J&J's Wake-Up Call

The Cypher drug-coated stent, a runaway bestseller that fueled Johnson & Johnson's (NYSE: JNJ) earnings jump last quarter is now the subject of an FDA advisory. That's not good.

An FDA public health notification to physicians encourages physicians to report any adverse events associated with the device. The 290 reports received thus far (including 25 from outside the U.S.) report clotting between 24-hours and 30 days - - and 60 patient deaths.

Given the uncertainty, physicians are warned to be "vigilant for any patient symptom that may be attributed to hypersensitivity." That vague warning may temper the device's blockbuster sales growth. That said, Cypher remains the only drug-coated stent available.

J&J must now also fund a new 2,000-patient study and continue monitoring patients in on-going trials, "to assess the long-term safety and effectiveness of the stent and to look for rare adverse events."

The FDA advisory does clearly note that, "hundreds of thousands of patients have been successfully treated with the Cypher stent." Such a low failure rate may explain the stock's modest 4% drop on the news, though, of course, J&J is a monster with many profitable products and sells at a modest 21 times earnings.

Bad news for J&J is being taken as good news for rivals Boston Scientific (NYSE: BSX), Angiotech (Nasdaq: ANPI), and Guidant (NYSE: GDT). Boston Scientific (who partners with Angiotech) is awaiting an FDA advisory panel review of its Taxus stent scheduled for November. Guidant and Medtronic (NYSE: MDT) should have their products in review next year.

Not surprisingly, smaller partner SurModics (Nasdaq: SRDX), supplier to J&J of the process used to coat the Cypher stent, fared even worse. Though SurModics, incidentally, also reported earnings yesterday.

The market for drug-coated stents is estimated to hit $5 billion by 2005. The company that gains significant market share should see its stock head higher. Speculators should be warned, however, that FDA delays are not uncommon.

Indeed, J&J's issues may cause the FDA to move more slowly with new products, which, ironically, could benefit J&J if the clotting problems can be traced to a small but easily identifiable population. But that may be looking on the bright side.

W.D. Crotty owns stock in Boston Scientific and Medtronic. He feels lucky now that he did not need a J&J drug-coated stent (that was ready to go) when he had a cardiac catheterization a week ago.

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