Analysis of The Proposed Consent Order
The Federal Trade Commission ("Commission") has accepted for public comment from Medtronic, Inc. ("Medtronic" or "proposed Respondent") an Agreement Containing Consent Order ("the proposed consent order"). The proposed Respondent has also reviewed a draft complaint contemplated by the Commission. The proposed consent order is designed to remedy likely anticompetitive effects arising from the acquisition of Avecor Cardiovascular, Inc. ("Avecor"). Both Medtronic and Avecor are medical technology companies that compete in the manufacture and sale of non-occlusive arterial pumps, perfusion devices used in heart/lung machines. The proposed consent order remedies the acquisition's anticompetitive effects by requiring Medtronic to divest Avecor's non-occlusive arterial pump assets ("Avecor Pump Assets") as a viable, on-going product line. Medtronic has entered into an agreement to divest the Avecor Pump Assets to Baxter Healthcare Corporation ("Baxter").
Medtronic, which is headquartered in Minneapolis, Minnesota, is engaged in the research, development, manufacture and sale of medical devices, including implantable devices, such as pacemakers and defibrillators, which regulate heart rhythm; tissue and mechanical heart valves; coronary stents; and perfusion devices for heart/lung machines. Medtronic's perfusion devices include non-occlusive arterial pumps. Medtronic's Bio-Pump is the market leader in non-occlusive arterial pumps. Avecor, also headquartered in Minneapolis, Minnesota, is engaged in the research, development, manufacture and sale of perfusion devices, including, among other things, non-occlusive arterial pumps. Avecor introduced its non-occlusive arterial pump in the Fall of 1997. Avecor's pump, which utilizes different technology, is still in the early stages of gaining market acceptance. Some in the industry believe that this new pump may offer consumers advantages over the Bio-Pump and other conventional non-occlusive pumps.
Pursuant to an Agreement and Plan of Merger ("Merger Agreement"), signed July 12, 1998, and as subsequently amended, Medtronic agreed to acquire 100% of the voting stock of Avecor for approximately $106 million. The proposed Complaint alleges that the Merger Agreement violates Section 5 of the FTC Act, as amended, 15 U.S.C. §45, and that the acquisition violates Section 7 of the Clayton Act, as amended, 15 U.S.C. §15, and Section 5 of the FTC Act, as amended, 15 U.S.C. §45, in the United States market for the research, development, manufacture and sale of non-occlusive arterial pumps.
The draft complaint alleges that Medtronic's proposed acquisition of Avecor would lessen competition in the United States market for research, development, manufacture and sale of non-occlusive arterial pumps. Arterial pumps are a perfusion device used primarily to stand in for the heart and lungs during surgical procedures involving those organs. Perfusion devices are products that handle blood in heart/lung machines. These devices circulate and oxygenate the blood and regulate body temperature during heart bypass surgery and other procedures where the heart must be relieved of its pumping function. Arterial pumps circulate the blood. According to the complaint, there are no competitive substitutes for non-occlusive arterial pumps.
The complaint alleges that the United States is the relevant geographic market in which to analyze the effects of the proposed acquisition.
The complaint alleges that the United States market for research, development, manufacture and sale of non-occlusive arterial pumps is highly concentrated, and would become significantly more concentrated as a result of the acquisition. Premerger concentration in this market, as measured by the Herfindahl-Hirschmann Index,(1) exceeds 5,700, and the acquisition would increase the HHI by more than 340 to more than 6,050.
According to the draft complaint, entry into the United States market for research, development, manufacture and sale of non-occlusive arterial pumps is difficult and would not be timely, likely or sufficient to prevent the adverse competitive effects that may result from the proposed acquisition.
The proposed consent order remedies the Commission's competitive concerns about the proposed acquisition. Under Paragraph II of the proposed consent order, Medtronic must divest all of the assets relating to Avecor's non-occlusive arterial pump to Baxter or to another acquirer approved by the Commission. Baxter is a major producer of medical devices used in cardiac surgery and has substantial experience in the research, development, manufacture and sale of other perfusion devices used in cardiac surgery bypass operations. Baxter also is a major provider of perfusion services. In the event that Medtronic does not sell these assets to Baxter or another Commission-approved buyer within ninety (90) days of the Order's becoming final, the Commission may appoint a trustee to divest the Avecor Pump Assets.
The Commission's purpose in evaluating possible purchasers of divested assets is to maintain the competitive environment that existed prior to the acquisition. A proposed buyer must not itself present competitive problems. The Commission believes that Baxter is well qualified to operate the divested assets and that divestiture to Baxter will not be anticompetitive in this market.
The proposed consent order requires Medtronic to provide substantial assistance to the buyer of the Avecor Pump Assets to enable the buyer to obtain FDA approval to manufacture and market the Avecor pumps and reservoirs to use with the pump. First, Medtronic must contract manufacture a supply of the Avecor pumps and the reservoirs used with the Avecor pumps for a year while the buyer establishes its own manufacturing capability. Medtronic must continue to supply the buyer with such reservoirs for a second year if the buyer determines that it needs additional time to establish the manufacturing capability to produce a reservoir to use with the Avecor pump. Second, Medtronic must provide technical assistance to help the buyer obtain necessary FDA approvals and to acquire the capability to manufacture the Avecor pump. Finally, the proposed consent order provides the buyer with the opportunity to hire Avecor employees associated with the Avecor Pump Assets.
In order to facilitate the smooth transfer of assets and ensure that the buyer will get the assistance necessary to independently manufacture the Avecor pump, the proposed consent order also provides for the appointment of an interim trustee. The interim trustee will serve until the acquirer has received all necessary FDA approvals to manufacture the Avecor pump and becomes an independent producer of the Avecor pump.
Under certain circumstances if the Commission-approved buyer fails to become a viable, independent manufacturer and seller of the Avecor pump, the Commission may terminate the divestiture and appoint a divestiture trustee to find a new buyer for the Avecor pump assets. If, prior to obtaining the necessary FDA approvals and beginning to manufacture the Avecor pump and a compatible reservoir, the buyer stops selling the Avecor pump for 60 days or otherwise fails to make good faith efforts to sell it, the Commission may step in and terminate the divestiture. The Commission may also terminate the divestiture if the buyer fails to make good faith efforts to obtain the necessary FDA approvals. Similarly, the Commission may revoke the divestiture if the buyer fails to obtain the FDA approvals or to begin manufacturing within one year. Under this last scenario, the Commission may refrain from revoking the divestiture (for a second year) if it appears that the buyer is likely to obtain the FDA approvals or begin to manufacture the products in that time period.
The proposed consent order also requires Medtronic to provide to the Commission a report of compliance with the divestiture and assistance provisions of the proposed consent order within sixty (60) days following the date the proposed consent order becomes final and every ninety (90) days thereafter until Medtronic has completed the divestiture and the acquirer has obtained all necessary FDA approvals and has become an independent manufacturer of the Avecor pump and a reservoir that can be used with the Avecor pump. The proposed consent order also requires Medtronic to notify the Commission at least thirty (30) days prior to any change in the structure of Medtronic that may affect compliance with the proposed consent order.
The proposed consent order has been placed on the public record for sixty (60) days for receipt of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreements and the comments received and will decide whether it should withdraw from the agreement or make the proposed consent order final.
By accepting the proposed consent order subject to final approval, the Commission anticipates that the competitive problems alleged in the complaint will be resolved. The purpose of this analysis is to facilitate public comment on the proposed consent order, including the proposed sale of the Avecor pump assets to Baxter, in order to aid the Commission in its determination of whether to make the proposed consent order final. This analysis is not intended to constitute an official interpretation of the proposed consent order, nor is it intended to modify the terms of the proposed consent order in any way.
1. The Herfindahl-Hirschmann Index, or "HHI," is a measurement of market concentration calculated by summing the squares of the individual market shares of all participants in the market. Under Section 1.51 of the Horizontal Merger Guidelines issued April 2, 1992, by the Federal Trade Commission and the Department of Justice, the Commission considers concentration levels exceeding 1,800 as "highly concentrated" and concentration levels between 1,000 and 1,800 as "moderately concentrated."