Cordis Corporation

(a Johnson & Johnson company) MS&E 270 Company Paper

Matthew Avery Max Chan Stephen Klein Yvonne Leung March 15, 2004

Cordis Corporation

Table of Contents
Introduction................................................................................................................................. 3 Stent Technology ........................................................................................................................ 5 Bare-Metal Stents.................................................................................................................... 5 Drug-Eluting Stents ................................................................................................................ 5 Players in the Stent Wars......................................................................................................... 8 Cordis...................................................................................................................................... 8 Boston Scientific..................................................................................................................... 8 Medtronics ............................................................................................................................ 10 Guidant.................................................................................................................................. 10 Cordis Strategy in the Stent Market ........................................................................................ 12 Cordis History...................................................................................................................... 12 R&D Strategies (Resource-Based View and Learning from Collaboration)........................ 12 Marketing Strategies (Porters Five Forces, Value Creation, and Game Theory)................ 13 Cordis Mistakes (Learning and Evolution) ......................................................................... 16 Cordis Alliance with Guidant in the U.S. Market ............................................................... 17 Recommendations for Cordis in the Future Hypercompetitive Environment ...................... 19 References................................................................................................................................. 21 Exhibits ..................................................................................................................................... 23 Exhibit 1: Cross-sectional view of coronary artery with plaque buildup ......................... 23 Exhibit 2: Balloon angioplasty procedure......................................................................... 23 Exhibit 3: Stenting procedure ........................................................................................... 24 Exhibit 4: Restenosis......................................................................................................... 24 Exhibit 5: World Wide Stent Market, 1996-2006 (estimate)............................................ 25 Exhibit 6: Stents................................................................................................................ 26 Exhibit 7: First In-Man Angiograms................................................................................. 27 Exhibit 8: Financial Results of Stent Manufacturers, 2003 .............................................. 28 Exhibit 9: Cypher Sales, 2003-2005 (estimate) ................................................................ 29

2 of 29

Cordis Corporation

Introduction
Coronary artery disease (CAD or atherosclerosis) affects more than 5 million people in the United States, and is the leading cause of death among both men and women. CAD is caused by the buildup of plaques (consisting mostly of cholesterol and lipids) in the lining of the coronary arteries. The accumulation of plaque reduces blood flow through the arteries (see Exhibit 1). If left untreated, CAD may result in a heart attack. It is estimated that 1.1 million Americans will have a heart attack this year, and more than 40% of the people experiencing these attacks will die from them. There are many treatments for coronary artery disease. Most patients receive medication to help prevent heart attack and/or lower cholesterol levels. For patients at higher risk for heart attack, more aggressive treatments are necessary. The two most common procedures are percutaneous transluminal coronary angioplasty (PTCA, also known as balloon angioplasty. See Exhibit 2) and coronary artery stenting. Both of these treatments are minimally invasive, nonsurgical treatments which allow patients to avoid coronary artery bypass surgery. Coronary stents are small, slotted, metal tubes which are implanted at the site where an artery is impeded from plaque buildup. In general, stents are implanted by interventional cardiologist using the following procedure (see Exhibit 3): A guidewire is inserted into an artery in the groin and the doctor threads the guidewire to the diseased artery, which is observed on an x-ray screen. A balloon catheter mounted with a collapsed, or crimped, stent is inserted over the guidewire and positioned at the site of the blockage. Once the balloon catheter is in place, the balloon is inflated and the stent expands, pressing it into the inner wall of the artery. The balloon is then deflated and removed, with the stent remaining in place. The stent acts as a scaffold, holding the artery open and improving blood flow. Coronary stents have revolutionized the treatment of CAD. But arteries that are treated with stents often experience restenosis, which is when the treated artery re-narrows (see Exhibit 4). The exact mechanism of restenosis is not completely understood. What is known is that in regions where restenosis occurs, there is an overproduction of cells, similar to scar tissue. Patients who are implanted with bare-metal stents the only type of stents available prior to 2002 experience 10-20% restenosis rates. Restenosis is important because additional interventional procedures, or even heart surgery, may be required to eliminate reoccurring 3 of 29

Cordis Corporation blockage. Patients who have restenosis usually need additional intervention within 3-6 months. Repeat procedures typically carry a higher risk of complication. Drug-eluting stents (DES), first marketed in 2002, have a negligible restenosis rate. In 2003, 2.6 million stents were implanted worldwide, with total sales of $3.59 billion. The introduction of high-priced drug-eluting stents has caused a recent upsurge in the value of the stent market, and this growth is expected to continue for the next several years. Analysts estimate that by 2006, 3.7 million stents will be implanted annually with sales increasing to $6.5 billion (see Exhibit 5). Cordis Corporation (a subsidiary of Johnson & Johnson) is currently the leading producer of coronary stents. Cordis Cypher stent, approved by the FDA in April 2003, was the first drugeluting stent to be marketed in the United States. In the past year, the Cypher has captured more than 60% of the total stent market. Cordis competitors, Boston Scientific, Guidant, and Medtronic, are all working on drug-eluting stents of their own. Boston Scientific received FDA approval for their Taxus drug-eluting stent in March 2004. The Taxus is expected to provide fierce competition to the Cypher.

4 of 29

Cordis Corporation

Stent Technology
Bare-Metal Stents
The first coronary stent implantation was performed by researchers in 1987, but it took until 1993 for the FDA to officially approve the first stent for use in coronary intervention. Cook Inc. was the first company to gain marketing approval from the FDA for their Gianturco-Roubin stent (see Exhibit 6). This stainless steel stent was shaped as a coil, making it flexible but easily damaged and deformed during delivery to the artery. In 1994, Johnson & Johnsons Interventional Systems unit (which later merged with Cordis Corporation) introduced the Palmaz-Schatz stent. Its slotted tube design was a superior to Cooks stent and the PalmazSchatz was quickly adapted by interventional cardiologists. In the past decade, several companies have gained FDA marketing approval for their own stents. There are now more than 40 different bare-metal stents marketed in the United States. There are five characteristics which differentiate stents: Material of Construction: The material of construction of a stent must exhibit excellent corrosion resistance and biocompatibility. It is also desirable that the material be radiopaque (visible via x-ray) and that it not interfere with MRIs. Most bare-metal stents are made from stainless steel, though cobalt-alloy and tantalum are sometimes used because they provide better radiopacity, strength, and corrosion resistance than steel. Nickel-titanium (nitinol) stents are sometimes used because they are resistant to deformation and are self-expanding, but manufacturing stents from this alloy is difficult. Raw Material Form: Stents can be made from sheet, round or flat wire, and tubing. Most stent are made from wire or tubing. Stents made from sheet metal have to be rolled into a tubular shape. Fabrication Method: The choice of fabrication depends on the raw material form. Wires can be formed into stents by coiling, braiding, or knitting. Most stents are produced by laser cutting from tubing. Intricate patterns can be produced on tubes as small as 0.5 mm. Balloon expanding stents are cut in the crimped condition and then electropolished. Geometry: Stents can be manufactured in a variety of shapes. These geometries fall into five types: coil, helical spiral, woven, individual rings, and sequential rings. The first three geometries are the most popular. Additions: These include grafts, radiopaque markers, and coatings. Stents made from stainless steel and nitinol have poor radiopacity. To improve x-ray visibility, gold and platinum markers are often attached to stents. Coatings include electroplating to enhance x-ray visibility and polymer coats which elute drugs (see the next section).

Drug-Eluting Stents
Development and Clinical Trials of Cordis Cypher 5 of 29

Cordis Corporation In 1995, Cordis began investigating the possibility of manufacturing a drug-eluting stent. The concept was to coat a bare-metal stent with a polymer layer which would contain an embedded drug. Once implanted, the drug would be released from the polymer matrix, and would continue to be released over a long period of time. Choosing which drug to use on their stent was a complicated decision. Several pharmaceutical agents were evaluated, including Taxol (paclitaxil), which is commonly used as an anti-cancer agent. Cordis deemed Taxol to be too hazardous to patient safety because the dosage range over which Taxol is efficacious is very close to the drugs toxicity level. In 1997, Cordis settled on using sirolimus in their drug-eluting stent, and they entered into an exclusive licensing agreement with Wyeth Pharmaceuticals, who produce the drug and market it under the brand name Rapamune. Sirolimus was chosen because it is a potent cytostatic agent, capable of inhibiting the cellular growth associated with restenosis, is highly stable, and is capable of being formulated into a polymer matrix. Additionally, it is efficacious over a wide range of concentrations and is non-toxic at high concentrations. In 1999, Cordis finished the initial development of what would become the Cypher stent. The Cypher is made from laser-cut 316-stainless steel and is coated with a polymer matrix which carries sirolimus (See Exhibit 6c). The embedded drug is released from the polymer at a controlled rate, providing continued therapy over a period of 15-30 days. Pre-clinical animal studies were performed in this year and the first in-man clinical studies began in December 1999 at a research center in Sao Paulo, Brazil. These first in-man trials produced exceptional results, where 44 of 45 patients showed no restenosis two years after stenting (see Exhibit 7). Cordis then launched two large-scale clinical trials in order to seek FDA and EU regulatory approval. The first clinical trial, called RAVEL, was launched in Europe in 2000. The SIRIUS clinical trial was launched in the U.S. in 2001. Both of these clinical trials were random, double-blind, controlled studies. The patients in these trials exhibited more than a 90% reduction in restenosis when compared to the control group, who had bare-metal stents implanted. Of every100 patients tested, 14 fewer had restenosis, and the major adverse cardiac event (MACE) rate was zero. In addition, the stent was tested in various kinds of situations in a diverse patient pool to ensure its efficacy in a wide range of cardiac problems. A variety of diameters and widths are available to treat more specified occlusions.

6 of 29

Cordis Corporation Launch of Drug-Eluting Stents In April 2002, the Cypher received approval from EU regulators based on the results of the RAVEL trial. At this time Cordis also began marketing the Cypher in the Middle East, Asia, and Latin America. The Cypher was quickly adopted in Europe and Cordis did not face competition in the drug-eluting stent market until Boston Scientific launched their Taxus stent in February 2003. The Taxus is coated with paclitaxil, the drug that was earlier rejected by Cordis. Clinical studies suggest that both stents are equally efficacious, but anecdotal evidence from cardiologists suggests that the Taxus is easier to implant. In April 2003, the FDA approved the Cypher for the U.S. market. This approval was met after the Cypher had already successfully endured clinical trials involving more than 50,000 patients in 60 countries. Boston Scientific received FDA approval for the Taxus in March 2004.

7 of 29

Cordis Corporation

Players in the Stent Wars

(see Exhibit 8 for a comparison of the financial results of all stent manufacturing companies)

Cordis
With the introduction of Cypher into the U.S. market, Cordis quickly gained 60% of the total stent market share. In the fourth quarter of 2003, Cypher sales totaled $470 million. The Cypher has a list price of $3195 and an average sale price of $2800. It is estimated that hospitals can purchase the Cypher in bulk at a cost of $900-$1100 each. In 2003 the Cypher had $1.4 billion in sales worldwide, which is 15% lower than analyst projections (see Exhibit 9). It is predicted that the launch of Boston Scientifics Taxus will cause the value of the drug-eluting stent market to grow rapidly and should reach total sales of $3.3 billion in 2004. By the end of 2004, drug-eluting stents should account for 42% of all stents sold in Europe and 80% of the U.S. market. In the U.S., doctors estimate that Boston Scientific will gain more than 60% of that market. Doctors attribute the lower usage of the Cypher to two factors: poor deliverability and potential MACEs. First, cardiologists claim that Cyphers structural characteristics make it difficult to implant successfully and precisely at the point of occlusion. Second, a number of deaths, stirring litigation, have made physicians wary of Cypher use in some cases. Additionally, the Cypher is three times more expensive than the average stainless-steel stent. Hospitals and managed care companies have pressured doctors to use the cheaper bare-metal stents when possible. To date, however, U.S. patients have received nearly 400,000 Cypher stents, and very few have required repeat procedures. With these numbers, despite projected competition, Johnson & Johnsons stock has risen 2%, with overall company earnings per share of $2.95. In 2004, J&J predicts almost 10% sales growth, in part due to Cyphers success. As the only drugeluting stent available in the U.S., Cypher was used in more than 50% of coronary angioplasty patients in Q4 2003 and constituted 76% of total money spent on stents.

Boston Scientific
Boston Scientific is a leading developer of medical technologies used in cardiac electrophysiology, a field that focuses on the heart's electrical system. They also manufacture devices for the diagnosis and treatment of arrhythmia (abnormal heartbeats). 8 of 29

Cordis Corporation In 2003, Boston Scientific spent $452 million on research and development, and recorded net sales of $3.48 billion. For the second half of 2003, Taxus brought in $159 million of revenue, all from international sales that stretched from Europe, South America, to parts of Asia except Japan. Boston Scientifics Taxus stent is the biggest product ever for the firm. The company predicts that its net income will more than triple due to revenue from the Taxus, from $500 million in 2003 to $1.8 billion by 2005. The Taxus received European approval in February 2003 and FDA approval in March 2004. Boston Scientific claims that it ended 2003 with 56% of the European DES market and 78% of the intercontinental markets (overseas markets excluding EU and Japan). Cordis disputes these numbers, and claims that the Taxus only has 40% of the European DES market and 45% of the intercontinental market. In the overseas market, Taxus logged sales of $95 million in Q4 2003, compared with $80 million for rival Johnson & Johnson's Cypher stent which was the only approved product in U.S. On November 21, 2003, a Delaware District Court judge initially rejected an injunction Cordis sought against Boston Scientific to keep the Taxus from entering the U.S. market. The lawsuit has been rescheduled for trial in June 2005, by which time the Taxus will already have been in the U.S. market for 15 months additionally, the disputed patent is only valid until November 2005. The slow movement of the court system is fortunate for Boston Scientific. By the time the case is decided in 2005, the Taxus will have already built its customer base. Even if Boston Scientific loses in court, the Taxus will only be forced off the market for five months at most. It is believed that limited availability of Cordis Cypher is one of the reasons its sales growth has disappointed Wall Street in recent months. As a result, Boston Scientific built a large inventory of the Taxus stent in preparation for its expected FDA approval. Now that the Taxus has been approved, Boston Scientific says its effort in the coming quarter will be focused on successfully launching the Taxus. Boston Scientific has already begun a Phase IV trial of the Taxus stent in order to carefully monitor any possible side effects, including blood clots. Phase IV trials, which are follow-up safety trials, aren't normally begun until after a drug or device is launched. However, Boston Scientific is beginning its trial now, with volunteers, in the hopes of getting real data as soon as possible so that patients and physicians know the risk of blood clots. The reason for this 9 of 29

Cordis Corporation is because in October 2003, the FDA issued an advisory warning to doctors about the risk of potentially fatal blood clots with the Cypher. The FDA has stressed that it believes the stent is safe but the safety concerns have hurt Cordis sales. Those risks are small, and also exist with bare-metal stents, but uncertainty about the level of risk for blood clots associated with the Cypher has made some members of the medical community hesitant to adopt the Cordis product. The new Taxus is proving a strong competitor to Johnson & Johnson's Cypher stent in markets where they are both sold. Taxus is favored by many doctors because it is easier to insert in arteries. Cypher is perceived by many doctors as not the most deliverable stent on the market, and that will hurt Cordis once Taxus becomes available.

Medtronics
Medtronic received conditional approval from the FDA to begin Phase III clinical trials for its drug-eluting stent, Endeavor, in February 2004. The Endeavor uses a unique drug and coating technology, both of which are licensed from Abbott Laboratories. The Endeavor utilizes Medtronics newest technology, the Driver stent, which is made from a cobalt-based alloy that is stronger and denser than stainless steel. The new Driver stent has thinner struts and better deliverability in the vessel while maintaining radial strength and radiopacity. This bare-metal stent was approved in by the FDA in July 2003.

Guidant
Guidant, once the worlds largest maker of stents, is now falling behind its rivals in the rapidly expanding DES market. In March 2002, its actinomycin-D-coated stents failed in clinical trials and was not proved efficacious in preventing restenosis. In its attempt to gain rights to use the anti-cancer drug paclitaxel as an alternative, Guidant agreed to sign a distribution agreement with medical device maker Cook Inc. that allowed the firm to sell paclitaxel-coating stents in the market. Boston Scientific sued Guidant for infringing on the exclusive licensing rights to use paclitaxel given earlier in 1997 to only Cook and Boston Scientific by Angiotech Pharmaceuticals. Calling the Guidant-Cook agreement an unlawful act, the judges ruling forced Guidant to consider acquiring Cook for $3 billion. Boston Scientific reacted by filing a lawsuit to prevent Guidant from using existing clinical data co-generated by itself and Cook. Again the court ruled against Guidant. As a result, any effort made by Guidant to obtain FDA approval of a 10 of 29

Cordis Corporation paclitaxel-coated stent would have to be accompanied by success in new clinical trials. Upon disappointing failure in the preliminary clinical trials, Guidant decided to abandon the Cook acquisition in early 2003. As a result, Guidant never had a chance to market paclitaxel-coated stents despite its efforts. The prolonged jury trial has delayed Guidants entry into the DES market. Guidant is now developing the Champion, an everolimus-eluting stent (everolimus, marketed by Novartis as Certican, is similar to sirolimus), which is expected to enter the market in late 2006.

11 of 29

Cordis Corporation

Cordis Strategy in the Stent Market

Cordis History
Cordis Corporation was established in 1959 as a medical device manufacturer in Miami, Florida. The company has grown rapidly since then and gained recognition for being an innovator and leader in developing products for treating cardiovascular diseases. Its mission is to deliver high quality products and services to meet the needs of doctors, nurses and patients in the field of cardiology. Cordis has created a wide portfolio of products, including guidewires, balloons, catheters and stents many of these technologies have successfully become the industry standard. In 1996, the company merged with Johnson & Johnson Interventional Systems. Cordis currently employs 5,300 people worldwide. Cordis parent company, Johnson & Johnson, it the largest healthcare company in the world. J&J has a market capitalization of $158.2 billion with $42 billion of sales and $7.2 billion of net income in 2003. J&Js medical devices and diagnostics business units generated 36% of this revenue.

R&D Strategies (Resource-Based View and Learning from Collaboration)

Cordis was committed to developing a core competency of producing efficacious drugeluting stents. The idea of constant release of a drug that prevents restenosis, through the polymer coating on conventional stents, was a stunning innovation. In an attempt to gain a competitive advantage over its rivals through developing core capabilities, Cordis spent years of research in identifying the best drug among hundreds of candidates for its Cypher stent. Cordis R&D team believed that sirolimus-eluting stents would completely abolished restenosis, thus making the drug a valuable resource to the firm. Sirolimus has been a trademark drug of Wyeth Pharmaceuticals. Cordis realized that it was strategically important to make the resource inimitable, rare and non-substitutable, so that the relative advantage generated from it could be sustained in the competitive and rapidly dynamic industry environment. The led Cordis to negotiate an exclusive worldwide license agreement with Wyeth for the localized delivery of sirolimus in certain fields of use, including delivery via vascular stenting. This was a strategically optimal move because the collaboration filled in missing pieces of Cordis value chain, and at the same time allowed the firm to save time and money by skipping the drug

12 of 29

Cordis Corporation development process. Leveraging on this outside resource, Cordis was be able to focus on its core competency and commit its research capacity in developing a more effective stenttechnology. Three large-scale clinical studies were conducted using Cypher sirolimus-eluting stents. SIRIUS, a large-scale U.S.-based clinical trial, involved a total of 53 U.S. treatment centers and 1058 patients. The SIRIUS population contained substantial numbers of patients with high risk of restenosis. The rationale for choosing tough-to-treat patients in the clinical trial was to pick a patient population that would display the greatest improvement in restenosis rate between the treatment and control groups. Cordis believed that they would be able to show a remarkable difference between the treatment group and the control group, allowing them to make it clear to the FDA and customers that the Cypher drug and stent combination was safe and efficacious. A unique aspect of the Cypher clinical trials was analysis of the economic benefits provided by the new technology. Normally it takes at least two years to get Medicare to approve government reimbursement for a new type of treatment. By choosing a patient population where they could show a large improvement in treatment, Cordis hoped to get Medicare reimbursement for the Cypher approved more quickly. This strategy worked, and Cordis was able to get Medicare to approve reimbursement for the Cypher before the product was even launched. According to Mr. Ward, Cordis believed that being first to market in the stent industry was not as important as in other technology industries. Interventional cardiologists have not proven to be loyal customers. If several products have similar quality of performances, doctors tend to choose whatever that is readily available. Doctors are also excited about trying new products this is one reason why they are eager to use the newly launched Taxus. Many cardiologists say that they are anticipating switching from the Cypher to the Taxus.

Marketing Strategies (Porters Five Forces, Value Creation, and Game Theory)
The marketing arena for stents has become increasingly complicated. It is a very competitive market, and in the near future, many competing stents will be highly comparable. Stent companies like Cordis will have to become more aggressive with their marketing strategy. One major marketing disaster that affected the perception of Cordis Cypher stent were the few early cases of major adverse cardiac events, such as clotting, that resulted in death. Although many stent implantations have this possibility, the press surrounding these MACEs has 13 of 29

Cordis Corporation been devastating to Cordis sales. Some cardiologists claim that they will not use the Cypher for fear of similar outcomes. Information from the Director of the Methodist Hospital Catheterization Lab (Houston, Texas), Katrina Dunn, elucidates the complexity of the stent marketing atmosphere. In general, stent prices are increasing due to the adoption of drug-eluting stents, which are three times the price of bare metal. Methodist Hospital spent $1 million purchasing Cypher stents last year. Cordis sells this product in a tiered approach wherein a hospital receives a discount for purchasing the stent in bulk, with prices varying between $900 and $1100, depending on the quantity purchased. Using this strategy, Cordis improves its market share by providing incentive for Methodist, one of the biggest stent customers in the U.S., to use Cypher. Cath labs like Methodist Hospital purchase specific stents when pressured by the cardiologists that use the facilities for their procedures. Doctors hear about these products through trade journals (ex., Circulation) and industry meetings like the American College of Cardiology. In the past, drug companies were allowed to pay for recreational activities, such as vacations, as a part of a marketing scheme to encourage doctors to use their products. These activities have recently decreased because of new industry guidelines forbidding these practices. Sales reps are only allowed to provide educational information to doctors about the product theyre selling, such as relevant clinical trial results. Stent companies often try to involve a large number of physicians in their clinical trials as a way to pre-market their product. Mike Ward explains that Porters Five-Forces clearly plays a key role in stent competition. The barriers to entry are large, and it is unlikely that any company outside the Big Four Guidant, Medtronic, Cordis, and Boston Scientific will have the capital or core competencies to compete in the DES market. However, while Cordis and Boston Scientific have the only drug-eluting stents currently available, products from Guidant and Medtronic will be available in the near future. Buyers have a great deal of power in this market. A stents perceived deliverability will have the greatest influence on what stent doctors choose to use while the drug pharmacokinetics and pricing will have little affect. According to Mike Ward, cardiologists are fickle customers. They like test the latest equipment, and if they see results that are at least as good as their old selections, they may switch completely. This fickleness removes the primary incentives for being first to market. Stent interchangeability makes if very difficult to market

14 of 29

Cordis Corporation stents and maintain a high market share. Mr. Ward estimates that when cardiologists sample Taxus, even if it delivers results at the same level as the Cypher, up to 80% percent may switch. Interestingly, the buying power of doctors does not translate into bargaining power over price. Doctors are mostly insensitive to pricing when choosing a stent. For this reason, stent companies are not expected to enter into a price war over drug-eluting stents. They will maintain relatively high prices, thus keeping margins high. Additionally, the suppliers, such as the partner pharmaceutical companies, do not wield much bargaining power since stent companies often have access to similar drugs from many comparable sources. Industry rivalry represents the largest force for competition. The Big Four are consistently involved in litigation over intellectual property, and all companies utilize game theory to outmatch their competitors. For example, Cordis reduced the Cyphers price to meet the expected list price of Taxus. More significantly, the understanding that the Cypher has poor deliverability has led to the massive campaign by Boston Scientific to advertise Taxus as a more deliverable stent. In turn, Cordis will promote the Cypher by emphasizing safety of sirolimus versus the potential toxicity of Taxol and by highlighting the extensive clinical trial data available for the Cypher, which shows the long-term safety of Cordis product. Cordis will be able to point to exceptional results from specific customers, such as Methodist Cath Lab, where only 1 in 1000 patients returned for a repeat procedure after receiving the Cypher stent. Game theory is a central part of the strategies of all companies in this market since the products are highly comparable. Cordis strategy has been complicated by supply problems. The tight product specification required by the FDA force Cordis to discard half of the Cypher stents they manufacture. As a result, Cordis is not able to make enough Cypher stents to meet demand. While 99% of cath labs want the Cypher, Cordis cannot supply such a large demand. In one sense, Cypher lies at the center of the value creation zone, having scarcity, appropriability, and high demand. The hospitals supplied by Cordis are especially appreciative that they have been included by Cordis, while those denied are alienated from both the product and the company. Katrina Dunn claims that some cath labs confused lack of supply capability with arrogance in providing the stent, and as a result, many cath labs will use the Taxus instead of the Cypher since they feel Cordis has established poor public relations.

15 of 29

Cordis Corporation Cordis wanted to bundle the Cypher with its other delivery products, giving physicians a discount for using them in tandem. However, since Cypher was the only DES available, they feared litigation over monopolistic behavior. With the introduction of Taxus, however, Cordis is expected to begin bundling the Cypher with their other products. Despite these strategies, Mr. Ward believes that the key to marketing strategy is the relationship with the physicians. Since products are similar, a personal relationship with doctors may increase the likelihood of business.

Cordis Mistakes (Learning and Evolution)

Cypher Supply Shortages When the Cypher was first introduced in April 2003, Cordis reputation took a beating from physicians because of their inability to adequately supply the new stent. Prior to the Cyphers launch, the FDA had indicated to Cordis that the Cyphers quality specifications would be within a certain range. When the FDA granted marketing approval for the Cypher, they made a last-minute change to Cordis product license agreement. This change tightened the product specifications for the Cypher and forced Cordis to discard half of the 100,000 stents they had already manufactured. Cordis was now in a difficult situation. They could delay the launch of the Cypher, allowing them time to build inventory so that when it launched they would be able to provide their product to every cardiologist who wanted it. Cordis instead decided that patients should have access to the better product sooner. Because Cordis didnt have enough Cypher stents for every hospital, initially they only sold the new stents to larger hospitals and those institutions who had been Cordis supporters. As a result, those customers who werent supplied immediately felt Cordis was being haughty and came to view both Cordis and the Cypher stent negatively. These tight product specifications remain a problem for Cordis, and the company continues to have trouble producing enough quality Cypher stents to meet demand. Although they have the capacity to make 19,000 stents a week, only half of the manufactured stents are able to meet the FDA quality requirements. This problem has hurt Cordis image and greatly decreased the confidence that customers place in the firm. If they could have better communications with FDA, they would probably avoid this disaster. Poor Deliverability

16 of 29

Cordis Corporation Another problem facing Cordis stents is their deliverability. Compared against many of the bare-metal stents in the market, Cypher stents are believed to have a poor delivery system which makes them more difficult to implant. Doctors complain that it is difficult to get the Cypher through tortuous vessel paths. Although physicians can get the Cypher into most patients successfully, it can take a lot of time and some patients need extra preparation prior to insertion of the stent. Sometimes they end up needing a longer stent or need multiple stents instead of just one. As a result, poor deliverability creates problems in both cost and efficiency. This contrasts the Cypher sharply with the Taxus, which doctors believe is an easier stent to place in blocked arteries and is particularly effective for diabetic patients, who are a large percentage of the market. Since stents are a price-insensitive product, when all the competing players have drug-eluting stents on the market, the main factors will be who has the most deliverable stent and who has the best sales and marketing team. Cordis says that the Cypher can be maneuvered as easily as Taxus and that there isnt enough data to show which stent works better for diabetics. Despite Cordis marketing efforts, physicians perception is that the Taxus is more deliverable and many plan on switching to Boston Scientifics stent as soon as possible.

Cordis Alliance with Guidant in the U.S. Market

In early 2004, Cordis was expecting the FDA to approve Boston Scientifics Taxus any week. Cordis was desperately looking for a way to protect their dominant market share in the U.S. At the end of 2003, the majority of all stents implanted in the U.S. were Cypher stents. Analysts anticipated that by the end of 2004, 80% of all stents implanted in the U.S. would be drug-eluting stents, and that the Taxus would claim 65% of the DES market. The Taxus is already providing fierce competition in Europe, where it nearly evenly splits the drug-eluting stent market with the Cypher stent. In late February 2004, Cordis announced an alliance with Guidant. Cordis granted Guidant the right to co-market the Cypher, with each company covering its own marketing and sales expenses. Additionally, both companies agreed to immediately settle all current litigation between the companies regarding patents, and to license certain patents. In exchange, Guidant agreed to assist Cordis in the development of an improved stent delivery system for the Cypher based on Guidants superior Vision delivery system technology. One of the major weaknesses of the Cypher is that it is more difficult to implant than the Taxus. The deal with Guidant will give

17 of 29

Cordis Corporation Cordis access to technology to improve the delivery system for the Cypher, eroding the competitive advantage of the Taxus. Additionally, the FDA has recently created additional clinical trial requirements for stent manufacturers which are expected to lengthen the timeline for introducing modifications to stents. Mike Ward, Manager of Key Accounts for Cordis, said the following regarding the Guidant alliance: The other thing is about six months ago the FDA added some additional clinical trial requirements [for companies who are thinking of developing or modifying drug-eluting stents] which has pushed everyones timeline back one or two years. That is something devastating to our business because if we want to fix the deliverability problem, we need to take more clinical trials to modify the stent. Whereas if Cordis partners with a company that has a very well-known and good quality deliverability system that works with the stent, that will cut our timeline by a year. Gaining access to Guidants delivery technology will allow Cordis to accelerate the introduction of a new delivery system for the Cypher because they will be using technology which has already been approved by the FDA. Assuming a quick clinical trial could be performed this year, a Cypher stent with a modified delivery system could be launched in the first half of 2005. This deal has the immediate effect of increasing the size of the sales force promoting the Cypher. Cordis had a sales force of approximately 180 people, and its estimated that Guidant has 200 sales representatives. This combined sales force will be competing fiercely with Boston Scientifics 160-person sales force. This alliance is beneficial for Guidant because it creates some activity for their idle sales force. Once the market leader, Guidants sales of bare-metal stents had been struggling in the past two years do to competition from the Cypher and Taxus. Guidants own drug-eluting stent, the Champion, is not expected to be approved in Europe until Q1 2005, and the year after that in the U.S. The terms of the deal stipulate that the co-marketing arrangement will end as soon as Guidant launches their drug-eluting stent in the U.S. Despite this alliance, analysts suggested that Taxus achieve market leadership by the end of 2004. The reason for this is that doctors view the deliverability of a stent as a function of both the delivery system and the stent itself. The joint Cypher/Vision product will be a better offering than the current Cypher stent, but it may not be as compelling a stent option as Taxus.

18 of 29

Cordis Corporation

Recommendations for Cordis in the Future Hypercompetitive Environment

Although Cordis Cypher has enjoyed nearly a year of being the only drug-eluting stent on the market, Boston Scientifics Taxus was launched this month and will likely take the majority of Cordis market share. Boston Scientific has built a large inventory of the Taxus and has said they will begin supplying hospitals immediately. The DES market will become hypercompetitive in the coming years. By 2006, projections suggest that four drug-eluting stents will be available in the U.S., with the introduction of Medtronics Endeavor and Guidants Champion. Since these products are likely to be highly substitutable with respect to performance and applicability, they will compete in several areas, such as deliverability, pricing, and pharmacological considerations. While these three factors could vary from stent to stent, both cardiologists and marketing executives at Cordis and Medtronic estimate that differences in deliverability will be the main arena for competition. There will likely be little variation in the pharmacological properties of these drug-eluting stents. The sirolimus compound used by some of these products is almost completely non-toxic, and can already be loaded into the polymer coating of a DES in high enough concentrations to provide sustained dosage over time. Because restenosis typically happens within six months of stenting, a sustained delivery of sirolimus for a month or longer, which the Cypher already provides, has proven sufficient to prevent restenosis. While some trials have shown different results for the incidence of restenosis, the discrepancies are not large between competing stents. Doctors will simply not distinguish enough between a stent that exhibits 1% restenosis and one that shows 2% restenosis. Additionally, no company wishes to pulverize the market by initiating a price war. Although the prices will probably decrease as new entrants appear, prices will be held in check by the companies so they do not erode their margins too greatly. One of the main ways that Cordis will be able to increase their margins is by improving the quality of their manufacturing processes to produce a higher yield of viable stents. The difficulty of manufacturing a DES is expected to be an issue for all players in this industry. As emphasized earlier, the deliverability of a stent will be the way in which stents differentiate themselves, and the success of a stent will be dictated by its perceive deliverability. The perceived ability to implant the device by doctors will dictate their choices, and the most deliverable stents will take over the market. Current projections indicate that the Medtronic stent 19 of 29

Cordis Corporation will be the most deliverable, based on its cobalt-chromium design. In order to stay competitive, Cordis will need to improve the Cyphers deliverability. Beyond deliverability, the only room for new products will likely be in niche markets. For example, diabetic patients have a higher risk of adverse complications with stents, with restenosis rates 50-80% higher than the average patient. Therefore, Cordis should attempt to develop products specifically targeting subsets of the population that have special medical issues. Although such a market will exist for smaller patient groups, the majority of the market will still belong to the most deliverable stent.

20 of 29

Cordis Corporation

References
Primary Interviews:
1. 2. 3. 4. Phone conversation with Dr. Milton Klein, M.D., Houston Cardiovascular Associates (Houston, TX). Phone conversation with Katrina Dunn, Director, Methodist Hospital Catheterization Lab (Houston, TX). Phone conversation with Mike Ward, Manager, Key Accounts, Cordis. Phone conversation with Brian Donlon, Marketing, Stent Division, Medtronic.

Print References:
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. "Boston Scientific Announces Completion of FDA Inspection of Minnesota Drug-Eluting Stent Manufacturing Facility". The Wall Street Journal. Feb 6, 2004. "Boston Scientific Sees 4Q EPS at or Slightly Above 14c-16c". The Wall Street Journal. Jan 13, 2004. "Court Sets Schedule for Drug-eluting Stent Litigation Between Boston Scientific and Johnson & Johnson". The Wall Street Journal. Jan 30, 2004. Eisinger, Jesse. "Ahead of the Tape - No More Tears Please". The Wall Street Journal. Jan 20, 2004. "FDA Issues Advisory on J&J Stent". The Wall Street Journal. Oct 30, 2003. "FDA Updates on J&J Stent, Calls Product Safe, Effective". The Wall Street Journal. Nov 26, 2003. Golden, Daniel. "Boston Scientific Stent is Approved". The Wall Street Journal. Mar 5, 2004. "Guidant Deal Sideswipes Angiotech Shrs". The Wall Street Journal. Feb 24, 2004. "Guidant Gains Immediate Access To Drug Eluting Stent Market". The Wall Street Journal. Feb 24, 2004. "J&J: Two-Year SIRIUS Trial Follow-up Shows Sustained Outstanding Performance of CYPHER Sirolimuseluting Coronary Stent". The Wall Street Journal. Nov 11, 2003. "Johnson and Johnson's Cordis Guidant to Co-market Stents". The Wall Street Journal. Feb 24, 2004. Johannes, Laura. "Boston Scientific Cites Stent Gains Over Rival J&J". The Wall Street Journal. Feb 3, 2004. Johannes, Laura. "Boston Scientific Plans Attack On U.S. Coated-Stent Market". The Wall Street Journal. Feb 2, 2004. Johannes, Laura and Tomsho, Robert. "J&J's Stent Patent Suit Has Limited Shelf Life." The Wall Street Journal. Jan 30, 2004. "Judge Denies J&J's Injunction Against Boston Scientific". The Wall Street Journal. Nov 24, 2003. "Medtronic Applies to FDA for Drug Eluting Stent Trial". The Wall Street Journal. Dec 2, 2003. "Medtronic Gets FDA Conditional Approval to Begin the ENDEAVOR III Drug Eluting Coronary Stent Clinical Trial". The Wall Street Journal. Feb 12, 2004. "Medtronic Optimistic About its Drug-Eluting Stent Effort". The Wall Street Journal. Feb 26, 2004. "Pepine, Carl J., Holmes, David R., et al. "Coronary Artery Stents". JACC. Vol 28, No.3. Sept 1996: 782-94. Rosenberg, Daniel. "Boston Sci CEO Says Expect Quick Adoption of New Stent". The Wall Street Journal. Mar 5, 2004. Rosenberg, Daniel. "Boston Scientific Promises Stents Aren't Its Only Focus." The Wall Street Journal. Feb 23, 2004. Rosenberg, Daniel. "Boston Sci Says Wall Street Underestimates Its Potential". The Wall Street Journal. Feb 23, 2004. Rosenberg, Daniel. "Boston Sci Stent Approval Changes Face of US Market". The Wall Street Journal. Mar 5, 2004. Rosenberg, Daniel. "Doctors, Hospitals Eagerly Await Boston Sci's Taxus Stent". The Wall Street Journal. Feb 20, 2004. Rosenberg, Daniel. "Guidant, J&J Alliance Seen As Attempt to Fend Off Threat." The Wall Street Journal. Feb 25, 2004.

21 of 29

Cordis Corporation
30. Rosenberg, Daniel. "Guidant Deal with J&J Raises Its Stent Market Profile". The Wall Street Journal. Feb 24, 2004. 31. Rosenberg, Daniel. "J&J's 4Q Stent Sales Raise Concern About Market Penetration." The Wall Street Journal. Jan 21, 2004. 32. "Soring Sorin". The Economist. Jan 8, 2004. 33. Stoeckel, D., Bonsignore, C., and Duda, S. "A Survey of Stent Designs". Min Invas Ther & Allied Technol 2002: 11(4) 137-147. 34. Ulwick, W. Anthony. "Turn Customer Input into Innovation". Harvard Business Review. Jan 2002. 35. Winslow, Ron and Burton, Tom. "J&J and Guidant From Alliance Before Launch of a Rival's Stent". The Wall Street Journal. Feb 25, 2004.

Web References
36. Boston Scientific. Feb, 2004. <www.bostonscientific.com> 37. Boston Scientific Press Release. Feb 18, 2003. Boston Scientific. Feb, 2004. http://www.bostonscientific.co.uk/common_templates/articleDisplayTem...task=tskPressRelease.jhtml&section Id=2&relId=24,25&uniqueId=ABPR2162 38. Boston Scientific Reports Zero Restenosis in Drug-Eluting Stent Trial. Oct 10, 2001 Oct 16, 2001. GlobalTechnoScan.com. <http://www.globaltechnoscan.com/10thOct-16thOct01/restenosis.htm> 39. Boston Scientifics Stent Hopes. Feb 2, 2004. Fool.com. Feb, 2004. <http://www.fool.com/News/mft/2004/mft04020207.htm> 40. Cordis. Feb, 2004 www.cordis.com 41. Cypher Sirolimus-eluting Coronary Stent. Feb, 2004. <http://www.cypherstent.com/home.jhtml?page=viewContent&contentId=CYPHER_aacs&Heading=2&loc=U SENG&menuNumber=-1> 42. Drug Eluting Stent News. May 21, 2003 Mar 4, 2004. Angioplasty.org. Feb, 2004 <http://www.ptca.org/news_des.html> 43. FDA. Feb, 2004. www.fda.gov 44. Guidant. Feb, 2004. www.guidant.com 45. Johnson and Johnson. Feb, 2004. <www.jnj.com> 46. Medtronic. Feb, 2004. www.medtronic.com 47. Sirolimus-Eluting Stents Offer Reduced Rates of Restenosis Over Standard Stents Among Patients With Complex Coronary Lesions. Oct 7, 2003. New England Journal of Medicine. <http://www.docguide.com/news/content.nsf/news/C6C3AC952C0D629A85256DB8006714C6?OpenDocume nt&c=Cardiology%20Other&count=10>

Analysts Report Sources:

48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. Bear Stearns Equity Research CIBC World Markets Emedsecurities Inc. Fulcrum Global Partners JPMorgan US Equity Research Leerink Swann & Company Lehman Brothers Equity Research MedaCorp MedTrack Morgan Stanley Equity Research Oppenheimer PiperJaffray

22 of 29

Cordis Corporation

Exhibits
Exhibit 1: Cross-sectional view of coronary artery with plaque buildup

Exhibit 2: Balloon angioplasty procedure

Balloon angioplasty, or percutaneous transluminal coronary angioplasty (PTCA), uses a small inflatable balloon to open an obstructed coronary artery. During the procedure, a balloon catheter is placed across the lesion and the balloon is inflated. This procedure widens the vessel and increases blood flow.

23 of 29

Cordis Corporation Exhibit 3: Stenting procedure

Exhibit 4: Restenosis

24 of 29

Cordis Corporation Exhibit 5: World Wide Stent Market, 1996-2006 (estimate)

25 of 29

Cordis Corporation Exhibit 6: Stents

(a)

(b)

(c) (a) Johnson & Johnson Interventional Units Palmaz-Schatz stent (1994). (b) Cook Inc.s Gianturco-Roubin stent (1993). (c) Cordis Corp.s Cypher stent (2003).

26 of 29

Cordis Corporation Exhibit 7: First In-Man Angiograms

Angiograms of a patients left anterior descending (LAD) coronary artery. In the picture on the left, note the occlusion where a minimal amount of blood is flowing through the artery due to plaque buildup, In the center picture, the implanted stent has reopened the artery and now a healthy amount of blood flows to the heart muscle tissue. Based on the drug elution, two years later the patients artery still exhibits healthy blood flow. Angiograms like these are key factors in drug-eluting stent success, both medically and from a marketing standpoint.

27 of 29

Cordis Corporation Exhibit 8: Financial Results of Stent Manufacturers, 2003

Johnson & Johnson Inc (JNJ) VALUATION MEASURES Market Cap (intraday): Enterprise Value (7-Mar-04): Trailing P/E (ttm, intraday): Forward P/E (fye 29-Dec-04): PEG Ratio (5 yr expected): Price/Sales (ttm): Price/Book (mrq): Enterprise Value/Revenue (ttm): Enterprise Value/EBITDA (ttm): FINANCIAL HIGHLIGHTS Fiscal Year Fiscal Year Ends: Most Recent Quarter (mrq): Profitability Profit Margin (ttm): Operating Margin (ttm): Management Effectiveness Return on Assets (ttm): Return on Equity (ttm): Income Statement Revenue (ttm): Revenue Per Share (ttm): Revenue Growth (lfy): Gross Profit (ttm): EBITDA (ttm): Net Income Avl to Common (ttm): Diluted EPS (ttm): Earnings Growth (lfy): Balance Sheet Total Cash (mrq): Total Cash Per Share (mrq): Total Debt (mrq): Total Debt/Equity (mrq): Current Ratio (mrq): Book Value Per Share (mrq): Cash Flow Statement From Operations (ttm): Free Cashflow (ttm): 9.17B 6.90B 749.00M 607.00M 406.80M 157.50M 2.43B 2.04B 8.85B 2.98 5.17B 0.201 1.733 8.672 752.00M 0.92 1.72B 0.603 1.35 3.377 1.47B 4.71 948.30M 0.35 2.899 8.782 1.44B 1.19 2.47B 0.284 1.138 7.17 41.86B 13.933 10.00% 25.85B 11.72B 7.20B 2.399 16.40% 3.48B 4.112 9.20% 2.05B 786.00M 472.00M 0.559 N/A 3.70B 11.198 14.20% 2.80B 499.60M 425.50M 1.287 -46.00% 8.57B 6.981 19.60% 5.77B 2.70B 1.88B 1.53 62.60% 16.46% 29.71% 9.48% 18.11% 9.69% 16.41% 14.86% 23.10% 17.19% 24.45% 13.58% 20.05% 11.50% 13.11% 21.91% 31.26% 29-Dec 31-Dec-03 31-Dec 31-Dec-03 31-Dec 31-Dec-03 25-Apr 31-Jan-04 157.70B 154.02B 22.15 16.35 1.38 3.76 6.12 3.68 13.14 35.66B 35.54B 77.87 18.6 1.2 10.4 13.06 10.22 45.22 22.27B 21.75B 55.56 25.63 1.91 5.9 7.98 5.88 43.54 58.85B 59.87B 31.73 25.69 1.64 6.75 6.66 6.99 22.14 Boston Scientific Corp (BSX)

Guidant Corp (GDT)

Medtronic Inc (MDT)

28 of 29

Cordis Corporation Exhibit 9: Cypher Sales, 2003-2005 (estimate)

Cypher Line Sales ($ in millions) % % Year U.S. Chg. Foreign Chg Worldwide 2003A $1,110 $280 $1,390 2004E $1,785 61% $415 48% $2,200 2005E $1,135 -36% $480 16% $1,615 Sources: Company data and Fulcrum Global Partners LLC % Chg 58% -27%

29 of 29