Boston Scientific, J&J Face Off in Stent War

You know a marketing battle is brewing when the federal government approves a new medical device and the first two Wall Street reports acknowledging the event use the same headline: "Off To The Races."

The race commenced late Thursday afternoon when the Food and Drug Administration approved the Taxus drug-coated stent made by Boston Scientific ( BSX).

The company will immediately begin shipping the device, which is inserted into arteries to improve blood flow and reduce the risk of heart disease and heart attack.

Taxus will take on the only other drug-coated stent, Cypher, from Johnson & Johnson ( JNJ) in the U.S. market. (Both Cypher and Taxus already are available in many overseas markets).

Cypher has been on the U.S. market since last April, but the excitement on Wall Street about Taxus has been so great that many medical device analysts believe Taxus will grab a majority of market share by year-end. Boston Scientific hasn't discouraged such speculation: it predicts it will take 70% of the U.S. drug-coated stent market in 70 days.

"We believe Boston Scientific is poised for impressive growth in both 2004 and 2005 based on the strength of the Taxus offering and sales team," said Lynn C. Pieper, of Thomas Weisel Partners, in one of the "off to the races" research reports issued Thursday evening. "Our physician feedback has consistently favored Taxus over Cypher, citing a superior delivery system" and greater ease in inserting Taxus through twisting, difficult-to-navigate arteries.

Pieper, who rates the stock as outperform, said Taxus should also help Boston Scientific sell other cardiac care products to hospitals using stents. (Pieper's firm expects to receive or intends to seek investment-banking compensation from Boston Scientific in the next three months, although Pieper doesn't own shares.)

The FDA approved "an impressive array of stent sizes" for Taxus, said Wade H. King of Wells Fargo Securities, the other author of an "off to the races" research report on Thursday. King has a buy recommendation on the stock.

He noted that Boston Scientific has some 200,000 Taxus stents ready for delivery - enabling quick penetration of the market ? and the ability to make 25,000 a week. (King doesn't own shares, but his firm says it "does and seeks to do business with companies covered in its research reports.")

By contrast, J&J's Cordis unit had only about 50,000 to 55,000 Cypher stents immediately available for the U.S. market upon FDA approval. Manufacturing and distribution problems plagued J&J's efforts for about six months, antagonizing doctors who were clamoring for the new device.

Stents are tube-like metal scaffolding inserted in arteries to enhance blood flow. They are used after a patient has undergone angioplasty, in which a catheter is inserted into an artery clogged with plaque. A balloon at the tip of the catheter is then inflated to unclog the plaque.

Angioplasty revolutionized heart care by reducing the need for more invasive heart surgery. The first stents to reach the U.S. market were more effective in reducing the rate of arteries reclogging ? or restenosis ? than the angioplasty procedure.

But these bare metal stents, which have only been available for 10 years, are being surpassed by the drug-coated stents ? also called drug-eluting stents ? which allow medication to be released from the stent slowly into the artery to reduce reclogging. The drug-coated stents have lower restenosis rates than do bare metal stents, and analysts predict bare metal stents will be reduced to niche-market status by as early as year-end.

Drug-coated stents also will expand total stent sales regardless of who is the market leader. There will be more angioplasties and - because a drug-coated stent can cost triple that of a bare metal stent ? more revenue. Fulcrum Global Partners said Friday that total U.S. stent revenue last year climbed to $2.1 billion, a 52% gain from 2002, the year before Cypher entered the market. This year, the figure could jump to $3.3 billion.

The FDA's announcement on Taxus had been expected. And although Boston Scientific's stock got a boost in after-the-bell trading Thursday and before-the-bell trading Friday, the shares were little changed as drifted in regular trading Friday. The stock was recently at $43.88, having moved as high as $45.31. J&J inched up 19 cents to $53.22.

Investors tracking the horse race aspect of Taxus versus Cypher will be handicapping several issues: manufacturing and distribution, competition, upcoming research and price.

Boston Scientific's large and immediately available supply of Taxus certainly gives it an initial marketing edge; but J&J has fought back by enlisting another medical device maker, Guidant ( GDT)in marketing Cypher.

Guidant had been the stent market leader until Cypher came along, and it remains the top seller of bare metal stents. But its sales will erode quickly as more Cypher and Taxus stents become available. Guidant has failed twice in its quest to develop a drug-coated stent; but tests results for its latest effort look promising and the Wall Street consensus calls for Guidant's product to reach the U.S. market in about two years. That's also the estimated timetable for a drug-coated stent from Medtronic ( MDT).

"Guidant's marketing alliance with Johnson & Johnson will pit a large sales force against Boston Scientific's, possibly slowing the Taxus stent's sharp ramp slightly," said Juan V. Noble, an Oppenheimer analyst who has a buy rating on Boston Scientific. "But we believe that the Cypher's current dominance of the U.S. market for drug-eluting stents will end shortly due to Taxus' competitive advantages."

Noble, in a Friday research report, reiterated the Wall Street consensus that the pro-Taxus advantages include a plentiful supply and "a widely held view" among interventional cardiologists ? the physicians who insert the stents ? that Taxus and its delivery system "offer superior deliverability." (Noble doesn't own shares and his firm doesn't have an investment banking relationship with Boston Scientific).

Some analysts figure the Guidant-J&J alliance will trim a few market share points from their Taxus market predictions, as well as a few cents per share from their Boston Scientific earnings calculation, for the next two years ? but not enough to make them change their ratings on Boston Scientific or their fundamental forecasts for the company. The alliance, they say, will give J&J access to some of Guidant's stent technology ? which they believe is superior to J&J's. In addition, Guidant will get a commission on Cypher sales and Guidant's sales staff will get training in marketing drug-coated stents in preparation for the launch of Guidant's own product.

J&J fired back at Boston Scientific early this week, releasing some initial results from the first head-to-head comparison between Cypher and Taxus. (All other tests, including those leading to FDA approvals, featured comparisons in which Taxus was measured against a Boston Scientific bare metal stent and Cypher was matched against a J&J bare metal stent.)

J&J said the Taxus and Cypher had "virtually equivalent" deliverability based on tests of nearly 1,400 patients at 90 medical center in Europe, Asia and Latin America. "Deliverability" was defined as the ability of a stent to reach the plaque-clogged section of an artery. (Crucial results measuring the effectiveness of both stents will be ready by year-end).

Analysts jumped on the J&J report, pointing out there's a big difference between a stent's deliverability and the ease of inserting the device.

J&J "muddied the waters" with its announcement, said Phil Nalbone, of RBC Capital Markets, in a Friday report to clients. "We believe that statement about deliverability was highly misleading ? or at least confusing to many investors." Deliverability, he added, is "not such a big deal" because virtually all stents ? drug-coated as well as bare metal ? have 98% to 99% procedural success. (Nalbone doesn't own shares in Boston Scientific; his firm doesn't have an investment banking relationship.)

The other issue is price, more so for companies and investors who want to know how much revenue stents can produce than for doctors who just want to find the product that works the best and is easiest to use. Boston Scientific on Thursday unveiled a list price of $2,950 or $245 below the list price of J&J's Cypher.

But just like automobile sticker prices, stent prices are subject to negotiation. Boston Scientific will offer discounts to heavy users of Taxus as well as to hospitals that use other Boston Scientific cardiac care products. J&J began offering volume discounts last fall. Although Cypher can sell for as low as $2,400, the average selling price is about $2,820, according to Eli Kammerman of Cathay Financial. A similar discount for Taxus would produce an average selling price of about $2,600, Kammerman said in a Friday research report.

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