When Will This Stent See Circulation?
James R. Tobin knew he was speaking to a skeptical crowd of analysts last January, but the CEO of Boston Scientific Corp. took the plunge anyway: He boldly predicted that his company could grab 75% of the $5 billion coronary stent market -- and trounce the mighty Johnson & Johnson (JNJ ) in the process. The response? Snickers. After all, Boston Scientific then had just a 13% share. "Everybody thought we were the gang that can't shoot straight, that if we were lucky, we'd get 20% market share," recalls the 59-year-old Tobin. "I've never believed any of that."
Today, Wall Street's snickers have turned into applause. Boston Scientific, which last year sold $3 billion worth of medical devices, such as catheters, coils, and sponges, has seen its stock price rise 37% this year, to about $59. Investors saw the new coronary stent, Taxus, perform strongly in Europe and move toward Food & Drug Administration approval early next year. Analysts now think the new device -- a drug-coated metal tube about the size of the spring inside a ballpoint pen, which is inserted into blood vessels to treat coronary disease -- could add $2.5 billion in new revenues and more than double the company's earnings in 2004, to $1.2 billion. And they think Taxus can back up Tobin's boast of grabbing the lion's share of the U.S. stent market. "This could be an extraordinary takeoff point for the company," says Merrill Lynch & Co. analyst Daniel Lemaitre.
How can Boston Scientific hope to beat J&J, a company 10 times its size whose own stent, Cypher, holds about half of the market? Tobin's cheerleaders are betting on Taxus being cheaper, easier for doctors to use, and just as effective as Cypher. Boston Scientific may also tap into doctors' resentment of J&J, which priced its stent three times higher than previous versions and could not supply them fast enough to all the patients who needed them. J&J is now boosting supply and on Sept. 8 cut prices by about 10%.
Yet while the payoff is in sight, it is too early for Boston Scientific to start counting cash. Besides the challenge of launching Taxus, the company faces a slew of patent-infringement lawsuits, and at the same time is being investigated by the Justice Dept. over whether it violated FDA rules when it supplied data for an earlier stent. And, of course, J&J will flex its muscles to stay ahead. It hopes to launch a better stent in the second half of 2004, and is planning head-to-head clinical trials between Cypher and Taxus. "We feel very confident of our position," says Bob Croce, president of Cordis (JNJ ) J&J's stent unit.
Just getting FDA approval for Taxus presents its own set of challenges. Boston Scientific has yet to learn if an expert panel will consider its application in October or at a later date, which could delay the stent's launch. It took J&J six months after its expert panel met to receive approval. There's no telling how long the process will take for Boston Scientific. On Sept. 15, the company was to reveal the clinical trial data it submitted to the FDA. Analysts believe that if Taxus keeps arteries from reclogging at least 88% of the time, it will prove the device's effectiveness. But unlike J&J, Boston Scientific doesn't have a drug partner to help respond to FDA queries. J&J's Cypher uses rapamycin, an immunosuppressant made by Wyeth (WYE ) Taxus, by contrast, uses a generic cancer drug. So when FDA queries arise, it may take longer for Boston Scientific to reply.
Further resources could be drawn away by the patent-infringement lawsuits filed by J&J, stent maker Medtronic, and Medinol Ltd., a former partner in making a stent. If Boston Scientific loses any of these complex cases -- and some analysts don't discount that possibility -- damages and royalties could total hundreds of millions of dollars. Tobin is combative about the claims that other companies own technologies behind Taxus, calling the suits "a sideshow." "The [stent] is ours. We developed it from scratch," he says.
The Justice Dept. probe doesn't directly involve Taxus but bears watching. Investigators are looking into whether Boston Scientific withheld data from the FDA for a stent it made with Medinol, which was recalled in 1998. The device was allegedly linked to one death and more than 20 injuries. Tobin acknowledges that the probe is picking up steam. He says his company is cooperating with Justice to extend the statute of limitations, which runs out at the end of 2003, so that it can finish investigating. The result could be criminal indictments.
Tobin had a cleanup job on his hands when he arrived in March, 1999. Boston Scientific, which began in 1979 by making catheters and angioplasty balloons, was smarting from the stent recall and an accounting scandal at its Japanese subsidiary. And after years of acquiring small device makers, it had no head of quality, clinical trials, or regulatory affairs. Tobin, former CEO of Biogen (BGEN ) Inc. and a 22-year veteran of Baxter International (BAX ) Inc., fixed all that, better integrated the companies to achieve cost savings, and upped the research budget.
From that effort in the labs came Taxus, now going mano-a-mano with J&J. Price is a key consideration. In Europe, both stents have competed since February. J&J claims it has half the market, while Boston Scientific claims it holds two-thirds. Boston Scientific is undeniably winning the price war. Taxus goes for about $1,800. J&J won't confirm a European price, but analysts say Cypher is priced 33% higher. Boston Scientific hasn't set a U.S. price. But analysts think Taxus will cost $2,500 to $2,750. Cypher lists for $3,200, though J&J now says that discounts have driven the average cost down to $2,600. Even so, J&J's new stent has sent some doctors into sticker shock -- older, uncoated stents cost only $1,000.
Johnson & Johnson also alienated doctors by not having enough stents on hand after Cypher was approved earlier this year. The problem: It made too many stents too early. When the FDA O.K.'d Cypher, it mandated a shelf life of six months. Because J&J was counting on a year, much of its inventory had already expired. It had to toss thousands of stents and couldn't meet demand. "They made some doctors angry," says Dr. S. Chiu Wong, director of the cardiac catheterization lab at New York-Presbyterian Hospital. "Supply was 35% to 40% of what we needed." Boston Scientific claims that it can manufacture stents more quickly than J&J and will dodge that problem. J&J counters that it is ramping up production and will meet 80% of projected demand by yearend. That, it believes, will help heal relations with doctors. Says Croce: "Is Boston the overwhelming favorite and we're the overwhelming underdog on a customer-relationship basis? I have a hard time with that one."
Even if he grabs a lead, Tobin must know that the riches from Taxus will begin to diminish in 2006 as new competitors enter the market. So he is already prowling for more acquisitions. Boston Scientific may never again see a potential blockbuster like this stent. For Tobin, not looking for the next big thing doesn't seem to be an option.
By Faith Arner in Natick, Mass.