If you're a practicing cardiologist, expect a call -- probably several -- from sell-side analysts or money managers in the next few days, inquiring about your confidence in Boston Scientific's ( BSX) Taxus drug-coated stent. The opinions of these heart doctors and whether they'll stick with Taxus or favor the rival Cypher stent from Johnson & Johnson ( JNJ) remain the important unanswered questions after Friday's announcement from Boston Scientific that it's
recalling 85,000 Taxus stent units and another 11,000 Express (uncoated) stents because of a manufacturing defect. Boston Scientific is being forced to pull the stents from hospital shelves because of a problem with the catheter delivery system that doctors use to insert the stent in a patient's artery. It's the same problem that forced Boston Scientific to recall 200 Taxus stents on July 5. At that time, Boston Scientific executives said there wouldn't be additional recalls. Obviously, they were wrong. Boston Scientific shares traded for only the last 15 minutes of Friday's session, falling $3.09, or 7.6%, to $37.40. In the early premarket Monday, the stock was down 90 cents, or 2.4%, to $36.50.
Regaining ConfidenceOn a Friday night conference call with investors, Boston Scientific executives expressed confidence that this latest, broad recall -- coupled with manufacturing and quality inspection changes already made -- would eliminate the problem once and for all. "This a speed bump," said Boston Scientific CEO Jim Tobin. "We see no long-term impact with our customers." But at the same time, company officials acknowledged that it would take some work to convince doctors to share in the company's confidence. Earlier Friday, Boston's Brigham & Women's Hospital said it had stopped using the Taxus stent until it receives additional information and assurances from Boston Scientific. Other hospitals are likely to do the same.
Deutsche Bank analyst Tao Levy said in a research note that he queried 17 cardiologists over the weekend, finding that use of Taxus would drop to 62% from its current 69% rate, at least for the next several quarters. Levy reduced his 2004 and 2005 earnings-per-share estimate by 10 cents and 7 cents to $1.68 and $2.38, respectively. He maintained his buy rating, and his firm has a banking relationship with Boston Scientific. Boston Scientific's earnings are expected to soar 185% to $1.77 in 2004, mainly because of the new Taxus drug-coated stent, according to the consensus estimate compiled by Thomson First Call. Earnings are expected to reach $2.38 a share in 2005. These estimates, or at least earnings for 2004, will be reduced as a result of Friday's recall. Boston Scientific said it was still tallying the financial impact of the recall, but on a preliminary basis, it expected a reversal of sales of about $45 million, pre-tax, and a write-down of inventory of about $50 million, also pre-tax. On an earnings-per-share basis, the company estimated the hit to be 6 to 8 cents in the second quarter. The company's second-quarter earnings announcement, set for this morning, was postponed one week to July 26.
Quick AcceptanceBoston Scientific launched Taxus in March, and it quickly became the No. 1 choice of doctors, grabbing a 70% share of the market from Johnson & Johnson's Cypher, which was launched in April 2003. Boston Scientific has sold about 500,000 Taxus stents so far, with sales in 2004 estimated to exceed $1.5 billion in the U.S. alone. Stents are tiny metal coils inserted into arteries to prop them open and keep blood flowing to the heart. The addition of a drug coating to stents revolutionized their use by helping to retard the buildup of scar tissue around the stent, which often forced patients to have their procedures redone.
There have been no problems associated with Boston Scientific's Taxus stent itself, only with the tiny balloon attached to the delivery catheter. In some cases, this balloon has failed to deflate fully, requiring surgery to remove it. The company said it has received reports of one death and 18 serious injuries related to the Taxus stent, and two deaths and 25 serious injuries related to the Express stent. On its Friday night conference call, Boston Scientific executives said there would be approximately a one-week supply interruption in the U.S. and four to six weeks in Europe as the recalled stents are removed from hospital shelves and replaced with newer models. Boston Scientific is blessed with a hefty manufacturing capacity that can handle the recall and replacement with relative ease and minimal financial impact. Winning back the confidence of doctors is a more difficult task. "In our opinion, the key concern following the recall of the Taxus stent is gauging the reaction from the physician community. Specifically, physicians are likely to need reassurances that the manufacturing change and the added inspection have corrected the balloon non-deflation issue," said Goldman Sachs analyst Lawrence Keusch in a research note. "Although there will clearly be some physicians that will use the recall as a reason to switch back to J&J's
Johnson & Johnson's Cypher stent, we suspect that the majority of physicians will look upon the recall as the appropriate action and be supportive of the company's efforts." Keusch said the recall will have limited negative impact on Boston Scientific because doctors will not stop using drug-coated stents, and Johnson & Johnson continues to have problems with limited manufacturing capacity for its Cypher stent, which limits the company's ability to take advantage of the situation. Keusch maintained his outperform rating on Boston Scientific; his firm has a banking relationship with the company.