Copyright 2000 Federal News Service, Inc.
Federal News Service
April 12, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 6551 words
HEADLINE:
PREPARED STATEMENT OF ROBERT PITOFSKY CHAIRMAN* THE FEDERAL TRADE COMMISSION
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY
BODY:
Mr. Chairman and Members of the
Committee, I am Robert Pitofsky, Chairman of the Federal Trade Commission. I am
pleased to appear before you to present the Commission's testimony providing an
overview of our antitrust enforcement activities. Today I will review the
Commission's activities since I last testified before this Committee for general
antitrust oversight purposes. The Commission is charged with the enormous
responsibility of ensuring that consumers receive the benefits of a competitive
marketplace, a mission that we share with the U.S. Department of Justice. We
welcome that responsibility and believe that we are fulfilling our obligation.
The Commission strongly believes in the bedrock principle that
protecting competition by preventing improper creation, acquisition, or exercise
of market power enhances the welfare of consumers. Congress decided long ago
that a competitive economy is vastly preferable to an economy reliant on
government regulation of the conduct of firms with market power. Competition is
the best way to ensure that consumers receive the benefits of lower prices,
higher quality and quantity of goods and services, and greater innovation. As
Chairman Hyde has observed: "Antitrust is the antithesis of government
regulation. . . . Antitrust remains the preeminent defender of economic freedom
for the individual consumer against private concentrations of power."
These are dynamic times for the economy, and with these changes come
many challenges for the antitrust agencies. The economy is rapidly being
reshaped, and markets are being created or redefined, by numerous forces
operating at the same time, including: the explosion of electronic commerce;
deregulation of critical industries such as telecommunications, financial
services and electricity; convergence of technologies and, indeed, of markets;
and globalization. These forces result in a fast-changing, more complex economy,
even with respect to basic sectors of the economy such as electricity. While
these changes carry the promise of tremendous benefits for consumers, some may
also create incentives and opportunities for anticompetitive behavior. The
challenge for us, apart from the sheer magnitude of the amount of activity, is
to understand these changes and to know when antitrust intervention is
appropriate.
The Commission's approach to antitrust enforcement is
guided by two important principles. First, we seek to enforce the antitrust laws
with vigor, and protect consumers from abuses of market power in whatever form.
It is the Commission's responsibility to protect consumers from anticompetitive
consequences of private agreements, the abuse of monopoly power, or illegal
mergers. The Commission also recognizes, however, the costs that government
intervention can place on private parties. For this reason, our second guiding
principle is to avoid unnecessary intrusions and to minimize, to the extent
possible, the burdens placed on businesses by our efforts to protect consumers.
We have an important responsibility to ensure that antitrust policy makes sense
and is sensibly and effectively applied.
I will begin this overview with
a topic that is not new news, but is still big news -- the astounding level of
merger activity. We are busier than ever on that front. I will review some
recent merger enforcement actions that have had particularly immediate
significance for consumers. I will then cover several other areas that receive
our close attention: competitor collaborations, retailing, and health care
markets.
Level of Merger Activity
The number of mergers reported
to the FTC and the Justice Department pursuant to the Hart-Scott-Rodino Act has
more than tripled over the past decade, from 1,529 transactions in fiscal year
1991 to 4,642 transactions in fiscal 1999. Thus far in fiscal year 2000, filings
are at a record pace; if this continues, filings for the year will be
approximately 18% above the record set in fiscal 1998.
Currently, more
than two-thirds of our competition resources are dedicated to merger
enforcement, compared to an historical average of closer to 50%. The merger wave
strains the FTC resources to the breaking point. The Washington Post recently
characterized the merger wave as a "frenzy of merger madness, capping a dramatic
wave of corporate consolidation that has been gaining momentum through much of
the decade." The article quotes merger experts who note that a key force driving
merger activity is the new world of electronic commerce.
While the
number of merger filings has more than tripled in the past decade, the dollar
value of commerce affected by these mergers has risen on an even steeper
trajectory, increasing an astounding eleven- fold during the past decade. This
represents a vast increase in the potential for consumer harm from
anticompetitive mergers if left unaddressed. Moreover, mere numbers do not fully
capture the complexity and the challenge of the current merger wave. Today's
merger transactions not only are larger, but often raise novel or complex
competitive issues requiring more detailed analysis. In the past year alone,
companies filed notifications for 273 mergers with a transaction size of one
billion dollars or more, and many of these mergers involved overlaps in multiple
products or services.
There are many reasons for the current merger
wave. A large percentage of these transactions appear to be a strategic response
to an increasingly global economy. Many are in response to new economic
conditions produced by deregulation (e.g., telecommunications, financial
services, and electric utilities). Still others result from the desire to reduce
overcapacity in more mature industries. The rapidly evolving world of electronic
commerce has a substantial impact on the merger wave because consolidations
often quickly follow the emergence of a new marketplace. These factors indicate
that the merger wave reflects a dynamic economy, which on the whole is a
positive phenomenon. But some mergers, as well as some other forms of
potentially anticompetitive conduct, may be designed to stifle competition in
important sectors of this dynamic economy.
Out of necessity, our scarce
resources are directed at preserving competition in the most important areas of
the economy. The Commission dedicates the bulk of its antitrust enforcement to
sectors that are critical to our everyday lives, such as health care,
pharmaceuticals, retailing, information and technology, energy, and other
consumer and intermediate goods. Rather than recite a litany of cases, I will
focus on some cases that underscore the importance of the Commission's antitrust
enforcement as we move forward in this new century.
Merger Enforcement
In the last two fiscal years and fiscal 2000 to date, the Commission has
brought over 60 enforcement actions in industries ranging from food retailing to
basic industrial products. Retailing, energy, and pharmaceuticals commanded the
most enforcement resources.
The Commission has committed considerable
resources to addressing the wave of consolidation in the petroleum and gasoline
industry. In fiscal years 1999 and 2000 to date, the FTC's Bureau of Competition
used a staggering one-third of its enforcement budget to address issues in
energy industries. In February of this year, the Commission filed an action in
federal district court in San Francisco seeking a preliminary injunction against
the proposed merger of BP Amoco p.l.c.
and Atlantic Richfield Company
("ARCO"). The complaint alleges that the merger would combine the two largest
firms exploring for and producing crude oil on the North Slope in Alaska; that
BP already exercises market power in the sale of crude oil on the West Coast;
and that by acquiring ARCO, BP would eliminate as an independent competitor the
firm most likely to threaten BP's market power. The Commission's suit has been
joined by suits filed by the States of California, Oregon, and Washington. This
is the latest of a number of enforcement actions in which the Commission worked
with various states in pursuit of our common interest in protecting American
consumers. Last month, the Commission, the states and the parties obtained an
order from the Court adjourning the preliminary injunction hearing while the
Commission evaluates the parties' proposal to sell all of ARCO's Alaska
operations to Phillips Petroleum Co.
The BP/ARCO case comes on the heels
of the Commission's investigation of the merger between Exxon and Mobil. After
an extensive review, from oil fields to the gas pump, the Commission required
the largest retail divestiture in FTC history -- the sale or assignment of 2,431
Exxon and Mobil gas stations in the Northeast and Mid-Atlantic, and California,
Texas and Guam. The Commission also ordered the divestiture of Exxon's Benicia
refinery in California; light petroleum terminals in Boston, Massachusetts,
Manassas, Virginia, and Guam; a pipeline interest in the Southeast; Mobil's
interest in the Trans- Alaska Pipeline; Exxon's jet turbine oil business; and a
volume of paraffinic lubricant base oil equivalent to Mobil's production. The
Commission coordinated its investigation with the Attorneys General of several
states and with the European Commission (about 60% of the merged firm's assets
are located outside the United States).
There are several particularly
noteworthy aspects of the Exxon/Mobil settlement. First, the divestiture
requirements eliminated all of the overlaps in areas in which the Commission had
evidence of competitive concerns. Second, while several different purchasers may
end up buying divested assets, each will purchase a major group of assets
constituting a business unit. This is likely to replicate, as nearly as
possible, the scale of operations and competitive incentives that were present
for each of these asset groups prior to the merger. Third, these divestitures,
while extensive, represent a small part of the overall transaction. The majority
of the transaction did not involve significant competitive overlaps. In sum, we
were able to resolve the competitive concerns presented by this massive merger
without litigation.
The Commission also required divestitures in the
merger between BP and Amoco, and in a joint venture combining the refining and
marketing businesses of Shell, Texaco and Star Enterprises to create at the time
the largest refining and marketing company in the United States.
The
Commission challenged potentially anticompetitive mergers in other energy
industries as well. Three recent matters served to protect emerging competition
in electric power generation. Two of these cases were so-called "convergence
mergers," where an electric power company proposed to acquire a key supplier of
fuel used to generate electricity. One involved PacifiCorp's proposed
acquisition of The Energy Group PLC and its subsidiary, Peabody Coal.
PacifiCorp's control of certain Peabody coal mines allegedly would have enabled
it to raise the fuel costs of its rival generating companies and raise the
wholesale price of electricity during certain peak demand periods. The
Commission secured a consent agreement to divest the coal mines, but the
transaction was later abandoned by the parties. In another case, Dominion
Resources, an electric utility that accounted for more than 70% of the electric
power generation capacity in the Commonwealth of Virginia, proposed to acquire
Consolidated Natural Gas ("CNG"), the primary distributor of natural gas in
southeastern Virginia and the only likely supplier to any new gas-fueled
electricity generating plants in that region. Dominion allegedly could have
raised the cost of entry and power generation for new electricity competitors.
Working closely with Commonwealth officials, the Commission required the
divestiture of Virginia Natural Gas, a subsidiary of CNG. In a third matter, the
Commission challenged CMS Energy Corporation's proposed acquisition of two
natural gas pipelines. The Commission alleged that the acquisition would have
enabled CMS to raise the cost of transportation for its gas and electric
generation customers. This case did not require divestitures, but the
Commission's consent order assures that CMS cannot restrict access to its
pipeline network, thus allowing new entry that should maintain a competitive
market.
Another highlight from the past two years is the Commission's
successful challenge to the proposed mergers of the nation's four largest drug
wholesalers into two firms. McKesson Corp. proposed to acquire AmeriSource
Health Corp., and Cardinal Health, Inc. proposed to acquire Bergen Brunswig
Corp. The two surviving firms would have controlled over 80% of the prescription
drugs sold through wholesalers. These mergers allegedly would have increased
costs to these wholesalers' customers -- thousands of pharmacies and hospitals.
These two cases were among the few that have led to litigation in recent years
(although many more had to be prepared for trial). The district court granted a
preliminary injunction against both mergers, and the transactions were later
abandoned. Another significant aspect of these two cases is that the district
court's thoughtful and well- articulated opinion helped to update merger case
law in several respects, including market definition and analysis of entry
conditions, competitive effects, and efficiencies. This helps make antitrust law
more transparent, and provides more guidance to the business community. The
court's analysis is consistent with the Commission's analytical approach under
the 1992 Horizontal Merger Guidelines, issued jointly by the Commission and the
U.S. Department of Justice.
Food retailing is another sector that is
experiencing a period of consolidation. The number of supermarket mergers has
increased dramatically just in the last three years. While the Commission has
not challenged geographic expansion mergers, many mergers among direct local
competitors have raised competitive concerns. The Commission has taken
enforcement action where appropriate. Last June, for example, the Commission
took steps to prevent undue market concentration resulting from Albertson's
acquisition of American Stores -- combining the second and fourth largest
supermarket chains in the United States. In Albertson's the Commission required
the divestiture of over 140 stores in California, Nevada and Arizona -- at the
time, the largest retail divestiture in Commission history (but now surpassed by
the Exxon/Mobil divestiture). In the last four years alone the Commission has
brought more than 10 enforcement actions involving supermarket mergers,
requiring divestiture of nearly 300 stores in order to maintain competition in
local markets across the United States.
Another major transaction the
agency reviewed last year was Barnes & Noble's attempted acquisition of
Ingram Book Group. Barnes & Noble was the largest book retailing chain in
the United States, and Ingram was by far the largest wholesaler of books in the
United States. Thus, it was largely a vertical transaction. While many vertical
transactions are likely to be efficiency-enhancing, and therefore few are
challenged, in this case there were concerns raised that the transaction posed a
serious competitive threat to thousands of independent book retailers and new
rivals such as Internet book sites. The acquisition of an important upstream
supplier such as Ingram might have enabled Barnes & Noble to raise the costs
of its bookselling rivals by foreclosing access to Ingram's services, or denying
access on competitive terms. If rivals became less able to compete, Barnes &
Noble could have increased its profits at the retail level or prevented its
profits from being eroded by competition from new business forms such as
Internet retailing. The Commission did not take formal action on this merger
because the parties abandoned the transaction.
We have also challenged a
number of other large mergers involving products and services that are highly
important to consumers, including pharmaceutical products, medical devices,
household products, and insurance services. In each of these cases, our goal has
been to protect consumers from the potential exercise of market power by the
merged firm, either unilaterally or in combination with others. Under the
methodology we use to determine consumer savings pursuant to the Government
Performance and Results Act, we estimate that the Commission's merger
enforcement actions in fiscal year 1999 saved consumers from paying
$1.2 billion in higher prices. In contrast, the Commission's
budget for the competition mission in fiscal 1999 was only
$55.7 million.
We have taken steps to ensure that these
consumer savings are in fact realized by implementing changes that result in
better remedies. Last year, the staff completed a major study of merger remedies
based on the Commission's merger cases in the early 1990s. The study found that
while most of the cases settled through divestitures resulted in the
establishment of a new competitor to replace the one lost through the merger,
there were some ways in which merger remedies could be improved to avoid
potential problems. One of the steps we have taken is to require, in a greater
number of cases, that the merging parties bring us qualified purchasers for the
divestiture assets before the transaction may be consummated.
This
procedure, referred to as the "up-front buyer" requirement, requires the merging
parties to find a suitable purchaser before the Commission accepts a settlement
agreement. This procedure has several benefits for consumers: we know before
accepting a divestiture settlement that a suitable buyer exists and that the
divestiture package is an appropriate one, and we can restore the lost
competition more quickly and with greater confidence that the divestiture will
succeed. It also reduces the burden of uncertainty on the merging parties
because they know up front that they have an acceptable candidate, and they can
then devote their full attention to their newly merged business.
While
we are on the subject of mergers, we would like to offer a few observations
about proposed legislation which seeks to amend various aspects of the
Hart-Scott-Rodino (HSR) process. As you know, the HSR Act has not been amended
since its enactment in 1976. Because the Act has not been amended for some time,
we agree that serious consideration should be given to issues such as raising
the size-of- transaction threshold for reporting transactions and the use of a
tiered structure for premerger notification filing fees.
There has been
some attention focused recently on burdens associated with the HSR process.
Senate Bill S. 1854 contains certain provisions intended to reduce those
burdens. While the Commission agrees with the burden-reduction goals of S.1854,
we believe that the procedures contemplated by the bill are unnecessary and
impractical, would themselves cause substantial delay in the process, and could
seriously impair our efforts to protect consumers from anticompetitive mergers.
The burdens placed on the merger process by antitrust review need to be
put into an appropriate perspective. The vast majority of merger filings are
cleared within 20 days. Fewer than 3% of reported transactions receive a request
for additional information (the "second request"). The issuance of a second
request is not undertaken lightly, and the care we take in choosing when to
issue them is illustrated by the fact that a large majority of those
transactions that receive second requests result in some form of enforcement
action. In addition, most second request investigations are resolved without
major document production. Over 60% of the investigations result in productions
of fewer than 20 boxes of responsive documents, and over 85% of the second
request investigations are resolved without the parties' having to complete
their document production (i.e., "substantially comply" with the second
request).
Last week the Commission announced a series of procedures to
address the concerns over HSR burdens. First, all second requests will be
reviewed prior to issuance by senior management in the Bureau of Competition.
The greater involvement by senior management is intended to provide additional
scrutiny of the scope of the second request, to assure consistent and focused
requests that are narrowly tailored to limit the burdens on businesses. Second,
staff will convene a conference promptly following the issuance of a second
request, to discuss with the parties the competitive issues raised by the
proposed transaction. Third, staff will respond to party requests for
modifications of second requests within five business days. Prompt responses by
staff will afford the parties greater opportunities for more focused searches of
their records. Finally, parties will have recourse to the Commission's General
Counsel for resolution of second request modification issues not resolved after
discussions with staff. This new procedure sets short deadlines for completion
of the process 10 business days from appeal to decision.
Other
initiatives are also under way. The agency is developing a set of "best
practices" for staff's conduct of premerger investigations. In addition, the
agency will evaluate its FY 1998 and 1999 investigations to identify strengths
and weaknesses and to assess how to improve management of future investigations.
Finally, the Bureau of Competition will provide specialized staff training in an
effort to make the second request process more efficient. We will continue to
work with the business community to address their concerns and receive their
valuable input.
In sum, we can all agree that the process can be
improved, and we acknowledge the leadership and assistance of Chairman Hyde and
Congressmen Conyers, Rogan, and Delahunt in addressing these issues. Over the
past several months we have been working with Congress, the business community
and members of the private bar to find common ground for improving the process.
We believe we have taken an important step in that direction.
Collaborations Among Competitors
Let us now shift gears and
briefly discuss conduct in which competitors do not merge, but instead
collaborate with each other. In today's markets, competitive forces are driving
firms toward complex collaborations to achieve goals such as expanding into
foreign markets, funding expensive innovation efforts, and lowering production
and other costs. Most of these collaborations are procompetitive business
arrangements that will benefit consumers; some, however, are not. Last week, the
Federal Trade Commission and the Antitrust Division of the Department of Justice
jointly issued "Competitor Collaboration Guidelines," which provide an
analytical framework to assist businesses in assessing the likelihood of an
antitrust challenge to a collaboration among two or more competitors. The
Guidelines were first issued in draft form last October and placed on the public
record for comment. They have received praise from sources as diverse as the
Chamber of Commerce; antitrust's leading treatise author, Professor Herbert
Hovenkamp; and practitioners, who found that "(b)y synthesizing the existing
cases into an analytical framework, the Federal Trade Commission and the
Department of Justice will have made antitrust analysis vastly more accessible
to smaller law firms and their clients."
Retailing
As a result
of global and innovation-based changes, consumers are becoming aware that a
"retail revolution" is underway. To remain competitive, retailers -- whether
brick-and-mortar or online -- are seeking new ways to market new and old
products. This dynamic is leading to much pro-consumer innovation in retailing.
For example, the Internet has changed traditional sales and distribution
patterns for products of all types, providing faster, cheaper, and more
efficient ways to deliver goods and services. A market study by Jupiter
Communications estimates that annual consumer sales on the Internet will explode
from $15 billion in 1999 to $78 billion by
2003. There appears to be tremendous demand for Internet-based services.
However, whenever there is great upheaval in the marketplace,
traditional retailers sometimes respond by trying to forestall new forms of
competition. Some of those actions may be legitimate defensive maneuvers, but
when conduct steps over the lines of the antitrust laws, enforcement action is
needed to ensure that anticompetitive practices do not deter development of
procompetitive innovations. In 1998, for example, the FTC charged 25 Chrysler
dealers with an illegal boycott designed to limit sales by a car dealer that
marketed on the Internet. These brick-and-mortar dealers allegedly had planned
to boycott Chrysler if it did not change its distribution of vehicles in ways
that would disadvantage Internet retailers. The competitive danger of such a
tactic is obvious: a successful boycott could have limited the use of the
Internet to promote price competition and reduced consumers' ability to shop
from dealers serving a wider geographic area via the Internet. An FTC consent
order prohibits the dealers from engaging in such boycotts in the future.
The Internet is not the only place where we have seen popular new forms
of retailing. Another example involves the Commission enforcement action
alleging abuse of market power by Toys "R" Us, the nation's largest toy
retailer. As alleged by the Commission, Toys "R" Us used its market power to try
to stop warehouse clubs, such as Costco, from selling popular toys, such as
Barbie dolls, in ways that allowed consumers to make comparisons to the prices
charged by Toys "R" Us. Warehouse clubs, as you know, are a relatively new
retailing format that has grown significantly in the past decade. Toys "R" Us's
concern was that warehouse clubs were selling some toys at lower prices and
beginning to take market share away from traditional toy retailers. In response,
Toys "R" Us allegedly pressured toy manufacturers to deny popular toys to
warehouse clubs, or to sell them on less favorable terms. The FTC issued an
administrative order to stop these practices, and the matter is now on appeal to
the U.S.
Court of Appeals for the Seventh Circuit. Although the products
were toys, and the rivalry was between two different kinds of brick-and- mortar
firms, the enforcement principles underlying the Commission's action apply with
equal -- and perhaps even greater -- force to the new world of online retailing.
Of course, much of our enforcement effort focuses on traditional
retailing. Last month, the FTC and the Attorneys General from 56 U.S. states,
territories, commonwealths, and possessions settled charges that Nine West, one
of the country's largest suppliers of women's shoes, engaged in resale price
maintenance, resulting in higher prices for many popular lines of shoes. The
FTC's proposed consent order prohibits Nine West from engaging in future resale
price maintenance. In addition, to settle the charges with the states, Nine West
agreed to pay $34 million, which will be used to fund women's
health, vocational, educational, and safety programs.
Slotting
allowances are another retailing-related topic of current interest at the
Commission. The term "slotting allowance" typically refers to a lump-sum,
up-front payment that a supplier, such as a food manufacturer, might pay to a
retailer, such as a supermarket, for access to its shelves. These allowances can
amount to tens or hundreds of thousands of dollars. Slotting allowances can be
either beneficial or harmful. They can be beneficial if they fairly reimburse
retailers for the costs and risks of taking on an unproven new product, or when
they result in lower prices to consumers. On the other hand, slotting allowances
can be harmful if they permit one manufacturer to acquire a degree of
exclusivity, across many retail outlets, sufficient to prevent other firms from
becoming effective competitors. Still other situations fall in an intermediate
grey area. To sharpen our understanding of the circumstances under which
slotting allowances can be beneficial or harmful to competition and to
consumers, the Commission will hold a two-day workshop on May 31 and June 1.
This session will bring together people from manufacturing, retailing,
economics, and other relevant disciplines to discuss the issues involved in this
very complex subject.
The Commission recently examined charges of price
discrimination in a related retailing context. By majority vote, the Commission
charged McCormick & Company, the world's largest spice company and by far
the leading supplier in the United States, with engaging in unlawful price
discrimination in the sale of spice and seasoning products. Some retailers
allegedly were charged substantially higher net prices than were others, and
discounts to favored chains allegedly were conditioned on an agreement to devote
all or a substantial portion of shelf space to McCormick products. McCormick
agreed to settle the charges by accepting an order that would prohibit the
selling of spices at different prices to different retailers, except when
permitted by the Robinson-Patman Act.
Health Care and Pharmaceuticals
Health care is an increasing part of overall consumer expenditures, and
the significant rise in health care costs is felt by all consumers. For many
years, the Commission has been at the forefront in bringing enforcement actions
to protect the competitive process in all types of health care markets,
including services provided by hospitals and health care professionals as well
as products provided by the pharmaceutical and medical equipment industries. In
the past two years alone, the Commission has brought more than a dozen
enforcement actions involving health care, pharmaceuticals, and medical devices.
In one of these cases the Commission, jointly with several states, sued
Mylan Laboratories, one of the nation's largest generic pharmaceutical
manufacturers, charging Mylan and other companies with monopolization, attempted
monopolization and conspiracy to eliminate much of Mylan's competition by tying
up the key active ingredients for two widely-prescribed drugs used by millions
of patients. The FTC's complaint charged that Mylan's agreements allowed it to
impose enormous price increases -- over 25 times the initial price level for one
drug, and more than 30 times for the other. For example, in January 1998, Mylan
raised the wholesale price of clorazepate from $11.36 to
approximately $377.00 per bottle of 500 tablets, and in March
1998, the wholesale price of lorazepam went from $7.30 for a
bottle of 500 tablets to approximately $190.00. In total, the
price increases resulting from Mylan's agreements allegedly cost American
consumers more than $120 million in excess charges. The
Commission filed this case in federal court under Section 13(b) of the FTC Act
seeking injunctive and other equitable relief, including disgorgement of
ill-gotten profits. In July of last year the district court upheld the FTC's
authority to seek disgorgement and restitution for antitrust violations.
Just last month, the Commission charged four other pharmaceutical
companies with entering into anticompetitive agreements that allegedly delayed
the entry of generic drug competition, potentially costing consumers hundreds of
millions of dollars a year. The administrative complaint issued against Hoechst
Marion Roussel (now Aventis) and Andrx Corporation charges that Hoechst, the
maker of Cardizem CD, a widely prescribed drug for treatment of hypertension and
angina, agreed to pay Andrx millions of dollars to delay bringing its competing
generic drug, or any other non-infringing version, to market. Cardizem CD is a
form of diltiazem, and Hoechst accounts for about 70% of the sales of
$1 billion once-a-day diltiazem products in the United States.
Cardizem is prescribed to over 12 million consumers each year. The complaint
further alleges that, because the Hatch- Waxman Act grants an
exclusive 180-day marketing right to Andrx, Andrx's agreement not to market its
product was also intended to delay the entry of other generic drug competitors.
The complaint against two other companies, Abbott Laboratories and
Geneva Pharmaceuticals, Inc., which the companies agreed to settle, involved
allegations of similar conduct in connection with Hytrin, that Abbott
manufactures, and a generic version that Geneva prepared to introduce. Hytrin is
used to treat hypertension and benign prostatic hyperplasia (BPH or enlarged
prostate) -- chronic conditions that affect millions of Americans each year,
many of them senior citizens. BPH alone afflicts at least 50% of men over age
60. In 1998, Abbott's sales of Hytrin amounted to $542 million
(over 8 million prescriptions) in the United States. The complaint alleges that
Abbott agreed to pay Geneva approximately $4.5 million per
month to keep Geneva's generic version of the drug off the U.S. market. This
agreement also allegedly delayed the entry of other generic versions of Hytrin
because of Geneva's 180-day exclusivity rights under the
Hatch-Waxman Act. Abbott was charged with monopolization of the
market, and both companies were charged with conspiracy to monopolize. The
proposed consent order enjoins such practices. Once Abbott and Geneva became
aware of our investigation and terminated their agreement, the entry of generic
Hytrin may have reduced the price to customers up to 60%. A patient taking one
terazosin a day and purchasing at an average discount could save over
$200 a year. We believe the savings to purchasers from this
enforcement action alone may exceed $100 million a year.
The drug settlement cases are the first Commission actions to challenge
payments by a brand-name drug firm to induce a generic rival to stay out of the
market. This is a tremendously important area, with high stakes to consumers and
to our Nation's efforts to control medical costs. Generic drugs play a vital
role in bringing low-cost drugs to the market, especially for the elderly who
often have to pay the full price for drugs. According to a recent Congressional
Budget Office study, the savings from the use of generic drugs were between
$8 billion and $10 billion for pharmaceutical
sales through retail pharmacies alone in 1994. Moreover, within the next four
years alone, patents on 33 drugs -- representing over $14
billion in sales -- will expire. Consumers can expect major savings from
generics if the incumbents do not block competition with illegal agreements.
Another recent enforcement effort was directed at an anticompetitive
patent pool between Summit Technology, Inc. and VISX, Inc. Summit and VISX
compete in the market for equipment and technology employed in laser vision
correction. Most of the approximately 140 million people in the United States
with vision problems correct their vision with contact lenses or eyeglasses, but
an increasing number are turning to laser techniques. Until recently, VISX and
Summit were the only firms with FDA approval to market the laser equipment used
for this surgery. The complaint charged that the two companies eliminated
competition between themselves by placing their competing patents in a patent
pool and agreeing to charge doctors a uniform
$250-per-procedure fee every time a Summit or VISX laser was
used. In essence, this was price- fixing under the guise of a patent
cross-licensing arrangement. After the Commission issued an administrative
complaint charging that the patent pool and related agreements were unlawful,
the companies dissolved the patent pool and settled this portion of the case in
August 1998, with an agreement not to enter into such agreements in the future.
The per-procedure fees charged by VISX and Summit did not immediately change as
a result of the settlement -- an example of "stickiness" of prices in a tight
oligopoly -- but competition eventually prevailed. Last month, VISX announced
that it would reduce its per-procedure fee from $250 to
$100 per eye, and Summit announced that it too would reduce its
fee for one of its laser products. Had the Commission not taken action, the
millions of consumers using this procedure likely would still be paying
substantially higher fees.
The Commission also plays an important role
in studying the changing health care marketplace and advising regulators and
Congress. The Bureau of Competition's staff has filed comments before the FDA on
two recent regulatory initiatives: (1) reform of the generic exclusivity
provisions (the regulations at issue in the drug settlement cases) and (2) the
citizen petition process. We believe this advocacy serves an important role by
helping regulators and take competition concerns into account in structuring the
regulatory process. In addition, last year the Bureau of Economics issued a
detailed report on the rapidly evolving pharmaceutical industry. The report
found that developments in information technology, federal legislation, and the
emergence of market institutions such as health maintenance organizations and
pharmacy benefit managers have accelerated change in this industry. The report
attempts to provide a more complete understanding of the competitive dynamics of
this market and discusses possible competitive problems and procompetitive
explanations for pricing strategies and other industry practices. These kinds of
studies help inform regulators, enforcers, and Congress on the important public
policy issues involving health care.
Conclusion
In closing, we
believe that antitrust enforcement by the Commission has demonstrable benefits
for consumers -- benefits that far outweigh the resources allocated to our
maintaining competition mission. We are concerned, however, that our growing
workload -- largely the result of the continuing merger wave -- has outstripped
our ability to keep pace. Over the past decade, the FTC has performed its
mission in the face of a rapidly changing marketplace, with staffing at about
half the size it was in 1979. We have done so primarily by stretching our
resources, streamlining our processes, and simply doing more with less. In no
small measure, that is attributable to our dedicated, hard-working staff. We
have also shifted resources from non-merger enforcement to mergers as a stop-gap
measure. That has left us understaffed in non-merger matters, but still not at
full strength in mergers. If we are to keep up with the growing demands that
will be imposed by the 21st Century marketplace, we need significantly more
resources. The President's proposed budget for fiscal year 2001 asks for an
additional 69 workyears, over the current fiscal year, for our antitrust
enforcement efforts. We ask for the Committee's support for additional resources
for this important mission.
Mr. Chairman and Members of the Committee,
we appreciate this opportunity to provide an overview of the Commission's
efforts to maintain a competitive marketplace for American businesses and
consumers. We would be pleased to respond to any questions you may have.
END
LOAD-DATE: April 13, 2000
