|View David D. Smith Profile||EI Vice President David D. Smith has dealt with antitrust issues in a wide range of industries. Before joining EI, he was an economist at the Antitrust Division of the U.S. Department of Justice.|
A federal judge in Ohio recently refused the Federal Trade Commission’s (FTC’s) request that he preliminarily block the $1.9 billion merger of Steris Corporation and Synergy Health PLC, the second- and third-largest sterilization companies in the world. The FTC alleged that the merger would violate Section 7 of the Clayton Act under the actual potential entrant doctrine. Defendants argued that this doctrine had been rejected by many courts, including the Supreme Court. Since the FTC has endorsed the doctrine, and it would be used in any administrative proceeding, the district court judge assumed the doctrine was valid.
The Food and Drug Administration requires that many healthcare products be sterilized. Most manufacturers contract for sterilization of their product with outside firms, such as Steris, Synergy, and the largest sterilization company, Sterigenics. The three leading methods of contract sterilization are gamma radiation, e-beam radiation, and ethylene oxide gas. Gamma sterilization is the most effective and economical technology for most healthcare products because it is the only viable option for dense products, such as implantable medical devices.
In the United States, only Steris and Sterigenics provide contract gamma sterilization services. They account for about 85% of all U.S. contract sterilization services. Synergy, a British company, is the largest provider of e-beam services in the United States. It operates 36 contract sterilization facilities outside the United States, which are primarily gamma operations.
The FTC alleged that prior to the proposed merger, Synergy had been planning to enter the United States with an emerging fourth type of sterilization technology, x-ray. The FTC alleged that x-ray sterilization is a competitive alternative to gamma sterilization because it is “comparable, and possibly superior,” in its depth of penetration and speed. Thus, the FTC argued that the market included gamma and x-ray sterilization.
Some Synergy documents showed that the company initially believed the x-ray technology would be “lower cost than gamma, and would beat the gamma service on every other operating metric.” But as the company continued to evaluate the technology, it thought less of it. Synergy ultimately decided not to build x-ray facilities in the United States.
The judge concluded that the FTC had not shown that it was likely to succeed in an administrative trial because it could not show a likelihood of proving that, absent the merger, Synergy soon would have entered the market by building an x-ray facility. He found that no customers would agree to use the x-ray technology because of the high cost of switching, and that Synergy was unwilling to risk the investment needed to build x-ray facilities in the United States. The FTC responded to the decision by ending the administrative proceeding thus stopping its attempt to block the merger.