Guidant's Loss Is the Competition's Gain

A court ruling will knock it out of the sure-to-be-lucrative drug-coated stent market for years

By Robert Gold

Drug-coated stents -- the medication-enhanced version of the devices used to keep coronary arteries open after angioplasty procedures -- have yet to receive formal approval from the Food & Drug Administration. But it looks like the pitched battle to dominate the U.S. stent market has seen its first casualty: Guidant (GDT ). It was dealt a sharp blow from a U.S. District Court ruling on Oct. 1 that will prevent Guidant from using existing clinical data compiled with its partner, Cook Inc., to seek an FDA O.K. The ruling stemmed from a lawsuit filed by Guidant's archrival Boston Scientific (BSX ) disputing Guidant's co-development agreement with Cook.

While Guidant has indicated that privately held Cook will appeal the ruling, it appears that any effort by Cook to obtain regulatory approval of a paclitaxel-coated stent would have to be accompanied by a new clinical trial, which would further delay Guidant's efforts to bring the product to market. Guidant may pursue several other options to sell paclitaxel-coated stents, but none are likely to result in sales prior to 2005. And while Guidant's paclitaxel efforts have been stymied, another offering using the anticancer compound everolimus remains in preclinical stage.

The big winners in all this? Boston Scientific, of course, and health-care products giant Johnson & Johnson (JNJ ). By removing Guidant from the picture, the ruling creates a significant opportunity for these companies in a projected $5 billion market.


  It's no wonder that interest in this product is intense. Preliminary trial results suggest that the new devices -- coated with compounds that inhibit cell growth -- will significantly lower the occurrence of vessel reclosure (restenosis) following angioplasty procedures.

In a highly unconventional move, the Centers for Medicare & Medicaid Services (CMS) announced in July, 2002, that it had created two new diagnosis-related groups (DRGs) for drug-coated coronary stents, to take effect Apr. 1, 2003. The decision was unusual in that drug-coated stents continue to be evaluated in clinical trials. S&P believes that this is the first time Medicare has formally adopted reimbursement guidelines for an unapproved medical device.

Under the new guidelines, the government will increase its payments by 17%, including both the cost of the new device and the procedure to implant the stent. The two DRGs, one for patients with myocardial infarction (MI) and one for patients without MI, will result in $1,700 to $1,800 in additional reimbursement for Medicare patients receiving coated stents compared with reimbursement levels now for traditional bare metal stents.


  The higher reimbursement rate is a major positive development for the companies racing to commercialize drug-coated stents. The new DRGs will make it much more economically feasible for hospitals to absorb the incremental cost increases and should, therefore, result in a more rapid conversion among physicians who implant stents.

Based on what's expected to be a $3,000 starting point for initial drug-coated stents to be sold by J&J, S&P believes that domestic stent sales in 2003 will be around $2.5 billion. We assume that industrywide drug-coated stent unit volumes will ramp up to 2.1 million by 2005, vs. 1.3 million in 2002. We project that the market will quickly rise to an annual sales rate of about $4.5 billion to $5 billion by yearend 2004, as physicians increasingly adopt the new devices for nearly all patients undergoing angioplasty.

But that's cold comfort for Guidant. Given its reduced prospects, we lowered our investment recommendation on Guidant to 3 STARS (hold) from 5 STARS (buy) on Oct. 2. We have cut our 2003 earnings per share forecast by 20 cents, to $1.90, and see Guidant's three-year earnings growth rate at 10% to 12%, assuming that continued growth in its other key product areas, cardiac-rhythm management and surgery, along with cost cuts, can offset erosion in its vascular intervention business.


  Guidant's loss, however, is Boston Scientific's gain. The court ruling sets Boston Scientific up for extraordinary growth beyond 2003. With the apparent removal of Guidant from the paclitaxel-coated stent market, Boston Scientific will compete directly against J&J. On Oct. 2, we raised our recommendation on Boston Scientific to 5 STARS from 4 STARS (accumulate).

We're maintaining our EPS estimates of 98 cents for 2002 and $1.20 for 2003. Assuming a late 2003 launch for its paclitaxel-coated stent, we see 2004 EPS potential of $2 to $2.25. We've established a 12-month share-price target of $45.

The ruling also effectively reduces competition against J&J's Cypher drug-coated coronary stent, which is expected to be approved in an FDA panel meeting on Oct. 22. Although Boston Scientific's competing product is likely to reach the market in the second half of 2003, Cypher should command 80% of the market and generate sales of over $2.7 billion in 2003.

S&P analyst Herman Saftlas raised his 2003 earnings per share estimate for J&J by three cents, to $2.62. He has a 4-STAR opinion on the stock and thinks J&J's premium valuation to the rest of the Big Pharma group is justified by the robust and sustainable EPS growth he expects.

Analyst Gold follows medical-device stocks for Standard & Poor's

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