Ventilator merger scrutinised as potential “killer acquisition”

Ben Remaly

31 March 2020

Ventilator merger scrutinised as potential “killer acquisition”

Credit: Shutterstock/Olena Yakobchuk

A ventilator manufacturer’s 2012 purchase of a rival start-up contracted to supply the US government’s emergency reserves has some antitrust observers questioning if the Federal Trade Commission missed a “killer acquisition”. 

The New York Times on Sunday reported that the US Department of Health and Human Services had awarded a contract to Newport Medical Instruments in 2010 to manufacture tens of thousands of ventilators to handle a potential shortfall during a pandemic.

Covidien, a large medical device manufacturer, spent $108 million to acquire Newport, which designed a cheaper and more portable ventilator than Covidien.

The Times reported: “Government officials and executives at rival ventilator companies said they suspected that Covidien had acquired Newport to prevent it from building a cheaper product that would undermine Covidien’s profits from its existing ventilator business.”

The FTC granted an early termination to Covidien’s purchase of Newport in April 2012 without opening a formal investigation.

Covidien ultimately backed out of the government contract in 2014, citing concerns that the arrangement would not be profitable, the Times reported. The US government then awarded a contract to another firm, but HHS is reportedly still awaiting a final product.

Hospitals across the US now say they lack enough devices to keep patients breathing during the covid-19 pandemic, which has killed over 3,000 people in the US as of Sunday night, according to a CNN tally. Some other countries have had to decide which lives to prioritise due to a shortage of ventilators.

FTC Commissioner Rebecca Kelly Slaughter on Monday called for a retrospective review of the Covidien/Newport merger.

“The public reporting on this acquisition raises important questions about the review of this deal. We should absolutely be looking back to figure out what happened,” she said in a statement to GCR USA.

House of Representatives antitrust subcommittee chair David Cicilline said in a statement on Tuesday that, based on public reporting, “all signs point to the conclusion that this was a killer acquisition.” 

“The public deserves answers. We should absolutely know why this was approved with what appears to have been hardly any scrutiny in the first place,” Cicilline said. 

The FTC declined to comment yesterday on the approval of the merger. The agency does not usually provide a rationale for why it approves transactions after the first phase of review.

Medtronic, which purchased Covidien in 2015, said in a statement that it had no prior knowledge of the contract with the US government. Covidien realised it would not be able to produce a product close to the government’s target cost of $3,000 and that the decision to terminate the contract was mutual, Medtronic said.

Antitrust regulators have enhanced their focus in recent years on transactions where a larger competitor may acquire a smaller innovative rival to squash out a potential market disruptor. The FTC is currently studying acquisitions made by the five largest US technology companies. 

Killer acquisition? 

Florian Ederer, a co-author of a 2018 paper that coined the phrase “killer acquisition”, tweeted on Sunday that this was “THE ULTIMATE KILLER ACQUISITION”.

“[The FTC] probably did a thorough job,” said Florian Ederer, a professor at Yale University, “[but] that looks really really bad now in retrospect.”

Ederer said he completely trusts the judgement of the FTC and conceded that this might be an example of consumer harm not being immediately evident, adding that it would be hard to predict a shortfall in ventilators.

“Killer acquisitions” can have a nefarious image, but killing off a rival’s product was probably not the main purpose of the transaction, Ederer said. He raised the possibility that Covidien decided to kill Newport’s innovation upon realising that the development of the devices would be expensive and unlikely to result in profits.

Sally Hubbard, director of enforcement strategy at Open Markets Institute, said the Covidien/Newport merger is “too literal of an example of a killer acquisition.”

Hubbard said she believes the US antitrust authorities have been missing competitive harm related to acquisitions of smaller firms.

“A paradigm that looks only at the size of deals… is dangerous not just for competition, but for public health,” Hubbard said. 

Speaking on the condition of anonymity, an antitrust practitioner that frequently represents clients in the healthcare industry raised the possibility of suing Medtronic with respect to the Covidien/Newport merger. 

“If we can find a claim and a client, we are going to bring it,” the practitioner said. “This company deserves to be punished and punished royally.” 

“This puts the FTC and our entire merger review system in a very harsh light,” the source said, adding that perhaps the disclosure of more evidence would clear Covidien of nefarious intentions.

In defence of the FTC

Several former FTC officials questioned the amount of information the agency had when reviewing the deal.

Kevin Arquit, a former head of the FTC’s bureau of competition, said the elimination of a maverick rival like Newport is one of the strongest reasons for challenging a merger.

“It’s very hard for me to imagine that the FTC was aware of this dynamic at the time of the transaction,” said Arquit, now a partner at Kasowitz Benson Torres. 

Saying that the FTC blew it in hindsight is not the right way to look at this, former FTC trial attorney Michael Kades said.

Kades, now the director of markets and competition policy at the Washington Center for Equitable Growth, said it would be an uphill battle for the FTC to argue that Newport would have injected competition into the market as a potential entrant.

“The antitrust laws are very hostile to that kind of theory, he said. 

Others said there simply is not enough information to conclude the FTC erred in approving the deal. 

“[We] know nothing about the deal. It is unclear to me whether there is any antitrust issue here,” said David Wales, another former director at the FTC’s bureau of competition.

Now a partner at Skadden Arps Slate Meagher & Flom, Wales said the merger would not void the contract, and it appears as though the government could have held Covidien to the contract had it wanted.

A former FTC official speaking on the condition of anonymity said it is a “tantalising story”, but said that it’s impossible to know whether Covidien intended to kill off a competitor without access to the merger documents.