CDU Associate

In a bid to expand its pipeline, especially giving itself an edge in the highly competitive drug-eluting stent (DES) market, Johnson & Johnson (J&J; New Brunswick, New Jersey) has pulled out its check book and has made a $1.4 billion all-cash offer for Conor Medsystems (Menlo Park, California). J&J, via its Cordis (Miami Lakes, Florida) unit, said the acquisition of Conor will provide it with a "new and unique" controlled drug delivery technology. This technology is currently employed on Conor's CoStar stent system, a paclitaxel-eluting cobalt chromium stent with a bioabsorbable polymer.

The CoStar is currently sold outside the U.S., and enrollment in its U.S. pivotal clinical trial has been completed, with the company expecting an approval in late 2007 or early 2008. It received its CE mark in February.

Cordis, whose Cypher sirolimus-eluting system was the first DES to be approved for marketing in the U.S. in April 2003, gains a potentially much quicker pathway to a second-generation product available immediately in Europe and by 2008 in the U.S. Prior to this deal, which still must be cleared by regulators on both sides of the Atlantic, J&J was not expected to have a next-generation DES available in Europe until 2009 and in the U.S. until 2010.

Nicholas Valeriani worldwide chairman, cardiovascular devices and diagnostics at J&J, said during a conference call that Conor's CoStar stent "is unique in its drug delivery mechanism. The design enhances control and direction of drug delivery, enabling a wider range of drug therapies and potentially increasing the range of clinical applications. The technology holds the potential for the delivery of multiple therapeutic agents that may be useful in the treatment of cardiovascular, peripheral vascular and neurovascular disease."

That technology features a design focus on drug delivery, with the CoStar incorporating hundreds of small reservoirs into which drug/polymer combinations can be loaded. That's distinctly different from the other versions of DES on the market, or coming to it in the near future, which universally involve a drug coating on a conventional mesh stent.

The reservoirs on the Conor stent are designed to allow enhanced control of drug release. In addition, the CoStar features bioresorbable polymers absorbed by the body after the drug is released, which in concert with complete drug discharge may solve the problem of delayed stent thrombosis, an important issue to the medical community with these devices as of late.

Valeriani also said his company believes the acquisition greatly bolsters its DES portfolio, making it "the most comprehensive in the market in terms of stent design, delivery platform, polymer science, drug and drug delivery mechanisms."

The Conor buy received mixed reviews from Wall Street.

"On the one hand, the acquisition adds much-needed and immediate muscle to J&J's drug-eluting stent pipeline," Bank of America analyst Glenn Novarro said in a note. But the lack of long-term data and pending U.S. trial results on Conor's stents add "considerable risk to the deal," he added.

Marshall Gordon, an analyst at Credit Suisse who has an "underperform" rating on J&J, wrote that the acquisition was a "step in the right direction," noting that J&J's drug-eluting stent pipeline is almost nonexistent. The big issue, he wrote, is whether an intellectual property (IP) challenge from Boston Scientific (Natick, Massachusetts) could delay arrival of the CoStar stent.

Larry Biegelsen, of Prudential Financial, said he believes Boston Scientific stands to lose the most if this deal goes through. He said in a research report that the CoStar "may have safety advantages over the Taxus" and he believes "J&J's resources will improve the chances of Conor prevailing in its IP litigation with Boston Scientific."

Conor stockholders will receive at closing $33.50 for each outstanding Conor Medsystems share. The $1.4 billion estimated value of the deal is based on Conor's 42.7 million fully diluted shares outstanding, net of estimated cash. The deal, which still requires Conor Medsystems stockholder approval, is expected to close in 1Q07.

While the CoStar stent is an important device, Conor is not a one-device company. It also is developing a dual-drug DES called the SymBio. The SymBio, currently in a clinical trial called GENESIS, is a pimecrolimus/paclitaxel-eluting coronary stent system. Enrollment in that clinical trial, conducted in the Middle East and Europe, is expected to be completed in late 2006 or early 2007.

The SymBio will be engineered to first release the pimecrolimus drug into the artery to prevent early inflammation, with the paclitaxel then releasing more slowly to have a second impact on later proliferation. The goal will be to develop a stent that targets high-risk patients, such as diabetics. In this strategy, what is left is just the bare metal stent.

J&J CFO Robert Darreta said during the conference call that, upon closing, the company is expected to incur an estimated one-time after-tax charge of about $600 million, reflecting the write-off of in-process research and development charges. He said the transaction will be dilutive to 2007 earnings and will be "essentially break-even in 2008."

The company currently has distribution deals with Biotronik (Bulach, Switzerland) and St. Jude Medical (St. Paul, Minnesota) in Japan, but Biegelsen said he understands that change of control provisions allow Conor to terminate those agreements.