Conor Medsystems May Get Edge
Amid Issues Among Stent Makers

The growing debate over the safety of drug-coated cardiac stents may be good news for Conor Medsystems Inc.

Conor, a small company based in Menlo Park, Calif., is trying to compete in a more than $5 billion market dominated by medical-device giants Boston Scientific Corp. and Johnson & Johnson. The company may have a chance with an innovative stent that could dodge the blood-clotting worries now rattling the sector. Conor's "CoStar" stent is unlike anything else on the market.

Conor is by no means a sure bet, as it needs more supporting data, and its competitors could create major legal and marketing barriers. But as the safety chatter grows louder, the spotlight on Conor could intensify.

"In my opinion, they certainly will benefit from this debate," said Suraj Kalia, an analyst with Rodman & Renshaw who rates Conor market outperform and has $30 price target on Conor's stock.

Conor shares are up 20% so far this year despite a slide last month following a warning for its third-quarter revenue. Investors already have shown a tendency to separate Conor from other stent makers when signs of market uncertainty arise -- Conor shares gained 6.1% on June 22, a day both Johnson & Johnson and Boston Scientific slipped on stent-market concerns.

At issue for Conor are coronary stents, or tiny metal tubes that prop open arteries. Older, bare-metal stents showed a tendency to trigger scarring that can lead to repeat procedures, so companies developed stents coated with drugs to prevent that from occurring.

Now there is mounting concern that drug-coated stents may increase the risk of blood clots months or years after implantation, a condition called late thrombosis. The cause is uncertain, but polymers used to attach medication, and the medication itself, may play a role.

The issue has triggered debate among companies. Boston Scientific recently acknowledged a slight late-clotting risk with its Taxus drug-coated stent, compared with bare-metal predecessors, and said it believes this is an industry issue. But Johnson & Johnson has argued otherwise, as has Medtronic Inc., a medical-device company with a growing stent program.

Enter Conor's CoStar stent. The device starts out like a drug-eluting device, emitting medication from tiny reservoirs rather than a coating. After six months, the medication is gone and the polymer is absorbed by the body, leaving CoStar as a bare-metal stent.

Conor believes this transformation bolsters CoStar's safety case. The company's trials so far follow 1,000 patients for as long as a year, and 145 patients for two years, and show no late thrombosis.

CoStar went on sale in certain international markets last year, and was rolled out in Europe early this year. Conor hopes for U.S. introduction in late 2007 or early 2008.

Medtronic's Endeavor drug-coated stent may be Conor's toughest near-term competitor. Endeavor studies -- which are more extensive than CoStar's -- also don't show any evidence of late thrombosis to date. Endeavor has done well in Europe and should hit the U.S. market ahead of CoStar next year, pending regulatory approval.

Scott Ward, president of Medtronic's vascular business, said it is too early to really comment on CoStar, though he noted CoStar uses the same drug as Boston Scientific's Taxus. Conor doesn't "have very much clinical data out in the marketplace," Mr. Ward said.

Michael Boennighausen, Conor's chief financial officer, said the company plans to differentiate CoStar by highlighting its unique technology. Given a choice between two stents with strong safety performance, Conor believes doctors will lean toward a stent where the polymer disappears after six months.

Doctors seem intrigued by bio-absorbable polymers, but as the clotting issue is debated, they also seem bent on seeing more information. The problem with all drug-coated stents, CoStar included, is the need for more long-term data, said Eric Topol, chairman of the department of cardiovascular medicine at Case Western Reserve University in Cleveland.

"It's really too early to know" if a bio-absorbable polymer is the answer, Dr. Topol said. "A lot of things sound really good theoretically."

Conor faces some notable risks. If its safety data turn sour, it loses its key edge. Another threat is patent suits from the imposing competition -- and the medical-device sector is a litigation minefield for even the biggest companies.

Court battles are a concern, but shouldn't block U.S. market entry, analysts said.

Then, there is marketing clout, which Conor's competitors have in abundance. Conor, in contrast, recently disclosed it is expecting weaker third-quarter revenue on a sequential basis, down from $11.3 million in the second quarter, because of summer marketing snafus in Europe by private distributor Biotronik.

Conor plans to market CoStar in the U.S. on its own. Citigroup analyst Matthew Dodds thinks Conor should be fine, and noted Medtronic's rapid start-up with bare-metal stents several years ago. Still, Conor's U.S. market share ceiling is around 8% to 10% as a stand-alone company, said Rodman & Renshaw's Mr. Kalia.

Which leads to another major question -- will Conor be sold? It might be hard for Johnson & Johnson to ignore Conor's potential to enliven the Johnson & Johnson stent pipeline, which isn't drawing rave reviews from analysts.

Write to Jon Kamp at jon.kamp@dowjones.com