EUROPEAN COMMISSION. Brussels, 04.IV.2006 C(2006)1189 final. State aid N 639/2005 Ireland Abbott Vascular Devices Ireland. Sir, 1.

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1 EUROPEAN COMMISSION Brussels, 04.IV.2006 C(2006)1189 final Subject: State aid N 639/2005 Ireland Abbott Vascular Devices Ireland Sir, 1. PROCEDURE (1) The Irish authorities notified the abovementioned measure on 20 December 2005, registered in the Commission on the next day with the reference number COMP(2005)A/ After a first analysis of the information received, the Commission considered the notification to be incomplete and, by letter of 24 January 2006, asked for additional elements. The Irish authorities replied to that request by a first letter of 16 February 2006, registered in the Commission on the next day with the reference number COMP(2006)A/31317 and a second letter of 9 March, registered in the Commission on 14 March with the reference number COMP(2006)A/ DESCRIPTION OF THE MEASURE (2) The object of the notification is an individual aid granted to Abbott Vascular Devices Ireland Limited to support the establishment of a global endovascular and coronary research and development (R&D) centre in Galway The products Description (3) Vascular devices are medical devices which have to be split between 2 families: the coronary and the peripheries endovascular devices. The latter treats disease states outside of coronary, in the body s extended arterial vascular system (carotid, renal, iliac / femoral). The product range covers bare metal stents, drug eluting stents, stent delivery systems and embolic protection devices. Mr Dermot Ahern, TD Minister for Foreign Affairs 80 St. Stephen's Green DUBLIN 2 Ireland Commission européenne, B-1049 Bruxelles Belgique/Europese Commissie, B-1049 Brussel België Telephone: (32-2)

2 (4) A stent is a small expandable wire tube that is used to support the walls of the artery, enabling the blood flow. Two deployment technologies are used to make the stent expand to fit the inner wall of the vessel: Balloon expandable stents (BX) are mounted on a balloon so that when the balloon is inflated the stent expands. Self expandable stents (SX) are usually made of Nitinol, an alloy with shape memory properties. These properties ensure the correct expansion of the stent in the artery, and make SX stents particularly apt for superficial arteries subject to mechanical forces. SX stents are covered by a sheath so that when the sheath is rolled back the stent expands. (5) Drug eluting stents (DES) are a recent evolution of standard bare metal stents (BMS), whereby a drug and a drug-releasing mechanism are added to the basic tube. The gradual release of the drug reduces restenosis (excessive cell growth within and near the stented area). DES are designed for use in patients with symptomatic disease and is intended to improve artery luminal diameter by preventing restenosis. (6) Stent delivery systems are advanced to the occluded vessel using a steerable guidewire as a lead; they place the stents on the lesion site. This procedure is called angioplasty. For BX stents, delivery systems are basically balloon catheters (hollow tube with a balloon at the end). Once the lesion site has been reached, the balloon is inflated a number of times to compress BX stents against the arterial walls. For SX stents, delivery systems are plain catheters (without balloon). Once the lesion site has been reached, the sheath is rolled back and the stent expands to fit the artery. Thanks to a recent evolution called Rapid exchange system (RX), the catheter slides on only a small part of the steerable guidewire to reach the target vessel (with the previous system, the catheter would be inserted over the whole length of the steerable guidewire). Because stent delivery systems are generally sold together with the stents 1, they have to be considered together with the stents regarding competition issues. (7) Embolic protection devices (EPD) are small umbrella-type devices that are placed beyond the lesion with the aim of trapping any material or debris dislodged during the angioplasty procedure Regulatory approvals (8) Regulatory studies are performed on vascular devices to obtain commercialisation approval: 1 See Commission decision of 25/08/2005 on merger case N COMP/M.3687 Johnson&Johnson / Guidant, p 5, 12. 2

3 In Europe, the CE marking process requires the intervention of a notified body which delivers a certificate of conformity mandatory to CE mark the device. In the USA, the investigational device exemption / pre-market approval application (IDE/PMA) process is required by the American Food and Drug Administration (FDA). (9) The community rules 2 concerning the CE marking process classify all implantable devices and long-term surgically invasive devices in risk Class IIB, unless they are intended to be used in direct contact with the heart, the central circulatory system or the central nervous system, in which case they are designated as risk Class III products. Coronary DES require a substantive body of clinical investigation in order to obtain CE mark and an additional approval process to verify the safety, quality and usefulness of the medicinal product The markets (10) Interventional cardiology (treatment of coronary diseases with minimally invasive procedures) is a relatively recent, innovation driven business which has registered dramatic growth over the last few years. In 1987, the first coronary stent was implanted in a human being. In the late 1980s and early 1990s a large number of new interventional devices were invented and perfected and, by 2000, each year about 2 million angioplasties were performed worldwide. The use of stents had by then also become commonplace. The first DES was put on the market in Europe in (11) The overall interventional cardiovascular market is expected to grow significantly over the next five to ten years, fuelled by new and improved therapies and products, proven clinical performance in new indications, increased reimbursement and the overall ageing of the population. Interventional cardiology has experienced a compound annual growth rate (CAGR) of 11% over the last five years. Worldwide cumulative growth is expected to be at about 15% on average per year, at least for the next three years and at about 13% over the next ten years 5. (12) The market for endovascular devices shows some features resembling those of the interventional cardiology area. It is increasingly recognised that this is a huge and untapped market which requires significant development on existing stent design and existing delivery systems. At European level, a moderately positive growth is The reference Directives are: Council Directive 90/385/EEC of 20 June 1990 on the approximation of the laws of the Member States relating to active implantable medical devices, OJ L 189, , p. 17, as last amended by Directive 93/68/EEC (OJ L 220, , p. 1); Council Directive 93/42/EEC of 14 June 1993 concerning medical devices, OJ L 169, , p. 1, as last amended by Regulation (EC) No 1882/2003 of the European Parliament and of the Council (OJ L 284, , p. 1); and Directive 98/79/EC of the European Parliament and of the Council of 27 October 1998 on in vitro diagnostic medical devices, OJ L 331, , p. 1, as last amended by Regulation (EC) No 1882/2003. See Commission decision of 25/08/2005, p 6, 16. See Commission decision of 25/08/2005, p 18, 73. See Commission decision of 25/08/2005, p 18, 73. 3

4 forecast over the period, with a CAGR of 5.9%. Within this area, two of the most dynamic segments are forecast to be that of endovascular stents, with a CAGR of 5.3% and that of EPD, with a CAGR of 17.9% 6. (13) In 2004, the global vascular stent market was valued at $ 4.8 billion, coronary stents accounting for $ 3.8 billion, and endovascular stents for $ 1 billion 7. The market in 2005 is estimated at more than $ 5 billion and projected to grow to $ 6 billion by end It is characterised by a number of entry barriers. Innovation and regulatory approvals are the most significant ones. For instance, until September 2005, Guidant had the only FDA approved carotid stent and thus enjoyed a monopoly position in that market 9. In September 2005, Abbott s Xact freestyle was the next entrant. Likewise, Johnson&Johnson and Boston Scientific are the only two companies that currently have FDA approval to sell DES products in the USA. Abbott s Zomaxx might be the next one. In its decision on the merger J&J / Guidant 10, the Commission concluded that the concentration resulted in the elimination of one of the strongest new entrants in the market of DES. However, the investigation showed that other new entrants, primarily Medtronic and Abbott were likely to compensate for the loss of competition resulting from Guidant s exit from the marketplace 11. Based on the above, the concentration was authorised The beneficiary (14) Abbott Vascular Devices (AVD) is a large firm, subsidiary of the American pharmaceutical company Abbott. AVD operates in the medical devices sector and more specifically in the vascular devices sub-sector. (15) Prior to the application, AVD did not conduct any R&D activity in Galway, which was a standard production plant, employing 378 persons in February 2006, in the manufacture and distribution of a range of BMS, intravascular filtration devices, balloon angioplasty and catheters. Before 2005, AVD s R&D activity was run mainly in the USA (60 specialists in California), and also in Europe (12 specialists in Germany and 7 in Switzerland). As DES use drugs, some additional R&D activity could also be considered (Abbott s Chicago centre). (16) AVD s total revenues for 2005 were $ million, i.e. approximately 5% of the global vascular stent market. Before 2006, in worldwide terms, Johnson&Johnson (J&J), Boston Scientific, Medtronic and Guidant were the main players in that order. AVD was probably number See Commission decision of 25/08/2005, p 48, 201. See the Medical and Healthcare Marketplace Guide, 19 th Edition, Dorland Healthcare Information Source: Millenium Research Group. See Commission decision of 25/08/2005, p 72, 300. Commission decision of 25/08/2005 N COMP/M See Commission decision of 25/08/2005, p

5 (17) Ten months after the R&D programme started, on 25 January 2006, Boston Scientific and Guidant announced they are to merge. Guidant s earlier merger agreement with J&J was terminated. As part of this merger, Boston Scientific has entered into an agreement with Abbott under which Boston Scientific has agreed to divest Guidant s vascular intervention and endovascular businesses, while agreeing to share rights to Guidant s DES program. As many issues remain to be resolved, the Irish authorities were not able to predict at this stage what impact the proposed merger will have on AVD s market size. The Commission notes that AVD would not become the largest player in the market and that J&J and Boston Scientific should remain the two major ones The R&D programme (18) AVD proposes to establish in Galway a dedicated state of the art R&D facility to carry out development work on products that treat coronary vascular disease and periphery vascular functions. This is the first R&D programme undertaken by the company in Ireland. It will create 50 high level R&D positions by 2007, with the potential to grow to 80 by The Irish authorities claim that the project faced strong competition from the USA where Abbott already conducts R&D activity. (19) During 3 years, from 2005 to 2007, the R&D programme will focus on the following products: BX stent SX stent DES EPD Coronary devices - deepening and diversifying the current product [ ] - next generation [ ] Endovascular devices - new product for renal - next generation for carotid [ ] * - next generation for iliac / femoral - new product - next generation for carotid [ ] and renal (20) Each of the projects listed here-above is designed to develop a product to the point that it has received regulatory approval and is in a position to be commercialised. According to the Irish authorities, each project involves pre-competitive development activity and has significant technical and clinical hurdles to overcome. All of these projects present high levels of risk to be managed on the path to approval. None of them involve mere line extensions or minor changes to an existing product. Further clarification specific to each major project area is given below. (21) The R&D programme can be defined as a platform project as the periphery product range will build on the experiences gleaned over years of coronary product knowledge. However, the anatomies of the respective peripheries are completely different than the coronary anatomy. Even within the peripheries endovascular sphere, the anatomies differ for each area. It means that the technical challenges * Business secret 5

6 and the development processes required to navigate, access and treat the disease of the peripheral vascular anatomy are very specific Coronary DES (22) The programme will deliver a series of products [ ] to the marketplace over the next five years. AVD is currently developing its first generation coronary DES (Zomaxx) which is in the process of being evaluated in an extensive international clinical trial. [ ] The next generation stents will integrate a range of future drugs and compounds. [ ] They will share the metal platform of the Zomaxx. From a single stent implant, it will deliver therapeutic treatment of multiple biological targets. (23) The planned launch of Zomaxx is for Q in Europe, and most likely for 2008 in the USA. Indeed, the FDA has requested significant studies and development work in relation to coating integrity, its potential effects on patient safety, its impact on drug elution rate profile and its subsequent impact on restenosis. (24) Pre-competitive development work in Galway is in relation to stent design, processing of tri-layer material, first phase of drug coating technology. Controlled release of the drug is a critical attribute of AVD s coronary DES projects. AVD will conduct experimentation to determine the stent geometries, drug concentrations and topcoat layer dimensions that optimise controlled drug elution. (25) [ ] AVD will also develop an adequate delivery system Endovascular BX stent (26) AVD already has a BX stent designed for peripheral vessels. [ ] AVD will develop a new stent and an adequate delivery system tailored for the renal indication Endovascular SX stent (27) [ ] AVD launched in September 2005 a carotid stent [ ] in the USA. This product is a first generation product and only meets the needs of one segment of the carotid market. The next generation carotid stent [ ] is intended to meet the needs of the second important segment of this market, consisting of patients with more tortuous vessels. The challenging objective here will be to develop a product which will be very conformable and will deliver high radial force to the vessel while being flexible in bending. This allows the stent to better absorb neck movements after placement. (28) The [ ] future carotid stent will utilise a similar delivery system to that developed for the [ ] current stent. The distal sheath and inner member are being redesigned to suit the more compliant nature of the [ ] new stent, but the basic platform will remain unchanged. The catheter element of this project is therefore considered minor in nature, and has not been included in the eligible costs. (29) In addition, AVD currently has an iliac / femoral / infrapopliteal stent on the market. This product is also a first generation product. In recent years it has 6

7 become clear that SX stents used in the leg have a greater tendency to fracture over time than in other locations. AVD will work on improving this problem Endovascular DES (30) AVD intends to develop a DES and an adequate delivery system for treating peripheral vessels. [ ] EPD (31) AVD currently has a first generation embolic protection system on the market [ ]. This product was commercialised in the USA in September 2005 and AVD was only the second company in the world to launch a carotid embolic protection device after Guidant. But it is expected that J&J and Boston Scientific s EPD will be approved by mid AVD s next generation device will represent a big step forward in technology and provide the user with many benefits to compete with the new players. The objective is to achieve a large reduction in crossing profile, improved radiopacity, reduced pore size and a large number of "ease of use" changes The aid Legal basis (32) The individual aid under scrutiny is based on a scheme called R&D Capability Grant Scheme which comes from the Research Programme NN 34/87 recognised by the Commission as an existing aid in The R&D Capability Grant Scheme is applied in accordance with section 29 of the Industrial Development Act 1986 as amended (latest amendment 2003). (33) The aid is governed by a Grant Agreement between, on the one hand, the beneficiary company Abbott Vascular Devices Ireland Limited and, on the other hand, the Irish Industrial Development Agency (IDA). Condition 14.9 of the Agreement states that no payment shall be made from the grant under this Agreement until the aid has been ratified by the EU Eligible costs (34) The million eligible expenditures are described hereafter: x Total Building (1a) [ ] [ ] [ ] [ ] Cleanroom (1b) [ ] [ ] [ ] [ ] Equipment (1c) [ ] [ ] [ ] [ ] Process Development Workshop (1d) [ ] [ ] [ ] [ ] Building and Equipment (1=1a+1b+1c+1d) [ ] [ ] [ ] [ ] Directors (2a) number of jobs [ ] [ ] [ ] [ ] cost [ ] [ ] [ ] [ ] Managers / metallurgists / number of jobs [ ] [ ] [ ] [ ] 12 Letter SG(87)D/15766 of 21 December

8 chemists (2b) cost [ ] [ ] [ ] [ ] Program managers / number of jobs [ ] [ ] [ ] [ ] engineers / specialists (2c) cost [ ] [ ] [ ] [ ] Technicians / analysts / number of jobs [ ] [ ] [ ] [ ] assistants (2d) cost [ ] [ ] [ ] [ ] R&D labour costs number of jobs [ ] [ ] [ ] [ ] (2=2a+2b+2c+2d) cost [ ] [ ] [ ] [ ] Consultancy (3) [ ] [ ] [ ] [ ] Materials (4a) [ ] [ ] [ ] [ ] Animal studies (4b) [ ] [ ] [ ] [ ] Consumables (4c) [ ] [ ] [ ] [ ] Clinical Trials (4d) [ ] [ ] [ ] [ ] Travel and subsistence (4e) [ ] [ ] [ ] [ ] Overheads (4f) [ ] [ ] [ ] [ ] Additional overheads (4=4a+4b+4c+4d+4e+4f) [ ] [ ] [ ] [ ] Programme cost (T= ) (35) Tangible assets - Building and Equipment (1) - are listed at their capital costs because they will be used by AVD in Galway, solely and on a continual basis for R&D activities, even after the end of the notified programme. This is confirmed by Condition 11 of the Grant Agreement between AVD and IDA which states that the company shall not permit the use of the eligible assets or any part thereof except for the purpose of the carrying out of research and development. The Irish authorities committed themselves to demonstrate in the 2007 annual report, this use for R&D purpose after the end of the notified programme. (36) Overheads (4f) are composed of administrative support, communications, maintenance, logistics, quality services and additional staff (deployment of production staff from the manufacturing facility to support the R&D process). [ ] (37) Employees will be equally allocated to coronary DES, endovascular stents (BX stents, SX stents, DES) and EPD projects. Clinical trials (38) The programme integrates clinical trials for 3 products: [ ] carotid stent, EPD and coronary DES [ ] as described hereafter: Cost x 1000 Carotid stent [ ] EPD [ ] 8 Coronary DES [ ] Duration 1 year 1 month n.c. Location USA USA USA USA USA EMEA+USA Phase I Patients USA Start Q2 06 Apr Sep 06 Q1/Q2 07 Phase II 2000 EMEA Patients USA

9 Start Q2 06 Q2 06 n.c. Feb 06 Sep 06 Q4 06 EMEA Q1 07 USA (39) The Irish authorities claim that the R&D cannot be completed and implemented without such trials taking place. As described in section 2.1.2, these trials are required by regulation to obtain commercialisation approval. The requirement for a clinical trial is largely dependant on the results of a clinical risk assessment upon completion of development testing and the subsequent review of this assessment with either the notified body (EU) or the FDA (USA). Trials required by regulation are carried out because there is a perception of possible risk with the use of a new product design, which needs to be evaluated. For instance, the EPD [ ] will introduce an entirely new technology for the frame and membrane of the filter. As these changes are significant, they will require both animal and human clinical trials to achieve market approval. (40) Clinical investigations are mandatory in the clinical risk assessment for all vascular devices. The European process is more flexible than the American one in the sense that clinical data can be obtained outside the Union and be validated by the notified body. This explains why most clinical trials will be undertaken in the USA. (41) A first clinical trial (phase I) is generally conducted on a small number of patients with a view to establishing safety. A second trial (phase II) on a larger sample of patients is then meant to prove safety and efficacy. A third trial (phase III) is meant to prove the comparative efficacy of a stent relative to other products already on the market. Phase III trials are only required by the American FDA 13 and are not listed in the eligible costs. (42) Considering coronary DES trials [ ], international testing of Zomaxx started in September 2004 with 1000 patient trials being carried out in Europe, Middle East and Africa (EMEA). A 500 patient phase I study begun in July 2005 in the USA. These first trials which have already been carried out for initial development work, are not supported as part of the application. On the other hand, phase II clinical trials will be carried out as part of the development process of Zomaxx, as well as trials for [ ] next generation platforms Aid amount (43) The aid takes the form of a direct grant. A 35% intensity is applied to the eligible expenditures and leads to an amount of million. The 35% aid intensity is explained by the pre-competitive development nature of the programme and its location in the Border Midlands and West (BMW) region which is eligible under Article 87(3)a EC. Concerning the regional bonus, Condition 4 of the Grant Agreement between AVD and IDA states that the Company shall carry out the Projects wholly or mainly within Galway, Ireland. Galway is located in the BMW region. (44) The Irish authorities also claim that the R&D programme is in accordance with thematic 3 of VI th Framework Program for Research and Technological 13 See Commission decision of 25/08/2005, p 23, 92. 9

10 Development (FP6) 14. The current Community Framework for State Aid for Research and Development 15 (thereafter R&D framework ) states that in such cases, an extra 15% bonus applies. Nevertheless, the Irish authorities limit the aid to a maximum amount of million. (45) The grant under scrutiny can not be cumulated with other aids to cover the same eligible costs. In particular, the 50 R&D positions considered in the eligible costs can not benefit from the regional grant of AVD got in 2002 when it established in Ireland. 3. ASSESSMENT 3.1. Existence of aid within the meaning of Article 87(1) EC (46) The Commission has come to the conclusion that the measure constitutes state aid within the meaning of Article 87(1) EC. (47) The grant is funded through the general State budget. It favours one specific enterprise and is therefore selective. In addition, the grant makes it possible for the recipient to improve its overall financial condition and to enhance its market position. The grant is likely to distort competition and thereby affect trade between Member States Legality of the aid (48) Considering the nature of the project, the aid is analysed in the light of the R&D framework and it falls under point 4.7 of this framework. (49) The aid is part of an R&D scheme that has been authorised by the Commission, the individual research project costs more than 25 million and the gross grant equivalent (GGE) of the proposed aid exceeds 5 million. The Irish authorities have complied with the requirement under point 4.7 and have notified the individual aid prior to the application. Condition 14.9 of the Grant Agreement between AVD and IDA shows that the measure s entry into force is subject to the Commission s approval. (50) The R&D Capability Grant Scheme on which the aid is based will fall under the appropriate measures for the reviewed R&D framework that will be published in It might be required to amend the measure where necessary in order to bring it into line with the new framework after its entry into force Compatibility of the aid Stage of the R&D activity Nanotechnology and nanosciences, knowledge-based multifunctional materials and new production processes and devices. OJ C 45, of 17 December 1996, p 5. Of this, only has been paid to date; full payment will require the creation of the full new jobs. 10

11 (51) The programme under scrutiny falls into the definition of precompetitive development activity given in Annex 1 of the R&D framework 17. (52) Some of the projects listed in paragraph 2.4 aim to create new products in market segments, where the results of research were not introduced yet because of the level of risk. For instance, AVD previously attempted to develop a renal BX stent but failed to achieve the performance levels they judged necessary to make a significant market impact and therefore scrapped the project. The new project aims to succeed where the previous one failed by utilising a new stent alloy, which will provide high levels of visibility under X-ray. This will give the device a great competitive advantage in the marketplace, but it has never before been used as an implant material in humans. The risk associated with the development and approval of this stent is therefore high, but is justified by the benefits to be gained from a high performing, differentiated device for this important indication. (53) The other projects consist in developing the next generation of an existing product. The technical description provided by the Irish authorities demonstrates that these activities are innovative and that routine changes were excluded. The very complex IP landscape for stents has to be considered to assess the R&D challenges met by these projects. It becomes a real achievement to develop a new design which can meet the anatomical challenges without infringing existing competitor IP. (54) The current generation of coronary DES [ ] are based on AVD s proprietary coronary stent design TriMaxx which has been brought forward through a combination of technology acquisition and aggressive internal R&D. AVD s next generation of coronary DES [ ] will obsolete TriMaxx. In particular, the R&D programme introduces pharmaceutical and chemical challenges to optimise controlled drug elution. (55) The new carotid SX stent [ ] will face mechanical challenges in order to better absorb neck movements after placement. It will be overtaken thanks to Finite Element Analysis (FEA) which is not mastered by AVD. Indeed, the investment in FEA capabilities will involve closer partnerships with educational and research institutes and it will also result in Galway being able to provide FEA support to AVD s other European R&D sites. (56) The next generation of EPD [ ] will meet material and design challenges to provide a one size fits all filter to treats vessels within a wide range of diameter. 17 The shaping of the results of industrial research into a plan, arrangement of design for new, altered or improved products, processes or services, whether they are intended to be sold or used, including the creation of an initial prototype which could not be used commercially. This may also include the conceptual formulation and design of other products, processes or services and initial demonstration projects or pilot projects, provided that such projects cannot be converted or used for industrial applications or commercial exploitation. It does not include the routine or periodic changes made to products, production lines, manufacturing processes, existing services and other operations in progress, even if such changes may represent improvements. 11

12 Eligible costs (57) The eligible costs are in line with Annex 2 of the R&D framework. Tangible assets (58) All tangible assets will be used for R&D purpose even after the end of this programme. In the Grant Agreement with IDA, AVD committed itself that most of these assets will be part of R&D projects since their acquisition till the end of their amortisation. Indeed, Condition 17 states that this Agreement shall terminate five years from the date of the last payment from the grant. Considering the nature of the assets, particularly high-tech equipment, they would be substantially, if not fully, amortised by that time. Condition 18 on cancellation and revocation of grant makes clear that if AVD does not fulfil its commitments, the remaining aid would be recovered. In addition, the Irish authorities confirmed that these assets will receive no further aid at any time in the future. (59) In this context, it has to be noted that the tangible assets can be aided at capital cost through the guidelines on national regional aid 18 which even allows a higher intensity (40% GGE) for investment aid 19. Point 4.20 of these guidelines states that where the expenditure eligible for regional aid is eligible in whole or in part for aid for other purposes, the common portion will be subject to the most favourable ceiling under the schemes in question. Therefore, the assets can be granted on the basis of their capital cost. Clinical trials (60) In line with Commission previous decisions 20, phase I and II clinical trials for [ ] carotid stent, EPD and coronary DES can be considered as part of the eligible expenditures. The Irish authorities will keep these trials at a reasonable portion of the R&D programme and will not increase the amount of aid dedicated to them above the limit shown in paragraph projected budget. (61) Clinical trials are a necessary part of the precompetitive development activity. They are fundamentally technical and scientific. Phase I and II clinical trials lead to the acquisition of new knowledge, because they either confirm the safety of the product as currently designed, or highlight unforeseen problems and deficiencies that mean that further R&D work is necessary. New knowledge may be gained regarding the suitability of different materials, chemicals and mechanical mechanisms in various human body environments that aid the development of products OJ C 45, of 10 March 1998, p An artificial cut of the programme would make the aid for the fixed assets, listed at their capital cost, compatible under the guidelines on national regional aid and the aid for the other eligible expenditures compatible under the R&D framework. State aid R&D cases in the pharmaceutical sector (N 213/2002 and C 8/2003 IT Industriafarmaceutica Cesare Serono SpA; N 126/2005 PT Portela & Ca SA) and FP6 priorities 1 and 3 projects (Life sciences, genomics and biotechnology for health; nanotechnology and nanosciences, knowledge-based multifunctional materials and new production processes and devices). 12

13 (62) The likelihood of changes being required in response to data gathered both during and after the trial is very high, and such changes frequently require additional development, testing and submission. The success rate of the AVD s current EPD [ ] in the American clinical trials is a good example of this: The first clinical trial run in the USA took three years to complete and failed to show equivalence of the [ ] EPD to an existing device in coronary bypass grafts. A number of factors contributed to this result, not least being the design of the protocol and its statistical analyses. The second clinical trial run in the USA succeeded in showing equivalence of the [ ] EPD and [ ] carotid stent to the current standard of care in the treatment of carotid artery disease. In both trials, clinician feedback resulted in several design changes which were introduced during the trials and several more which were introduced after trial completion but prior to final approval and commercialisation. (63) For the programme under scrutiny, AVD intends to gain approval for [ ] a next generation EPD for a number of indications in the American market. The carotid indication will be the initial target, with the renal arteries and coronary bypass grafts to follow. The [ ] next generation device is significantly different to its predecessor in terms of design, materials and technologies. Despite rigorous preclinical testing it is very likely that these trials will result in feedback requiring design changes prior to commercialisation. (64) The situation with clinical trials involving DES is somewhat different. Changes are even more difficult to make, and more onerous to introduce. Only two coronary DES have been approved in the USA to date (by J&J and Boston Scientific), although many clinical trials have been initiated. AVD tries to mitigate the risks through continuous R&D hence the [ ] next generation DES project is being initiated prior to completion of Zomaxx. (65) In conclusion the clinical trials associated with this programme are far from formalities. Attempting to develop and approve such devices for new indications presents risks. There is significant likelihood of R&D activities being required both during and after trial completion Aid intensity (66) The 35% aid intensity complies with the R&D framework thresholds. (67) A 10% bonus can be applied to the basic 25% aid intensity as the precompetitive development programme takes place in a region which is eligible under Article 87(3)a EC. This bonus can also apply to the clinical trials even if the patients who will take part to these trials are not located in the BMW region. Indeed, by nature, these trials can not be limited to one single region but they remain part of the R&D programme as their exploitation by AVD will be done in Galway. (68) The Irish authorities claim that a 15% additional bonus could also be applied because the R&D programme is in accordance with a thematic of FP6. Indeed, point of the R&D framework foresees an extra 15 percentage points for research project in accordance with the objectives of a specific project undertaken as part of the Community framework programme for R&D. Nevertheless, AVD s programme will not fulfil FP6 rules of participation as collaborations are required and most projects under scrutiny are realised without collaboration. Therefore, the 13

14 15% bonus could not apply to the aid but this is not relevant as these extra points are not necessary to reach the maximum amount of million. (69) At last, the grant under scrutiny will not be cumulated with other aids. In particular, the 50 R&D jobs can not be counted in the 1,616 new jobs to be created in connection with the regional aid attributed to AVD in Incentive effect (70) The Commission considers that the aid has a clear incentive effect. (71) First, the application for aid was made before the R&D activities started. Indeed, the company commenced discussions with IDA in late The IDA made an offer, subject to Irish Government and EU approval, in March Condition 14.8 of the Grant Agreement states that expenditure occurred on or after the 1 st April 2005 shall be eligible for grant. The approval from the Irish Government was received on 25 th October (72) Moreover, this is the first R&D project undertaken by the company in Ireland. Before the programme under scrutiny, AVD was conducting R&D activities in Germany and in Switzerland, involving 19 specialists and spending less then 10 million per year. The new R&D programme will create 50 additional R&D positions and will cost more than million for 3 years. This effort is bigger and additional to the current R&D activities performed by AVD in Europe. The increase of AVD s R&D spending in Europe between the years 2004 and 2005 shows this additional effort. [ ] million Europe Ireland Rest of Europe 2004 [ ] [ ] [ ] 2005 [ ] [ ] [ ] (73) In addition to that demonstration of the incentive effect of the measure, it could also be noted that the Irish location was in competition with other parts of the company in the USA. The requirement of the FDA to run clinical trials in the USA was an argument in favour of these American locations. The Californian R&D centre could have been chosen also because of the available qualified personnel and equipment. Nevertheless and as shown above, the factory in Galway was involved in R&D activities through the manufacturing of clinical product. Therefore, the Irish site had some attributes to make AVD build a new R&D centre in that location. Even if we do not have any concrete elements on the additional cost for this European choice, the Irish authorities claim that the availability of aid could have convinced AVD to select Galway in spite of the FDA requirements and of the absence of R&D capabilities. (74) Therefore, the risks linked to the operations and the incentive effect for AVD to conduct this R&D programme make the measure in line with the R&D framework. Further, considering AVD s position in the relevant market, it is reasonably expected a reduced likelihood that the aid will distort competition and trade. 14

15 4. DECISION (75) On the basis of the foregoing assessment, the Commission finds that the aid does not raise doubts as to the compatibility with the common market and has accordingly decided to consider the aid to be compatible with Article 87(3) EC. (76) The Commission reminds the Irish authorities to submit annual reports concerning the application of the aid which will allow the Commission to verify that all given conditions are fulfilled. In particular, 2007 annual report will show that the tangible assets will still be used by AVD for R&D purpose after (77) The Commission reminds the Irish authorities that, in accordance with Article 88(3) EC, all plans to refinance, alter or change this aid have to be notified to the Commission. (78) The Commission reminds the Irish authorities that the R&D Capability Grant Scheme will fall under the appropriate measures for the reviewed R&D framework that will be published in (79) If this letter contains confidential information, which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Greffe B-1049 Brussels Fax No: Yours faithfully, For the Commission Neelie Kroes Member of the Commission 15