Johnson & Johnson Misses Beat
With Device for Cardiac Surgery
By RON WINSLOW
Staff Reporter of THE WALL STREET JOURNAL
September 18, 1998
Four years ago, Johnson & Johnson sparked a revolution in the treatment of coronary-artery disease with a new medical device called a stent.
Few devices have yielded such an immediate eye-popping bonanza for their manufacturer. Doctors rushed to use the tiny metal scaffold to prop open obstructed heart vessels. In just 37 months, the New Brunswick, N.J., health-care giant tallied more than $1 billion of stent sales and garnered more than 90% of a remarkably profitable U.S. market.
Then last fall, Guidant Corp. launched a competing stent in the U.S. "Within 45 days, we had gained a 70% market position," says Ronald W. Dollens, Guidant's president and chief executive officer. J.P. Morgan analyst Michael Weinstein characterizes the shift as "the most dramatic transfer of wealth between two companies in medical-device history."
Sharing the Market
Now, as the annual U.S. market for stents surges past $1 billion, Guidant shares more than 80% of it with yet another competitor, Arterial Vascular Engineering Inc. A fourth maker, Boston Scientific Corp., just won regulatory approval to enter the market. J&J's stent sales, meanwhile, are in free fall. Glenn Reicin, a Morgan Stanley analyst who pegged J&J's market share at 91% at the end of 1996, expects it to plummet to 8% by the end of this year.
"They were acknowledged to be the technology leader and to have an almost insurmountable lead," says David Fish, director of interventional cardiology research and education at the renowned Texas Heart Institute in Houston. "Somewhere along the line, they didn't anticipate the temperament of the marketplace."
How J&J, the revered marketer of baby powder, Band-Aids and Tylenol, won and lost the hottest medical-device market of the 1990s points up both the rewards of innovation and the perils of monopoly. Interviews with dozens of cardiologists and other industry insiders suggest that after doing almost everything right to get a breakthrough product approved by regulators, J&J did almost everything wrong to protect its franchise.
"Their stent changed cardiology and the treatment of coronary-artery disease forever," says Eric Topol, chairman of cardiology at the Cleveland Clinic, one of the world's leading heart centers. But "they didn't sustain the technology. They left the door open for the other manufacturers to come on the market with better designs."
Indeed, J&J was slow to develop next-generation versions of its technology, and left the impression among top doctors that it was banking on a strong patent to protect its product from competition. What appeared to be a master stroke to broaden its cardiology line -- its $1.8 billion acquisition of angioplasty-balloon maker Cordis Corp. -- also devolved into a culture clash that stalled product development and led to an exodus of Cordis talent.
Compounding these missteps, J&J angered many key customers with rigid pricing for its $1,595 device, balking at discounts even for accounts that purchased more than $1 million of stents a year. For hospitals' catheterization labs, where stent procedures are done, this exacerbated a budget-busting investment at a time when managed care and the national debate on health costs were putting enormous pressure on hospitals.
A Pool of Resentment
With no comparable stent options, many doctors felt gouged. The result was an astonishing pool of resentment among cardiology's highest-profile practices, which came back to haunt J&J as soon as new stents arrived in the U.S. last fall.
"Everybody was at our throats" over costs, says Louis McKeever, director of the catheterization lab at Loyola University Hospital in Chicago. "We were trying to do the best we could for our patients. I expected J&J should have participated in the effort."
J&J acknowledges that it didn't move fast enough to advance its device and that it misread a clientele with whom it hadn't previously done business. It says its Cordis acquisition was troubled by factors typical of the initial stages of mergers. But it staunchly defends its pricing strategy. The main problem, J&J maintains, was that insurers initially refused to reimburse hospitals for any costs beyond the standard angioplasty rate. The company mounted an aggressive and ultimately successful campaign to win higher insurance coverage.
'Back in the Race'
In any event, J&J says it now has a full pipeline of new products that will be competitive in what has become a crowded market. "We know we're getting kicked in the shins right now," says Robert W. Croce, a J&J group chairman in charge of the Cordis business line. "But we're doing a lot to get back in the race."
This is in a market that revolves around a tiny metal-mesh tube no thicker than a pencil lead, crimped on a tiny balloon that is threaded into the heart's arteries. At a blockage site, the balloon is inflated to deploy the stent, creating a scaffold resembling a ballpoint-pen spring that remains to keep the vessel open after the balloon is withdrawn.
When J&J introduced its device, known as the Palmaz-Schatz stent, in August 1994, cardiologists had long been frustrated by a major drawback in balloon angioplasty, their flagship procedure: the tendency of arteries to reclose or reclog after being opened with a balloon. In up to 5% of balloon-only cases, the vessel snaps shut abruptly within minutes or a few days -- a life-threatening event that often requires a risky emergency coronary-artery bypass operation. In addition, about 30% of the 400,000 angioplasties done annually in the U.S. fail within six months -- due to a renarrowing known as restenosis -- leading to further treatment.
J&J's stent all but eliminated the abrupt-closure problem, and cut the longer-term failure rate in half. As doctors leapt to embrace it, they tipped their hats to the company for its seven-year effort to get the device to market: It had persevered in the face of regulatory skepticism about safety and the failure of a competing stent that caused deaths. "The original J&J design had a very good track record that was honorably and painstakingly acquired," says the Texas Heart Institute's Dr. Fish. "J&J absolutely developed this market," adds Mr. Dollens of Guidant. "They took the early risks of whether this therapy would work at all."
And they reaped the rewards. In the first year after the U.S. launch, an estimated 100,000 patients received stents amid a frenzy of enthusiasm that promised soaring future sales. With gross profit margins estimated at more than 80%, analysts figured that a product that, at its peak, provided about 4% of J&J's annual revenue, accounted for about 8% of its bottom line. Moreover, competitors had to mount trials to show their products were as good as the Palmaz-Schatz standard before they could win regulatory approval.
But like most first-generation medical devices, the Palmaz-Schatz has limitations. Its width and rigidity make it difficult to use in narrow or sometimes gnarled coronary arteries of heart patients. It isn't easily visible in the X-ray pictures doctors use to guide them to the site of a blockage. And it comes in just one length -- about five-eighths of an inch -- requiring the use of two more stents to treat longer obstructions.
At first, these shortcomings were small annoyances. But the nation's 6,000 interventional cardiologists soon became impatient. This small cadre of physicians are medical-technology junkies who thrive on the latest and best products, who often work closely with manufacturers to improve existing devices and test new ones.
Since J&J was a newcomer to the catheterization lab, some doctors suspected the stent was a one-hit wonder. Others sensed that J&J was behaving more like a drug company, for which rapid product cycles are less important. "As a physician, I expect products to change every year," says Martin B. Leon, chief executive of the Cardiology Research Foundation at Washington Hospital Center, Washington, D.C., and a consultant to J&J on the device. "As a corporation, they couldn't understand that."
Stent Envy
Moreover, by early 1996, more-advanced stents from Guidant, AVE and other companies were available in Europe, where regulatory hurdles are lower than in the U.S. This led to an epidemic of stent envy among U.S. cardiologists.
J&J's Mr. Croce says the small unit that developed the stent was so focused on getting it to market, and meeting enormous demand, that it devoted little time or resources to the next generation. Once that effort began, he says, developers spent too much time modifying the original and didn't pay enough attention to ease-of-use features that cardiologists wanted.
The other big flaw in J&J's stent, according to cardiologists and hospital administrators, was its price. The stent's popularity provoked an explosion in unexpected costs in catheterization labs, typically crucial hospital profit centers. St. Joseph's Hospital in Atlanta, for instance, spent $2 million for stents in 1995 after buying hardly any the year before, one doctor says. Stent-related technology added sharply to the cost of a routine angioplasty procedure. But insurers generally continued to reimburse hospitals at regular angioplasty rates.
Still No Deal
Administrators and cardiologists at high-volume hospitals asked J&J for a break. At Our Lady of Lourdes Hospital in Lafayette, La., Stephanie Mayeaux, director of cardiovascular procedures, first sought a discount based on the number of stents her hospital used. Rebuffed, she pooled the purchases of a three-hospital system. Still no deal. Finally, she tried to leverage the buying power of a 300-hospital purchasing group. "J&J did not bend," she says. Major programs in Washington, D.C., Minneapolis, Chicago, New York and elsewhere were similarly frustrated.
J&J also alienated the prestigious Cleveland Clinic. "In their dealings with catheterization labs, there was a very strong sense of arrogance," the clinic's Dr. Topol says. When he and his associates sought better rates, they say, J&J officials suggested they could help doctors design "care tracks" to make the procedure more efficient. "They were implying that we didn't know how to manage our patient population," recalls Mary Heisler, manager of the catheterization lab.
J&J says the stent was a bargain in the U.S. compared to the $2,400 initially charged in Europe, and the $3,500 sticker price in Japan. And it was only $200 more than another stent on the U.S. market for a very narrow application. "We were never price-gouging," says Marvin Woodall, who headed the unit that brought the stent to the market and is now an international vice president for J&J. Today, the stent sells for about $1,000 in Europe, where competition has driven prices down, and about $3,000 in Japan.
The company says it has been vindicated by its competitors. Comparable stents from Guidant, AVE and Boston Scientific are similarly priced. And Mr. Croce says J&J eventually gave discounts to a dozen high-volume centers, including the Cleveland Clinic. "Doctors have short memories," he says.
When J&J launched its hostile bid to acquire Cordis late in 1995, many heart doctors believed both their technology and economic concerns would be addressed. Cordis had built a $500 million-a-year business in equipment used in angioplasty, including a high-pressure balloon favored by many cardiologists using the stent. Combining the companies, doctors felt, would yield new products and increase prospects for package pricing.
Culture Clash
But the anticipated synergy didn't develop. Former Cordis insiders say that J&J's top-down culture clashed with a more entrepreneurial approach that characterized Cordis under Robert C. Strauss, its chief executive officer. And though Cordis was much more experienced with catheterization-lab technology and in dealing with cardiologists, its managers felt that J&J's views prevailed on essentially all early decisions.
A stent that Cordis was about to launch in Europe was shelved. Efforts to combine J&J's stent with the high-pressure balloon foundered. Cordis's "core teams," adept at rapid product development by integrating marketing, R&D and manufacturing operations around specific business lines, were replaced by a more traditional structure that had such functions reporting to separate managers.
The new Cordis didn't come to market with a significant new product until last January -- nearly two years after the acquisition. Called the Crown stent, it was significantly outmatched by Guidant and AVE products when it was launched.
"People always underestimate what it takes to put two companies together," says J&J's Mr. Croce, but he defends the acquisition. "We're past a lot of the troubles," he says. But he readily concedes that the combination of J&J's inexperience with the cardiology industry and struggles with the Cordis integration were big factors in a "lag time" in product development.
By early 1997, the patience of many doctors with the Palmaz-Schatz stent was wearing thin. At the Cleveland Clinic, for instance, Dr. Topol became particularly frustrated after complications during an angioplasty procedure forced one of his patients to undergo an emergency bypass. "Had we had access to new stent designs, that would have turned things around" for her, he says. (The patient recovered.)
Top cardiologists, including Dr. Topol, urged the FDA to expedite approval of competing stents. Last October, the FDA cleared Guidant's Multi-link stent just 112 days after the company filed its application; by the end of December, it accepted AVE's stent. "These new stents are so much hands-down better," Dr. Topol says. "We needed them."
J&J was powerless to prevent the resulting rout. Discounts for what was perceived as inferior technology wouldn't work, and doctors weren't interested in J&J's argument that the Palmaz-Schatz stent had a proven track record.
Meantime, J&J's efforts on reimbursement began to bear fruit. Mr. Woodall headed an intense project to persuade insurers that they were underpaying for stent procedures. "They were benefiting because their patients weren't coming back for second and third angioplasties," Mr. Woodall says. The company's analysis of public data on 200,000 Medicare patients convinced Medicare officials to increase stent reimbursement by $2,300, or 26%.
The Next Wave
The new rate became effective last Oct. 1 -- just in time to benefit J&J's competitors. The next day, Guidant's stent hit the market at a list price no cheaper than J&J's device.
Now J&J has several new products in clinical trials, including the "miniCrown," for smaller arteries and a product intended to improve on the stent's track record in preventing restenosis. By the middle of next year, it expects to launch the Cross Flex LC, a "slick" stent, say doctors who have used it in clinical trials. That endorsement comes with irony for J&J -- the device is patterned after the old Cordis design the company rejected.
Mr. Croce says these products should convince skeptics the company is committed to the cardiology market. He says the only way the company can put to rest the resentment among key customers is with better products. "You can't sell everybody," he says. "But I think we have a decent following. When our technology matches up, they'll come back."
But Guidant, AVE and Boston Scientific are advancing their already-preferred devices as well. James J. Ferguson III, associate director of cardiology research at Texas Heart Institute, says J&J's road back to prominence in the market it created won't be easy. "J&J went out and poisoned the well," he says. "They have a couple of nice products in the pipeline, but they also have a huge backlog of ill will that is going to take a while to dissipate."
|
