Guidant

(GDT)

may be down, but it's far from out.

A worried market slashed 14% off the medical product company's market value last week amid worries about competition in its core business, leaving the stock about where it was at this time last year. But some experts say Guidant has a giant ace up its sleeve.

Analysts say the Indianapolis company could make a serious comeback starting late next year by being first to market with a new device for a different part of the cardiovascular market. The move is expected to give Guidant a jump on its nearest competitor,

Medtronic

(MDT) - Get Report

, in a new market that could be worth billions of dollars.

Both companies are in the final stages of developing advanced pacemakerlike devices to treat some 5 million U.S. patients with congestive heart failure, a large and poorly treated population. The devices could provide a major new earnings stream to offset competition in a saturated market for "stents," which are mesh tubes installed in heart blood vessels and a mainstay of both companies.

Competitive Worries

Worries over a new competitive threat from

Johnson & Johnson

(JNJ) - Get Report

sent Guidant's shares to 51 Friday from near 60 earlier in the week. And that's after shares dropped from 75 in March on jitters about competition from Johnson & Johnson,

Boston Scientific

(BSX) - Get Report

, Medtronic and others. While Guidant leads the stent market, fortunes can change rapidly: Johnson & Johnson, an early pioneer in stents through its

Cordis

division, nearly got knocked out of the market altogether by competition several years ago.

Up and Down at Guidant
Stentmaker's shares suffer through a jumpy year

Source: BigCharts

And although Guidant posted a 21% rise in per-share earnings in the latest quarter, that gain was less than the one at Medtronic, whose earnings rose 28% before charges related to major acquisitions. By sales, Medtronic is also twice as large as Guidant in a market where leaders can dominate with larger sales forces and marketing muscle.

Deadly Condition

CHF is a deadly condition in which the heart, often weakened by disease or heart attack, fails to pump enough blood, leaving the worst-hit patients in severely limited condition, a virtual bed-to-chair existence. Other than childbirth, it's the biggest cause of hospital admission, with nearly 500,000 new cases each year in the U.S.

Short of rare heart transplants, doctors can do little other than feed patients older heart drugs and keep them calm. About half die within a couple of years.

Looking to tap a potentially major earnings vein, Guidant and Medtronic are racing to develop "ventrical resynchronizers" that stimulate the four chambers of the heart to beat in sync, similar to tuning a motor. Currently, pacemakers, those widely used implanted devices made by Guidant, Medtronic,

St. Jude Medical

(STJ)

and others, only prompt the heart to beat faster when the heart slows to a dangerous level. And defibrillators, another popular implanted device, mainly modify irregular heart beats. Existing devices, which deliver an electrical charge to the heart, leave much to be desired in the weakened hearts of CHF patients.

"The early indications are that these are going to be extremely successful devices," says David Lothson, analyst with

PaineWebber

, which has strong-buy ratings on both companies and has done underwriting for Medtronic but not Guidant.

The new devices, which Guidant brands as Contak CD and Medtronic calls InSync, will be "major drivers of earnings" for the companies, says Lothson.

Big Opportunity

Lawson is clearly bullish on the potential for the new devices, which have yet to be approved in the U.S., although Medtronic recently began selling InSync in Europe. He says the current $4 billion market for cardiac devices will grow to between $10 billion to $13 billion in the coming years. That's because pacemakers and defibrillators are used in only about 10% of the CHF market, while resynchronizers could be used in half the CHF market.

Not all analysts are so confident that the market will be as large, but all agree that the resynchronization market could be a major business opportunity. And insurance companies will likely foot the bill for the devices, likely to cost under $5,000, because they could save on hugely expensive CHF hospitalization costs.

"CHF would be a huge new opportunity if we could find something to help this population," says Anne Malone, analyst with

Salomon Smith Barney

, who forecasts the resynchronization and related device market could grow to anywhere from $1 billion to $5 billion in coming years. Salomon rates Medtronic a buy, Guidant neutral and does no underwriting for either company.

Both companies are in advanced clinical testing of their resynchonization devices, but Guidant is expected to gain U.S. approval in next year's second half, beating out its larger rival Medtronic in the U.S. by an estimated three months, according to

Lehman Brothers

. St. Jude Medical is farther behind in developing similar devices.

Long and Winding Road

But Lehman says Guidant's market lead will give it mostly just bragging rights over its rivals. All the companies will face a struggle in building a market lacking in electrophysiologists, who are medical specialists that must be persuaded for a successful marketing campaign.

"Timing of entry is less important than the need for extensive market development," says Lehman analyst David Gruber in a recent report.

The market-building efforts, which typically start years before product approval, got a boost last week at a Washington, D.C., medical conference, where European data was presented showing that the devices improved heart performance and quality of life in some patients. No data has been presented so far that has statistically demonstrated that the devices save lives compared to drug therapy, however.

One doctor said it could take a lot of evidence for the devices to gain widespread use. Doctors have seen many promising new CHF therapies bite the dust over the years.

"So many things have come and gone that there is a lot of skepticism among doctors," says Jeff Paley, staff physician at

New York Hospital

. "Unless the evidence is dramatically convincing, it will take a long time to persuade doctors."

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