The Wall Street Journal Interactive Edition -- September 21, 1998
Arterial Vascular Battles
New Competitor, Pricing
By LINDA SANDLER
Staff Reporter of THE WALL STREET JOURNAL
Stents -- those clever little devices for coronary procedures -- have
captured the hearts of investors in the past year or so. But remember how
quickly prices of earlier hot medical products such as angioplasty balloons
were punctured? Well, skeptics now see a stent price war in the making,
too.
The current U.S. leader in stents is Arterial Vascular Engineering, or AVE,
of Santa Rosa, Calif. At last count, in June, it claimed about 45% of the
estimated $1.5 billion U.S. stent market. And the stock has been jumping in
recent days because the company's top executives have been promoting
their products and plans at medical conferences.
At 44 1/8 Friday, AVE wasn't far off its 1998 high of 48 1/8. It has greatly
enriched fans since it went public in April 1996 at about 21.
But meanwhile, a new competitor is quickly taking U.S. business away from
AVE. Boston Scientific, a big rival of AVE in Europe, got federal approval
in August to sell its stent in the U.S. Some analysts see it capturing 25% or
more of U.S. stent sales by the fourth quarter.
Even AVE executives acknowledge the threat. Says John Miller, chief
financial officer, "In coming years, we anticipate three major players" in the
U.S. stent market. The other big player is Guidant. It is possible that as soon
as year end, Mr. Miller adds, the three majors will each have about 30% of
the market.
So what will happen to stent prices during the scramble for market share?
"We're not about to talk about pricing," Mr. Miller says.
At the moment, stent prices seem to be holding up quite well. But bears take
their cue from Europe, where fierce competition among stent makers keeps
prices low. Investor Larry Feinberg of Oracle Partners in New York sees
U.S. stent prices diving to about $1,200 in the next year, from $1,600 or so
currently.
Even allowing for the market to grow, he says, AVE under that scenario
wouldn't come close to meeting profit estimates. He figures the company will
earn about $1.60 a share in the fiscal year ending June 1999. Currently,
analysts put AVE's 1999 profit at $2.57 a share.
"Everybody's in love with stents," Mr. Feinberg says. "They're just about the
fastest-growing medical devices ever. But we're short all of the stent
stocks," he says.
Oracle isn't the only bear that has sold AVE shares, hoping to buy them
later at lower prices. Despite attempts to diversify, the company remains
heavily reliant on stents and would be hit hard if prices fall.
Bears scented blood when financial chief Mr. Miller sold 100,000 AVE
shares in August. Less widely known, since early this year he has greatly
lessened his exposure to the company's fortunes.
In two fancy transactions involving puts and calls, disclosed in regulatory
filings, Mr. Miller hedged against a price change in a whopping 1.2 million
AVE shares, says analyst Bob Gabele of CDA/Investnet, who tracks insider
sales. Mr. Miller's move to hedge one-third of his total AVE stake of 3.6
million shares "is something I think investors should know about," Mr.
Gabele says.
Mr. Miller says the 100,000 AVE shares were sold by a trust set up for his
children, and the hedge was recommended by his financial advisers. "It
doesn't mean I believe prices [of AVE's products and stock] will come
down."
Makers of hot medical-technology products often have volatile profit cycles.
Johnson & Johnson dominated the U.S. stent market a year or so ago,
before AVE launched its stent. This year, J&J lost much of its stent sales --
and a couple of hundred million dollars in pretax profit -- to ambitious rivals.
But J&J now has a new stent for heart procedures awaiting federal
approval, and is working on stents for leg and other arteries. In a year or so,
if all goes well, "we could have four to six new stent products on the market
world-wide," a J&J spokesman says; "We intend to be a major player."
As for U.S. stents, he adds, "I think there's going to be pressure for lower
prices, but I don't know how much."
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