When Invibio, Inc and its parent company Victrex began marketing implant-grade PEEK (polyether ketone) back in 1999, it was a game changer for medical device makers. Now surgeons could see how bones were fusing without being blocked by metal instrumentation.
Everybody had to have it.
The company knew this and entered into supply contracts with its medical device customers which included an exclusivity term of some kind. According to the Federal Trade Commission (FTC), these terms generally required that the customer use Invibio PEEK for all PEEK-containing medical devices, for a broad category of devices, or for a list of identified devices.
These contracts worked so well that even as competitors entered the market, the company cornered 90% of PEEK sales, causing the FTC to file a complaint against the company.
The FTC accused the UK-based company of monopolistic behavior by making customers sign exclusive contracts. By 2013, the number of cleared devices using PEEK Optima reached over 500 in the U.S. and more than 80 in China. With over 5 million implanted devices in use worldwide, the FTC had reason to notice.
On July 1, 2016, the company agreed to a Consent Decree which settles charges that it violated federal antitrust law by using the long-term exclusive contracts to monopolize the PEEK market.
Under the proposed consent order, the company is prohibited from entering into exclusive supply contracts and from preventing current customers from using an alternate PEEK sources in new products. In addition, Invibio must allow current customers meeting certain conditions to modify existing contracts to eliminate the requirement that the customer purchase PEEK for existing products exclusively from Invibio.
Invibio is also barred from using pricing in new contracts to effectively create exclusivity between Invibio and a device maker.
“These prohibited terms include setting minimum purchase requirements; conditioning discounts or important services on a device maker’s purchase from Invibio of a specified percentage of its PEEK requirements; and providing retroactive volume discounts, ” said the FTC.
The FTC voted unanimously to issue the complaint and accept the proposed consent order for public comment.
PEEK
PEEK is a high-performance polymer used in a number of applications. A predecessor company to Victrex developed industrial-grade PEEK in the late 1970s. Industrial-grade PEEK is now used in a number of industries, including aerospace, automotive, and energy.
But the principal use of medical implant-grade PEEK is for spinal interbody fusion.
Titanium to PEEK
Before the development of PEEK, spinal interbody fusion devices were made primarily of titanium and other metals and provided structural support in the spine and carried autograft (a patient’s own bone) or allograft (cadaver bone) to facilitate boney fusion. While titanium offered excellent structural support and supported boney ingrowth, it also created a visual barrier to X-rays and made it very difficult for surgeons to track post-operative bone growth via X-ray.
When Invibio launched implant-grade PEEK, it was the first company to obtain an FDA Master File and therefore was the only supplier of medical grade of PEEK. The company quickly found that nearly every spinal implant supplier wanted to add PEEK implants to their product line.
Competitors
As the first PEEK supplier with an FDA Master File, Invibio’s exclusivity terms went unchallenged by customers, says the FTC. Then starting in the late 2000s, medical device makers became aware of competing suppliers.
In 2006, Solvay, a large chemical company, acquired assets to gain entry into the sale of industrial-grade PEEK. Solvay also sold non-PEEK polymers to medical device makers.
According to the FTC complaint, device makers (customers of Invibio) informed Solvay that they were seeking a competitive implant-grade PEEK supplier and inject price and product choices into the market. In response to this encouragement from device makers, Solvay expanded into implant-grade PEEK.
The FDA cleared the first spinal implant device using Solvay PEEK in 2010.
In 2005, Evonik, also a large chemical company, began producing industrial-grade PEEK. Like Solvay, Evonik supplied non-PEEK polymers to medical device makers. As with Solvay, the FTC says device makers encouraged Evonik to produce implant-grade PEEK. In response to this encouragement, Evonik expanded into implant-grade PEEK.
The FDA cleared the first spinal implant device using Evonik PEEK in 2013.
“Coercion and Inducements”
According to the FTC, both before and after entry by Solvay and Evonik, Invibio included exclusivity terms in these contracts. “Invibio employed various strategies to coerce or induce device makers to accede to exclusivity terms, including threatening to discontinue PEEK supply or to withhold access to regulatory support.
“Invibio’s insistence on exclusivity terms has been a deliberate and successful strategy to hinder its competitors and to maintain its monopoly power.”
In 2014, years after entry by Solvay and Evonik, and despite Solvay’s and Evonik’s lower prices, Invibio still accounted for over 90% of PEEK sales worldwide, according to the FTC. “A substantial majority of these sales have been foreclosed from Solvay and Evonik due to the exclusivity terms in Invibio’s long-term supply contracts.”
The FTC says Solvay and Evonik have offered to sell PEEK at prices significantly lower than the prices charged by Invibio. Invibio was aware of this price gap.
Preventing Competitors
So, states the complaint, “Invibio decided to adopt a strategy of expanding the scope and coverage of exclusivity terms in PEEK supply contracts to prevent Solvay and Evonik from developing into effective competitors. Invibio was concerned that if it did not block rivals, it would be forced to engage in painful price competition with Solvay and Evonik.”
The complaint continues that Invibio recognized that it was particularly important to lock up the largest and most sophisticated medical device makers with exclusive contracts, “as doing so would prevent Solvay and Evonik from achieving success at these device makers and then building on that success with other customers. If Solvay’s or Evonik’s PEEK were used successfully by leading medical device makers, this would validate the rival in the eyes of other device makers, thereby enhancing competition in the market.”
Invibio, according to the FTC, implemented its exclusivity strategy through negotiations with existing and potential customers. During these negotiations, “Invibio sought to broaden its exclusivity terms in several ways, including by: (1) inserting more explicit exclusivity provisions into supply contracts; (2) expanding the scope of and limiting the exceptions to exclusivity requirements; and (3) employing restrictive contract terms that impeded customers’ ability to switch to an alternative PEEK supplier for existing products even upon contract expiration.”
After the market entry by Solvay and Evonik, a number of PEEK purchasers sought to negotiate supply terms with Invibio that did not require exclusivity. These device makers, says the FTC, wanted to arrange a second source of PEEK supply in order to reduce the risk of a supply interruption and to obtain lower prices.
Invibio responded by insisting on the exclusivity terms. States the complaint; “Invibio’s message was that if customers were going to use Invibio PEEK, they must use only Invibio PEEK.”
Because device makers could not quickly obtain regulatory clearance to use a new source of PEEK for all of their devices, device makers generally had no choice but to sign an exclusive contract with Invibio.
Threatening to Withhold Supplies
“Invibio enforced its position by threatening to withhold needed supply or regulatory support and, where necessary, offering minor inducements in exchange for exclusivity, ” charged the FTC.
According to the complaint, Invibio’s threats in support of its exclusivity demands took several forms. “For example, Invibio threatened to cut off PEEK supply for all of a device maker’s existing products. Invibio also threatened not to sell Invibio’s new brands of PEEK to a device maker unless the device maker agreed to buy Invibio’s main brand of PEEK on an exclusive basis. And Invibio threatened to withhold access to Invibio’s FDA Master File and other regulatory support if device makers did not agree to exclusivity.”
Other device makers, “while not explicitly threatened by Invibio, were too fearful of a supply interruption or other retaliatory tactics to resist Invibio’s demand for exclusivity.”
Invibio did offer a small price discount or other benefit in exchange for exclusivity. The company recognized that limited discounts were a small price to pay for the benefit of cutting off Solvay and Evonik from key customer accounts.
Limits of Exclusive Contracts
Attorneys for the Orrick law firm wrote that this case serves as a reminder that exclusive contracts can be an important tool in a business’s market strategy, but they should be executed with care.
“Start-ups with market power that use exclusive contracts, especially as a means to enter new markets, should not assume, as Invibio apparently did, that once they establish a strong foothold they can continue the exclusive contracting scheme indefinitely. Eventually, as other companies enter the market, actions taken to solidify market power through exclusive contracts may come under a microscope. And, once examined, there is a greater risk that the contracts will be found unlawful, especially if done in consort with other exclusionary conduct to maintain market power.”
Debbie Feinstein, Director of the FTC’s Bureau of Competition, said, “This case affirms that the first company to enter a market cannot rely on anticompetitive contract terms to lock up customers and box out rivals. This settlement is designed to provide buyers a meaningful choice among suppliers, to open the door to price competition, and to enhance innovation.”
The test will be if Invibio’s change in contract language lowers their 90% market share in the coming years. The FTC will be measuring.
