FTC Challenges Medical Device Coatings Deal

The Federal Trade Commission is suing to block GTCR BC Holdings LLC’s (GTCR) $627 million acquisition of Surmodics Inc., claiming the proposed deal is anticompetitive.

Merging the two largest manufacturers of critical medical device coatings would create a combined company that controls more than half the market for outsourced hydrophilic coatings, the FTC charges.  These coatings are often used by medical device manufacturers and are applied to lifesaving medical devices such as catheters and guidewires.

“Medical device makers rely on high-quality coatings in designing and bringing to market life-saving devices, such as neurovascular catheters,” said Daniel Guarnera, director of the FTC’s Bureau of Competition. “This merger threatens to disrupt competitive dynamics that have ultimately benefited patients. Today, the FTC is stepping in to protect patients from this unlawful acquisition.”

GTCR currently owns a majority stake in Biocoat, Inc., which is the second-largest provider of outsourced hydrophilic coatings. Surmodics is the largest provider of outsourced hydrophilic coatings.

As the FTC’s complaint alleges, GTCR’s acquisition of Surmodics would lead to a highly concentrated market for outsourced hydrophilic coatings and eliminate significant head-to-head competition between Biocoat and Surmodics. This direct competition has spurred lower prices, higher quality coatings, and product innovation. The proposed deal would change those competitive dynamics and harm medical device manufacturers as well as patients, the complaint states.

Surmodics, however, disagrees with the FTC and has vowed to defend the case in court to complete the transaction.

“Surmodics respectfully disagrees with the FTC’s decision and remains committed to completing the merger,” an official company statement read. “Surmodics remains confident in both its rationale for the merger and the value it will bring to all stakeholders, including shareholders, customers, and patients. We have worked constructively with the FTC over the last several months to secure regulatory approval for the merger and are disappointed by its decision to initiate litigation, as the merger is pro-competitive.”

Hydrophilic coatings allow physicians to maneuver medical devices within the tight confines of the body—within a blood vessel in the brain, for example—without damaging sensitive tissue or vital structures. Medical devices with hydrophilic coatings are used in a range of interventional neurovascular, structural heart, coronary, and peripheral vascular procedures.

Market Dynamics

GTCR’s acquisition of Surmodics would significantly increase market concentration in the outsourced hydrophilic coatings sector, which already suffers from few competitors. The merger would result in a level of market concentration that violates the 2023 Merger Guidelines, the FTC’s complaint states.

Internal documents from both companies, as well as competitor and customer testimony, recognize Surmodics and Biocoat as head-to-head competitors. As alleged in the complaint, Surmodics and Biocoat closely monitor each other’s business strategy and often target the same large, small, and startup medical device manufacturers, also known as original equipment manufacturers (OEMs). This fierce competition has driven Surmodics and Biocoat to improve coating quality and services, lower prices, and increase innovation. The benefits of these competitive dynamics, however, would be eliminated by the proposed merger, the FTC’s complaint alleges.

The manufacturing of hydrophilic coatings requires specialized expertise, years of research, and millions of dollars in investments. Many OEMs prefer to outsource this process instead of manufacturing it in-house. Often, OEMs outsource to coatings manufacturers with a proven track record, like Biocoat and Surmodics. Given these dynamics, it is unlikely any new coating provider could emerge to meaningfully compete with GTCR and Surmodics post-merger, the FTC’s complaint alleges.

The Commission vote to issue an administrative complaint and authorize staff to seek a temporary restraining order and a preliminary injunction was 4-0. Commissioner Rebecca Kelly Slaughter joined by Commissioner Alvaro M. Bedoya issued a statement.

The federal court complaint and request for preliminary relief will be filed in the U.S. District Court for the Northern District of Illinois to halt the transaction pending an administrative proceeding.

The Mergers I Division of the FTC’s Bureau of Competition led the investigation in this matter.