinary course documents.
The 2023 Merger Guidelines continue to gain traction with the courts. Courts have begun to rely on the Guidelines favorably in merger challenges.[2] In its analysis finding a relevant R&D market, the Court looked to the Guidelines’ analytical tools (§ 4.3.D.7) which allow for relevant antitrust products to be defined “around the products that would result from that innovation if successful.” While the Court did not cite Guideline 2, Edwards is also a paradigmatic example of the types of transactions Guideline 2 attempts to capture: the Court blocked the deal solely on the basis of qualitative factors indicating significant head-to-head competition without resorting to the HMT or market share analysis. While nonbinding, companies should be aware that deals at odds with the Guidelines may face increased scrutiny, and the agencies may be emboldened to block transactions that run afoul of them.
The FTC continues its focus on innovation competition and the healthcare sector. The agency marked this victory as an important win in its ongoing focus on healthcare and life sciences antitrust enforcement, highlighting two other recent healthcare-related actions in an accompanying statement. In this case and in Illumina, R&D and innovation markets have been accepted by the courts. Agencies may continue to pursue these types of markets in life sciences transactions, especially against the backdrop of rapid advancement of new technologies.
