The Dow Chemical Company, et al.; Proposed Consent Agreement With Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 941 0019]

The Dow Chemical Company, et al.; Proposed Consent Agreement With

Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair acts and practices and unfair methods of competition, this

consent agreement, accepted subject to final Commission approval, would

require, among other things, Marion Merrell Dow to license its

dicyclomine formulations and production technology to a third party,

and to contract manufacture dicyclomine for the third party while that

party awaits the Food and Drug Administration approval to sell its own

dicyclomine. The consent agreement also would prohibit future

acquisition of any dicyclomine manufacturing, production or

distribution capabilities without prior Commission approval.

DATES: Comments must be received on or before September 6, 1994.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Ann Malester or Claudia Higgins, FTC/S-2224, Washington, DC 20580.

(202) 326-2682.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the following consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. Public comment is invited. Such

comments or views will be considered by the Commission and will be

available for inspection and copying at its principal office in

accordance with Section 4.9(b)(6)(ii) of the Commission's Rules of

Practice (16 CFR 4.9(b)(6)(ii)).

Agreement Containing Consent Order

The Federal Trade Commission (``Commission''), having initiated an

investigation of the Acquisition of certain stock of Rugby-Darby Group

Companies, Inc. (``Rugby'') by Marion Merrell Dow Inc. (``MMD''), a

subsidiary of The Dow Chemical Company (``Dow'') (collectively referred

to as ``Proposed Respondents''), and it now appearing that Proposed

Respondents are willing to enter into an Agreement Containing Consent

Order (``Agreement'') to license certain assets, contract manufacture

dicyclomine tablets and capsules, cease and desist from certain acts,

and provide for certain other relief:

It is hereby agreed by and between Proposed Respondents, by their

duly authorized officers and their attorneys, and counsel for the

Commission that:

1. Proposed Respondent Dow is a corporation organized, existing,

and doing business under and by virtue of the laws of the state of

Delaware, with its principal place of business located at 2030 Dow

Center, Midland, Michigan, 48674.

2. Proposed Respondent MMD is a subsidiary of Dow, and is a

corporation organized, existing, and doing business under and by virtue

of the laws of the state of Delaware, with its principal place of

business located at 9300 Ward Parkway, Kansas City, Missouri, 64114.

3. Proposed Respondents admit all the jurisdictional facts set

forth in the draft of complaint here attached.

4. Proposed Respondents waive:

(a) Any further procedural steps;

(b) The requirement that the Commission's decision contain a

statement of findings of fact and conclusions of law;

(c) All rights to seek judicial review or otherwise to challenge or

contest the validity of the order entered pursuant to this agreement;

and

(d) Any claims under the Equal Access to Justice Act.

5. This agreement shall not become part of the public record of the

proceeding unless and until it is accepted by the Commission. If this

agreement is accepted by the Commission it, together with the draft of

complaint contemplated thereby, will be placed on the public record for

a period of sixty (60) days and information in respect thereto publicly

released. The Commission thereafter may either withdraw its acceptance

of this agreement and so notify the Proposed Respondents, in which

event it will take such action as it may consider appropriate, or issue

and serve its complaint (in such form as the circumstances may require)

and decision, in disposition of the proceeding.

6. This agreement is for settlement purposes only and does not

constitute an admission by the Proposed Respondents that the law has

been violated as alleged in the draft of complaint here attached, or

that the facts as alleged in the draft complaint, other than

jurisdictional facts, are true.

7. This agreement contemplates that, if it is accepted by the

Commission, and if such acceptance is not subsequently withdrawn by the

Commission pursuant to the provisions of Section 2.34 of the

Commission's rules, the Commission may, without further notice to

Proposed Respondents, (1) issue its complaint corresponding in form and

substance with the draft of complaint here attached and its decision

containing the following Order to license and to cease and desist in

disposition of the proceeding, and (2) make information public with

respect thereto. When so entered, the Order shall have the same force

and effect and may be altered, modified, or set aside in the same

manner and within the same time provided by statute for other orders.

The Order shall become final upon service. Delivery by the United

States Postal Service of the complaint and decision containing the

agreed-to Order to Proposed Respondents' addressed as stated in this

agreement shall constitute service. Proposed Respondents waive any

right they may have to any other manner of service. The complaint may

be used in construing the terms of the Order, and no agreement,

understanding, representation, or interpretation not contained in the

Order or the agreement may be used to vary or contradict the terms of

the Order.

8. Proposed Respondents have read the proposed Complaint and Order

contemplated hereby. Proposed Respondents understand that once the

Order has been issued, they will be required to file one or more

compliance reports showing they have fully complied with the Order.

Proposed Respondents further understand that they may be liable for

civil penalties in the amount provided by law for each violation of the

Order after it becomes final.

Order

I

It is ordered that, as used in this Order, the following

definitions shall apply:

A. ``Dow'' means The Dow Chemical Company, its predecessors,

subsidiaries, divisions, groups and affiliates controlled by Dow, and

its respective directors, officers, employees, agents and

representatives, and their respective successors and assigns.

B. ``MMD'' means Marion Merrell Dow Inc., its predecessors,

subsidiaries, divisions, groups and affiliates controlled by MMD, and

its respective directors, officers, employees, agents and

representatives, and their respective successors and assigns.

C. ``Rugby'' means Rugby Group, Inc., its predecessors,

subsidiaries, divisions, groups and affiliates controlled by Rugby, and

its respective directors, officers, employees, agents and

representatives, and their respective successors and assigns.

D. ``Respondents'' means Dow and MMD.

E. ``Commission'' means the Federal Trade Commission.

F. ``Acquisition'' means the acquisition by Respondents of certain

Rugby stock that is the subject of a stock purchase agreement dated

October 4, 1993.

G. ``Rugby intangible dicyclomine assets'' means those assets

relating to the manufacture and sale of dicyclomine tablets and

capsules acquired in the Acquisition that are not part of Rugby's

physical facilities or other tangible assets, including but not limited

to all formulations, patents, trade secrets, technology, know-how,

specifications, designs, drawings, processes, quality control data,

research materials, technical information, management information

systems, software, the Drug Master file, and all information relating

to United States Food and Drug Administration (``FDA'') approvals.

H. ``Potential New Entrant'' means the person(s) for whom MMD shall

contract manufacture, and to whom MMD shall sell, dicyclomine tablets

and capsules and license the Rugby intangible dicyclomine assets. The

Potential New Entrant must be a generic or a branded pharmaceutical

manufacturer with manufacturing facilities approved by the FDA for the

manufacture of generic or branded pharmaceutical products in the United

States.

I. ``Dicyclomine tablets and capsules'' means pharmaceutically

acceptable finished tablets and capsules consisting of either 10mg or

20mg of dicyclomine hydrochloride U.S.P. manufactured under an approved

New Drug Application (``NDA'') or an approved Abbreviated New Drug

Application (``ANDA'') for sale in the United States and that have

received at least an AB rating by the FDA.

J. ``Contract manufacture'' means the manufacture of an unlimited

volume of dicyclomine tablets and capsules by MMD for sale to a

Potential New Entrant in finished packaged form suitable for commercial

sale in the United States.

K. ``Finished packaged form'' means packaged in all forms required

by the Potential new Entrant so as to optimize sales and distribution

of the product, including but not limited to inscribing the name and

identification codes of the Potential New Entrant on the packaging of

dicyclomine capsules or tablets, and packaging the dicyclomine tablets

and capsules in units required by the Potential New Entrant, as

permitted by Rugby's existing ANDA.

L. ``Formulation'' means any and all information, including both

patent and trade secret information, technical assistance and advice,

relating to the manufacture of dicyclomine tablets and capsules that

meet United States Food and Drug Administration approved specifications

therefor.

II

It is further ordered that:

A. Within twelve (12) months from the date this Order becomes

final, MMD shall enter into an agreement (hereinafter ``Agreement''),

in good faith:

1. To license to the Potential New Entrant in perpetuity a non-

exclusive right to the Rugby intangible dicyclomine assets at no

minimum price; and

2. To contract manufacture and deliver in a timely manner the

volume of dicyclomine tablets and capsules requested by the Potential

New Entrant, at a price not to exceed 48% of the Average Wholesale

Price of Rugby's dicyclomine tablets and capsules in effect as of July

2, 1993.

MMD shall enter into such Agreement to license and contract

manufacture only with a Potential New Entrant that receives the prior

approval of the Commission, and only in a manner that receives the

prior approval of the Commission and that is consistent with the

purposes of this Order. The purposes of this Order are: (a) to provide

the means for establishing an ongoing, viable enterprise to replace the

competition in the dicyclomine tablet and capsule market alleged in the

Commission's Complaint to have been eliminated by the Acquisition; and

(b) to remedy the lessening of competition alleged in the Commission's

Complaint to have resulted from the Acquisition.

B. The Agreement shall require the Potential New Entrant to submit

to the Commission a certification attesting to the Potential New

Entrant's good faith intention and actual plan to obtain FDA approval

of its own NDA or ANDA for the manufacture and sale of dicyclomine

tablets and capsules in an expedited manner. The Agreement shall

terminate in the event that the Potential New Entrant fails to sell or

discontinues the sale of contract manufactured dicyclomine tablets and

capsules prior to obtaining FDA approval, or abandons its efforts or

fails to obtain FDA approval of its own NDA or ANDA for dicyclomine

tablets and capsules within seven (7) years from the date the

Commission approves the Agreement.

C. The Agreement shall require the Potential New Entrant to submit

to the Commission a verified written report setting forth in detail its

efforts to sell contract manufactured dicyclomine tablets and capsules

and to obtain FDA approvals necessary for manufacturing its own

dicyclomine tablets and capsules. The Agreement shall require such

report to be submitted one (1) year from the date the Agreement becomes

effective and annually thereafter until contract manufacturing ceases.

The Agreement shall also require the Potential New Entrant to report to

the Commission at least thirty (30) days prior to its discontinuing the

sale of contract manufactured dicyclomine tablets and capsules or

abandoning its efforts to obtain FDA approvals necessary for

manufacturing its own dicyclomine tablets and capsules.

D. MMD shall deliver dicyclomine tablets and capsules to the

Potential New Entrant within two (2) months from the date the

Commission approves the Potential New Entrant and the Agreement. The

Potential New Entrant shall have the right to continue to purchase

dicyclomine tablets and capsules from MMD pursuant to the Agreement

until six (6) months after the date that the Potential New Entrant

obtains FDA approval of its own NDA or ANDA for the manufacture and

sale of dicyclomine tablets and capsules in the United States.

E. MMD shall make representations and warranties to the Potential

New Entrant that the contract manufactured dicyclomine tablets and

capsules meet the United States Food and Drug Administration approved

specifications therefor and are not adulterated or misbranded within

the meaning of the Food, Drug and Cosmetic Act, 21 U.S.C. 321, et seq.

MMD shall agree to indemnify, defend and hold the Potential New Entrant

harmless from any and all suits, claims, actions, demands, liabilities,

expenses or losses alleged to result from the failure of the

manufactured dicyclomine tablets and capsules to meet the

specifications. This obligation shall be contingent upon the Potential

New Entrant giving MMD prompt, adequate notice of such claim,

cooperating fully in the defense of such claim, and permitting MMD to

assume the sole control of all phases of the defense and/or settlement

of such claim, including the selection of counsel. This obligation

shall not require MMD to be liable for any negligent act or omission of

the Potential New Entrant or for any representations and warranties,

express or implied, made by the Potential New Entrant that exceed the

representations and warranties made by MMD to the Potential New

Entrant.

F. Upon reasonable notice from and at the option of the Potential

New Entrant, MMD shall provide information, technical assistance and

advice sufficient to assist the Potential New Entrant in obtaining FDA

approval for the manufacture and sale of dicyclomine tablets and

capsules. Such assistance shall include reasonable consultation with

knowledgeable employees of MMD and training at the Potential New

Entrant's facility for a period of time sufficient to satisfy the

Potential New Entrant's management that its personnel are appropriately

trained in the manufacture of dicyclomine tablets and capsules.

G. While the obligations imposed by Paragraphs II.A, II.D or

Paragraph III of this Order are in effect, Respondents shall take such

actions as are necessary to maintain the viability and marketability of

the Rugby intangible dicyclomine assets and the tangible assets needed

to contract manufacture and sell dicyclomine tablets and capsules and

to prevent the destruction, removal, wasting, deterioration or

impairment of any of the Rugby intangible and tangible assets relating

to the manufacture of dicyclomine tablets and capsules except in the

ordinary course of business and except for ordinary wear and tear that

does not affect the viability and marketability of the Rugby intangible

and tangible assets.

III

It is further ordered that:

A. MMD shall consent to the appointment of a trustee by the

Commission to terminate MMD's prior Agreement, if any, and to enter

into a new Agreement on behalf of MMD with a Potential New Entrant

selected by the trustee if:

1. MMD has not entered into an Agreement to contract manufacture

dicyclomine tablets and capsules and to license the Rugby intangible

dicyclomine assets to a Potential New Entrant within twelve (12) months

as provided for in Paragraph II of this Order; or

2. The Potential New Entrant terminates the Agreement to contract

manufacturer, fails to sell, or discontinues the sale of contract

manufactured dicylomine tablets and capsules in the United States prior

to obtaining FDA approval of its own NDA and ANDA for the manufacture

and sale of dicyclomine tablets and capsules; or

3. The Potential New Entrant abandons its efforts or fails to

obtain FDA approval of it own NDA or ANDA for diclyclomine tablets and

capsules within seven (7) years from the date the Commission approves

the Agreement.

In the event the Commission or the Attorney General brings an

action against Respondents to enforce this order pursuant to section

5(l) of the Federal Trade Commission Act, 15 U.S.C. section 45(l), or

any other statute enforced by the Commission, MMD shall consent to the

appointment of a trustee in such action. Neither the appointment of a

trustee nor a decision not to appoint a trustee under this Paragraph

shall preclude the Commission or the Attorney General from seeking

civil penalties or any other relief available to it for any failure by

Respondents to comply with this Order.

B. If a trustee is appointed by the Commission or a court pursuant

to Paragraph III.A of this Order, MMD shall consent to the following

terms and conditions regarding the trustee's powers, duties,

authorities, and responsibilities:

1. The Commission shall select the trustee, subject to the consent

of MMD, which consent shall not be unreasonably withheld. The trustee

shall be a person with experience and expertise in acquisitions and

divestitures. If MMD has not opposed, in writing, including the reasons

for opposing, the selection of any proposed trustee within ten (10)

days after notice by the staff of the Commission to MMD of the identity

of any proposed trustee, MMD shall be deemed to have consented to the

selection of the proposed trustee.

2. Subject to the prior approval of the Commission, the trustee

shall have the exclusive power and authority to enter into an Agreement

as specified in Paragraph II of this Order.

3. Within ten (10) days after appointment of the trustee, MMD shall

execute a trust agreement that, subject to the prior approval of the

Commission and, in the case of a court-appointed trustee, of the court,

transfers to the trustee all rights and powers necessary to permit the

trustee to enter into the Agreement required by Paragraph II of this

Order.

4. The trustee shall have twelve (12) months from the date the

Commission approves the trust agreement described in Paragraph III.B.3

to terminate any prior Agreement and to enter into the Agreement

specified in Paragraph II of this Order, which Agreement shall be

subject to the prior approval of the Commission. If, however, at the

end of the twelve (12) month period the trustee has submitted a plan or

believes that the Agreement required by Paragraph II of this Order can

be entered into within a reasonable time, the twelve (12) month period

may be extended by the Commission or, in the case of a court-appointed

trustee, by the court; provided, however, the Commission my extend the

twelve (12) month period only two (2) time and for no longer than

twelve (12) months each time.

5. The trustees shall have full and complete access to the

personnel, books, records, facilities and technical information related

to the manufacture of dicyclomine tablets and capsules and to the Rugby

intangible dicyclomine assets, or to any other relevant information, as

the trustee may reasonably request. Respondents shall cooperate with

any reasonable request of the trustee. Respondents shall take no action

to interfere with or impede the trustee's ability to enter into the

Agreement required by Paragraph II of this Order. Any delays in

entering into the Agreement required by Paragraph II of this Order

caused by Respondents shall extend the time under Paragraph III.B.4 for

entering into the Agreement required by Paragraph II of this Order in

an amount equal to the delay, as determined by the Commission or, for

the court-appointed trustee by the court.

6. The trustee shall use his or her best efforts to negotiate the

most favorable price and terms available in each contract that is

submitted to the Commission, subject to MMD's absolute and

unconditional obligation to enter into the Agreement required by

Paragraph II of this Order at no minimum price. The Agreement shall be

made in the manner and with a Potential New Entrant as set out in

Paragraph II of this Order; provided, however, if the trustee receives

bona fide offers from more than one Potential New Entrant, and if the

Commission determines to approve more than one such Potential New

Entrant, the trustee shall enter into an Agreement as required by

Paragraph II of this Order with the Potential New Entrant selected by

MMD from among those approved by the Commission.

7. The trustee shall serve, without bond or other security, at the

cost and expense of MMD, on such reasonable and customary terms and

conditions as the Commission or a court may set. The trustee shall have

authority to employ, at the cost and expense of MMD, such consultants,

accountants, attorneys, investment bankers, business brokers,

appraisers and other representatives and assistants as are reasonably

necessary to carry out the trustee's duties and responsibilities. The

trustee shall account for all monies derived from the Agreement

required by Paragraph II of this Order and all expenses incurred. After

approval by the Commission and, in the case of a court-appointed

trustee, by the court, of the account of the trustee, including fees

for his or her services, all remaining monies shall be paid at the

direction of MMD and the trustee's power shall be terminated.

8. Respondents shall indemnify the trustee and hold the trustee

harmless against any losses, claims, damages, liabilities, or expenses

arising out of, or in connection with, the performance of the trustee's

duties, including all reasonable fees of counsel and other expenses

incurred in connection with the preparations for, or defense of any

claim whether or not resulting in any liability, except to the extent

that such liabilities, losses, damages, claims, or expenses result from

the misfeasance, gross negligence, willful or wanton acts, or bad faith

by the trustee.

9. If the trustee ceases to act or fails to act diligently, a

substitute trustee shall be appointed in the same manner as provided in

Paragraph III.A of this Order.

10. The Commission or, in the case of a court-appointed trustee,

the court, may on its own initiative or at the request of the trustee

issue such additional orders or directions as may be necessary or

appropriate to enter into the Agreement required by Paragraph II of

this Order.

11. The trustee shall report in writing to MMD and to the

Commission every sixty (60) days concerning the trustee's efforts to

enter into the Agreement required by Paragraph II of this Order.

IV

It is further ordered that for a period of ten (10) years from the

date this Order becomes final, Respondents shall not acquire, without

the prior approval of the Commission, directly or indirectly, through

subsidiaries, partnerships, or otherwise:

(a) Any stock, share capital, equity, leasehold or other interest

in any concern, corporate or non-corporate, presently engaged in, or

within the two years preceding such acquisition engaged in, the

manufacture, production, distribution or sale of dicyclomine tablets

and capsules in the United States; or

(b) Any assets currently used for or previously used for (and still

suitable for use for) the manufacture and production of dicyclomine

tablets and capsules in the United States from any concern, corporate

or noncorporate, presently engaged in, or within the two years

preceding the acquisition engaged in the manufacture, production,

distribution or sale of dicyclomine tablets and capsules in the United

States.

Provided, however, that the obligations imposed by this Paragraph

shall not terminate while the obligations of Paragraphs II or III are

in effect.

V

It is further ordered that:

A. Within sixty (60) days after the date this Order becomes final

and every sixty (60) days thereafter until the Commission has approved

a Potential New Entrant, MMD shall submit to the Commission a verified

written report setting forth in detail the manner and form in which it

intends to comply, is complying, or has complied with Paragraphs II and

III of the Order. MMD shall include in its compliance reports, among

other things that are required from time to time, a full description of

the efforts being made to comply with Paragraphs II and III of this

Order, including a description of all substantive contacts or

negotiations for entering into the Agreement required by this Order,

including the identity of all parties contacted. MMD shall include in

its compliance reports copies of all written communications to and from

such parties, all internal memoranda, and all reports and

recommendations concerning the Agreement required by Paragraph II of

this Order.

B. One (1) year from the date this Order becomes final and annually

for the next nine (9) years on the anniversary of the date this Order

becomes final, and at such other times as the Commission may require,

Respondents shall file a verified written report with the Commission

setting forth in detail the manner and form in which they have complied

and are complying with Paragraphs II, III and IV of this Order.

Provided, however, that the obligations imposed by this Paragraph

shall not terminate while the obligations of Paragraphs II or III are

in effect.

VI

It is further ordered that, for the purpose of determining or

securing compliance with this Order, and subject to any legally

recognized privilege, upon written request and on reasonable notice to

Respondents, Respondents shall permit any duly authorized

representatives of the Commission:

A. Access, during office hours and in the presence of counsel, to

inspect and copy all books, ledgers, accounts, correspondence,

memoranda and other records and documents in the possession or under

the control of Respondents, relating to any matters contained in this

consent order; and

B. Upon five (5) days notice to Respondents, and without restraint

or interference from Respondents, to interview officers or employees of

Respondents, who may have counsel present, regarding such matters.

VII

It is further ordered that either Respondent shall notify the

Commission at least thirty (30) days prior to any change in either

Respondent such as dissolution, assignment or sale resulting in the

emergence of a successor, the creation or dissolution of subsidiaries

or any other change that may affect compliance obligations arising out

of the Order.

Analysis of Proposed Consent Order to Aid Public Comment

The Federal Trade Commission (``Commission'') has accepted

provisionally an agreement containing a proposed Consent Order from The

Dow Chemical Company (``Dow'') and Marion Merrell Dow Inc. (``MMD''), a

subsidiary of Dow, under which MMD would be required to manufacture and

supply the drug dicyclomine for a potential new entrant and to provide

the dicyclomine formulation and other intangible assets to expedite

that potential new entrant's entry as a manufacturer into the

dicyclomine market. In addition, under the proposed Consent Order the

potential new entrant would be required to certify its good faith

intention to manufacture dicyclomine.

The proposed Consent Order has been placed on the public record for

sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

Order.

On October 4, 1993, MMD and Rugby-Darby Group Companies, Inc.

(``Rugby'') signed an agreement whereby MMD acquired all of the stock

of Rugby's generic pharmaceutical business. The proposed compliant

alleges that the acquisition violates Section 7 of the Clayton Act, as

amended, 15 U.S.C. 18, and Section 5 of the FTC Act, as amended, 15

U.S.C. 45, in the market for dicyclomine hydrochloride capsules and

tablets in the United States.

The proposed Consent Order would remedy the alleged violation by

establishing a new entrant into the U.S. market for dicyclomine

capsules and tablets to replace the competition lost as a result of the

acquisition. The proposed Consent Order would require MMD to enter into

an agreement with a potential new entrant within twelve (12) months

from the date the proposed Consent Order becomes final.

The agreement would require MMD to manufacture and supply

dicyclomine, as well as to license the relevant dicyclomine technology,

to a Commission approved potential new entrant. MMD must continue to

supply the potential new entrant with dicyclomine until the potential

new entrant has begun manufacturing dicyclomine with FDA approval, or

for seven (7) years, whichever is shorter. The price at which MMD may

contract to supply dicyclomine to the potential new entrant may not

exceed 48 percent of the Average Wholesale Price charged by Rugby as of

July 2, 1993. The potential new entrant must certify its good faith

intention and actual plan to obtain FDA approval to manufacture

dicyclomine capsules and tablets for sale in the U.S. In the event that

MMD fails to enter into such an agreement with a potential new entrant,

or that the potential new entrant discontinues or fails in its efforts

to obtain FDA approval to manufacture dicyclomine within seven (7)

years, the proposed Consent Order provides that MMD shall consent to

the appointment of a trustee by the Commission. The trustee will be

responsible for locating a potential new entrant that will obtain the

necessary approvals and sell dicyclomine into the U.S. market.

The proposed Order will also prohibit for a period of ten (10)

years, Dow and MMD from acquiring any interest in assets used for the

development, manufacture or sale of dicyclomine without prior approval

from the Commission. The proposed Order will also require MMD to

provide to the Commission a report of its compliance with the

provisions of the Order within sixty (60) days following the date this

Order becomes final, and every sixty (60) days thereafter until the

Commission has approved a potential new entrant.

One year from the date the Order becomes final and annually

thereafter for nine (9) years, Dow and MMD will be required to provide

to the Commission a report of their compliance with the Consent Order.

The Consent Order also requires Dow or MMD to notify the Commission at

least thirty (30) days prior to any change in the structure of Dow or

MMD resulting in the emergence of a successor.

The purpose of this analysis is to facilitate public comment on the

proposed Order, and it is not intended to constitute an official

interpretation of the agreement and proposed Order or to modify in any

way their terms.

Donald S. Clark,

Secretary.

Dissenting Statement of Commissioner Mary L. Azcuenaga

In The Dow Chemical Company, File No. 941-0019

Today, the Commission accepts for comment a consent agreement

settling charges that Marion Merrell Dow's consummated acquisition of

certain stock in the Rugby-Darby Group Companies, Inc. would

substantially lessen competition in the United States market for

dicyclomine hydrochloride capsules and tablets. I support the

allegations in the complaint that the acquisition created a monopoly in

the manufacture and sale of dicyclomine hydrochloride capsules and

tablets, and I have reason to believe the acquisition violated the law.

I dissent because I find the remedy insufficient. Ideally, the

Commission would have sought to enjoin the transaction. Although it did

not seek a preliminary injunction, the Commission still should seek

through administrative litigation divestiture of assets sufficient to

create a viable, independent dicyclomine business. Administrative

litigation takes time but affords a much higher likelihood of obtaining

effective relief by divestiture of an ongoing enterprise than does a

technology license designed to induce new entry.

The order requires Marion Merrell Dow to grant a nonexclusive

license to certain intangible dicyclomine assets, including patents and

technology, and for up to seven years to sell to the person acquiring

the license dicyclomine tablets and capsules at a price not exceeding

48 percent of the average wholesale price on July 2, 1993. Technology

licenses tend to be highly regulatory and less effective than

divestitures in restoring competition. Further, because of the great

difficulty government agencies have in specifying competitive market

prices, it is highly questionable whether requiring sales of

dicyclomine at a Commission-specified maximum price will provide

consumers with interim relief from the monopoly. Indeed, since the

Commission granted early termination of the Hart-Scott-Rodino waiting

period on July 12, 1993, it seems entirely possible that the price on

July 2 reflected the impending merger to monopoly and was already

supra-competitive.

Concurring Statement of Commissioner Deborah K. Owen on Proposed

Consent Agreement With Marion Merrell Dow Inc., File No. 941-0019

The Commission is accepting for public comment a proposed consent

agreement with Marion Merrell Dow Inc. (``MMD''), the manufacturer of

Bentyl, a drug commonly prescribed for the treatment of certain

gastrointestinal disorders. In October 1993, MMD acquired Rugby-Darby

Group Companies, Inc. (``Rugby''), a manufacturer of numerous

pharmaceutical products, including a generic version of Bentyl:

dicyclomine hydrochloride. The proposed complaint alleges, inter alia,

that this acquisition ``created a monopoly in the manufacture of

dicyclomine hydrochloride capsules and tablets.'' Complaint VIII(c). I

am writing separately in order to explain one aspect of my analysis of

this case, and to raise some questions concerning the proposed remedy.

A threshold issue in analyzing this merger is whether MMD's Bentyl

and Rugby's generic dicyclomine are in the same product market. On the

one hand, it may seem obvious that two drugs deemed to be bio-

equivalent by the Food and Drug Administration, must be in the same

relevant product market. On the other hand, branded drugs and their

generic counterparts typically vary dramatically in price, suggesting

that consumers may not view the products as equivalent or

interchangeable.

As indicated in the Merger Guidelines, the Commission approaches

the issue of market definition by asking what products, if any,

constrained the price of MMD's Bentyl (and Rugby's generic dicyclomine)

at the time of the merger. If, in response to a small but significant

increase in the price of Bentyl, enough customers would switch to

generic dicyclomine (or, if in response to a small but significant

increase in the price of generic dicyclomine, enough customers would

switch to Bentyl) to make the price increase unprofitable, then the two

products are deemed to be in the same market. Whether a particular

branded drug and any generic versions are in the same market may vary

over time, and depends in part upon their relative prices at the time

of the merger. In general, where the price differential between the

branded product and the generic product is great, the products are more

likely to be in separate markets.\1\ Conversely, where the price gap

between the branded product and the generic product is relatively small

(for example, where there is only one generic version available to

consumers), the products are more likely to be in the same market.

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\1\This price differential may be greatest where there is

intense price competition among different generic versions of a

drug. In this situation, the branded drug may not serve as a

significant constraint on the price of the generic versions; that

is, a five or ten percent increase in the (very low) price of the

generic drugs would not be defeated by sales lost to the (much

higher priced) branded drug. And in this situation, the next best

substitute for the branded drug (from the perspective of those

consumers who are uninterested in low priced generics) may be

another branded drug. Under the Merger Guidelines, the branded and

generic drugs may then be viewed as occupying separate product

markets.

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The proposed consent agreement aims to establish a new competitor

in the U.S. dicyclomine market to replace the competition lost as a

result of MMD's allegedly illegal acquisition. Specifically, MMD is

required to license certain dicyclomine production technology to a

Commission-approved licensee that avows a good faith intention to

obtain FDA approval to independently manufacture dicyclomine for sale

in the United States. Further, MMD must supply dicyclomine to the

potential new entrant for up to seven years, until such time as the

licensee has begun manufacturing dicyclomine on its own.

I am concerned about the terms of this Commission-mandated supply

agreement. The proposed consent order provides that the price at which

MMD may contract to supply dicyclomine to the potential entrant may not

exceed 48 percent of the average wholesale price charged by Rugby as of

July 2, 1993.\2\ This is in effect a form of government price

regulation, and is apt to result in a significant misallocation of

resources. It is particularly troubling that the maximum transfer price

is fixed by the Commission's order for up to seven years, and (unlike

market-based prices) does not vary with either changes in demand or

changes in the costs of production. If the costs of production come to

exceed the transfer price, then the licensee may have an incentive to

delay the opening of its own production facility, and hence delay the

return of true, market-based competition.

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\2\My view, based upon the evidence assembled during this

investigation, is that the July 2, 1993 price did not reflect the

exercise of any market power gained as a result of the then

impending MMD/Rugby transaction, but reflected other factors.

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Furthermore, the fixed transfer price may actually be in effect for

longer than seven years. For example, if the original licensee fails

after seven years to obtain FDA approval, then a replacement licensee

may be selected by a trustee. This second licensee is entitled to

purchase dicyclomine from MMD at the same fixed price. Given the

Commission's recent experience in the Institut Merieux (File No. C-

3301) and Promodes (Docket No. 9228) matters, the prospect of another

seemingly interminable and complicated compliance proceeding disturbs

me.

I hope that during the public comment period the Commission will

receive advice on the wisdom and workability of the proposed supply

agreement. In particular, I am interested in considering alternate ways

of structuring the price term. Is there a practical way, under a

revised order, to permit the price term to vary should the costs of

production or demand vary?\3\ Or would the uncertainties of future cost

and demand changes be better accomodated if MMD and the licensee were

free to negotiate a price term (perhaps subject to Commission

approval)? Finally, what is the optimal duration for the supply

agreement? Specifically, how long should it take a licensee, acting

diligently, to obtain required FDA approvals and commence manufacturing

dicyclomine? At this time, I am not confident that the appropriate

maximum duration for the MMD supply agreement should be as long as

seven years. Public comment on these issues may be of significant value

to the Commission not only in this matter, but more generally as the

agency seeks to devise effective antitrust remedies for the

pharmaceutical, and other industries.

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\3\Would it be desirable to use the producer price index or some

other index as a proxy for the costs of production?

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Statement of Commissioner Dennis A. Yao

In The Dow Chemical Company, File No. 941 0019

I voted to accept for public comment the proposed consent agreement

in this matter because I believe it represents a viable solution to the

potential anticompetitive effects that resulted from Marion Merrell

Dow's (``MMD'') acquisition of Rugby Holding, Inc. (``Rugby''). The

acquisition created a monopoly in the market for dicyclomine tablets

and capsules by combining the only two manufacturers of the branded and

generic product. The proposed consent has the potential of establishing

a second competitor through the grant of a nonexclusive license by MMD

of certain intangible dicyclomine assets. The order also sets a maximum

price at which MMD is allowed to sell dicyclomine tablets and capsules

to the licensee for up to seven years. The goal is to replace the

competition lost from the dicyclomine market as quickly as possible by

establishing a new entrant in the market. The order is the best

mechanism to provide quick relief.

The order sets a ceiling of 48% of the average wholesale price on

July 2, 1993, as the maximum price at which MMD is allowed to sell

dicyclomine tablet and capsules to the licensee. The July 2, 1993,

wholesale price offers the best available approximation of the price

that would exist in a market consisting of only one manufacturer of the

branded and one manufacturer of the generic product. The 48% is based

on our best approximation of the margin that a generic distributor of

another manufacturer's product needs to make a profit. Furthermore, the

July 2 price is the firs price increase that reflected the exit of two

generic competitors. The timing of the merger announcement and the

price increase could suggest that the price on July 2nd were also

influenced by the impending merger; however there is no evidence of

this. If the ceiling is higher than one would prefer, the licensee and

licensor could conceivably arrive at a transfer price that somewhat

reduces their incentives to fully compete. Unfortunately, there is no

other non-arbitrary method for setting the maximum allowable price, nor

would it be easy to determine such a price. The provision, however,

does serve the basic purpose of providing the licensee a chance to

succeed without injecting a regulator's version of competition into the

market.\1\

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\1\I think indexing for inflation might have been more

appropriate given the seven year period over which the ceiling would

be in effect.

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I have a mild concern that the licensee will not have sufficient

incentives to begin manufacturing dicyclomine on its own under the

order. A potential licensee could enter the licensing agreement for a

short period of time with the intention of taking advantage of the

profit available for selling the licensed product but without the

intention of manufacturing dicyclomine on its own. Alternatively, a

licensee might initially intend to elf-manufacture, but change its

strategy at some later date and sell only the licensed product.\2\ In

this particular instance, no reasonable fixes to the licensee incentive

problem seem available. Therefore, on balance, I support the order

because, at a minimum, it should achieve the necessary intermediate

relief. Permanent relief, such as divestiture, may not be as needed in

this instance because there is a good possibility of future entry,

albeit untimely.

\2\Such a change of strategy could come about because of the

entry of others, or by unanticipated problems associated with

gaining FDA approval, or self-manufacturing.

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[FR Doc. 94-16279 Filed 7-5-94; 8:45 am]

BILLING CODE 6750-01-M