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Merger Could Give Boost to Medtronic Inc.'s Drug-Coated Stent Program

Posted on: Friday, 12 August 2005, 00:00 CDT

Aug. 12--Some Wall Street analysts think there's a chance that Medtronic Inc.'s Endeavor drug-coated stent program could come out a winner from Johnson & Johnson's acquisition of Guidant Corp.

As the Federal Trade Commission reviews antitrust implications of the $25.4 billion merger, one key issue is the elimination of Guidant as a potential competitor in the $5 billion drug-coated stent market, now the largest medical-device market.

The only two players in the U.S. drug-coated stent market are New Brunswick, N.J.-based Johnson & Johnson and Boston Scientific, whose stent division in based in Maple Grove.

Stents are tiny metal mesh tubes that are implanted to prop arteries open. The drug coating makes it easier for the body to accept the stent.

The next player expected to crack the lucrative stent market is Fridley-based Medtronic, which recently won approval to sell its drug-coated stent in Europe. If Medtronic's clinical trials go well, it expects to begin selling the stent in the United States sometime in 2007.

Indianapolis-based Guidant, which had been the largest stent seller before the drug-coated version became available, was expected to follow, as was Abbott Labs, whose device is not expected to hit the U.S. market until 2008.

But Medtronic and Abbott face a major obstacle in cracking the U.S. market, even after they get approval to sell their drug-coated stents by the U.S. Food and Drug Administration. Unlike Guidant, Johnson & Johnson and Boston Scientific, neither Medtronic nor Abbott has access to the most popular method of delivering the stents, called the rapid exchange system.

"Rapid exchange is the standard of care," said Scott Ward, president of Medtronic's vascular division. Not being able to use that system would "reduce our market," he acknowledged.

Medtronic had to stop using the rapid exchange system in 2001 when it lost two patent infringement lawsuits -- one to Boston Scientific and the other to Guidant, each of which held patents key to the delivery system. Boston Scientific's relevant patent expires later this year, but the Guidant patent does not expire for several years.

Once it was barred from using the rapid exchange system in the U.S., Medtronic's stent sales declined and the company was forced to lay off hundreds of workers at its vascular division's plants in Santa Rosa, Calif.

Some analysts predict that in order to win FTC approval for the Guidant merger, Johnson & Johnson will have to sell licensing rights to the rapid exchange system to one of the potential competitors -- most likely either Medtronic or Abbott.

"It could be thrown out as a concession," said Phil Nalbone, a securities analyst with RBC Capital Markets.

In any case, whichever company gets the license would be afforded a significant leg up in the market.

In Europe, where Medtronic is not barred from using the rapid exchange system, analysts expect it to grab as much as 20 percent to 25 percent of the market. But without the popular delivery system in the U.S., Medtronic would be lucky to get 10 percent, said Thomas Gunderson, a securities analyst with Piper Jaffray Cos. With rapid exchange, Medtronic likely would get more than 20 percent of the domestic market. The difference translates into hundreds of millions of dollars in sales.

"It would be a major hurdle that would go away," Gunderson said.

There's some irony in that, because many analysts thought Medtronic would be the loser in the merger because Guidant, its archrival in implantable heart devices, specifically defibrillators and pacemakers, would suddenly have the vast resources and marketing clout of the giant Johnson & Johnson. Though Guidant makes its defibrillators and pacemakers in Arden Hills, its stents are made in California.

Meanwhile, if Medtronic is able to gain share of the drug-coated stent market, Johnson & Johnson certainly would lose. But perhaps the biggest loser would be Boston Scientific if for no other reason than it has more to lose. Natick, Mass.-based Boston Scientific, which develops and makes its stents in Maple Grove, controls about 60 percent of the market compared with Johnson & Johnson's 40 percent.

Some analysts expect that if Johnson & Johnson had to choose between the two, it would pick Abbott over Medtronic because Abbott poses less of a competitive threat. Abbott has not been a significant player in the stent market and does not have Medtronic's sales and marketing clout.

If either Medtronic or Abbott gets access to the rapid exchange system, they could not simply plug their current stent into that system -- they would have to go through further clinical testing, which could delay the introduction.

The Federal Trade Commission has not disclosed when it would reach a decision on Johnson & Johnson's purchase of Guidant, although some analysts expect it to come no later than the end of September.

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Source: Saint Paul Pioneer Press (St. Paul, Minn.)

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