When the Food and Drug Administration approves a new medical device from
, it will solidify a dramatic shift in the treatment of heart disease and firmly place the company in the upper echelon of medical-equipment makers.
As early as this week, the FDA could approve the company's Taxus drug-coated stent, a tubular, mesh-like device inserted into arteries to keep blood flowing freely, prevent the reclogging of arteries and reduce the risk of heart attacks. The company and the regulatory agency are in the home stretch of negotiating the wording on the stent's label, a crucial factor in how the company can market the device.
Taxus will be the second drug-coated stent on the U.S. market.
Johnson & Johnson
got there first with its Cypher stent, which reached the U.S. market in late April. Cypher started the revolution, but if you believe many money managers on Wall Street and many heart specialists on Main Street, Taxus will help create a new medical and economic environment, at least until the next drug-coated stent is introduced.
Why Taxus Is Important
Boston Scientific predicts its stent sales could be $1.7 billion to $2.2 billion this year. The highest end of that estimate would mean Boston Scientific would have more drug-coated stent revenue this year than the entire U.S. market recorded last year.
If the company is correct, Taxus, which is already available in many foreign markets, will help propel total company sales this year to a range of $5.2 billion to $5.8 billion, up from $3.5 billion last year. In 2005, total sales could double from 2003, the company said Monday.
This forecast for stent sales -- and total sales -- for the next three years convinced Standard & Poor's to raise its outlook on the company to positive from stable. Commenting earlier this week, the ratings agency said that if it makes good on its predictions, Boston Scientific "could have considerably more financial flexibility" than S&P had figured.
The new device, also called a drug-eluting stent, is winning Boston Scientific new respect on Wall Street. Before Jim Tobin took over as chief executive in mid-1999, the company had "a record of disappointing investors because of its erratic financial performance," said David J. Lothson, a medical devices analyst at UBS, in a recent research report. Within 18 months, "the company emerged as stabilized but without the engines to power growth for the future."
Taxus became the key engine, as Boston Scientific surged ahead of two big medical device makers --
-- and began closing in on J&J.
Lothson just raised his rating on Boston Scientific to buy from neutral, saying that the company has articulated a strong strategy for expanding product sales and developing second-generation versions of its drug-coated stents. (His firm has had an investment banking relationship with the company, and UBS says "the analyst covering this company, a member of his team or one of their household members, has a long common stock position" with Boston Scientific.)
Taxus represents such an advance that J&J just signed an agreement with Guidant that, among other things, allows Guidant's sales force to market Cypher. Analysts say the deal will help slow -- albeit slightly -- J&J's declining share of the drug-coated stent market once Taxus arrives.
Guidant has been the market leader in bare metal stents -- devices without the drug coating that do a better job of keeping arteries unclogged. Guidant has struck out twice in developing a drug-coated stent. It is doing a better job on its third try, and analysts say a Guidant product could be on the U.S. market by early 2006. (Medtronic is also about two years away, analysts say.) The deal gives Guidant sales representatives practice in marketing for when its own drug-coated stent hits the market, and it gives J&J access to Guidant's superior stent delivery technology.
And let's not forget the doctors and the patients. Taxus will give physicians a greater choice, expand the market's supply and create price competition. J&J has already started trimming the price of Cypher for its highest-volume customers.
What Wall Street's Thinking
Boston Scientific has built a strong following on Wall Street. According to Thomson First Call, 25 analysts have strong buy or buy recommendations, while six recommend holding the stock. Three investment banking firms raised their ratings to buy in February.
Another, more anecdotal, sign of respect was noticed by UBS analyst David Lothson. Boston Scientific holds an annual analyst/investor conference in New York, and for many years the session has been held in a small meeting room. In recent years, the company has had to use a large ballroom to accommodate the crowds. And last Monday's meeting was packed.
The major knock on Boston Scientific appears to be that its stock threatens to outrun analysts' target prices or, more recently, that the J&J-Guidant deal could shave some EPS points and trim some of the more gaudy market-share predictions for Taxus.
For example, Dhulsini deZoysa of Fulcrum Global Partners, moved to a neutral rating in early February before the J&J-Guidant deal was announced, suggesting that investors lock in some profits as Boston Scientific's stock marched toward a $45 price target. (It hasn't hit the target yet.) After the J&J-Guidant deal was struck, deZoysa kept the neutral rating, saying that there doesn't appear to be the potential for positive surprises now that Wall Street has assumed Taxus will grab a huge portion of the U.S. stent market at least through 2005. (DeZoysa doesn't own shares; Fulcrum doesn't have an investment banking relationship with Boston Scientific.)
No Wall Street firm has downgraded its rating on Boston Scientific since the Guidant-J&J deal, and the consensus opinion is that Taxus will grab more than half of the U.S. drug-coated stent market by year-end. Many Wall Street estimates roam at or above the 60% market share range this year. Last Monday, Boston Scientific executives bragged they could achieve 70% of the U.S. drug-coated stent market within 70 days of launching Taxus.
Boston Scientific's stock is up by about one-third since the company's mid-September announcement that clinical tests showed strong Taxus results vs. a Boston Scientific stent without the drug coating. On a split-adjusted basis, the stock has nearly doubled in 12 months and nearly quadrupled in 24 months.
Guidant is no slouch, either. Shares have doubled in 12 months. Thomson First Call reports that 19 analysts have buy or strong buy ratings, 11 have hold recommendations and one advocates selling the stock. Four of those buy ratings have come since the beginning of the year.
Johnson & Johnson, bigger and more complex than the medical device makers, has had little net stock movement in 12 months. J&J, whose total revenue is about 12 times that of Boston Scientific, still has solid Wall Street support: nine buy ratings, 12 hold recommendations and one sell rating, according to Thomson First Call.
Dynamics of the Stent Market
Despite the rampaging shares of Boston Scientific and Guidant, there is still enough uncertainty and potential competition that investors must be aware of the many behind-the-scenes factors in the ever-changing stent market -- a market that is only 10 years old in the U.S.
Today's winner could be tomorrow's also-ran. Just ask J&J. It had 88% of the U.S. stent market in 1996 and just 8% three years later, according to Fulcrum Global Partners. That's because Guidant, Boston Scientific and Medtronic began producing more bare metal stents. In recent years, even before its Cypher stent reached the market, J&J made a comeback, regaining second place as Guidant emerged as the market leader.
Guidant had 45% of the market in 2002, the year before J&J introduced Cypher. By the end of 2003, Fulcrum says, J&J grabbed 54% of the total stent market -- bare metal plus drug-coated -- even though Cypher had been available for barely eight months.
Guidant's market share dropped to 26% last year and could fall to 5% this year. (As part of their agreement, Guidant will get a commission for helping sell J&J's Cypher. It is unclear if the deal would cut into Guidant's bare metal stent revenue.)
The financial impact of drug-coated stents is equally riveting. In 2002, the year before Cypher was introduced, the total U.S. stent market was worth $1.42 billion, and Guidant grabbed $629 million, according to Fulcrum Global Partners. Last year, the total market grew to an estimated $2.06 billion. J&J's share alone -- $1.25 billion -- nearly matched the total market in 2002. More than 90% of J&J's stent revenue came from Cypher. Guidant's sales fell to $471 million.
Assuming Taxus reaches the market soon, Fulcrum looks for a total U.S. stent market of $3.34 billion this year, with Boston Scientific grabbing $1.85 billion. (Last year it had $214 million in stent sales.) J&J would be in second place with $1.28 billion.
Despite the varying predictions, one thing is for certain: Bare metal stents, which transformed cardiac medicine in the 1990s, will be reduced to a niche market in a few years. Fulcrum Global Partners predicts bare metal stents will capture 10% of the market this year, continuing to fade in subsequent years.
How Stents Work
Investors trying to understand the stent market need to know what goes into the products and how they work.
Stents are inserted into arteries following angioplasty, a procedure in which a catheter is inserted into an artery clogged with plaque. The catheter is inserted into the body usually through an artery in the groin or arm, then manipulated toward the obstruction in the artery. A balloon is inflated to flatten or push the plaque, opening the artery channel to allow a steadier blood flow. Afterwards, stents are inserted to serve as tube-like scaffolding to reduce the possibility of arteries reclogging.
Angioplasty alone experiences a reclogging -- or restenosis -- rate in the range of 30%, according to Fulcrum Global Partners. Bare metal stents can cut the clogging rate to 20% to 25%.
Companies found that if they coated the stents with a drug and created a delivery system by which the drug was released slowly over time, the reclogging rate could be reduced even more.
For example, the crucial clinical trial that led to the FDA approving J&J's Cypher showed that 8.9% of Cypher patients suffered a reclogging of arteries compared to a 36.3% rate for patients receiving a J&J bare metal stent. The key Taxus test submitted to the FDA showed that the drug-coated stent had a reclogging rate of 7.9% vs. a 26.6% rate for patients using Boston Scientific's bare metal stent.
These results cannot provide direct comparisons between Taxus and Cypher. But J&J hopes to settle that issue. Last week it announced it was conducting a test of Taxus vs. Cypher involving 1,386 patients at 90 hospitals in Europe, Asia and Latin America. Results are expected by year-end.
The savviest stent investors can benefit from some training in medicine, chemistry, anatomy and metallurgy. That's because companies must find the right drug -- at the right dose -- as well as the best-performing polymer that, when affixed to the stent, can release the drug in the proper dose.
Investors also must look for the best marriage of flexibility and strength in the stent's metal, as well as the best design so the device can be inserted smoothly and remain in an artery without causing any damage.
If any of these elements fail, the patient is facing another visit to the hospital, another angioplasty procedure and, if the damage is severe, surgical repair.
What Physicians Think
Here's an interesting lesson for stent-market investors: Price is not the most important factor, because a doctor choosing a stent is not like a patient choosing between a generic drug and a brand-name drug.
Boston Scientific's market research shows that doctors rank price below safety, efficacy, ease of use and deliverability. Company executives told investors Monday that Taxus should grab a large chunk of the U.S. market because their research shows many doctors experience less resistance in inserting Taxus and use less force in bending Taxus around the hair-pin turns in arteries. Physicians want their stent delivery devices to bend to accommodate the curves in arteries rather than make the arteries fit the design of the stent delivery system.
This research is borne out by many analysts in discussions with interventional cardiologists -- the physicians who insert the stents. For example, a Feb. 25 research report by J.P. Morgan relaying comments from 75 to 100 of these specialists indicated a preference for Taxus over Cypher, enough to suggest that Taxus could grab 60% of their drug-coated stent purchases.
"Taxus is still the best product," said Michael Weinstein, the J.P. Morgan analyst, who has an overweight rating on the stock. He believes J&J will take back some market-share points from Boston Scientific next year and trim a few cents from Boston Scientific's EPS in 2004 and 2005, thanks to J&J's deal with Guidant. But the impact will not be enough to shake Boston Scientific's emerging dominance of the drug-coated stent market. (Weinstein doesn't own shares, but his firm has had an investment banking relationship with Boston Scientific.)
And even though money may not be the biggest issue in a doctor's choice of drug-coated stents, the cost cannot be ignored. J&J placed a $3,195 sticker price on Cypher, then ran into supply and distribution problems that weren't corrected until fall. According to analysts, J&J only had 50,000 to 55,000 stents ready for market once the FDA granted approval for the device. Boston Scientific says it has more than 200,000 ready to be sold.
The combination of price -- the original Cypher price was triple that of a bare metal stent -- and inadequate supply angered doctors and hospitals. J&J tried to soothe some of the feelings by offering discounts to some high-volume customers bringing the price down, analysts say, to as low as $2,400 to $2,600.
Boston Scientific won't discuss its pricing, although one top official told a health care conference in New York last fall that Taxus would cost at least $2,700. The company says its will create a sliding scale, offering discounts to high-volume users and users of other Boston Scientific cardiac-care products.
Investors also might need a law degree to keep track of all the patent lawsuits and other litigation among the major players. Part of that burden was lifted this week when Guidant and J&J said they had settled all pending stent patent lawsuits and agreed to cross-license certain patents. Late last week, Guidant and Boston Scientific reached a similar agreement involving stents and stent-delivery systems.
But the biggest fight still remains on the docket. A U.S. district court in Delaware has set a trial date for mid-June 2005 for the patent dispute between Boston Scientific and J&J, each of which has filed stent patent infringement suits against the other.
Last November, the court rejected attempts by both companies to seek preliminary injunctions against each other's stents. Analysts say an injunction would be a remarkably extreme measure, adding that the lengthy legal process should keep all stents flowing for at least the next two years.