Stents Make Investors' Hearts Beat Faster
By Amy Tsao
The newest versions of stents, the medical devices used to prop open clogged arteries, are catching investors' attention. Impressive data from Johnson & Johnson (JNJ ), released in early September, suggest its antibiotic-coated stent could be a huge advance in keeping coronary arteries unblocked. Shares of the health-care giant jumped 6.5% on the news, close to a 52-week high, and have remained in the $55 a share range. End of story? No, just the beginning.
Indeed, JNJ's trial results looked nearly impossible to beat. In a 238-patient study conducted in Europe, after 210 days there were zero cases of restenosis -- the reclogging that occurs in 20% to 30% of patients who get stents -- in those who were implanted with JNJ's antibiotic-coated devices. When the study's positive data were announced, shares of device makers with similar products in testing came under pressure as analysts questioned whether rivals could come close to achieving JNJ's stellar results.
In recent weeks, though, JNJ's competitors, have shown solid preliminary results of their own, giving their shares a boost, too. Results from Cook, which is partnered with Guidant (GDT ), showed that after six months, a mere 4% of patients treated with its stents coated with cancer drug paclitaxel had new blockages, while 27% of those treated with bare stents experienced reclogging.
A HANDY LEAD.
And after six months, there were no cases of restenosis in patients implanted with Boston Scientific's (BSX ) paclitaxel stent, compared with 11% occurrence in patients given uncoated stents. But with a U.S. launch projected for early 2003, JNJ is at least a year ahead of Cook and Guidant and Boston Scientific. Medtronic (MDT ) is also doing research on coated stents but is still further behind.
The new stents -- latticed tubes -- are an important innovation. "For those companies that sell stents now, having a viable coated stent is a significant priority," says Andrew Jay, an analyst with First Union Securities. Medical specialists are excited about the new combined device and drug technology, a concept that has already been applied successfully in stents used to prevent coronary clotting. "It should be a huge advance over where we are now," says Thomas Feldman, an interventional cardiologist at the University of Chicago. And drug-coated stents could push the rate of restenosis beneath 10%, says Bonnie Weiner, a professor of medicine at the University of Massachusetts, Worcester.
Amid all the enthusiasm, however, investors should consider the nature of the medical-device industry, cautions Standard & Poor's analyst Robert Gold. Already, the major players are locked in a tight race. As one company brings out a new, improved device, the others respond by introducing products with their own innovations.
Likewise, the first drug-coated stents will be premium-priced, but first-to-market players will eventually have to share the pie with competing device makers, and pricing will come under pressure. "Everyone will come in, and the market will mature quickly, just like with the original stent," Gold says. Also, the medical device business, unlike the pharmaceutical industry, has relatively low sales margins.
"In one year, [JNJ] will probably take over the whole market. But it will become very competitive," says Weidong Huang, a portfolio manager at Times Square Capital Management. "The monopoly will last only a short period of time." JNJ now has about 25% of the stent market, in third place behind Guidant and Medtronic.
The silver lining is that the field, while crowded with players, could grow considerably. The coronary stent market today is estimated at around $2.4 billion. The new products, which will cost considerably more than uncoated stents, are expected to expand the size of the market to some $4 billion over the next several years.
Citing the coated-stent business as a major source of revenue growth for JNJ's medical-device division, Merrill Lynch analyst Dan Lemaitre recently raised his expectations for sales growth at the division to 11% in 2002 and 20% in 2003. He also raised his 2003 earnings per share estimates for JNJ to $2.50, from $2.45, and to $2.85 in 2004.
The improved technology will make the procedure available to patients who were formerly at high risk of renewed blockages. "It's terrific for everyone in this market. We'll see procedure growth and stent prices go way up," Lemaitre says, noting that in most cases, drug-coated stents will replace uncoated ones. "If [doctors] are much more confident that [they] could intervene with little downside, then [they] can tackle both the tougher cases and the easier cases," adds the analyst, who believes the number of stent procedures could rise by between 20% to 30% after the introduction of the new devices.
And the market for drug-coated stents could eventually extend beyond heart patients, analysts believe. The devices could also be used to prop open peripheral arteries, where the recurrence of blood-vessel blockage is much higher. Lemaitre sees possible applications in brain disorders, with the stent delivering a drug to open the area of the brain where blood flow has been cut off. Such devices could also have application in gastrointestinal ailments. Says Lemaitre: "Combination drugs and devices could find more routine use in a lot of ways."
Of course, the U.S. Food & Drug Administration has yet to approve any of the new stents, and stumbles in testing are still possible. For the next year and beyond, investors should look out for updates on the development of drug-coated stents. As long as data continue to be strong, analysts expect European approval for JNJ's stent in early 2002 and U.S. approval in 2003.
So JNJ has plenty of reason to rejoice. But don't expect its dominance to last for long. If history is any indication, competition among makers of drug-coated stents should become fierce. "Eventually, these companies will participate in a much bigger stent market. The stocks may languish for a bit here, but the reality is probably that investors could think of this as altering the growth rate significantly over the long term," Lemaitre says.
But regardless of who is first or second to market, the opportunity created by the new devices represents a rising tide that should lift all boats -- just not as high as investors might have hoped.
Tsao covers the markets from New York