[Federal Register Volume 72, Number 199 (Tuesday, October 16, 2007)]
[Notices]
[Pages 58665-58668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-20325]


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FEDERAL TRADE COMMISSION

[File No. 071 0101]


Kyphon Inc., Disc-O-Tech Medical Technologies Ltd. (Under 
Voluntary Liquidation), and Discotech Orthopedic Technologies Inc.; 
Analysis of Agreement Containing Consent Orders to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint and the terms of the consent order--embodied in the consent 
agreement--that would settle these allegations.

DATES: Comments must be received on or before November 8, 2007.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Kyphon Inc., File No. 071 0101,'' to 
facilitate the organization of comments. A comment filed in paper form 
should include this reference both in the text and on the envelope, and 
should be mailed or delivered to the following address: Federal Trade 
Commission/Office of the Secretary, Room 135-H, 600 Pennsylvania 
Avenue, NW., Washington, DC 20580. Comments containing confidential 
material must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with Commission Rule 4.9(c).

[[Page 58666]]

16 CFR 4.9(c) (2005).\1\ The FTC is requesting that any comment filed 
in paper form be sent by courier or overnight service, if possible, 
because U.S. postal mail in the Washington area and at the Commission 
is subject to delay due to heightened security precautions. Comments 
that do not contain any nonpublic information may instead be filed in 
electronic form as part of or as an attachment to e-mail messages 
directed to the following e-mail box: [email protected].
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, athttp;//www.ftc.gov. As a matter of discretion, the FTC 
makes every effort to remove home contact information for individuals 
from the public comments it receives before placing those comments on 
the FTC Web site. More information, including routine uses permitted by 
the Privacy Act, may be found in the FTC's privacy policy, athttp://www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Jonathan S. Klarfeld (202) 326-3187, 
Bureau of Competition, Room NJ-5108, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580.
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  2.34 of 
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned 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 thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for October 9, 2007), on the World Wide Web, at http://www.ftc.gov/os/2007/10/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order to Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'') has accepted, subject 
to final approval, an Agreement Containing Consent Orders (``Consent 
Agreement'') from Kyphon Inc. (``Kyphon'') and Disc-O-Tech Medical 
Technologies Ltd. (Under Voluntary Liquidation) and Discotech 
Orthopedic Technologies Inc. (collectively ``Disc-O-Tech''). The 
purpose of the proposed Consent Agreement is to remedy the 
anticompetitive effects that would otherwise result from Kyphon's 
acquisition of Disc-O-Tech's Confidence assets. Under the terms of the 
proposed Consent Agreement, Kyphon and Disc-O-Tech are required to 
divest all assets (including intellectual property) related to Disc-O-
Tech's Confidence business to a third party, enabling that third party 
to manufacture and sell the Confidence cement and delivery system for 
the treatment of vertebral compression fractures.
    The proposed Consent Agreement has been placed on the public record 
for thirty days to solicit comments from interested persons. Comments 
received during this period will become part of the public record. 
After thirty days, the Commission will again review the proposed 
Consent Agreement and the comments received, and will decide whether it 
should withdraw the proposed Consent Agreement or make it final.
    On December 20, 2006, Kyphon agreed to acquire certain spine-
related assets from Disc-O-Tech, including the intellectual property, 
sales agreements, and other assets relating to Disc-O-Tech's B-Twin, 
SKy Bone Expander, and Confidence product lines for approximately $220 
million (the ``Acquisition''). The Commission's complaint alleges that 
the proposed acquisition of the assets related to the Confidence 
system, if consummated, would violate Section 7 of the Clayton Act, as 
amended, 15 U.S.C. Sec.  18, and Section 5 of the Federal Trade 
Commission Act, as amended, 15 U.S.C. Sec.  45, by removing an actual, 
direct, and substantial competitor from the U.S. market for minimally 
invasive vertebral compression fracture (``MIVCF'') treatment products. 
The proposed Consent Agreement would remedy the alleged violation by 
requiring a divestiture that will replace the competition that 
otherwise would be lost in this market as a result of the Acquisition.

II. The Parties

    Kyphon develops and markets medical devices used to restore and 
preserve spinal function and diagnose the source of low back pain, 
including products used to treat vertebral compression fractures in a 
minimally invasive manner. In 2006, Kyphon reported worldwide sales of 
approximately $408 million, and U.S. sales of $324 million.
    Disc-O-Tech, an Israeli corporation and its U.S. subsidiary that 
develops, manufactures, and sells products for minimally invasive 
orthopedic surgeries, introduced the Confidence system to the U.S. 
market in July 2006. Disc-O-Tech's global revenues were approximately 
$14 million in 2006.

III. Minimally Invasive Vertebral Compression Fracture Treatments

    Vertebral compression fractures (``VCFs'') occur when one or more 
vertebral bodies collapse. Osteoporosis, a degenerative bone disease 
that largely affects elderly women, causes the vast majority of VCFs, 
but they can also be caused by cancerous tumors or traumatic injury. 
For some patients, VCFs cause extreme, persistent, and debilitating 
pain.
    Doctors and their patients have few ways to effectively treat VCFs. 
In the past, physicians most commonly treated VCF patients with a 
variety of pain management techniques such as back braces, bed rest, 
and pain medication. For many patients, these techniques do not control 
the pain associated with VCFs and could lead to later health problems. 
Open surgery involving the placement of metal hardware is rarely 
performed to repair a VCF because the patients are typically elderly 
and not good candidates for successful procedures. MIVCF treatments 
were developed to provide doctors and their patients with a VCF 
treatment that is more effective than pain management and safer and 
more effective than open surgery.
    Vertebroplasty, the first MIVCF treatment to be introduced, 
involves the injection of a fairly liquid polymethylmethacrylate bone 
cement into the fractured vertebral body under fluoroscopy image 
guidance. The bone

[[Page 58667]]

cement sets quickly, stabilizing the fracture and eliminating painful 
movement of loose bone in the vertebra. Vertebroplasty effectively 
relieves pain, but many doctors have safety concerns regarding the risk 
of the liquid bone cement leaking out of the vertebral body.
    Kyphoplasty, introduced by Kyphon in 1999, is similar to 
vertebroplasty, except that the physician performs the additional step 
of inflating one or two balloons inside the vertebral body before 
injecting the bone cement. The principal advantage of kyphoplasty is 
that the inflation of the balloons creates a cavity into which the bone 
cement can flow, reducing the likelihood that cement will leak outside 
of the vertebral body. Kyphoplasty may have the additional benefit of 
helping to restore the vertebral body towards its pre-fracture shape 
and height. Because of its safety advantage and other perceived 
advantages, kyphoplasty is the most widely used MIVCF treatment product 
in the United States.
    Because of the superiority of MIVCF treatment products over 
alternatives, the relevant product market in which to analyze the 
competitive effects of the Acquisition is no larger than MIVCF 
treatment products. The relevant geographic market is the United 
States. MIVCF treatment products are medical devices that are regulated 
by the United States Food and Drug Administration (``FDA''). MIVCF 
treatment products sold outside the United States, but not approved for 
sale in the United States, are not viable alternatives for U.S. 
consumers and hence are not in the relevant market.
    Kyphon's premium-priced kyphoplasty product dominates the MIVCF 
treatment product market with more than a ninety percent share based on 
revenues. Disc-O-Tech's Confidence system is the first MIVCF treatment 
product that uses a highly viscous cement. Both Kyphon's product, which 
uses balloons, and Disc-O-Tech's product, which uses a highly viscous 
cement, have substantially lower risks of leakage from the vertebral 
body following injection than do the ``traditional'' vertebroplasty 
products offered by numerous other firms. All of the latter inject a 
low viscosity cement. As a result, Disc-O-Tech's Confidence system is 
poised to become a closer substitute for Kyphon's product than are the 
traditional vertebroplasty products. For this reason, traditional 
vertebroplasty products will not constrain the prices for Kyphon's 
product to the same extent that Disc-O-Tech's Confidence system would, 
absent its acquisition by Kyphon.
    There are other competitors in the MIVCF treatment product market, 
including Medtronic and Spineology, but none provides the near-term 
competitive threat to Kyphon posed by Disc-O-Tech's offering. Medtronic 
has had limited success selling its Arcuate XP product to date, and its 
product appears to hold limited growth prospects. Spineology's MIVCF 
offering has been and appears likely to remain a niche product that 
competes primarily for younger VCF patients. Although several 
additional firms are attempting to enter the MIVCF treatment product 
market, the time line for commercialization of these products is 
significantly behind that of the Confidence system, and none appears to 
have the Confidence system's immediate prospects for success.

IV. Competitive Effects and Entry Conditions

    The Acquisition would cause significant competitive harm in the 
market for MIVCF treatment products. Confidence is Kyphon's principal 
competitive threat, and, but for the Acquisition, would make 
significant inroads into Kyphon's near-monopoly position. Because both 
products offer a safe method for treating VCFs, many physicians 
consider the Confidence system to be the best alternative to 
kyphoplasty, particularly for elderly osteoporotic patients who receive 
the vast majority of kyphoplasty treatments. By eliminating such a 
close competitor, the Acquisition would likely allow Kyphon to 
unilaterally raise prices in the MIVCF treatment market. The 
anticompetitive effects of the Acquisition are exacerbated by the fact 
that it appears to have been undertaken with the specific goal of 
precluding other major spine companies from acquiring Confidence and 
marketing it against kyphoplasty, which would have happened had Kyphon 
not acquired Confidence itself. By enabling Kyphon, rather than a major 
spine company, to control the further development and positioning of 
Confidence, Kyphon would be able to avoid the competition that it 
otherwise would have faced in the MIVCF treatment product market. As 
such, the Acquisition, if consummated, would have a significant, 
adverse effect on competition.
    New entry is not likely to avert the anticompetitive effects of the 
proposed transaction. It likely would take more than two years for a 
would-be entrant to develop a product, conduct clinical trials, and 
submit the product for FDA approval. After submitting an application 
for FDA clearance or approval, a firm must wait for the FDA to review 
the material and respond to any questions the FDA may have. In addition 
to the development and regulatory time requirements for firms seeking 
to enter the MIVCF treatment product market, there are substantial 
intellectual property barriers an entrant must overcome. Patent 
litigation among competitors in this market is ongoing, and key patents 
act as a major obstacle to any prospective entrant. As such, any new 
MIVCF treatment device of any competitive significance would have to be 
designed around existing patents. Finally, even after a non-infringing 
design is developed and the product is manufactured, a firm would still 
need to establish a U.S. sales and marketing force. Considering all 
these factors, entry into the manufacture and sale of MIVCF treatment 
products is likely to take longer than two years. Thus, timely and 
sufficient entry in response to a small but significant price increase 
is extremely unlikely.

V. The Proposed Consent Agreement

    The parties have agreed, pursuant to the proposed Consent 
Agreement, to divest Disc-O-Tech's Confidence assets to a Commission-
approved acquirer no later than 60 days after the Commission accepts 
the Consent Agreement for public comment, effectively remedying the 
Acquisition's anticompetitive effects in the MIVCF treatment product 
market. The Consent Agreement requires that the parties divest all 
assets relating to the Confidence system, including tangible property, 
intellectual property, and any permits and licenses that are necessary 
to manufacture, distribute, and sell the Confidence system. In 
addition, the parties must divest the rights to certain Disc-O-Tech 
development efforts related to the Confidence system. To the extent 
that an acquirer of the Confidence assets requires additional assets 
not included in the asset package, the Consent Agreement requires 
Kyphon to provide a license to any other assets it acquired from Disc-
O-Tech, which will ensure that the acquirer will be able to immediately 
enter the MIVCF treatment product market and remain a viable 
competitor.
    The proposed Consent Agreement contains several provisions to help 
ensure that the divestiture is successful. First, the Commission will 
evaluate possible purchasers of the divested assets to ensure that the 
competitive environment that would have existed but for the transaction 
is restored. If the parties do not divest the Confidence assets within 
the 60-day time period to a Commission-approved buyer, or if Kyphon 
closes on the acquisition of the

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Confidence assets, the Consent Agreement provides for the Commission to 
appoint a trustee to divest the assets. Second, Disc-O-Tech is required 
to provide transitional services to the Commission-approved buyer. 
These transitional services, which are similar in form to what Disc-O-
Tech would have provided to Kyphon, may be necessary for a smooth 
transition of the Confidence assets to the acquirer and to ensure 
continued and uninterrupted service to customers during the transition. 
The Consent Agreement also requires that Kyphon covenant not to sue the 
acquirer of the Confidence assets for infringing any intellectual 
property Kyphon acquired from Disc-O-Tech that is not being divested. 
This covenant covers not only the Confidence assets, but also extends 
to any developments an acquirer might make to the Confidence assets. 
This provision is designed as a safety net to ensure that Kyphon does 
not interfere with the acquirer's freedom to compete in the U.S. MIVCF 
treatment product market with a patent infringement lawsuit based on 
former Disc-O-Tech intellectual property. Finally, to ensure that the 
Commission will have an opportunity to review any attempt by Kyphon to 
acquire or license any of the Confidence assets at any time within the 
next two years, the proposed Consent Agreement contains a prior notice 
provision committing Kyphon to an H-S-R framework, even if such a 
transaction otherwise would be non-reportable.
    The Order to Hold Separate and Maintain Assets that is included in 
the Consent Agreement requires that Disc-O-Tech maintain the viability 
of the Confidence business as a competitive operation until the 
business is transferred to a Commission-approved buyer. Specifically, 
Disc-O-Tech must maintain the confidentiality of sensitive business 
information, and take all actions required to prevent the destruction 
or wasting of the Confidence assets. Kyphon may not interfere with the 
Confidence business during the pendency of the divestiture by having 
any involvement in the Confidence business, making offers of employment 
to Disc-O-Tech employees involved in the Confidence business before the 
Confidence assets are divested, or interfering with Disc-O-Tech's 
suppliers of materials for the Confidence product.
    The purpose of this analysis is to facilitate public comment on the 
proposed Consent Agreement, and it is not intended to constitute an 
official interpretation of the proposed Decision and Order or to modify 
its terms in any way.
    By direction of the Commission, with Commissioners Harbour and 
Kovacic recused.

Donald S. Clark,
Secretary.
[FR Doc. E7-20325 Filed 10-15-07: 8:45 am]
[Billing Code: 6750-01-S]