FTC Requires Divestiture of Assets to Allow Johnson & Johnsons Purchase of Guidant Corp.

The Federal Trade Commission today announced a consent agreement that will protect competition and consumers in three significant medical device product markets affected by Johnson & Johnson’s (J&J) proposed $25.4 billion acquisition of Guidant Corporation (Guidant). The agreement will allow the transaction to proceed, provided the parties comply with its terms.

Under the terms of the order conditionally approving the transaction, J&J is required to
1) grant to a third party a fully paid-up, non-exclusive, irrevocable license, enabling that third party to make and sell drug eluting stents (DESs) with the Rapid Exchange (RX) delivery system, 2) divest to a third party J&J’s endoscopic vessel harvesting (EVH) product line, and 3) end its agreement to distribute Novare Surgical System, Inc.’s (Novare) proximal anastomotic assist device (AAD).

“The consent order announced by the Commission today preserves competition in the U.S. markets for three important medical device products,” said Susan Creighton, director of the FTC’s Bureau of Competition. “As a result of the agreement announced today, J&J and Guidant will be able to proceed with their transaction while the benefits that competition brings to patients for these potentially life-saving products and technologies will be preserved.”

The Commission’s Complaint

According to the Commission’s complaint, the transaction as originally proposed would violate the FTC Act and Section 7 of the Clayton Act, as amended, and would reduce competition in the three product markets identified. Each of these markets is highly concentrated and potential entry would not be timely, likely, or sufficient to offset the alleged anticompetitive impact of the acquisition. Specifically, as described in more detail in the Commission’s analysis to aid public comment (which can be found as a link to this press release on the FTC’s Web site), J&J’s acquisition of Guidant would remove Guidant as an imminent competitor from the U.S. market for DESs and be likely to lessen competition in the U.S. markets for EVH devices and proximal AADs.

The Relevant Product Markets

The FTC’s competitive concerns regarding J&J’s proposed acquisition of Guidant arose in the following product markets: 1) drug eluting stents; 2) endoscopic vessel harvesting devices; and 3) proximal anastomotic assist devices. A description of each product is provided below.

Drug Eluting Stents. DESs are medical devices typically consisting of a thin metallic stent coated with a drug and polymer, mounted on a delivery system. Interventional cardiologists
use such stents to treat patients with coronary artery disease, a condition caused by the build-up of plaque deposits in one or more of the coronary arteries, leading to reduced blood flow through the affected arteries. DESs work by propping open the clogged artery and eluting a drug that helps prevent the artery from renarrowing. DESs are sold mounted on a delivery system used to deploy the stent to the blocked artery, with the two most common systems being RX and over-the-wire. RX delivery systems are currently highly preferred by doctors in the United States, and continue to grow in popularity.

Endoscopic Vessel Harvesting Devices. EVH devices are used in coronary artery bypass graft (CABG) surgery to remove a patient’s leg vein, arm artery or other blood vessel that can then be used as a conduit to bypass one or more blocked coronary arteries. The devices allow the harvesting procedure to be minimally invasive, requiring only one to three small incisions. EVH has several clinical benefits over other vessel harvesting methods such as the open method and bridging, both of which are much more invasive, leave large scars, and carry a greater risk of infection.

Proximal Anastomotic Assist Devices. Proximal AADs are used in beating heart CABG procedures, allowing the surgeon to avoid the need to clamp the aorta when attaching a harvested vessel. If a proximal AAD is not used, the surgeon must use a clamp to stop the flow of blood, which in some cases, can cause calcified plaque particles to dislodge from the aorta and travel through the blood stream to the brain, possibly causing a stroke or other harm.

The Consent Order

The Commission’s consent order is designed to remedy the alleged anticompetitive impact of J&J’s acquisition of Guidant, not to improve pre-transaction competition in the relevant product markets. First, it requires J&J to license Guidant’s intellectual property surrounding the RX delivery system at no minimum price to an up-front buyer with a DES program in development within 10 days of the acquisition’s consummation. The parties proposed Abbott Laboratories (Abbott), one of the two companies best positioned to replicate the competition provided by Guidant in this market in the relevant time frame, as the up-front buyer of this divestiture package. The Commission believes Abbott’s experience with both drugs and vascular stents will enable it to become a strong competitor in the DES market at its time of expected entry in late 2007, the same time Guidant would have entered with its DES on an RX delivery system. Still, the RX license defined in the agreement is transferable, so if Abbott’s DES program is unsuccessful, Abbott will have the incentive and ability to transfer the license to another firm to ensure continued competition with J&J/Guidant.

Second, the order remedies the acquisition’s potential anticompetitive effects in the market for EVH devices by requiring J&J to divest its EVH product line to a Commission-approved buyer within 15 days of its acquisition of Guidant. J&J has reached an agreement to sell these assets to Datascope, which currently has a line of products used in cardiac surgery, including products used in CABG procedures. The order allows Datascope to enter into a supply agreement with J&J for up to two years to ensure Datascope has time to receive required regulatory approvals and to begin manufacturing and/or packaging EVH device kits in its own facility.

Finally, the order will remedy the competitive concerns in the market for proximal AADs by requiring J&J to end its distribution agreement with Novare for Novare’s proximal AAD, eNclose. The FTC expects Novare will be able to find a new eNclose distribution partner within the next couple of months.

Other Terms of the Agreement

The consent agreement also contains a provision allowing the FTC to appoint an interim monitor to oversee J&J’s compliance with its terms. The monitor is required to file periodic reports with the Commission to ensure it remains informed about the status of the divestitures and the provision of services and assistance during the EVH divestiture transition period. In addition, the agreement allows the Commission to appoint a divestiture trustee to accomplish all of the remedies in the consent order if they are not completed in the time specified.

International Cooperation

The European Commission (EC), Canada’s Competition Bureau, and other foreign competition authorities also reviewed this proposed merger. Throughout the course of their respective investigations, the FTC and the staffs of the EC’s Competition Directorate, the Canadian Competition Bureau, and other interested competition authorities communicated and cooperated with each other under the terms of their respective cooperation agreements and, in the case of the EC, the 2002 Best Practices on Cooperation in Merger Investigations.

The Commission vote to accept the consent agreement, appoint the interim monitor, and place copies on the public record was 2-0, with Chairman Deborah Platt Majoras and Commissioner Pamela Jones Harbour recused. The consent agreement will be subject to public comment for 30 days, until December 1, 2005, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, consent order, and an analysis to aid public comment are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. 051-0050)