Medtronic Inc.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 9810329]

Medtronic Inc.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before May 24, 1999.

ADDRESS: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT: Stephen Riddell or Mark Menna, FTC/H-

2105, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580, (202) 326-

2721 or (202) 326-2722.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for March 8, 1999), on the World Wide Web, at ``http://www.ftc.gov/os/

actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, 600 Pennsylvania Avenue, N.W., Washington,

D.C. 20580, either in person or by calling (202) 326-3627. Public

comment is invited. Such comments or views will be considered by the

Commission and will be available for inspection and copying at its

principal office in accordance with Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of the Proposed Consent Order and Draft Complaint to Aid

Public Comment

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,

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among other things, non-occlusive arterial pumps. Avecor introduced its

non-occlusive arterial pump is 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. Sec. 45, and

that the acquisition violates Section 7 of the Clayton Act, as amended,

15 U.S.C. Sec. 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-Hirschamann Index,\1\ exceeds 5,700, and

the acquisition would increase the HHI by more than 340 to more than

6,050.

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\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.''

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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 independenty

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 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

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 required 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 acquire 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.

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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

the argument 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.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 99-7210 Filed 3-23-99; 8:45 am]

BILLING CODE 6750-01-M