Steris/Synergy: Stories from the GCR Archives

Citing future competition, FTC challenges transatlantic healthcare deal

Originally published 31 May 2015

The Federal Trade Commission has sued to block STERIS Corporation’s takeover of UK rival Synergy Health, claiming the deal would allegedly reduce future competition in the US healthcare services industry.

In a complaint filed on 29 May, the FTC says the merger would reduce competition for sterilisation of medical equipment. STERIS and Synergy provide services that clean medical implants and other devices using radiation.

The $1.9 billion deal, announced in October 2014, was one of a series of “inversions” in which companies based in the US – primarily healthcare companies – sought to reincorporate overseas to lower their tax bill. The FTC’s lawsuit is the first by a US antitrust authority to challenge such a deal in court.

According to the enforcer’s administrative complaint, Ohio-based STERIS is one of only two companies providing gamma sterilisation services to the medical industry in the US. Gamma radiation is thought to be the only feasible way to sterilise large volumes of dense and variously
packaged products.

Companies bring their medical devices and human tissue products to STERIS’s sterilisation facilities on a contractual basis, usually not travelling more than 500 miles from their manufacturing or distribution centres, the FTC says.

When the merger was announced, the FTC claims, Synergy was planning to open new plants that would provide sterilisation services using x-ray radiation. X-ray sterilisation is currently unavailable in the US, but would provide a greener and less heavily regulated alternative to gamma ray sterilisation, the FTC alleges.

“The commission alleges that the challenged acquisition would eliminate likely future competition between STERIS’s gamma sterilisation facilities and Synergy’s planned x-ray sterilisation facilities in the United States, thus depriving customers of an alternative sterilisation service and additional competition,” the FTC said in a statement.

STERIS chief executive Richard Steeves said the company is disappointed by the decision and vowed to fight the federal government in court.

“We have strong customer support for the transaction, and we are confident that the combination of STERIS and Synergy is pro-competitive and that the court will reject the FTC’s request for an injunction once the facts of the combination are fully understood,” Steeves said.

STERIS has extended the deadline for its deal to the end of 2015.

At the time of writing, the FTC had not released a public redacted version of the STERIS/Synergy complaint, which it filed with its in-house administrative court. The commission will file a motion in federal court seeking a temporary injunction against the deal.

Hoping to defeat that motion will be a team of litigators and antitrust lawyers at Jones Day. Partner John Majoras, whose merger litigation experience includes defending American Airlines against the DOJ’s challenge to its tie-up with US Airways, will lead STERIS’s defence team, which also includes antitrust partner Ryan Thomas, who advised STERIS during the FTC review, and commercial litigators Louis Fisher and Geoff Irwin.

The vote to challenge the merger was 5-0. Thomas declined to comment on the litigation when contacted by GCR.

FTC merger challenge “faulty and speculative”, STERIS and Synergy say

By Pallavi Guniganti

Originally published 17 June 2015

Two sterilisation providers whose tie-up is threatened by a Federn FTC lawsuit answered the agency’s complaint on Friday, saying it is grounded in an erroneous understanding of what would happen in the absence of a deal.

“As initial matter, the premise of the complaint – that, but for the merger between STERIS . . . and Synergy, Synergy would have constructed x-ray radiation sterilisation plants in the United States, and that the merger is therefore anticompetitive – is erroneous both in fact and in its application of the US antitrust laws,” Synergy’s counsel at DLA Piper wrote in court papers.

“The commission’s challenge to the merger is based on a faulty and speculative factual premise, and is unsupported by established antitrust doctrine.”

The FTC commissioners voted unanimously last month to issue an administrative complaint within the agency’s tribunal, and to seek a temporary restraining order and preliminary injunction in Ohio federal district court against STERIS’s proposed $1.9 billion purchase of Synergy Health.

The complaint alleges that Ohio-headquartered STERIS currently has only one competitor, Sterigenics, in the provision of contract sterilisation services using gamma radiation in the US, but that UK-based Synergy was on the verge of opening new plants to provide contract x-ray sterilisation services as an alternative to gamma radiation.

The FTC says STERIS’s acquisition of Synergy would eliminate that likely future competition, depriving consumers of the x-ray alternative, and that the competition thereby lost is unlikely to be replicated by new competitors due to regulatory and other barriers to entry.

In their answers to the complaint, the companies retorted that the agency wrongly frames the relevant geographic and product markets to reach its conclusion that competition is limited.

For example, STERIS and Synergy each claimed that “e-beam” radiation, and not just x-ray, can compete with gamma radiation in sterilising most products, and that they compete with potential customers’ in-house sterilisation, as well as with third-party providers.

The companies decried the commission’s concerns about how Synergy might become a competitor in the future as misplaced and inappropriate under competition law.

“STERIS denies that Synergy is ‘an actual potential entrant with its x-ray sterilisation business’, and avers that the phrase ‘actual potential entrant’ is self-contradictory and irrelevant to any valid theory of antitrust liability,” STERIS’s counsel at Jones Day wrote. “STERIS denies that any alleged US x-ray entry by Synergy would have occurred, or that it would have had a large and lasting competitive impact, and a de-concentrating effect if it had occurred, in each relevant market.”

While Synergy admits that it explored potential x-ray entry into the US, it says it terminated plans due in part to insufficient customer support for them, and denies that it had a well-developed strategy to enter.

Both companies’ answers repeatedly state that the FTC’s complaint selectively and misleadingly quotes materials it received in its investigation of the merger.

The administrative trial at the FTC is scheduled to begin on 28 October.

STERIS says FTC ignores “market, financial and technological” realities

By Yasmine Harik

Originally published 17 August 2015

Lawyers for STERIS came out firing on Monday, saying the FTC’s attempt to halt its proposed tie-up with rival sterilisation provider Synergy Health is devoid of market, financial and technological realities.

Jones Day partner John Majoras, delivering opening arguments on behalf of Ohio-based STERIS, faulted the FTC for trying to convince federal judge Dan Polster that UK company Synergy would have begun offering x-ray sterilisation services in the US but for STERIS’s takeover offer.

The FTC contends that the proposed merger destroyed Synergy’s plans for US expansion of its x-ray technology, which would have provided consumers a comparable and perhaps more efficient alternative to the gamma sterilisation used by STERIS.

Not so, Majoras said.

While the FTC’s “theory about Synergy would have been great”, it does not take into account: the market reality that Synergy had no commitments from customers that they would switch from gamma to x-ray sterilisation; the financial reality that x-ray investment in the US would yield far too low of a return; and the technological reality that x-ray equipment was not readily available.

“The value of this merger is going to be kept from consumers because the FTC wants to say, ‘Wouldn’t it be great to ignore such realities’?” Majoras said.

When Synergy’s idea to open x-ray sterilisation facilities in the US first surfaced last summer, x-ray had never been used for large-scale sterilisation in the US and customer commitments were speculative at best, Majoras said.

The cost of each facility – upwards of $20 million – could not be justified by the “build it and they will come” theory propounded by the FTC, he said. “That’s not how it is done in any business.”

Synergy eventually looked at the success of its x-ray sterilisation facility in Daniken, Switzerland to make additional predictions about a possible facility in the US. That x-ray plant “has not done well”, Majoras said, and operates at only 20-30% of capacity.

“The Switzerland plant shows that it’s tough. It’s more than just an idea,” Majoras said. “You have to build the customer demand and consider the attractiveness of switching to x-ray sterilisation.”

While the expansion of x-ray sterilisation would have been great in theory, Majoras said, the financial models for such an endeavour were “disastrous”. He promised to elicit testimony from Adrian Coward and Gavin Hill, Synergy’s chief operating officer and finance director respectively, to show that x-ray sterilisation in the US made no business sense.

Lawyers for the FTC, who delivered their opening statements first, told Judge Polster that American customers, including Johnson & Johnson and Zimmer Biomet, showed “real interest” in using x-ray sterilisation if it became available in the US. The agency claims that plans to build facilities continued, despite minor concerns about customers, until STERIS announced its proposed takeover.

FTC witnesses grilled over likelihood of using x-ray sterilisation

By Yasmine Harik

Originally published 18 August 2015

Representatives from Johnson & Johnson and Zimmer Biomet faced harsh questioning on the first day of the FTC’s STERIS/Synergy merger hearing, as lawyers for the defendants cast doubt on the likelihood that customers would have used Synergy’s x-ray sterilisation had it arrived in the US.

The FTC called its first two witnesses on Monday to support its claim that STERIS’s proposed acquisition destroyed Synergy’s plans to export x-ray sterilisation to the US.

Synergy’s technology would have provided interested customers with a comparable alternative to gamma sterilisation used by STERIS, adding a viable competitor to the market that STERIS already dominates, the FTC said.

The strategy may have backfired, however, as lawyers for the defendants drilled down on the practical and financial difficulties that stopped Johnson & Johnson and Zimmer Biomet from ever making real progress on stated intentions to explore x-ray sterilisation.

Joyce Hansen, vice president of sterility assurance at Johnson & Johnson, testified that for the past year, her company was “in talks” with Synergy to use its x-ray sterilisation and remains “very interested” in doing so. Last week, the company finally received all regulatory approvals to switch to x-ray sterilisation for its blood clotting agent Surgicel.

But Wachtell, Lipton, Rosen & Katz partner Stephen DiPrima pointed out that Hansen refused to sign Synergy’s letter of intent to express interest in the potential x-ray facility in the US, and instead wrote her own version.

“You preferred to be totally non-committal in your letter to Synergy, is that correct?” DiPrima asked.

Hansen conceded, but emphasised that Johnson & Johnson could not make specific product and volume commitments until it determined whether x-ray was “an appropriate modality for sterilisation” for its wide range of consumer and medical devices.

After being scolded repeatedly by Judge Dan Polster for interrupting the witness, DiPrima drove home his final point: that Johnson & Johnson has not done x-ray functionality testing for any product other than Surgicel, despite learning about Synergy’s x-ray plans over 15 months ago.

During direct examination by FTC litigator Amy Posner later in the day, Zimmer Biomet microbiologist David Silor said his company had been in discussion with Synergy about using x-ray sterilisation for more than two years, but paused the talks while the company diverted financial resources to an unrelated Food and Drug Administration project.

Silor said Zimmer is still interested in x-ray sterilisation.

But under questioning from Kerri Ruttenberg, a partner at Jones Day, Silor admitted that Zimmer has yet to evaluate whether x-ray would perform better than gamma sterilisation; if it would cost less; or if it was even feasible for the company to switch products.

During Ruttenberg’s cross-examination, Silor said his company had never formally discussed pricing of x-ray sterilisation and conceded that a move to x-ray “would not be easy”.

“Zimmer thinks x-ray might be a good idea and might be nice to have, but can’t unequivocally say it would switch technologies,” Ruttenberg said.

Silor agreed.

Richard Steeves, founder and chief executive of Synergy, was the last witness of the day. Both parties’ examinations of Steeves were plagued by confusion over missing notes in the minutes of a Synergy board meeting during which US x-ray expansion was discussed and applauded.

But just before the end of the day, Steeves told Judge Polster he would have recommended that his board reject the US project even if STERIS had not announced its takeover plans.

“The investment did not stack up economically,” Steeves said. “Capital costs were too high; we did not have any committed revenues from customers who would switch to x-ray; the projected internal rate of return was too low; and regulatory hurdles in the US turned out to be more of a barrier than we had first thought.”

The preliminary injunction hearing continues today in Cleveland federal court. The FTC will call to the stand Gaet Tyranski, president of Synergy’s Applied Sterilisation Technology (AST) operations in the US, followed by Andrew McLean, chief executive of Synergy’s overall AST business.

After the FTC rests its case, defence counsel will call STERIS chief executive Walter Rosebrough and Gavin Hill, financial director of Synergy.

Synergy sought to halt x-ray spending during FTC inquiry

By Yasmine Harik

Originally published 19 August 2015

On the final day of the FTC’s bid to stop the STERIS/Synergy merger, the head of Synergy’s US sterilisation business admitted suggesting to his colleagues that they halt progress on an x-ray project while the FTC investigated.

Gaet Tyranski was cross-examined by FTC attorney Tara Reinhart, who directed the court to an email he authored in February, in which he wrote “[t]his whole FTC inquiry is going down a rat-hole,” and said it would be “prudent to stop spending on x-ray in the Americas.”

Ohio-based STERIS announced its proposed $1.9 billion takeover of rival UK sterilisation provider Synergy in October 2014.

The FTC claims Synergy would have brought its x-ray sterilisation technology to the US as a comparable alternative to STERIS’s gamma sterilisation but for the merger. Instead, the agency contends, Synergy opted to shut down its US x-ray project, and potential competition in the US contract sterilisation market – where STERIS dominates – was destroyed.

With the help of Tyranski’s admission that the merger review was “not going well for the company”, Reinhart insinuated that Synergy did not want the FTC to see how far its US x-ray project had progressed, or the likelihood that a US x-ray facility would indeed come to fruition.

Tyranski testified that Andrew McLean, chief of Synergy’s overall sterilisation division, had also discussed “killing US x-ray” after speaking with the FTC in February. Based on McLean’s summary of that conversation, Tyranski said that his colleagues were not surprised by “the switch”.

STERIS and Synergy have said throughout the case that a lack of US customer commitments to use x-ray sterilisation, instead of gamma, was the reason the project shut down. In addition, Synergy says it hit a road bump with its x-ray machine manufacturer that caused an unexpected spike in the project’s capital costs.

However, US customers who had expressed interest in Synergy’s x-ray sterilisation since the summer of 2014 were still sending products for x-ray feasibility testing at the company’s Danekin, Switzerland plant just three weeks before the FTC spoke with McLean.

Under questioning from Reinhart, Tyranski admitted that three companies had already begun testing products at the Swiss plant in February, and that Synergy had finalised its purchase agreement for x-ray machines at the prospective US facilities.

Jones Day partner John Majoras provided some reprieve for Tyranski, highlighting the unexpected problems Synergy encountered with its equipment and the fact it did not have any formal contracts with US sterilisation customers in place – only letters expressing interest in exploring x-ray.

The preliminary injunction hearing will conclude this evening at the federal courthouse in Cleveland, Ohio. Judge Dan Polster has allotted 10 days for the parties to submit their post-hearing briefs.

STERIS breaks FTC win streak against mergers

By Pallavi Guniganti

Originally published 25 September 2015

By refusing to grant a preliminary injunction against STERIS’s acquisition of Synergy, an Ohio federal judge yesterday handed the FTC its first court loss in challenging a deal since 2011 – and forced it to apply an administrative rule reinstated earlier this year.

Judge Dan Polster held that the FTC had failed to show that in the absence of the merger, UK-based Synergy would have entered the US market to provide large-scale equipment sterilisation services – making itself a rival to STERIS – by building one or more x-ray facilities. Carrying its burden of proof on this factual question was crucial to the commission’s theory of “actual potential competition”.

In May, the FTC sued to block the $1.9 billion acquisition on the grounds that it would reduce future competition in the sterilisation of medical equipment. The agency claimed Synergy had been on the verge of entering the US market for these services until STERIS pre-empted that competition with a take­over offer.

All five commissioners voted in favour of filing the STERIS/Synergy complaint, including Joshua Wright, despite his 2013 opposition to the FTC’s challenging the Nielson/Arbitron merger because of its effect on a “future market” of cross-platform audience tabulation.

The companies retorted that the agency wrongly framed the relevant geographic and product markets to reach its conclusion that competition is limited, but mostly focused on the “actual potential competition” theory underlying the commission’s arguments.

“As initial matter, the premise of the complaint – that, but for the merger between STERIS . . . and Synergy, Synergy would have constructed x-ray radiation sterilisation plants in the United States, and that the merger is therefore anticompetitive – is erroneous both in fact and in its application of the US antitrust laws,” Synergy’s counsel at DLA Piper wrote in an answer to the FTC’s allegations.

Both sides presented their views and several fact witnesses in a preliminary injunction hearing in Cleveland federal court last month. Because the standard for an injunction includes the likelihood of success on the merits at a full trial, which, in this case, would have occurred at the commission’s own administrative court, the judge assumed the actual potential entrant doctrine was valid.

Nonetheless, he decided for the merging companies in a ruling yesterday that emphasised facts over case law citations.

An opinion long on facts and lean on law

Former DOJ antitrust division attorney Judge Polster described the “actual potential entrant” doctrine as holding that a merger violates the Clayton Act if the relevant market is highly concentrated; the competitor being acquired probably would have entered the market; its entry would have had pro-competitive effects; and there are few other firms that can enter effectively.

Though the companies did not concede the market concentration and ease of entry issues, they and the FTC were asked to focus briefing on the probability Synergy would have entered the market. The commission had the burden of proof, and Judge Polster concluded that it had failed to carry that burden.

Other than a few citations to precedent on the standards for Clayton Act violations and preliminary injunctions, the 41-page opinion is devoted to picking through evidence for and against Synergy entering the US sterilisation market, which would require the company to build facilities in the US.

It lays out the various hurdles to doing so: Synergy targets a 15% rate of return and return on capital within the first 10 years for any new project; and cash payback of the initial capital outlay within five years. “And last, but certainly not least, Synergy requires revenue commitments from customers who will use the facilities,” the judge wrote.

The description of the company’s metrics was drawn not only from executives’ testimony about this specific project, but also from other internal documents that showed these to be standards generally applied to all major new investments.

“If the FTC is correct, the evidence should show that if the merger does not go through (either because the parties abandon it or a permanent injunction is issued), Synergy is likely to revive its plans and build one or more x-ray facilities in the US in the near future. In fact, the evidence shows the opposite in at least three ways,” Judge Polster said.

He found that the lack of customer commitments to take their sterilisation business to Synergy was an obstacle the business plan could not overcome. Moreover, when the merger was announced in October 2013, Synergy employees continued to try to obtain those commitments, cut costs on the new facilities and develop appropriate technology for it. Finally, it was the head of the sterilisation technologies department, not the Synergy chief executive, who decided to kill the US x-ray project because it was too unlikely to get board approval.

Reaction to the ruling

An FTC spokesman said yesterday that the agency declined to comment at this time. But it may have to make a decision quickly.

In March, the agency revived a rule of practice that automatically withdraws, or stays, the commission’s internal administrative litigation against a merger after being denied a preliminary injunction. The withdrawal must occur within two days after the companies file a motion for it, unless FTC counsel files a procedural objection.

The change was applauded by Congressional Republicans, who said it was a step toward streamlining the merger process, and that it fulfilled one of the goals of proposed legislation to bring the FTC’s procedures for challenging deals in line with the DOJ’s.

Continuing to pursue administrative litigation, in the first case in which the FTC lost on the injunction since the rule change, may draw negative attention from Capitol Hill and add to rhetoric about the commission having a “heads I win, tails you lose” procedure.

In a statement, STERIS chief executive Walt Rosebrough said: “We are pleased with the court’s decision and we will work to expeditiously close the acquisition of Synergy Health.” Both companies have scheduled a shareholder vote on the tie-up for 2 October.

STERIS’s outside counsel, Jones Day partner John Majoras, said he was particularly happy the court “spent so much time digging into the facts we presented” and made a very detailed analysis of them.

“We felt all along this particular theory has problems being aired in court. It’s an interesting academic exercise, but not something the court should be addressing because it’s based so much on hypotheticals and the agency guessing what might happen down the road,” Majoras said. “A decision saying ‘you haven’t been able to predict what the future will hold’ is not surprising.”

He said the parties knew going into the hearing that, for the purpose of deciding the FTC’s likelihood of success on the merits in its administrative court, Judge Polster would assume the validity of the “actual potential entrant” doctrine, though the companies had said the Supreme Court would not sanction the theory as a basis to enjoin a merger.

“We think that’s an issue the courts ought to address,” Majoras said. “I hope what will happen from this case is that people will look again at this actual potential competition theory” and whether courts ought to be engaged in something so speculative.

He said in this case, he would like to believe the judge’s rejection of the FTC’s case “shows the problems of the actual potential competition theory, but it shows the facts here, once you dug into them”, did not support that theory.

David Marx, head of McDermott Will & Emery’s Chicago antitrust practice, said this potential competition case is “radically different” from the cases in which the FTC has been successful. In those traditional horizontal mergers, he said, the agency has benefited from the structural presumption that flows from market share analysis.

“The court relied on the same kind of evidence the FTC has typically relied on to meet its burden in horizontal merger cases – contemporaneously-­prepared company documents and customer testimony – to conclude in this case that Synergy wasn’t likely to have entered the market,” Marx said.

The witnesses were business people, without any economic expert testimony, because neither side was seriously contesting efficiencies or market definition, he said. The main numbers-based analysis related to the metrics Synergy was using to evaluate the potential financial return on the investment needed to enter the US market, based on its dual x-ray/e-beam strategy.

But Marx said he saw this as a “close case”, and an enforcement agency must determine whether to bring close cases and risk losing, or shy away from them.

“The FTC felt it had reason to believe this transaction would be anticompetitive; it enforced and it lost,” he said. “It’s possible the FTC wanted to see if it could develop a modern record on the potential competition theory, and viewed this as an appropriate vehicle.”

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