The Federal Trade Commission (FTC) has launched a legal challenge against private equity firm GTCR's proposed $627 million acquisition of Surmodics, a leading provider of hydrophilic coatings for medical devices. The regulatory body voted unanimously 4-0 to seek a temporary restraining order and preliminary injunction to halt the merger pending an administrative hearing.
According to the FTC, the acquisition would create a combined company controlling more than 50% of the outsourced hydrophilic coatings market, potentially disrupting competitive dynamics that benefit patients. GTCR already owns a majority stake in Biocoat, which the FTC identifies as the second-largest provider in this specialized market.
"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."
Market Concentration Concerns
The FTC's complaint centers on the specialized nature of the hydrophilic coatings market, which features few competitors. Hydrophilic coatings are critical components applied to medical devices such as catheters and guidewires to improve their performance and safety.
Based on internal company documents and testimony from competitors and customers, the FTC argues that Surmodics and Biocoat are direct head-to-head competitors that frequently target the same medical device manufacturers. The commission contends that "fierce competition" between these companies has driven improvements in coating quality and services, reduced prices, and increased innovation—benefits that would be eliminated by the merger.
The regulatory body further argues that new competitors are unlikely to emerge to challenge the combined entity due to significant barriers to entry:
- Manufacturing hydrophilic coatings requires specialized expertise
- Development demands years of research
- Market entry requires millions of dollars in investment
- Medical device manufacturers prefer outsourcing to companies with proven track records
Merger Timeline and Terms
GTCR agreed to acquire Surmodics in May 2024, with initial expectations to close the deal in the second half of the year. Under the terms of the agreement, GTCR would acquire all outstanding shares of Surmodics for $43.00 per share, resulting in an equity valuation of approximately $627 million.
Surmodics shareholders approved the merger on August 13, 2024. If completed, Surmodics would become a privately held entity, and its shares would no longer be listed on the Nasdaq Global Select Market.
The FTC requested additional information from both Surmodics and Biocoat in August, and as of late January, Surmodics was aiming to close the merger by the end of March 2024, subject to regulatory approval.
Surmodics' Response
Following the FTC's announcement, Surmodics issued a statement expressing disagreement with the agency's decision. The company emphasized that it has worked closely with the FTC for months to secure regulatory approval and voiced disappointment over the agency's move to initiate litigation.
Surmodics maintains that the merger is "pro-competitive" and has stated its intention to vigorously defend the case in court. The company remains confident in the deal's potential to benefit all stakeholders, including shareholders, customers, and patients.
Market Impact
The news has already impacted Surmodics' stock, which was reported trading lower by 4.76% to $28.21 in premarket trading following the FTC's announcement—significantly below the proposed acquisition price of $43.00 per share.
Industry Significance
The FTC's challenge highlights increasing regulatory scrutiny of private equity acquisitions in specialized healthcare markets. Hydrophilic coatings play a crucial role in medical device manufacturing, improving the performance and safety of life-saving devices.
The case also underscores the FTC's focus on preserving competition in concentrated markets with high barriers to entry, particularly those affecting healthcare and medical technologies. The commission's action aligns with its 2023 Merger Guidelines, which place increased emphasis on preventing further concentration in already limited competitive landscapes.
