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Boston Scientific's Double Bypass


Even as Boston Scientific Corp. (BSX) was trumping Johnson & Johnson (JNJ) to buy troubled Guidant Corp. for $27 billion last winter, Boston CEO James R. Tobin says he was warning his board to brace for a storm. "We're going to pay a lot of money for Guidant, and then we're going to wake up and discover we have a company with a lot of problems," he recalls saying. "And everyone will be wringing their hands and crying: My God, what have these guys done?' "

Cue the hand-wringing. New safety concerns about drug-coated stents, including Boston's blockbuster Taxus product, are fueling fears it will lose its leadership of the lucrative $6 billion stent market. Last year that business accounted for 41% of Boston's sales and more than half its profits.

Meanwhile, even as Tobin tries to turn Guidant around, the entire market for that unit's key product--implantable cardioverter defibrillators (ICDs)--has jerked into reverse. After growing 20% for each of the past several years, sales of these $25,000 devices for spotting and correcting abnormal heart rhythms are now falling. The culprit: Guidant's embarrassing string of quality-related recalls last year.

It's doubtful even Tobin expected things to get as bad as they have in recent weeks. With its two key products under fire, Boston warned on Sept. 21 that third-quarter earnings would come in well below expectations. That drove its once high-flying stock below $15, about 46% off from its level when Tobin began bidding for Guidant. At today's prices, Boston is now worth just $22 billion, or $5 billion less than it paid for Guidant. To top it all off, on Sept. 26, J&J sued Boston, Guidant, and Abbott Laboratories for $5.5 billion over the deal, alleging that Guidant leaked confidential information during the negotiations. No wonder critics are howling. "That deal is unfathomable," says Matthew Dodds, a Citigroup (C) analyst who has a sell recommendation on the stock. "And I don't see any light at the end of the tunnel."

While the troubles mount, Tobin is serene. "We would absolutely do the Guidant deal again today," he insists. Largely thanks to Taxus, Boston's sales have doubled since 2002, to $6.3 billion. But the stent market is now largely saturated. "We need to be $10 billion to make the hit parade" in the medical device market, says Tobin, whose chief rivals are $12 billion Medtronic Inc. (MDT) and $50 billion J&J. Tobin insists Boston will remain the leader in stents. As for Guidant, "we'll get the problems fixed, the new-product flow will resume, and it will become the growth engine of the company."

Tobin's most pressing challenge is to defend his stent business, which he is counting on to pay off the $8 billion in debt he assumed to buy Guidant. The debate over the safety of such devices has escalated. But Tobin says Boston's own long-term patient data show that "the balance of risk and reward still clearly favors drug-coated stents" such as Taxus over the bare-metal stents they have largely replaced.

CLOT FACTOR

Tobin figures for every 1,000 patients who get a bare-metal stent to clear clogged arteries, 200 will need to repeat the procedure, and 20 will have serious heart attacks. Using a Taxus stent appears to cut that number in half by addressing the reclogging problem--called restenosis.

Long-term results now suggest 5 out of 1,000 Taxus patients will eventually suffer a heart attack triggered by a blood clot. But that's still just 15 heart attacks for Taxus vs. 20 for bare metal, so "you're better off with Taxus," he says.

For now, most cardiologists will probably stick with Taxus or its only U.S. competitor, J&J's Cypher, says Dr. Richard W. Nesto, a cardiologist at Lahey Clinic in Burlington, Mass. Bare-metal stent usage will increase from 10% of all procedures to 15%, he predicts. But there may be a bigger problem for Boston Scientific: The blood clot risk with drug-coated products means "the market is ripe for some new entrants, and if their clinical data is good, there will be major market-share changes," he warns.

In fact, Medtronic, Conor Medsystems (CONR), and Abbott (ABT) are all readying new stent offerings in the U.S. Each argues that its products are safer--and cardiologists can jump quickly if they believe a new stent is superior, says Harvard Business School professor Robert Huckman. Boston controls about half the stent market today, figures Jan Ward, an analyst at A.G. Edwards Inc. (AGE), but by 2009, "they could be left with just 25% to 30%."

All of these players, Boston included, could face fresh hurdles when their new stents are reviewed by the Food & Drug Administration. Given how long it took for problems with drug-coated stents to surface, regulators may hold new products to a tougher standard. Even so, Tobin hopes the FDA next year will approve Boston's Taxus Libert? stent, which is easier to implant than the current Taxus and has already replaced the earlier versions outside the U.S. Boston will also benefit if Abbott's new stent takes off, as it has co-marketing rights on that device. And in late 2008, Tobin hopes to launch a next-generation stent code-named Barracuda. "No one can compete with our continual flow of new technology," says Paul A. LaViolette, Boston's chief operating officer.

The hard part will be mending Guidant's ICD business. After repeated recalls and an FDA warning letter, Guidant's share of the icd market has plunged to 25%, down from 40% two years ago, says Citigroup's Dodds. Tobin now spends nearly every Monday and Tuesday at Guidant's headquarters in St. Paul, Minn., where he's directing the turnaround. He has already brought in new people to head research and development, quality, and manufacturing, as well as to run Guidant's three plants. He has cut the number of projects Guidant is working on, and increased the frequency and intensity of product quality testing.

Guidant's quality problems were a bad blow to the industry. Defibrillators are technological marvels that can bring a patient who suffers sudden cardiac arrest back to life, but fear of malfunctions has caused doctors and patients to think hard. "I call it the sudden-death malaise," says Dr. Eric N. Prystowsky, vice-chairman of the Heart Rhythm Foundation.

Bullish as Tobin is, he doesn't imagine that the problems in his stent and defibrillator businesses can be handled quickly. "Some people say we have a communications problem," he says. "But the real issue is, how do we avoid having anything to communicate?"


Later, Baby
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