1. Innovation and Merger Control: M-3687 - Johnson & Johnson - Guidant Benoit Durand Director of Economic Analysis 24 November 2006 BIICL

2. 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

3. 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

4. Artery with plaque (CAD)

5. Pre-Dilatation Balloon Angioplasty Procedure

6. Stent Procedure

7. Result After Stent Procedure

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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