Innovation and Merger Control: M-3687 - Johnson & Johnson - Guidant

Benoit DurandDirector of Economic Analysis

24 November 2006BIICL

Innovation and Merger Control

What is Innovation? Covers a broad spectrum of activities

ranging from scientific discoveries to improving existing products

Innovation is often viewed as welfare enhancing

Innovation is the result of dynamic process

Johnson & Johnson - Guidant

Two merging firms are involved in production of devices used in Interventional Cardiology

Interventional Cardiology cures Coronary Artery Disease (CAD)

Instead of Bypass Surgery, use of a minimally invasive procedure

Artery with plaque (CAD)

Pre-Dilatation Balloon Angioplasty Procedure

Stent Procedure

Result After Stent Procedure

Interventional Cardiology: High Technology Market Interventional Cardiology has experienced new

development over the last 20 years Drug Eluting Stents (DES) are quickly

replacing Bare Metal Stents (BMS) Not a Winner-take-all Market but First

New Product Reaps Monopoly Profit until

Entry of Rivals Two firms active on DES market: Johnson

& Johnson and Boston Scientific

Potential Competition

Mergers may have negative effect on potential competition in an existing market Remove potential entrant Competitive assessment through the

lenses of unilateral effect theory

Competitive Assessment

Assessment of whether the elimination of Guidant as a potential entrant would remove a future competitive constraint on the DES market Two incumbents pricing at duopoly

levels – no existing constraint from potential entrants

Potential Entrants with different probabilities of having a significant impact

Prediction of DES market structure and performance with and without acquisition of Guidant

Competitive assessment

DG-Comp determines entrants that are most likely to offer significant competitive constraint Determine and Review key Assets

DG-Comp reviews facts, clinical trials and key “independent” experts’ opinion to predict Guidant’s future position Medtronics and Abbott future position

Competitive assessment

Role of Intellectual Property in the Competitive Assessment IPRs are viewed as Barriers to Entry Acquisition of Guidant IP portfolio

Existence of blocking patents?

Important IP Litigation in the US US remedies dealt with the issue

Effect on Innovation

Merger may have an effect on Competition on a market that does not yet exist but is predicted to exist (next generation of DES)

Cannot Rely on Traditional Static

Analysis but use of Innovation Markets Innovation market => firms do not sell products,

they are in the process of developing products

Competitive assessment

DG-Comp did not determine impact of the

Merger on Innovation, yet R&D spending

would determine next generation of product What likely impact on Innovation?

Elimination of one major player in IC =>

reduced rivalry Merger and dynamic efficiencies