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Crashing The Stent Party


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Conor Medsystems Inc. () is developing a new breed of stent that may have the power to swipe large swaths of business from rivals such as Johnson & Johnson () and Boston Scientific Corp. () But the company's chief executive officer, Dr. Frank Litvack, has a controversial past, and there are thorny questions about potential conflicts of interest and litigation that could torpedo its fortunes.

Stents, especially the ones that are coated with drugs to prevent blockage by scar tissue, are one of the most lucrative areas of medicine. The market for such "drug-eluting" devices is expected to reach $5.1 billion by the end of this year, up from $3.9 billion in 2004, according to CIBC World Markets Corp.

J&J and Boston Scientific are the two gladiators in this field, but many physicians are keeping a close eye on Conor's product as well. Although the stent's rate of restenosis, or recurrence of arterial blockages, has been about the same as existing devices, some doctors say Conor's is easier to implant and may prove safer and more effective.

On Oct. 21, the Menlo Park (Calif.) company will release new data from clinical trials at a top cardiovascular meeting in Washington. "If it came out in the U.S. right now, the market would swing," says Dr. Dean Kereiakes, a professor of clinical medicine at Ohio State University who is serving as a co-principal investigator for Conor's U.S. clinical trial.

Yet Conor's technology is difficult to assess, in part because some doctors helping to evaluate the devices have received stock options from the company. Among the 14 doctors who sit on Conor's scientific advisory board and are participating in clinical trials of its stent, three received consulting fees and five have received options, according to documents obtained by BusinessWeek.

Such relationships are a growing source of concern in the medical-device industry, drawing increasing scrutiny from regulators and medical ethicists. Still, Wall Street is smitten with Conor's potential. Last December the company went public at $13 a share, then soared to $23 for a market cap of nearly $800 million. Conor has virtually no revenue and is not expected to make a profit until 2008, but CIBC analyst John P. Calcagnini, who has a $26 price target on the stock, believes Conor can take 11% of the market by 2009.

TREADING CAREFULLY

Before that happens, though, Conor must navigate a minefield. Its powerful rivals vastly outspend the startup on research and development. Its stent has not yet been approved in any market. And this February, Conor was sued for patent infringement in Europe by Vancouver (B.C.)-based Angiotech Pharmaceuticals () and Boston Scientific. Angiotech licenses a drug called paclitaxel to Boston Scientific that inhibits the growth of scar tissue. Conor uses the same drug in its clinical trials, but claims the way it incorporates and releases the drug is novel and doesn't infringe on its rivals' patents. Boston has not yet sued Conor in the U.S., but if Conor tries to crack the U.S. market, Boston is expected to do so. "We haven't even looked into other potential infringements on the catheter side," says Boston's chief technology officer, Fred A. Colen.

If Conor were to lose the patent lawsuit, it would be forced to start a new stent trial with another drug, which would delay commercialization by several years. Even if Conor's device receives government approval, there's no proof that its stent offers a clinical advantage. "There are a lot of potential advantages," says Dr. Jeffrey A. Brinker, a professor at the Johns Hopkins University School of Medicine. But how likely are they to be realized? "I don't know," Brinker says.

No one is claiming that doctors enlisted by Conor are intentionally skewing the data because of their stock options. Moreover, there is no Food & Drug Administration rule barring doctors who participate in clinical trials from obtaining compensation from a company whose devices they are evaluating. But many universities, medical organizations, and scientific conferences now require that doctors disclose these relationships.

According to the disclosure documents, five of the doctors who have received stock options are top cardiologists at Columbia University and Stanford University Medical Centers and the Scripps Clinic. The doctors named couldn't immediately be reached for comments.

Columbia, Stanford, and Scripps say that their doctors who are affiliated with Conor have not violated any rules, and Conor also says that it has done nothing improper. Company execs say they paid doctors for their expertise with options since, as a small startup, Conor had little cash.

It's difficult to specify the value of compensation that each doctor receives because Conor does not release that data. In their disclosures made to medical conferences, doctors must reveal the type of compensation they receive, such as stock ownership, but not its value.

In its financial filings, Conor said it granted options to purchase 1,137,750 shares of its stock -- valued at $26 million -- to "consultants and other non-employee service providers." However, Conor says not all of those consultants are doctors. Some are contract workers, such as engineers.

Dr. Kereiakes of Ohio State receives airfare and several thousand dollars from Conor to attend meetings. But he sees no conflict, he says, because he is taking a hefty pay cut to devote time to Conor. Conor says it forbids lead investigators from receiving options, but Kereiakes and his co-investigator would not take them anyway because they say it would harm their credibility. "I would not embarrass myself and give a presentation when I have a million dollars in stock from a company," he says. "There's nobody in the world that would say that's not a conflict of interest."

Dr. Litvack's professional background has also attracted attention. Having served as co-director of the Cardiovascular Intervention Center at Los Angeles' Cedars-Sinai Medical Center from 1986 to 2000, he was recruited by Conor co-founder and Chief Technology Officer John F. Shanley to serve as CEO in the fall of 2001. But his track record as an entrepreneur is uneven. Litvack has helped run three companies, one of which was Advanced Interventional Systems Inc. The company developed laser technology to clear up artery blockages, but it lost a patent infringement lawsuit in 1992 and never gained much traction with doctors. In 1994 it was acquired by its chief rival, Spectranetics Corp. (), for just $12 million -- a thin sliver of the $150 million market cap it reached after going public in 1991.

Is Frank Litvack headed for a debacle like the one that burned investors more than a decade ago? CIBC's Calcagnini scoffs at the idea. "That's old news," he says."People are trying to detract from the idea that Conor has a novel design."

At least two physicians with no financial ties to Conor give its device high marks. Today's leading drug-eluting stents were designed as bare metal tubes, and the companies later added drug coatings. By contrast, Conor designed its stent from the ground up to deliver drugs to surrounding tissues. The idea comes from Conor's Shanley, who used computer-guided manufacturing techniques to create hundreds of little wells for drugs on the stent's lattice.

SLIPPERY SUCCESS

Some cardiologists say Conor may succeed because its stent, which is thinner and less sticky than existing drug-coated stents, is more easily maneuvered through a clogged artery. "If everything else was me-too, just that one feature would take the whole market," says Dr. Mitchell Krucoff, a professor of medicine and cardiology at Duke University Medical Center who is the co-principal investigator of Conor's U.S. clinical trial. Krucoff says he has received less than $10,000 in consulting fees from Conor.

If current clinical trials go well, European regulators could approve Conor's stent by yearend -- and the FDA could follow by late 2007. Still, even with approval, Conor must battle Boston Scientific, J&J, and others. Boston Scientific is spending more than $200 million a year on R&D for new stents and delivery systems -- four times what Conor has spent during its entire six-year existence.

For Litvack, the key to beating the competition is more innovation, both in devices and drugs. Conor is now developing a stent that uses anti-clotting compounds acquired from Novartis. "We believe the job of a good medical company is to make your products obsolete," he says.

By Spencer E. Ante in New York, with Amy Barrett in Philadelphia


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