DRÄGER/AIR SHIELDS INQUIRY

Statement of issues

The Competition Commission (CC) has today published an issues statement as part of its inquiry into the proposed acquisition by Dräger Medical AG & CO.KGAA of the Air-Shields infant warming therapy care business from Hillenbrand Industries Inc.

At present, both companies hold a significant share in the supply of neo-natal warming therapy products in the UK. These products include closed care incubators, open warming beds, transport incubators and photo therapy products, which are used to care for very young and premature babies.

The inquiry was referred to the CC by the Office of Fair Trading (OFT) on 18 December 2003, and will seek to establish whether there will be a substantial lessening of competition as a result of the proposed acquisition.

The issues statement follows the initial process of gathering information, views and evidence and identifies clearly for all interested parties, the specific questions and areas the inquiry will be examining. This will form the basis for the private hearings with both the main parties. (The full issues statement is attached at the end of this release).

The process for merger references requires the inquiry group (the Group) to define the relevant market, carry out an assessment of the competitive effects of the proposed merger, consider any customer benefits that might arise from the merger, and analyse what would be likely to occur in the absence of the merger (the counterfactual).

If the group considers that the proposed merger may be expected to result overall in a substantial lessening of competition, it will consider whether and if so, what remedies might be appropriate, issuing a statement at a later date.

The CC is required to publish its report by 3 June 2004.

This issues statement should not be seen as implying that the Group has identified any competition concerns - the CC has yet to reach any conclusions on this inquiry. The purpose of making the statement of issues public is to inform all interested parties and give them an opportunity to raise any further points with the CC.

Anyone wishing to comment on any of the issues set out below is requested to do so by 11 February 2004 in writing to:

Anne Jolly, Inquiry Secretary, Dräger/Air-Shields
Competition Commission
New Court
48 Carey Street
London WC2A 2 JT

Or by email to:

The CC will now continue to gather evidence in this inquiry and will publish its provisional findings according to the administrative timetable available on the CC's web site (www.competition-commission.org.uk).

Notes for Editors

The Enterprise Act 2002 empowers the OFT to refer to the CC completed or proposed mergers for investigation and report which create or enhance a 25 per cent share of supply in the UK (or a substantial part thereof) or where the UK turnover associated with the enterprise being acquired is over £70 million.
The CC has a 24-week period in which it is required to publish its report, which may be extended by no more than eight weeks if it considers that there are special reasons why the report cannot be published within that period.
The Dräger/Air-Shields Inquiry Group consists of four members - Sir Derek Morris (Chairman of the CC), Laurence Elks, Graham Hadley and Professor Stephen Wilks – supported by the CC’s staff.
Further information can be obtained from the CC’s web site at: http://www.competition-commission.org.uk.
Enquiries should be directed to Francis Royle, Press Officer, 020 7271 0242 or Rory Taylor on 020 7271 0488 /

ISSUES STATEMENT

The issues that the Commission intends to consider are:

Market definition

The group would like to explore the appropriate definition of the relevant economic markets affected by the proposed merger, in particular:

(a) whether the relevant markets are separate markets for different neonatal therapy products, specifically:

open care incubators, which might be further subdivided according to the different purposes for which the products are used within a hospital

closed care incubators

transport incubators

phototherapy products and

accessories, training and aftercare services related to each of the above products or whether the relevant market is broader, encompassing all these products together and/or other products or services.

(b) whether the geographical scope of the relevant market(s) is the UK or, given the global presence of many suppliers, wider than the UK.

The group has noted the OFT’s view that the relevant geographical scope is the UK and that similar competition issues arise whether the product market is deemed to be all the neo-natal therapy products listed above or ones for each category of product.

Assessment of the competitive effects of the merger

Most (though not all) suppliers of these products in the UK are vertically integrated with manufacturers, and the proposed merger involves vertically integrated companies. In the course of its assessment of the competitive effects of the merger, the group would like to explore the implications of the concentration in manufacture, as well as in supply, which the proposed merger will create.

Against this background, the group would like to explore the potential competitive effects of the merger within the markets identified:

(a) whether, and to what extent, Drager and Air Shields currently compete in the provision of neonatal warming therapy products;
(b) whether, and to what extent, Drager and Air Shields face competition from other suppliers of these products;
(c) whether there are identifiable trends in the development of the market (for example, trends in clinical practice or trends to outsourcing of bio-medical engineering or facilities management in hospitals) which might affect competition in the foreseeable future;
(d) whether the merger would enable the merged parties to exercise portfolio power as a result of their ability to link purchases of a range of products together;
(e) whether the merger would establish or strengthen the capability of the merged parties to influence hospitals’ decisions on purchase of neonatal warming therapy products because of their role as provider of broader medical engineering services;
(f) whether there are significant barriers to entry or to expansion (for example, technical or regulatory barriers, or barriers arising from customer behaviour), and in particular to what extent entry or expansion is possible for suppliers based outside the UK;
(g) whether the merger might enable or encourage the merging parties to engage in predatory pricing or other policies designed to induce exit from, or deter entry into, the market;
(h) whether the merger would be expected to create or increase market power and lead to a rise in prices, or a reduction in choice of products or quality of service for some or all customers, or a reduction in innovation in the market (non-coordinated effects);
(i) whether the merger would be likely to create or increase co-ordination between suppliers of neonatal warming therapy products which would be likely to lead to a rise in prices, or a reduction in choice of products or quality of service for some or all customers (co-ordinated effects);
(j) whether the merger might in any way restrict the ability of clinicians to select, by exercising clinical judgement, the best products or services for neonatal therapy, or to change their requirements over time as a result of changes to clinical practice or patient need;
(k) whether any potential lessening of competition might be offset by

the buying power of large customers,

to the extent that the market presents some of the characteristics of a bidding market, the fact that customers purchase these products through open tendering processes; and

(l) whether, taking account of all of the above, the proposed merger may be expected to result overall in a significant lessening of competition in the supply of neonatal warming therapy products to hospitals in the UK.

Counterfactual

The group would like to explore what would happen in the absence of the merger (the counterfactual). In particular the group would like to identify the likely alternatives to the merger as proposed (including the continuation of the status quo), and to establish whether the Air Shields business could be expected to provide effective competition to the Drager business in the UK, whether under current ownership or otherwise, in the absence of the merger.

Relevant Customer Benefits

The group would like to explore whether any relevant customer benefits can be expected to arise as a result of the merger, and if so what these benefits are likely to be, which customers they will benefit and the significance of those benefits.

Remedies

If the group concludes that the proposed merger may be expected to result overall in a significant lessening of competition, it will consider whether and if so, what remedies might be appropriate, and will issue a further statement at a later date.