Unit 5 – GROUP PROJECT Oligopolies and Monopolistic Competition – Grifols/Talecris Merger Rhonda D. Smith-Payne AIU Online Contributing Group Members: Rhonda D. Smith-Payne Non-Contributing Group Members:Ashley Battle, Latonia Jenkins, Betty Johnson, Crystal Williams Abstract The purpose of this report is to assess the impact of mergers on industry, on consumers, and on society as a whole and more specifically, the Grifols/Talecris Merger in the plasma-derived pharmaceutical industry. A complete description of the industry is discussed in depth. Part II discusses arguments in support of the merger and opposing the merger.
Grifols purchased Talecris in 2009, creating a merger which did not come without strict opposition. Supporting references assist in discussing Federal Trade Commission case against the Grifols/Talecris merger. In regards to remaining cited material, references are provided. A footnote concludes this report, explaining the circumstances related to this project. UNIT 5 – OLIGOPOLIES AND MONOPOLISTIC COMPETITION – GRIFOLS/TALECRIS MERGER Part I After reviewing The Federal Trade Commission’s website at http://www. ftc. gov/bc/index. shtml and selecting one proposed merger industry; this report will discuss the Grifols/Talecris merger.
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Grifols, S. A is a manufacturer of plasma-derived drugs. Headquartered in Barcelona, Spain, the company develops and manufactures human blood plasma-derived products, with facilities in Barcelona and Los Angeles. “Grifols entered the U. S. market in 2002, when it acquired the assets of a U. S. manufacturer, Alpha Therapeutics Corporation, and 42 plasma collection centers from SeraCare. Since then, Grifols has acquired additional plasma centers and is now vertically integrated, making it the second largest plasma collector in the world. Grifols employs approximately 6,000 people worldwide and had global 2009 revenues of $1. billion. ” (Commission, 2011) Talecris Biotherapeutics Holdings Corp. also specializes in the development, manufacture, and worldwide sale of blood plasma-derived products. “Talecris is also a public company- owned in part by the private investment firm Cerberus Capital Management, L. P. (“Cerberus”) – that specializes in the development, manufacture, and worldwide sale of human blood plasma-derived products. Talecris began its 2 U. S. operations in 2005, when Cerberus acquired Bayer AG’s global plasma business and Precision Pharma in the same year.
Talecris is headquartered in Research Triangle Park, North Carolina, with additional regional headquarters in Canada and Germany. Like Grifols, Talecris is a vertically integrated company, owning numerous plasma collection centers, as well as manufacturing facilities in Clayton, North Carolina, and Melville, New York. It employs approximately 5,000 people worldwide and had global 2009 revenues of approximately $1. 5 billion. ” (Comission, 2011). On June 6, 2010, Grifols agreed to acquire Talecris for approximately $3. 4 billion in stock and cash.
According to the FTC, “Grifols and Talecris currently have approximately 8. 4 percent and 22. 8 percent of the U. S. Ig market, respectively, and their merger would leave only three meaningful manufacturers with nearly all U. S. Ig sales. In the market for albumin, the companies have U. S. market shares of approximately 13 percent each, and the acquisition would leave only four significant competitors. In the market for pdFVIII, Grifols and Talecris have 23 percent and 3. 6 percent of the U. S. market, and after their merger there would be only three main competitors. (In The Matter of Grifolis/Talecris – press release, 2011) In the early 2000’s, the plasma-derived products industry maintained a competitive venue within the pharmaceutical drug market. Supply increases led to lower production and reduced production of the goods. This caused the product to vertically integrate, leaving it in the hands of only a few remaining firms. As manufactures consolidated, the product became dominated by only three firms, the largest three. One of these firms is Talecris. As time passed, prices of the drug increased while supply diminished.
Because of the characteristics that promote stability, “relevant markets are characterized by highly inelastic demand, increasing the firms’ incentives to coordinate because even a small change in supply can have a large effect on price. ” (Commission, 2011) The plasma derived pharmaceutical industry is led by a group of large and competitive firms. Besides Grifols/Talecris, many companies have gained success and continue to sustain competiveness within the industry. CSL Corporate, incorporated in 1916, is headquartered in Parkville, Victoria, Australia and has over 10,000 employees in 27 different countries. The company is the only manufacturer of influenza vaccines in the Southern Hemisphere. ” (Chhabra, 2010). “In 2007, the global revenues generated by the top-10 biotech companies exceeded $45bn. Amgen, Genentech and UCB are good examples of leading companies that have experienced strong sales growth in recent years. Principal drugs developed and marketed by the leading companies include Aranesp, Mabthera and Keppra, each with blockbuster sales. Moreover, pipelines of the leading biotech companies remain strong. (Visiongain, 2009) “The plasma-derived products manufactured and sold by Respondents are life-sustaining and life-enhancing biologics indicated for, among other things, the treatment of primary immune deficiency diseases, neurological conditions, severe burns, liver failure, and blood coagulation disorders. The relevant product markets in which to analyze the Acquisition are: (i) Ig, (ii) Albumin, and (iii) plasma-derived Factor VIII (“pdFVIII”). Ig is a widely used drug that can be administered intravenously (“IVIG” or “IGIV”) or subcutaneously (“SCIG”). IVIG, the more predominant form, has numerous indications approved by the U.
S. Food and Drug Administration (“FDA”), and as many as 150 offlabel uses. The most common uses involve the treatment of Primary Immunodeficiency Diseases and neurological conditions – e. g. , Guillain-Barre Syndrome and Chronic Inflammatory Demyelinating Polyneuropathy. ” (UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION, 2011). “Ig is a plasma protein replacement therapy largely used to treat immune deficient patients. The relevant product market for Ig includes all brands, concentrations (i. e. , 5% and 10%), formulations (i. e. , liquid and lyophilized/powder), and means of administration (i. e. intravenous and subcutaneous). Because intravenous Ig (“IVIG”) accounts for the overwhelming majority of Ig sales in the United States, industry participants often refer to the Ig market as the IVIG market. Although IVIG is available in two concentrations (5% and 10%), they are therapeutically equivalent. The main difference is one of convenience: a 10% IVIG requires less volume, meaning treatment typically takes less time. Ig has numerous FDA approved indications (e. g. , primary immunodeficiencies (sp) and Chronic Inflammatory Demyelinating Polyneuropathy), and there is a significant amount of off-label use. “Physicians use albumin to expand blood volume, prime heart valves during cardiac surgery, treat burn victims, and replace proteins in treating liver failure. In the United States, the parties compete in the sale of two different albumin concentrations: 5% and 25% liquid. The 5% and 25% concentrations have different clinical uses, but if a 5% product is unavailable, hospitals can dilute a 25% product to a 5% concentration if necessary. ” Physicians use pdFVIII to treat bleeding disorders, namely Hemophilia A and vonWillebrand Disease (“VWD”).
While both pdFVIII and its non-plasma counterpart, recombinant Factor VIII (“rFVIII”), can be used to treat Hemophilia A, rFVIII and pdFVIII have limited interchangeability and, hence, limited ability to constrain each other’s prices. For instance, although rFVIII is the standard of care for previously untreated patients with Hemophilia A (due to the perception that pdFVIII carries an increased risk of viral transmission), evidence suggests that patients using rFVIII are more likely to develop inhibitors – antibodies that impede the treatment’s effectiveness.
Thus, for some Hemophilia A patients, pdFVIII is the only viable treatment. Likewise, patients with severe VWD are treated with pdFVIII products containing von Willebrand Factor (“VWF”). No recombinant products contain VWF, so those patients also may have no choice but to use pdFVIII. ” (In the Matter of Grifols, S. A. and Talecris Biotherapeutics Holdings Corp. , 2011) In the competitive environment, according to 2009 reports, there combined firm would hold approximately 31% of the market with two competing firms, Baxter and CSL Limited. Baxter holds 35% and CSL holds 25%.
This would increase HH1 in the Ig market by 383 points. In September 2010, Octapharma AG (“Octapharma”) withdrew from the U. S. market because of concerns about serious adverse events. Prior to this, Octapharma held approximately 8. 8% of the Ig market and its future competitive significance is uncertain. “Under the Herfindahl-Hirschman Index (“HHI”), which is the standard measure of market concentration under the Merger Guidelines, an acquisition is presumed to enhance market power if it increases the HHI by more than 200 points and results in a post-acquisition HHI that exceeds 2,500 points.
The Acquisition creates market concentration levels well in excess of these thresholds for Ig and albumin. ” (UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION, 2011) “Grifols has concluded its planned $1. 1 billion High-Yield Senior Unsecured corporate bond issue together with $3. 4 billion in long-term syndicated ? nancing; to report that it has successfully completed all aspects of its proposed ? nancing structure. In place is $4. 5 billion estimated ? nancing that will be required at maximum to complete its purchase of Talecris Biotherapeutics. Grifols anticipates that, following the Talecris acquisition, its leverage level will be approximately 5x net ? nancial debt/EBITDA. This leverage is expected to be quickly reduced as the result of the combined company’s increased cash ? ow and the bene? t of the expected operating synergies. The company anticipates that its leverage ratio will decline to approximately 3x EBITDA by 2014. Grifols’ proposed acquisition of Talecris is currently pending approvals by U. S. Federal Trade Commission (FTC) and other trade regulators. ” (Berman, 2011) Part II Arguments Competition is important and a good thing because it increases efficiency.
This increases consumption opportunities by allowing more output from a certain given level of input. Less materials and energy are used for output, resulting in efficiency gains, less work hours, and higher wages. In favor of the merger, the industry benefits society by eliminating competition between Grifols and Talecris, resulting in remaining firms to promote stability within the pharmaceutical market. Opposition of the merger argues that the merger would lessen competition within the market, leaving only a few remaining competitors; possibly lowering service to consumers.
Market concentration in a high degree can be a boon and a threat to consumers because small effect on supply can have a large effect on price. The plasma-derived pharmaceutical markets are characterized by highly inelastic demand, meaning that the percent change in the quantity demanded is low. Oligopolies are a type of market structure where there are only a few competitors. In the matter discussed here, an oligopoly exists because the pharmaceutical manufacturing market is limited. With the Grifols/Talecris merger, the market becomes even less competitive.
In this type of structure, firms are transparent. “Firms have engaged in signaling to limit supply levels and maintain higher prices. if a firm were to “break ranks” from a coordinated scheme, the other manufacturers can detect any “cheating” over the course of the long manufacturing period and inflict punishment in other geographic markets…” (Commission, 2011) References In The Matter of Grifolis/Talecris – press release. (2011, JUN 1). Retrieved OCT 29, 2011, from www. ftc. gov: http://www. ftc. gov In the Matter of Grifols, S. A. and Talecris Biotherapeutics Holdings Corp. , File No. 01-0153 (Federal Trade Comission JUN 6, 2011). UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION, Docket No. C-4322 1010153 (Federal Trade Commission MAY 31, 2011). UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION, Docket No. C-4322 (THE FEDERAL TRADE COMMISSION Jun 6, 2011). Berman, K. E. (2011, JAN nd). international blood/plasma news. Retrieved NOV 6, 2011, from marketingresearchbureau. com: http://www. marketingresearchbureau. com/IBPN_Jan_2011. pdf Chhabra, T. (2010, DEC 12). Listing of Biotech Companies. Retrieved NOV 6, 2011, from eHowMoney: http://www. ehow. om/list_7487094_listing-biotech-companies. html Comission, F. T. (2011, JUN 1). FTC Challenges Grifolis/Talecris Merger. Retrieved OCT 29, 2011, from www. ftc. gov: http://www. ftc. gov/opa/2011/06/grifols. shtm Commission, F. T. (2011). ANALYSIS OF AGREEMENT CONTAINING CONSENT ORDERS Orders To Aid Public Comment. pdf. Washington, D. C. : Federal Trade Commission. Visiongain. (2009, JAN nd). Top 10 Biotech Companies. Retrieved NOV 6, 2011, from Pharmaceutical Market Research: http://www. pharmaceutical-market-research. com/publications/biotechnology/company_reports/top_10_biotech_companies. tml Group Assignment Footnote: This assignment is a Group Project for Microeconomics AIUOnline – Unit 5 – Oligopolies and Monopolistic Competition – Grifols/Talecris Merger. The group originally consisted of 5 members, assigned by the Instructor. Throughout the course of the group project and for the compilation of this report, the author of this report was abandoned by the remaining group members. The suggestions, research, writings, and compilation of all material contained in this report are the work of one individual, rather than five, as assigned.