Biotech Values

[DewDiligence]

CoStar Failure Puts JNJ Further Behind

[The big winners from the demise of CoStar appear to be MDT and ABT.]

http://online.wsj.com/article/SB117853824065494360.html

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By AVERY JOHNSON
May 8, 2007

Johnson & Johnson's scrapping of an important new stent it bought earlier this year leaves the health-care company further behind in the heart-device arms race and casts a shadow on its reputation for deal making.

Following the failure of its CoStar drug-eluting stent to perform as well as a competitor's in a recent clinical trial, J&J said it was pulling the device from overseas markets and withdrawing its application for approval in the U.S. The company said it would continue research on the stent system, which props open clogged arteries, and hoped to relaunch it in combination with a different drug.

But the news was a setback for J&J, which was counting on CoStar to be its next-generation entry into the competitive stent market. J&J bought CoStar's maker, Conor Medsystems, in February for $1.4 billion. Analysts and investors now are asking whether J&J could have known that CoStar might encounter problems such as this, and some are concluding that J&J should have been more careful.

J&J pledged its continued enthusiasm for the design of the stent itself, a unique system of reservoirs to hold and release the medicine that prevents arteries from reclosing. The New Brunswick, N.J., company blamed the study's results on the drug it chose to perform that function [Paclitaxel (a.k.a. Taxol), the same drug used on BSX’s Taxus stent]. J&J has just started testing in animals a modified version of the stent using a different drug, which can be used in a wider variety of doses; that stent likely won't be available for at least three years.

"I think it goes without saying that we're disappointed with what we've seen in this particular trial," said Nicholas Valeriani, J&J's world-wide chairman of medical devices and diagnostics, on a conference call. "However, we're not entirely surprised by these outcomes, given the dosing limitations" of the drug, called paclitaxel. "What has excited us all along about Conor Medsystems is the drug-delivery platform."

Still, hints of trouble in Conor's early research and overseas experience, as well as a bit more patience, could have saved J&J shareholders a lot of money, say doctors and analysts. Some CoStar studies showed high or variable rates of "late-loss," a measure of how much the artery closes up after implantation that can predict a stent's effectiveness. J&J said it looked at this issue but wasn't concerned by it.

J&J said that the problem likely stemmed from the dose of paclitaxel used. Paclitaxel, also used by Boston Scientific Corp.'s Taxus stent, can be more toxic and therefore has a more limited range of doses. J&J is more familiar with sirolimus, the drug it uses on its Cypher stent, and the failure of the stent with paclitaxel could allow J&J to move more quickly to a drug that has been a strength for it.

Glenn Novarro, a Banc of America analyst, calls the failure, "a major disappointment and hit to management's credibility." He adds that J&J could have saved shareholders $1 billion if the company had waited for the data or done better due diligence before buying Conor.

The setback leaves J&J without a so-called next-generation stent until at least 2010, at the same time that other makers are bringing new products to market that will challenge veterans J&J and Boston Scientific. And growing safety concerns about rare but deadly blood clots forming years after the implantation of drug-eluting stents have caused sales of Cypher and Taxus to suffer. Guidelines are expected from the FDA in coming months that could delay new stents even more.

J&J will cancel two other Conor stent programs, called Corio and Symbio. [I don’t know what these codenames refer to.] The company said it would review other projects in the pipeline at an interventional-cardiology meeting later this month, where the full results of the trial will be discussed.
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