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If you want to know why a big battle is brewing between

Boston Scientific

(BSX) - Get Boston Scientific Corporation Report


Johnson & Johnson

(JNJ) - Get Johnson & Johnson Report

over a medical device for heart care, then check out what's going on in Bridgeport, Conn.

Sixty miles northeast of New York City, in a city of some 140,000 people, two hospitals are aggressively promoting these heart devices -- in print ads, on Web sites and even on the radio -- in an effort to show that they have the best heart care.

Cardiac care is a major profit center for hospitals like the ones in Bridgeport, and heart services and heart surgery have long been the subjects of marketing campaigns. But what's happening in Connecticut is instructive to investors on how rapid changes in medical technology are playing out across the country -- and hence on Wall Street.

"We're competitors," said Brian Wallace, a spokesman for St. Vincent's Medical Center in Bridgeport. "We're trying to show you can get world-class care in a community hospital."

Audrey Wise, director of marketing for rival Bridgeport Hospital, noted, "If people think you have the latest and greatest in heart care, we're hoping that people will believe they can benefit from that same level of expertise for other services."

The focal point of the two hospitals' recent marketing campaigns is the drug-coated stent, a wire mesh tube that is inserted into arteries to keep them open after a procedure to unclog the blood vessels. The drug-coated stents -- also known as drug-eluting stents -- do a better job of preventing the arteries from reclogging than do bare metal stents.

For example, the key test that led to the approval of Johnson & Johnson's drug-coated Cypher stent by the FDA showed a reclogging rate of 8.9% for Cypher patients, compared with a 36.6% rate for patients receiving a Johnson & Johnson bare metal stent. In the latest test of Boston Scientific's drug-coated Taxus stent, patients receiving the drug-coated stent had a 7.9% reclogging rate compared with the 26.6% rate for patients receiving bare metal Boston Scientific stents. Taxus is not yet approved by the FDA.

Less reclogging of arteries means fewer repeat artery-clearing procedures, fewer heart-bypass operations and a reduced risk of patients having heart attacks.

The bare metal stents were revolutionary because they significantly reduced the rate at which arteries would reclog after the artery-clearing procedure known as angioplasty. In this procedure, doctors insert a balloon-tipped catheter into an artery. When the catheter reaches the obstructed portion of the artery, the physicians inflate the balloon, which disperses the fat and other material blocking the artery. The stents are then inserted into the artery.

Goodbye, Bare Metal Stents

On Wall Street, analysts predict that, at least in the U.S., bare metal stents, which helped transform heart care 10 years ago, could almost disappear in a few years if the drug-coated stents make good on their promises.

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"More and more people are aware of the drug-eluting stents, and they ask if they can have it," said Dr. Jose Missri, chairman of the department of cardiovascular medicine at St. Vincent's Medical Center. "We've had people reschedule elective procedures to wait for the drug-eluting stent."

Doctors don't care which company -- or how many companies -- make these stents, as long they make more. "Right now, they're a precious commodity," said Dr. Edward Tuohy, an interventional cardiologist at Bridgeport Hospital. "People are demanding drug-coated stents. They're learning about it from the Internet. They're reading about it."

Johnson & Johnson's drug-coated stent, Cypher, is the only such product available in the U.S., having been approved by the Food and Drug Administration in late April. The stent also is available in many international markets. However, clinical test results released Sept. 15 by Boston Scientific for its drug-coated Taxus stent provoked a stentorian chorus on Wall Street that Taxus would grab a majority of the U.S. drug-coated sent market within one or two years of gaining FDA approval. "Wow," "A Clean Sweep" and "A Grand Slam" were some of the analysts' research report headlines.

"We believe Boston Scientific has set a new gold standard that could increase the difficulty for competitors" to enter the drug-coated stent market, said David Bouchey, of C.E. Unterberg Towbin, in a recent research report that was titled "BSX Rules, The Competition Drools." Bouchey, who doesn't own shares, has a buy rating on the stock. His firm intends to seek compensation for investment banking services in the next three months.

Analysts took special notice of Taxus' performance with diabetics. "With no viable competitor for this population visible through 2006,

Boston Scientific has the closest thing to a stent franchise we can imagine," said Robert Faulkner of Prudential Securities, in a recent report to clients. Faulkner rates the stock as overweight. He doesn't own shares; his firm doesn't have an investment banking relationship with the company.

An FDA advisory committee will meet Nov. 20 to discuss Taxus. The FDA isn't required to follow advisory panel recommendations, but it usually does. Many analysts predict that Taxus -- which is available in many overseas markets and was just approved in Canada -- could be shipped to U.S. hospitals late in the first quarter of 2004.

"I'm hopeful that we can have two competing products," said Tuohy, who, as a medical fellow in cardiology at nearby Yale New Haven Hospital, participated in the key clinical trial that led to Johnson & Johnson's stent being approved by the FDA. "We have half of what we need."

High Prices

Competition is welcomed by doctors and hospitals, who want stent prices to drop. Johnson & Johnson's Cypher costs three times more than bare metal stents. Competition caused the average selling price of a bare metal stent to fall from $1,600 in 1994 to $1,001 last year, according to a recent report by Fulcrum Global Partners. By 2005, the price could drop to $715.

And it's no secret that J&J antagonized many hospitals and physicians when it set its list price for Cypher at $3,195 and then couldn't meet the demand because of manufacturing and distribution problems. The company says those problems have been resolved. In recent weeks, J&J also cut the average selling price of Cypher to what Wall Street analysts say is a range of $2,600 to $2,800, with the best prices going to J&J's highest-volume customers.

"We believe 2004 U.S. pricing remains the single most important factor for the

drug-coated stent marketplace in 2004," said Bruce Cranna, a medical devices analyst for the Boston-based Leerink Swann & Co., in a recent research note to clients.

Boston Scientific hadn't commented on a price for Taxus, but on Tuesday, Chief Financial Officer Lawrence Best said at a UBS health-care conference the introductory price for Taxus will be at least $2,700. A few analysts recently reduced their revenue estimates slightly in 2004 for Boston Scientific and Johnson & Johnson's drug-coated stents in anticipation of a price war. After Taxus reaches the market, some analysts had said the price per drug-coated stent could drop to the $2,200 to $2,400 neighborhood by the end of next year.

Missri said competition and lower prices should help alleviate some issues involving drug-coated stents and Medicare, the federal health care plan for the elderly, especially when doctors must insert more than one stent in a patients. Even though Medicare has increased reimbursement for the new stents, the payment still doesn't cover the device's full cost, Missri said. Because of the drug-coated stents' recent short supply and high price, doctors are reluctant to insert multiple drug-coated stents into patients, he added.

"Once there is availability of all sizes in the market, we won't be using the other

bare metal stents," said Missri, whose hospital participated in Boston Scientific's Taxus test. "The drug-eluting stents have advantages for all patients, all sizes and all types of

artery blockages."

The change in the U.S. stent market is dramatic. There were four stents available in 1997, says Fulcrum Global Partners, and there will be 40 this year. U.S. stent sales jumped from $90 million in 1994 to $1.36 billion in 2002, the last year in which bare metal stents had the market all to themselves.

Fulcrum predicts the market will jump to $2.14 billion this year, thanks to the popularity of Johnson & Johnson's Cypher. Looking to 2005, Fulcrum expects the U.S. sales of stents to reach $3.6 billion, with bare metal stents accounting for barely 4% of total sales.

Fulcrum's medical devices analyst Dhulsini de Zoysa said in a recent report to clients that bare metal stents are destined to become niche products for complex cases; for heart disease that affects multiple blood vessels, as the second or third stent for patients requiring many stents; and for placement in certain blood vessels for which no drug-coated stent exists.

Johnson & Johnson must be looking at the drug-coated stent market -- and analysts' raving about Boston Scientific's Taxus -- with a sense of d¿j¿ vu.

Johnson & Johnson dominated the bare metal stent market in the mid-1990s, grabbing 95% of U.S. sales in 1995 and 88% in 1996, says the Fulcrum Global Partners report. Within two years, Johnson & Johnson's market share plunged to 8% as



, Boston Scientific and


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muscled in.

Guidant was last year's U.S. market leader, with 44% of sales, while Johnson & Johnson fought back to second place with 27%. By the end of this year, Fulcrum predicts Johnson & Johnson -- aided by Cypher's sales -- will take over the total stent sales lead (58%) with Guidant in second place (25%), followed by Boston Scientific (12%) and Medtronic (6%).

By the end of 2004, however, Guidant's market share will have shriveled to 4%, and Medtronic's share will have shrunk to 2% as Johnson & Johnson and Boston Scientific rule the market.

Guidant, which has failed twice in developing a drug-coated stent, and Medtronic are both testing their own drug-coated stents. Analysts doubt their products could reach the U.S. market before late 2005 or early 2006.

Hurdles Loom

Even though most analysts were bowled over by Boston Scientific's latest test results -- according to Thomson First Call, 23 analysts have buy ratings on the stock, and five have hold ratings -- they also point out there are a few elements of uncertainty in their business models for the company.

First, there is the timing of Taxus reaching the U.S. market. Although an FDA advisory panel is due to meet Nov. 20, several analysts point out that it took six months for the FDA to act after an advisory committee endorsed Cypher. The longer the FDA takes to act, the fewer sales Boston Scientific can make next year and the longer J&J has to erect its defense strategy.

Second, Johnson & Johnson isn't rolling over. In addition to cutting Cypher prices, it has offered a critique of the Taxus research that will find its way to the FDA advisory committee.

Johnson & Johnson has been working on a new stent delivery system, which it hopes will reach the U.S. market next year. Some analysts have suggested that the apparent edge for Taxus is due as much to Boston Scientific's delivery system as it is to the different type of chemical used on its stent.

Third, Boston Scientific remains embroiled in a legal battle with Johnson & Johnson, which has claimed that Boston Scientific has infringed on its Cypher patent and has asked a Delaware court for a preliminary injunction against Boston Scientific's marketing of Taxus. Analysts who follow both companies doubt the court will make such an emphatic move. Boston Scientific also is fighting with an Israeli company, Medinol, over allegations of patent infringement, breach of contract and trade-secret disputes relating to Boston Scientific's Express stents, which serve as the foundation for Taxus.

The patent challenges probably won't impede a U.S. Taxus launch, said Glenn M. Reicin, Morgan Stanley's medical devices analyst, in a recent research note. "

But there is no guarantee that Boston Scientific will not need to write a large check to cover potential damages in the future," he added. Reicin said he was most concerned about the Johnson & Johnson patent dispute, noting that earlier this year Guidant was ordered by an arbitrator to pay Johnson & Johnson $425 million in a dispute over the same stent patent.