FTC Sees Through Synergy Health Detailed X-Ray Sterilization Plan

NEW YORK ( The Deal) -- Detailed and aggressive plans by United Kingdom-based Synergy Health to enter the U.S. market for medical sterilization services put the company and its would-be merger partner Steris (STE) on shaky ground in defending their $1.9 billion merger against the Federal Trade Commission legal challenge issued May 29, according to some antitrust lawyers.

The FTC in its complaint seeking to block the acquisition argues that Mentor, Ohio-based Steris would be able to eliminate Synergy Health's introduction of a potentially disruptive new technology into the sterilization market by acquiring its rival.

According to the FTC's complaint, Synergy Health had mapped out plans to offer sterilization services based on X-ray technology that will compete directly with gamma radiation-based services being used.

The two companies are the second- and third-largest sterilization companies in the world, though Synergy Health has only a small presence in the United States. The largest provider is Sterigenics International.

Steris and Synergy Health argue that their services are complementary.

Sterilization is essential to the manufacture of many health care products and is required by the Food and Drug Administration to eliminate bacteria and other microorganisms from products such as implantable medical devices and human tissue products.

There are three primary methods of sterilization: gamma radiation, e-beam radiation and EO gas.

Gamma radiation, which sterilizes by exposing a product to the radioactive isotope Cobalt 60, is favored by makers of implantable medical devises and other dense products that require deep penetration to be sterilized. E-beam doesn't penetrate as deeply as gamma radiation, and EO gas is effective only for products in which the gas can make contact with the entire product surface.

X-ray technology that Synergy Health has planned to introduce offers comparable and possibly superior depth of penetration as gamma, the FTC said.

"For many products, X-ray is the only functional alternative to gamma," according to the complaint.

The FTC, which announced plans to initiate legal challenges to the merger on May 29, didn't make its administrative complaint public until Monday. The agency is seeking a preliminary injunction in federal district court to temporarily block the merger's closing while the FTC conducts an in-house administrative trial to determine the deal's permanent fate.

Despite being heavily redacted to protect the confidentiality of the companies' market data, the complaint makes it clear that Synergy Health initially had big plans for entering the U.S. market with X-ray sterilization services that would compete against the established gamma providers. The FTC alleges that Synergy Health amended that strategy twice after entering merger plans with Steris, first when the deal was announced and again when the FTC issued a second request for information focusing on the potential for competition between gamma and X-ray services.

Although Synergy Health's specific predictions about how much market share it expected to take from Sterigenics International and Steris are redacted from the public version of the FTC suit, it is clear that the company has been planning to launch X-ray services in the United States after acquiring a facility in Daniken, Switzerland, that was developing the technology. Synergy Health formed a team to develop plans for the introduction of X-ray services in September.

The merger plans were announced in October, and Synergy Health officials soon recognized that the merger could affect their plans for the X-ray product, the FTC's complaint makes clear.

In November, Synergy Health pushed back some elements of the company's plan to roll out its first X-ray facility "to accommodate the anticipated closing of the Steris transaction."

The redacted version of the FTC's suit implies that Synergy Health officials, in their meetings with FTC staff, recharacterized their plans for the X-ray rollout after Jan. 9, when the FTC issued a second request for information seeking documents relating to potential competition between the X-ray and gamma sterilization businesses.

How the Synergy Health officials were now characterizing their plans is unclear from the public version of the complaint because those specifics have been redacted.

Nevertheless, it is clear from the complaint that Synergy Health originally planned to enter the United States with a game-changing technology that could take business from the gamma-based services offered by Sterigenics International and Steris.

Steris may not have known how aggressively Synergy Health planned to roll out its X-ray technology until its executives were presented with the FTC's complaint.

Companies are sometimes not aware of the strength of the FTC's case until the agency lays out its arguments, said Darren Tucker, a partner at Morgan Lewis & Bockius.

"Once a company sees the evidence the FTC obtained from other industry participants, it will sometimes reconsider its decision to contest the litigation," he said.

On Tuesday, a Steris spokesman said that the companies haven't altered their plan to fight the FTC challenge.

As to the competitive threat Synergy Health's X-ray plans posed to Steris's gamma-based services, he would only say, "We will not be discussing specific details of the administrative complaint."

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