JJ Acquires Synthes; Blockbuster Deal Part of a Bid to8200;Restore Confidence in the Company

J&J Acquires Synthes; Blockbuster Deal Part of a Bid to Restore Confidence in the Company

It’s been a tough year for Johnson & Johnson—between bribery allegations and multiple recalls, the healthcare conglomerate has been generating headlines on almost a daily basis. J&J executives, however, believe they’re almost at the top of what has been an uphill battle.

At the company’s annual meeting of shareholders in April, CEO William Weldon vowed that his embattled firm would return “stronger than ever” after this year’s string of quality problems.

While J&J continues to make headlines, its latest tango with the media resulted from a decision that significantly could improve its tarnished image: On April 27, the New Brunswick, N.J.-based firm purchased Switzerland-based orthopedic manufacturer Synthes for $21.3 billion in cash and stock. The deal was the biggest purchase in J&J’s 125-year history.

“Many would argue that it would make sense for J&J to hold off on a merger of this magnitude until it takes on the challenges it has faced in the last couple years,” Aarti Shetty, senior industry analyst at Frost & Sullivan, told Medical Product Outsourcing. “[The year] 2010 alone saw many recalls from J&J in various businesses.”

The most recent of these recalls was the ASR XL Acetabular System and the ASR hip resurfacing system in August 2010. Both systems are manufactured by J&J subsidiary DePuy Orthopaedics Inc. In March, four surgeons reported at the British Hip Society Annual Conference in Torquay, England, that nearly half of all patients receiving the ASR XL Acetabular System in the United Kingdom will require revision surgery—21 percent after four years and 49 percent after six years.

According to the surgeons’ data, use of large diameter metal-on-metal bearings in primary total hip replacement should carefully be considered and possibly avoided. The data addressed only large diameter metal-on-metal implants but the doctors did not define “large diameter.” Still, the information was compelling enough to convince the surgeons to release the data to their colleagues.

As J&J dealt with the fallout from the surgeons’ data, the company experienced another setback early last month when the U.S. Securities and Exchange Commission (SEC) charged the firm with violating the Foreign Corrupt Practices Act (FCPA). The SEC complaint accused J&J subsidiaries of bribing doctors in Greece, Poland and Romania, as well as paying kickbacks to Iraq in order to win 19 contracts under the United Nations Oil for Food Program.

J&J did not admit or deny the SEC’s allegations, but acknowledged responsibility for the actions of its subsidiaries, employees and agents who made the improper payments. The company also agreed to pay more than $48.6 million in disgorgement and prejudgment interest, and a $21.4 million fine to settle parallel criminal charges.

“The message in this and the SEC’s other FCPA cases is plain—any competitive advantage gained through corruption is a mirage,” Robert Khuzami, director of the SEC’s Division of Law Enforcement, said after J&J agreed to pay the fines. “J&J chose profit margins over compliance with the law by acquiring a private company for the purpose of paying bribes, and using sham contracts, off-shore companies, and slush funds to cover its tracks.”

With its purchase of Synthes, however, the tide of bad news finally may be turning for J&J. Industry analysts believe the move can help the firm gain market share and become a formidable player in the trauma and spine sectors.

“[Synthes] has more than 50 percent market share in trauma, and a J&J and Synthes partnership in that space will bode very well for J&J, benefitting [their] overall business,” Shetty told MPO. “Synthes has only solid products, good global presence, participates in a relatively secure market, has grown in the last couple years and has only about $98 million in debt,” she said. “All these factors make Synthes a good option even at $20 billion.”

“Trauma has more long-term growth potential,” Shetty said of one of the few markets in which J&J does not have a top three business. Traditionally, large orthopedic implant manufacturers do not experience high growth rates due to the elective nature of hip and knee replacement surgeries. However, trauma and spine markets cover more non-elective types of procedures, which has been key to Synthes’ success.

Rick Wise, medical device analyst for Boston, Mass.-based Leerink Swan LLC, estimated that trauma is growing at a “high-single-digit rate” compared with approximately 1 percent growth for hips and knees.

Wise also noted that Synthes offers a “highly complementary” spine business that could create a market-leading player behind Medtronic Inc., which holds about 50 percent of the overall spine market share. A more consolidated industry position in both the trauma and spine market could provide J&J/Synthes with additional leverage (e.g., pricing, bundling opportunities, stronger negotiating power with hospitals) and a strengthened overall orthopedic market position going forward, Wise noted.

“You would be right to ask if we made mistakes, and yes, we did,” Weldon told J&J’s shareholders last month. “Our goal is to restore McNeil Consumer Health Care to the highest level of quality…thus restoring confidence in McNeil.”

Boston Scientific Scores Victory in Stent War with Cordis

The ongoing battle between Boston Scientific Corp. and Johnson & Johnson’s Cordis Corp. intensified last month when Boston Scientific won a motion for summary judgment of infringement, while Cordis was denied a request to delay jury trial.

The case concerns 2.25-millimeter stents; Boston Scientific and Cordis are the only U.S. manufacturers of these models.

Both companies accused the other of patent infringement in 2003. The jury ruled in favor of Boston Scientific on the grounds that Cordis’ Cypher and BX Velocity stents were in violation of the patent. The ruling was upheld on appeal.

Boston Scientific’s triumph over Cordis is a rare win for the company. The firm paid $716 million to Cordis in 2009 to settle 14 patent infringement suits for stent technologies. Not included in that group was a lawsuit regarding a drug-eluting stent. In February, Boston Scientific was denied a request to suspend the lawsuit pending review by the U.S. Patent and Trademark Office because it would give an unfair disadvantage to Cordis.

New Device Firm Considers Talent Pool in Location Decision

Breathe Technologies, Inc. is planning to move its headquarters from San Roman, Calif., to Orange County, Calif., by July. CEO Larry Mastrovich said the company most likely will settle in Irvine, Calif.

Company executives currently are scouting buildings for the firm’s corporate offices and manufacturing. They initially expect to fill 25 jobs in sales and marketing, clinical, engineering, and operations when the company opens in its new location, and an additional 45 positions in its third year.

Talent recruitment was the primary factor behind Breathe’s decision to move, according to Mastrovich. Chief competitors in the area include CareFusion Corp. and ResMed Corp. (both located in San Diego, Calif).

Breathe Technologies produces small devices for the treatment of chronic obstructive pulmonary disease and sleep apnea. The company recently received U.S. Food and Drug Administration approval for home use of its BT-VS2 portable ventilator.

Healthcare Changes Prompt Medtronic to Merge Sales Force

Medtronic, Inc. is combining its U.S. Cardiac and Vascular Group sales functions into one unified cross-divisional sales organization. The change was effective at the start of Medtronic’s new fiscal year on May 1.

The change comes in response to the challenges hospitals face as the healthcare environment evolves, as well as the increasing importance of the hospital administrator in the device selection process.

“Medtronic’s new market strategy reflects how large hospital systems are making device selection decisions today,” said David Hargraves, senior director, clinical supply chain at the University of Pittsburgh Medical Center in Pittsburgh, Pa.

David Roberts will serve as national vice president of Cardiac and Vascular Group Sales, a 2,700-person organization. Roberts formerly was vice president of sales for Medtronic’s Cardiac and Rhythm Disease Management business. Direct sales representatives will preserve their previous business unit focuses while reporting to the new national sales organization.

A Strategic Account Management team also has been created to augment the work of the traditional field representative by focusing on delivery of a cross-business portfolio of products and services to the cardiac- and vascular-focused hospital administrators. The Strategic Account Management team will report to the new sales organization.

“Our Cardiac and Vascular Group of businesses have historically focused primarily on clinicians as the primary decision makers for medical device selection for their patients,” said Michael Coyle, executive vice president and group president of the Cardiac and Vascular Group at Medtronic. “With the growing partnership between clinicians and administrators as they work together to address the changing healthcare environment, our strategy going forward is to leverage Medtronic’s breadth of talent, technologies, products and services across our 15 market segments to help hospital administrators address their unmet needs, while maintaining and strengthening our ability to serve clinicians and their patients. This new leadership strategy and structure positions Medtronic as the only medical device company capable of doing both.”

Businesses included in Medtronic’s Cardiac and Vascular Group are Cardiac Rhythm Disease Management, Structural Heart, Endovascular Innovations, Peripheral, Coronary, Renal Denervation, and Physio-Control. All sales leadership from these businesses will be included in the new structure except Physio-Control, which Medtronic is divesting.

Medtronic is headquartered in Minneapolis, Minn.

AstraZeneca Turns to Auction to Unload Device, Dental Business

In an effort to focus solely on its core medicine business, pharmaceutical giant AstraZeneca has begun a $2.1 billion auction of Astra Tech Inc., its dental implants and medical devices division. The move is in direct opposition with competitors such as Novartis International AG and GlaxoSmithKline plc, which are diversifying their market opportunities.

By mid-April, more than ten companies had submitted bids for Mölndal, Sweden-based Astra Tech, which makes catheters and breathing aids as well as dental devices. Bidders include private equity firms Bridgepoint and Cinven, both based in London, England, and PAI Partners of Paris, France. Private equity investment firm Warburg Pincus LLC of New York, N.Y., and orthopedic manufacturing conglomerate Zimmer Holdings Inc. of Warsaw, Ind., also placed bids. Some companies only are interested in dental implants, while others are interested strictly in medical devices.

Last year, AstraZeneca appointed JP Morgan Chase & Co. to conduct a strategic review of its Astra Tech division. JP Morgan is offering financing to bidders; second-round bids are expected toward the end of May.

AstraZeneca paid $1.1 billion in a settlement of protracted dispute with British and U.S. authorities last month. The company had set aside $2.3 billion for this potential liability, meaning profit targets for the year could be lifted by nearly 7 percent.

California Jury Sides With St. Jude in Trade Secrets CaseSt. Jude Medical Inc. was awarded $2.3 billion after a California jury found that a former employee and the Chinese medical device firm he founded stole trade secrets.

“We did not expect such a high damages result,” Rita Bojalian, senior counsel for St. Jude Medical, said about the case against former employee Yongning Zou and Suzhou, China-based Nervicon Co. Ltd. Pacesetter Inc., St. Jude’s cardiac rhythm management division, won $947 million for past damages against Zou and Nervicon in addition to $868.5 million for future economic loss and $500 million for punitive damages. The company initially had hoped for about $300 million excluding punitive damages. Pacesetter is located in Sylmar, Calif.

Zou, a former principal hardware designer, was accused of stealing a document relating to a crystal oscillator unique to St. Jude’s products.

Zou left St. Paul, Minn.-based St. Jude Medical in late June 2009 and became a shareholder in Nervicon, which was formed just weeks earlier. About one month later, Statek Corp., the manufacturer of the crystal oscillator, received a request from Nervicon to make a product using specifications that were identical to St. Jude’s—Nervicon also produced a document bearing the words, “SJM Part Number.”

Court documents show that Zou holds a 47.5 percent stake in Nervicon.

“Zou has and will continue to provide Nervicon with additional proprietary and confidential documents and information in effort to deceivingly and unfairly compete against St. Jude or its affiliates,” a statement from Pacesetter read in court documents.

“The jury told us they wanted to send a message: Don’t steal trade secrets from your company and expect to profit from them for yourself,” Bojalin said.

FDA Clears ION Stent From Boston Scientific

The latest generation of drug-eluting stent from Boston Scientific Corp. has been given the nod by the U.S. Food and Drug Administration (FDA). The ION Paclitaxel-eluting platinum chromium coronary stent system is the company’s third-generation drug-eluting stent technology.
The system incorporates a unique platinum chromium (PtCr) alloy designed specifically for coronary stenting. According to the company, the design offers greater strength in addition to enhanced deliverability and visibility. The thin-strut stent is designed for improved conformability, minimal recoil, and uniform lesion coverage and drug distribution.
“I look forward to using the ION stent in my daily practice, and I believe our patients will benefit from its acute improved performance,” said Louis Cannon, M.D., FACC, FACA, Heart and Vascular Institute program director at Northern Michigan Regional Hospital in Petoskey, Mich. “The platinum chromium alloy represents a leap forward in materials technology and will address many of the limitations found in older stent alloys. Exceptional stent deliverability offers cardiologists the potential to treat patients with difficult-to-reach lesions.”
According to Cannon, the stent’s low-profile delivery system facilitates precise delivery of the stent across challenging lesions.
Company officials are enthusiastic about the device’s U.S. launch. In part, their optimism is based on a year’s worth of market experience in Europe, where the stent received its CE Mark in May last year. Outside the United States, including CE Mark countries, the ION Stent System is sold as the Taxus Element.
“The company hasmade significant investments in the platinum chromium alloy, and our success with the PtCr Stent Series in Europe and other international marketshas confirmed that stent material really matters,” said Hank Kucheman, the president of Natick, Mass.-based Boston Scientific’s Cardiology, Rhythm and Vascular division. “We believe the PtCr platform sets a new standard for drug-eluting stent performance and represents the future of coronary stenting.”

The ION stent was evaluated as part of the company’s PERSEUS trial, which reported 12-month results in March 2010.