On April 24th, the Food and Drug Administration (FDA) approved Johnson & Johnson's (NYSE:JNJ) highly anticipated Cypher stent, a "much-anticipated" move that was described as "revolutionary," "remarkable," and "tremendously innovative." Okay, so they did a great job with the PR, but what's the real story behind the hype?
Cardiac stents are flexible metal tubes (think Slinky) made out of wire mesh. They're used to treat patients whose coronary arteries are clogged by fat and cholesterol (or hunks of hamburger and steak). This blockage, known as atherosclerosis, prevents the adequate flow of blood to the heart and can lead to incapacitating chest pain or deadly heart attacks.
If the atherosclerosis is identified early, the blocked artery can be reopened through angioplasty, a procedure that uses balloons to expand arteries and reestablish blood flow. After the artery is opened, a stent is placed to help prop it open.
Regular "bare" stents were first approved for use in the United States in 1994. These stents worked so well that they quickly became a standard part of cardiovascular care. Now, nine years later, the domestic market for stents has grown to $2.6 billion a year.
What a perfect device!
Well, not exactly. Even though the use of stents greatly improves the outcome of angioplasty, they are far from ideal. In about 20% of cases, angioplasty results in restenosis, a type of scarring that completely occludes (or obstructs) the treated artery. For these patients (including Dick Cheney in 2001), the only option is a second procedure.
Due to this problem, the Holy Grail for medical companies everywhere has been a stent or treatment that prevents restenosis. Biotech start-ups searched high and low for this elusive goal, and came up with marginally useful solutions that used lasers, artery "polishers," and targeted radiation that aimed to reduce tissue growth. Despite millions of dollars in investment, none of these therapies were more than marginally effective.
A match made in... the lab
The combination of research on restenosis and pharmacological advancement throughout the '90s led to a new approach for intervention. The discovery of drugs that prevent the type of scarring that causes restenosis led to a series of "A-ha!" moments throughout the medical device world. Johnson & Johnson, Boston Scientific (NYSE:BSX), and Guidant (NYSE:GDT) -- the "Big 3" of the stent world -- all launched research programs that combined anti-restenosis drugs with existing stents to prevent restenosis.
These efforts resulted in two novel types of stents. Johnson & Johnson created drug-coated stents that were covered with Rapamune, an anti-rejection drug made by Wyeth (NYSE:WYE). Boston Scientific and Guidant both developed stents that incorporated drugs into polymers that slowly released the medicines. The ideas were sound, but did they work?
A series of large-scale clinical trials revealed the victors. Johnson & Johnson's Cypher stent and Boston Scientific's Taxus stent both resulted in a lowering of restenosis to 9% of patients. Guidant's stent showed no improvement over the bare stents, and the project was scrapped. Although the Cypher and Taxus stents were both approved in Europe, only Johnson & Johnson's stent has been approved for use in America. FDA approval for the Taxus is anticipated in late 2003 or early 2004.
Mo' money, less problems
Drug-eluting stents have major market potential. The new stents cost around $3,000, which is three times the cost of an ordinary stent. The higher costs and greater efficacy of these stents will help expand the market to one million patients and $4.7 billion in worldwide sales by 2005. Johnson & Johnson's second-quarter stent sales were up over 600% sequentially, and sales worldwide could rise to over $2 billion from $675 million in 2002. In fact, Johnson & Johnson's greatest difficulty to date with the Cypher has been an inability to produce enough to meet market demand.
The approval of Boston Scientific's Taxus in the coming months is expected to create pricing pressure for drug-eluting stents, reducing Johnson & Johnson's rich margins on Cypher. Analysts predict (for what it's worth) that when the dust settles, Johnson & Johnson will retain two-thirds of the market, with Boston Scientific claiming the rest.
Johnson & Johnson hopes to use the revenue generated from its Cypher stent to offset slowing growth in its pharmaceutical division. Boston Scientific already claims that Taxus may generate over $2 billion in sales in 2004, with a resulting increase in earnings from $0.93 cents per share in 2002, to an average estimate of $2.68 per share for 2004.
In 2005, competing products from Guidant and collaboration between Medtronic (NYSE:MDT) and Abbott Labs (NYSE:ABT) are expected to create added competition in the market. Until then, Boston Scientific and Johnson & Johnson will be feasting on what has been labeled "the greatest opportunity in the history of medical devices."
Nonetheless, investors should keep an eye on companies that are in the process of entering the stent market. Even though Johnson & Johnson's lead will be difficult (if not impossible) to challenge, those companies that manage to gain a sliver of the $4.7 billion annual market will likely realize substantial earnings growth.
Arash Mostaghimi is a student at Harvard Medical School. He holds undergraduate degrees in biomedical engineering and the history of science. He also runs a tutoring company in Boston, www.RagingKnowledge.org. He owns shares of Johnson & Johnson. Arash provided this column as a guest writer for The Motley Fool. He would enjoy receiving feedback via email.
