Changewave Research: Stents and Defibrillators

ChangeWave Research: Stents and Defibrillators

ChangeWave Research Report:

Next Boom in Cardiac Care: Stents and Defibrillators

Abstract

Cardiac device manufacturers are facing increased demand for their products due to the aging of Baby Boomers and recent changes in the definition of patient populations by payors, notably Medicare. Currently, two cardiac device categories of great interest are Stents (coated or drug-eluting) and Implantable Cardiac Defibrillators (ICDs).

Stents – Coated stents are about to be introduced to the market. Studies are showing these stents have a far lower "failure" rate (i.e., need for replacement) than traditional, bare-metal stents, but cost roughly $3,000 compared to $1,000 for traditional stents. Many analysts predict a rapid end to the sale of traditional stents despite their lower price. Others say the shift from traditional to coated stents will take several years.

Implantable Cardiac Defibrillators (ICDs) – Medicare recently approved reimbursement rates for the use of ICDs for a new population of patients – people at risk of heart failure but who have not yet had heart attacks and who may not have shown serious symptoms of an irregular heartbeat. This would greatly expand the patient population for such defibrillators.

During February 2003, we surveyed Alliance healthcare professionals about the outlook for coated stents and ICDs. Key findings include:

Traditional Bare-Metal Stents: Will Retain 70%-75% Share in First Year – While the new coated stents will make solid inroads – achieving 25% to 30% market penetrationin their first full year – this will still leave 70%-75% of the market in the hands of traditional stent providers. Importantly, only 25% of respondents said private payors will immediately begin paying for coated stents, another indication they’ll gain market share slower than many analyst forecasts.
Implantable Cardiac Defibrillators: Strong Growth Will Continue – Our survey findings point to ICD sales growing more rapidly than current analyst estimates. Many analysts don’t look past the cost of procedures when making forecasts for this kind of product. Tellingly, analysts within the industry and on the Street have underestimated ICD sales for the past four quarters.
Biggest Winner: Guidant (GDT) will benefit from both trends identified in this report, and will have time to develop a coated stent before its brand drops out of the marketplace for traditional stents.

Helping You Profit From A Rapidly Changing World ™

Table of Contents

Summary of Key Findings...... 3

Overview...... 3

(A) Stents...... 4

(B) Implantable Cardiac Defibrillators (ICDs)...... 5

Analysis...... 7

Appendix...... 10

ChangeWave Research Methodology...... 13

About ChangeWave Research...... 14

I. Summary of Key Findings

Overview

Cardiac device manufacturers are facing increased demand for their products due to the aging of Baby Boomers and recent changes in the definition of patient populations by payors, notably Medicare. Currently, two cardiac device categories of great interest are Stents (drug-eluting or coated) and Implantable Cardiac Defibrillators (ICDs).

Implantable Cardiac Defibrillators – Medicare recently approved reimbursement rates for the use of ICDs for a new population of patients – people at risk of heart failure but who have not yet had heart attacks and who may not have shown serious symptoms of an irregular heartbeat. This would greatly expand the patient population for such defibrillators. A major issue is the willingness of practitioners, insurance companies and patients to use these devices before serious onset of heart disease symptoms.

During February 2003, we surveyed 88 Alliance healthcare professionals about the outlook for coated stents and ICDs. We wanted to determine:

The rates of product adoption;
Factors supporting or inhibiting adoption rates;
The impact of these new products on two older technologies – i.e., bare-metal stents (uncoated) and pacemakers; and
The implications for the cardiac device marketplace

(A) Stents

1. Question Asked: How would you characterize the probable rate of change from traditional to coated stents over the next year?

Dramatic - 50% or more of all new procedures within one year28%

Rapid - 25-50% of all new procedures within one year47%

Typical - 10-25% or all new procedures within one year21%

Measured - less than 10% or all new procedures within one year 2%

Nearly one-half (47%) of Alliance healthcare respondents see a "Rapid" transition from traditional to coated stents within the coming year. An additional 28% said they expect an even more "Dramatic" rate of adoption of the new, coated stents.

2. Question Asked: Based upon statistical analyses of clinical trials, the new coated stents offer a materially better set of outcomes for patients than traditional metal stents, but also cost three times as much. How will insurance companies respond to the adoption of this new technology?

(a) They will begin reimbursing immediately for coated stents due to 25%

the perceived better efficacy of the stents

(b) They will begin reimbursing only after there is a groundswell of 46%

patient and physician feedback on the need for the new stents

reimbursement rate

(d) In most instances they will not reimburse for the increased cost of 1%

coated stents

Respondents overwhelmingly believe new coated stents will qualify for reimbursements over time, but only one-quarter (25%) expect it to start right away. The largest group (46%) said they see reimbursements beginning only after “a groundswell of feedback.”

A review of the member responses to the open-ended follow-up question on this issue is contained in the Appendix, pp. 10-12.

3. Question Asked: A key factor in the acceptance of new stents will be Medicare reimbursement rates. Due to computer issues, if Medicare does not develop a rate before April 1st, then there won't be any rates at least until July 1st. Would a slowdown in the implementation of Medicare reimbursement rates for coated stents affect how quickly they are adopted by non-Medicare patients?

Yes46%

No32%

Don't Know23%

By a 46% to 32% margin, respondents believe a delay in the introduction of Medicare reimbursement rates will effect the pace of adoption by non-Medicare patients.

4. Question Asked: Will the private sector reimburse at the same rate as Medicare, at a higher rate, or at a lower rate?

Same Rate31%

Higher Rate48%

Lower Rate 3%

Don't Know21%

A strong majority (79%) of respondents expect the private sector will reimburse at the “same rate” or a “higher rate” in comparison to Medicare.

5. Question Asked: Patient opinion often affects treatment procedures. Do you believe current patient knowledge about the new coated stents is adequate enough that a significant number of patients (i.e., 20%+) will be asking for the new stents this year?

Yes50%

No40%

Don't Know10%

One-half (50%) of respondents believe enough patients are “in the know” that at least 20% or more will be asking for the new coated stents this year.

(B) Implantable Cardiac Defibrillators (ICDs)

1. Question Asked: Do you believe the use of Implantable Cardiac Defibrillators will become accepted practice for this new patient population if and when Medicare grants the new reimbursement guidelines and rates?

Yes, but only in Medicare patients 5%

Yes, in both Medicare and Non-Medicare patients59%

No22%

Don't Know14%

A solid majority (59%) of respondents believe the use of ICDs will become widely used when Medicare introduces the new reimbursement guidelines and rates.

2. Question Asked: It is fairly common industry practice for insurance companies to provide reimbursement rates and guidelines similar to Medicare's. In this instance, however, that could prove expensive given the cost of these defibrillators and the procedures required to put them into a patient.

Do you think insurance companies will follow Medicare's lead and provide reimbursement rates and guidelines similar to Medicare's for implantable defibrillators?

(a) Yes, they will follow Medicare's lead35%

(b) No, they will not follow Medicare's lead 2%

patients and physicians put pressure on them to expand coverage

(d) Don't Know 9%

Respondents leave little doubt insurance companies will follow Medicare’s lead regarding its handling of ICDs. A majority of respondents (53%), however, said it will happen slowly and only when patients and physicians put pressure on them to expand coverage.

3. Question Asked: Among the manufacturers serving the implantable defibrillator market are Medtronic, Guidant and (by year-end) St. Jude Medical. These manufacturers are all increasing their sales forces to support the sale of implantable defibrillators.

Do you see any major differences between the implantable defibrillators manufactured by each of these companies, or is their sale solely determined by the ability of each company's sales force to educate and support physicians in using their device?

(a) There are major differences between the various devices on the market11%

(b) Sales are solely determined by the ability of each company's sales 31%

force to educate and support physicians in using their device

(d) Other 5%

By a margin of almost 3-to-1, respondents said the vendor’s sales force has the largest impact in determining the particular ICD device used by a physician.

4. Question Asked: Who do you believe is the vendor most associated with implantable defibrillators?

Guidant17%

Medtronic51%

St. Jude Medical 1%

Don't Know30%

Other 1%

Medtronic is the ICD company most associated with the device. Fifty-one percent (51%) of respondents picked Medtronic, while 17% chose Guidant.

5. Question Asked: There are several other new devices on the market that are hybrids of pacemakers and implantable defibrillators. When pacemakers need to be replaced, do you see such hybrid pacemaker/defibrillator devices as the product of choice if the replacement falls within Medicare treatment guidelines?

(a) Yes, new hybrid pacemaker/defibrillator devices will routinely be 60%

used to replace pacemakers if they fall within Medicare guidelines

(b) No, pacemakers will still be used to replace pacemakers16%

(d) Other 2%

Three-out-of-five (60%) respondents believe new combination devices (pacemaker/ ICDs) will routinely replace pacemakers once they are covered by Medicare.

Analysis

““2003 is shaping up as a watershed year for

cardiac device companies, especially ICDs.

Medicare recently doubled the target population

for these devices, and this will have a major impact

on the health of patients and the ICD industry.”

ChangeWave Director of Research, Michael Shulman

Traditional Bare-Metal Stents: Will Retain 70%-75% Market Share in First Year

While the new coated stents will make solid inroads – achieving 25% to 30% market penetration in their first full year – this will still leave 70%-75% of the market in the hands of traditional stent providers. This is slower than the current expectations of many industry analysts.

We find the probable rate of acceptance to be lower due to the unwillingness of payors, notably managed care companies, to pay for the new stents. Although coated stents reduce the incidence of restenosis (recurrent narrowing of a treated artery) from roughly 25% to below 10%, only one-fourth of respondents believe private payors will immediately begin paying for the new stents (coated stents cost $3,000 vs. to $1,000 for bare stents).

Thus, while some analysts claim coated stents will be the standard within a year, we expect coated stents to gain market share more slowly – both due to the unwillingness of private payors to reimburse for the much more expensive stent and a fierce determination by traditional stent providers to maintain revenues and share.

Bottom Line: Coated stents will achieve a market penetration of 25% to 30% in their first full year on the market. But this is slower than current analyst forecasts due to the unwillingness of private payors to reimburse for the much more expensive stent. Guidant’s experience of selling traditional bare-metal stents in Europe validates this conclusion – despite competing against coated stents for nine months in 2002, their European stent sales grew in double digits.

Implantable Cardiac Defibrillators: Strong Growth Will Continue

The survey findings point to ICD sales growing more rapidly than current analyst estimates. Many analysts don’t look past the cost of procedures when making forecasts for this kind of product. Tellingly, analysts within the industry and on the Street have underestimated ICD sales for the past four quarters. Other key findings:

Payors are more willing to pay for ICDs in the new patient population than they are coated stents, in part, because the cost of treating heart failure – $75,000 to $150,000 – is so high. Nearly 9-of-10 (88%) respondents said private payors will follow Medicare’s lead in paying for ICDs; although a slight majority of respondents (53%) still believe it will happen slowly and only when patients and physicians put pressure on them to expand coverage.

By a margin of almost 3-to-1, respondents said the vendor’s sales force has the largest impact in determining the particular ICD device used by a physician. This suggests that sales force effectiveness is the critical factor in the sale of an ICD – giving the company most focused on ICD sales a decided edge.

Sixty percent (60%) of respondents say pacemaker sales will decline as the replacement market and previous population moves to ICDs. Patients currently using pacemakers and falling within the new patient guidelines will receive an ICD when it is time for their pacemaker to be replaced, possibly sooner.

Bottom Line:The ICD market is growing rapidly. The Bank of America estimates there are currently 300,000 eligible patients and only 80,000 “installs.” Importantly, this does not include the doubling of the target population to 600,000 with the coming adoption of new Medicare guidelines. The number of eligibles will also grow due to demographics (aging Boomers) by 25% plus per year.

Companies: Boston Scientific (BSX), Guidant (GDT), Johnson & Johnson (JNJ), Medtronic (MDT), St. Jude Medical (STJ)

Boston Scientific (BSX): The company has a relatively high exposure to the pace at which coated stents are adopted in the marketplace and analysts are expecting a coated stent on the U.S. market in December 2003. Their 2004 forecasts and a P/E north of 40 are at risk even if the company gets FDA approval in 2003.

Guidant (GDT): GDT is in a unique position – its stock has been hammered because it has failed to get a coated stent into trial, while its ICD sales continue to surprise analysts. The company will benefit from both major trends identified in this research and will have time to develop a coated stent before its brand falls completely out of that marketplace.

Johnson & Johnson (JNJ): JNJ will be first to market with coated stents – but sales could be slower than anticipated, not just because of payor resistance but also because they may not get FDA approval by March 31. Medicare updates its reimbursement rate system every quarter, and if JNJ does not have coated stents loaded in the system by the end of Q1, the stents will not be paid for in Q2. Also, while very profitable, stents are still but a small part of JNJ’s business.

Medtronic (MDT): MDT is a very strong player in the ICD market and will benefit more than expected from ICD sales. The company also has an ability to move pacemaker patients to ICDs due to its strong brand and sales force – 51% of respondents identified ICDs with Medtronic. The company, however, is highly diversified and these successes, while important, will have less of an impact than on Guidant.

St. Jude Medical (STJ): The company is getting traction in the ICD market and is enjoying rapid growth off a relatively narrow base. STJ is still losing share to Guidant and Medtronic but is not out of it yet. They need to gain more share in the ICD market.

The Winner – Guidant

Guidant (GDT) will benefit from both trends identified in this report – they will retain a much larger share of stent sales than currently forecast and their ICD sales will be greater than forecast.

The company’s ICD sales rate consistently tops expectations – it took 2.5 share points in ICD sales last year and this pace should continue in 2003. Notably, they’ve added 350 new sales people – and our findings show that a vendor’s sales force does have a large impact on this market.

Guidant’s business has been quite vibrant, but despite this the stock has been hit hard because it failed to get a coated stent into trial. However, the slower-than-expected adoption rates for coated stents – as highlighted in this survey report – points to Guidant having the time to develop a coated stent before its brand drops out of the marketplace for traditional stents.

Appendix

I. Question Asked: Based upon statistical analyses of clinical trials, the new coated stents offer a materially better set of outcomes for patients than traditional metal stents, but also cost three times as much. How will insurance companies respond to the adoption of this new technology?

(a) They will begin reimbursing immediately for coated stents due to 25%

the perceived better efficacy of the stents

(b) They will begin reimbursing only after there is a groundswell of 46%

patient and physician feedback on the need for the new stents