US antitrust regulators could push Valeant Pharmaceuticals International Inc to sell part of its specialty contact lens materials business so it would lose the market dominance it built through two acquisitions, antitrust attorneys said. The US Federal Trade Commission is investigating the Canadian drugmaker's purchase of Paragon Vision Sciences in May, Valeant said in a government filing on Monday. Valeant disclosed that it had received a letter from the FTC on or about October 16 seeking information about the Paragon deal.
Valeant, whose shares plunged last week after a short seller issued a report alleging it was artificially inflating its revenue through dealings with a specialty pharmacy company, entered the contact lens business in 2013 by buying Bausch and Lomb for $8.7 billion. Among its businesses, Bausch and Lomb was a major manufacturer of basic components, or "buttons", used to make a type of rigid gas permeable lenses known as Ortho-K. Valeant then bought the much smaller Paragon for an undisclosed sum, without reporting it to securities regulators or antitrust authorities.
Paragon was the No 2 maker of CRT buttons which are similar to Ortho-K, according to sources at the laboratories which customise them for patients. With the takeover, Valeant gained control of more than 80 percent of the gas permeable button market, the sources said. It also brought in big price rises, some customers said. Antitrust regulators often see big price rises as a signal of anti-competitive practices. Under US antitrust law, it is legal to buy a small company without reporting the transaction to antitrust authorities if the value of the deal is less than $76.3 million. It is also legal to have a home-grown monopoly by developing a product in-house.
However, gaining a monopoly by buying companies can lead to a breach of regulations. "They do have a duty not to make themselves a monopolist by acquisition," said John Briggs of law firm Axinn, Veltrop and Harkrider LLP. Valeant defended the purchase, saying it "supports our mission to improve consumers' lives." "We are co-operating with the FTC on its inquiry," a spokesman said in a statement.
The FTC declined comment for this story. The FTC could sue to force Valeant to sell Paragon or to divest specific assets, such as the CRT portion of Paragon's business, said William Stallings, who recently left the Justice Department to join the law firm Mayer Brown as an antitrust and competition attorney. "This one cries out for disgorgement, which has been a big huge push for the agencies," he added in reference to antitrust actions that force a company to pay a penalty related to the profits they have made.
In recent years, the Justice Department and the FTC, which share the job of enforcing antitrust law, have gone after small, previously unreported transactions which they determined had broken antitrust law.
One small deal which caught the eye of the FTC was Carilion Clinic, which bought two competing clinics, one which does imaging and the other minor surgery, in Roanoke, Virginia in 2008, and then raised prices. In 2009, Carilion agreed to sell both clinics under pressure from the regulator. In April, the FTC required Cardinal Health to pay $26.8 million to refund customers. It had been accused of overcharging them for drugs used to perform heart stress tests after it made a series of acquisitions that gave it dominance in 25 cities and then put pressure on suppliers not to deal with competitors seeking to open rival clinics.
Both the Ortho-K and the CRT lenses re-shape the cornea as they are worn overnight, making glasses or other corrective lenses unnecessary during the day. An industry source estimated that Bausch and Lomb and Paragon made about $5.5 million annually from the CRT and Ortho-K business, through sales of both buttons and finished lenses. Valeant informed laboratories which bought the buttons of price increases in September and October, according to several laboratories interviewed by Reuters. Bill Masler, president of Colorado-based Accu Lens which buys buttons from Valeant, estimated that the average price he pays rose about 70 percent, with some buttons costing as much as 130 percent more. "The price increase is totally out of line. It's unjustifiable," said Masler.