Guidant Corporation

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Guidant Corporation

111 Monument Circle, 29th Floor
Indianapolis, Indiana 46204
U.S.A.
Telephone: (317) 971-2000
Toll Free: (800) 405-9611
Fax: (317) 971-2040
Web site: http://www.guidant.com

Public Company
Incorporated: 1994
Employees: 11,000
Sales: $3.23 billion (2002)
Stock Exchanges: New York
Ticker Symbol: GDT
NAIC: 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing; 551112 Offices of Other Holding Companies

Guidant Corporation is a leading designer and developer of cardiovascular medical products, marketing a variety of devices that aid surgeons in the treatment of cardiovascular disease. Based in Indianapolis, Indiana, the company maintains facilities in California, Minnesota, Texas, Washington, Puerto Rico, and Ireland.

Origins

Guidant began as a big but beleaguered division of Eli Lilly & Co., the giant pharmaceutical company based in Indianapolis, Indiana. During the early 1990s, the medical devices and diagnostics (MDD) division of Eli Lilly accounted for roughly 20 percent of the company’s more than $6 billion in annual revenues. One of the core products designed and manufactured by MDD was a defibrillator, a device that used electrical impulses to restore normal rhythm to a rapidly beating heart. In May 1992, MDD was forced to halt shipment of several of its defibrillator models because of manufacturing problems, which was not the only difficulty troubling Eli Lilly. The drug company was suffering from a list of problems during the early years of the decade. Patents had expired on important, revenue-generating drugs, and the company had failed to expand internationally at the same pace as its competitors. The company’s chief executive officer, Vaughn D. Bryson, was fired after 18 months at his post, a period during which Eli Lilly lost one-third of its market value. His replacement, Randall Tobias, a former executive at AT&T Corp., arrived in June 1993 and promised a fresh new look at the company’s operations. By the fall of 1993, industry analysts were speculating that Tobias might sell MDD. In 1994, the rumors were put to rest, having become reality. Eli Lilly spun off MDD, setting it free with its existing management team and saddling the new, independent entity, which was renamed Guidant Corporation, with hundreds of millions of dollars of debt.

The majority of Guidant’s senior executives at the beginning of the 21st century were former Eli Lilly executives. The original team that presided over the transformation from MDD to Guidant included its leader, Ronald W. Dollens. Dollens earned a Bachelor of Science degree in pharmacy from Purdue University before receiving a Master of Business Administration degree in marketing from Indiana University. In 1985, Dollens was named senior vice-president of sales, marketing, and product development for Advanced Cardiovascular Systems, Inc (ACS), a company owned by MDD. In 1988, he was promoted, becoming president and chief executive officer of ACS. In 1991, the retirement of a senior executive at Eli Lilly’s pharmaceutical division prompted the promotion of other executives, including Ronald A. Matricaria, MDD’s president. Dollens took Matricaria’s place in Eli Lilly’s hierarchy, becoming president of MDD, from which position he reported to Bryson, the short-lived Eli Lilly chief executive officer who was serving as the company’s executive vice-president at the time. When MDD was spun off in 1994, Dollens became president and chief executive officer of Guidant.

Guidant operated in a fiercely competitive industry, an industry in which only companies with the resources to fund continuous research and development could hope to succeed. Guidant manufactured a range of products, including the tiny wires, balloons, and catheters used by surgeons to clean and repair clogged arteries. The company’s medical devices offered a less-invasive alternative to treating cardiovascular disease, the leading cause of death in the United States. Open-heart surgery, often the only choice for those suffering from damaged arteries, required that a patient’s breastbone be cracked in half and an incision be made the length of a patient’s torso, procedures requiring hours on the operating table. Guidant’s devices offered an alternative, one embraced by both patients and the healthcare industry, whose emphasis on cost-containment generally favored less-invasive surgical procedures. By using Guidant’s devices, a surgeon could snake a small wire into a patient’s clogged arteries and clear them without cutting the patient open. The financial rewards for leading the market in medical devices designed to treat the cardiovascular system were vast, but Guidant was not the only company vying for control of the market. Market dominance would require constant investment in research and development and a consistent display of technological innovation.

To Guidant’s benefit, the company was supported by a number of products, giving it a broad base from which to compete. The company designed and made defibrillators. It also made coronary stents, which were mesh-like metal tubes that were inserted into a clogged artery by a catheter. By inflating the catheter, the stent expanded and adhered itself to the artery wall, enabling the free passage of blood. Guidant made guide wires to lead the catheters through the arteries and it made dilatation catheters, which were long, skinny tubes with a balloon attached to the end. The tubes were inserted through the skin and into an artery, winding their way toward the heart until reaching a clogged spot. The inflation of the balloon at the clogged spot opened the artery, thereby improving blood flow. In Guidant’s business, the life cycle for these and other products made by the company was brief. Generally, once a new product appeared on the market, its ability to generate revenue lasted less than two years. Nearly 60 percent of the company’s sales were derived from products less than 12 months old, which placed a premium on new product development. As Guidant set out on its own in the mid-1990s, the company was spending $160 million annually on research and development, endeavoring to beat its competitors to market with a superior product.

Product Innovations in the Mid-1990s

In 1995, the company’s commitment to churning out new products was on display. During the year, Guidant introduced 25 new products, helping it to generate $931 million in sales and post $101.1 million in net income. Among the products introduced were several new perfusion catheters, which increased blood flow during angioplasty procedures, and the Ventak Mini defibrillator, implanted in a patient for the first time in August 1995. The Ventak Mini provided an example of the transitory life span of Guidant’s products. Its successor, the Ventak Mini II was implanted in a patient for the first time in March 1996, seven months after the introduction of the Ventak Mini. The race to improve existing technology was the price paid to keep ahead of competitors, and in the Ventak Mini II Guidant had achieved this objective. The Ventak Mini II measured 59 cubic centimeters, 13 percent smaller than its predecessor, and ranked as the world’s smallest defibrillator, thereby making it preferable over models manufactured by rivals Medtronic, Inc. and Ventritex, Inc.

Although Guidant devoted considerable resources to developing new products internally, the company could not go it alone. The $120 billion medical device industry was a world of partnerships and alliances, with larger companies frequently forging agreements with smaller companies. The largest competitor in the medical device industry during the mid-1990s was Minneapolis-based Medtronic, Inc., a company with sales of $2.4 billion in 1996. Guidant generated $1 billion in sales in 1996, one of fewer than 20 companies with at least $1 billion in sales. At the lowest tier of the industry were hundreds of small companies conducting narrowly focused research projects. Although these small companies generated a fraction of the revenue collected by Medtronic and companies of Guidant’s size, they were often working on cutting-edge technology. Companies like Guidant, which sold a variety of products, could not expect to be in the vanguard of research in every product category composing their operations. Smaller companies, in turn, lacked the financial resources and the infrastructure to bring their innovations to market on their own. Consequently, the two sides often joined forces, something Guidant began doing in earnest in 1997.

By pursuing alliances with other companies, Guidant did not sacrifice its own internal research and development efforts. The company invested 16 percent of its sales to research and development projects, which was more than twice the industry average. Instead, the research conducted by smaller companies was work the company could not ignore. “Most revolutionary advances come out of the small, emerging, venture-capital-backed device companies,” an industry analyst explained in the December 8, 1997 issue of the Indianapolis Business Journal. Between April and December 1997, Guidant spent more than $250 million in cash and stock on alliances with five companies. In April 1997, Guidant agreed to invest an undisclosed sum in Neuroperfusion, Inc. which was developing a catheter-based treatment for strokes caused by blood clots in the brain. The investment in Neuroperfusion represented Guidant’s entry into the technology for the treatment of strokes, an initial foray that was strengthened by the company’s $10 million investment in Micro Therapeutics Inc., a company in the midst of developing another catheter-based device for the treatment of strokes. Other alliances included a $77 million investment in NeoCardia LLC, which pioneered radiation therapy as a means to prevent the re-narrowing of blood vessels following surgical procedures. The biggest deal of the year occurred in October 1997, when Guidant paid $170 million to acquire EndoVascular Technologies, Inc., a company with patented technology to prevent the rupture of swellings in the aorta.

Company Perspectives

Although Guidant is a young organization, our four business groups have established track records in their markets. Our structure provides the resources of a large organization, while preserving the innovative and entrepreneurial environment of a smaller company. The business groups stay close to the customer and respond quickly to evolving needs. They advance Guidant’s mission of providing leading-edge technology for physicians and life-saving therapy for patients.

Guidant’s success on the research and development front held it in good stead as the 1990s drew to a close. By the end of the decade, the company controlled 49 percent of the $1 billion global defibrillator market, maintaining a nine-percentage-point lead over its closest competitor, Medtronic. Guidant also had developed into the leader in the coronary stent market after receiving approval from the U.S. Food and Drug Administration to begin selling stents in the United States in the fall of 1997. However, Guidant’s unblemished rise in the cardiovascular medical device industry ended as the decade came to a close. In the years ahead, the company’s luster faded, pocked by research and development problems and legal troubles.

Hard Times in the 21st Century

Guidant’s esteem among investors waned during the company’s second decade of business. Shares in its stock reached a high of $71 before beginning precipitous fall to $28 by the summer of 2001. The freefall was reflective of Wall Street’s reaction to several developments at Guidant. In July 2001, after two of Guidant’s products were recalled, a U.S. Food and Drug Administration (FDA) panel recommended that the federal agency reject Contak CD, a Guidant defibrillator designed to help a weakened heart pump blood. There was further news to dampen the spirits of investors. In the all-important technological race, Guidant had fallen behind, failing to bring a drug-coated stent to market. Clinical studies had revealed that in roughly one in five cases tissue grew back to block the blood vessel repaired by the stent. Cardiovascular medical product companies responded with a drug-coated stent, which reduced the occurrence of tissue re-growth, but Guidant had failed to respond in kind.

Guidant’s troubles deepened in 2002. With its 50 percent share of the stent market at risk, the company joined forces with a rival, Cook, Inc., to jointly develop a drug-coated stent, the first step of the company’s plan to acquire Cook. In October, the U.S. District Court in Chicago essentially invalidated the agreement, ruling that it violated a licensing agreement between Cook and another company. Although Guidant hoped to prevail in the courts, the ruling, if it stood, threatened to strip the company of $800 million in revenue in 2003. Further, the decision had the potential to delay Guidant’s entry into the drug-coated stent market until 2005.

The news did not improve much for Guidant in 2003. The company closed Endovascular Technologies Inc., its California subsidiary, which resulted in a significant loss. Days before announcing it would cease the subsidiary’s operations, the company agreed to pay a $92.4 million fine to resolve federal charges for its failure to report problems with a device to treat abdominal aneurysms. Another blow to Guidant was delivered in June 2003, when an arbitration panel determined the company should pay Johnson & Johnson $425 million for patent infringement. Although the panel’s conclusion did not represent the final ruling on the matter, the news added to a steady stream of bad press.

As Guidant prepared for its 10th anniversary as an independent concern, industry observers waited to see what the company would do in the critically important period that awaited. Much depended on the company’s ability to maintain its control of the stent market, which was threatened by the emergence of the next generation of the devices. Although Guidant’s legal and technological problems had hobbled its progress, investors did not forsake the company. Amid all the negative publicity, the company’s shares were trading at more than $40 in mid-2003, an increase of 31 percent from the previous year. The next several years represented a crucible, however, standing as the company’s greatest test to stay ahead in the technological race that described success in its industry.

Principal Subsidiaries

Guidant Europe S.A. (Belgium); Guidant Japan KK; Guidant HK (Hong Kong); Guidant Australia Pty. Ltd.; Guidant Canada; Guidant do Brasil Ltda.

Principal Operating Units

Cardiac Rhythm Management; Endovascular Solutions; Vascular Intervention; Cardiac Surgery; Compass Group.

Principal Competitors

Boston Scientific Corporation; Medtronic, Inc.; St. Jude Medical, Inc.

Key Dates

1994:: Eli Lilly & Co. spins off its medical devices and diagnostics division, creating Guidant Corporation.
1997:: Guidant invests more than $250 million in research and development partnerships with smaller firms.
2001:: Product recalls and lagging research and development programs plague Guidant.
2002:: An arbitration panel determines Guidant should pay Johnson & Johnson $425 million for patent infringement.