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Company Perspectives:
We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. When we operate according to these principles, the stockholders should realize a fair return.
Cordis Corporation, a Johnson & Johnson (J&J) company, operates as a leading developer and manufacturer in the circulatory disease management industry. The company operates three main business segments including Cardiology Systems, Endovascular, and Interventional Neuroradiology. Cordis's products include guidewires, balloons, catheters, and stents that are used to treat circulatory system problems, including coronary artery disease and cerebral aneurysms.
Plagued throughout its relatively brief history by product recalls and marketing missteps, Cordis appeared to have found a profitable niche in the cardiac catheter industry in the early 1990s. Sales more than doubled during the first half of the decade, from $202.6 million in 1990 to more than $443 million in 1994, whereas net profits multiplied from $20.1 million to $50.2 million. Johnson & Johnson made a hostile bid for control of the fast-growing firm late in 1995 and won the takeover battle early in 1996 with a $109 per share stock swap valuing Cordis at $1.8 billion. Under J&J's direction, Cordis spent the remainder of the 1990s focusing on interventional medicine, minimally invasive computer-based imaging, and electrophysiology.
Postwar Origins
The medical device company was founded in Miami, Florida, by Dr. William Murphy. The son of Nobel laureate Dr. William Parry Murphy, Murphy was immersed in medicine from his youngest days. A 1984 Inc. article by Eugene Linden noted, "So total was the medical environment of his youth that it never occurred to him not to go into medicine." The younger Murphy also realized early on that he had a particular aptitude for mechanical engineering. The self-described "tinkerer" even designed his own medical devices as a teen.
After pursuing a dual education in medicine and engineering, Murphy was involved in the creation of the first artificial kidney. He also served briefly at Miami's Dade Reagents Inc., but when that company was bought out by American Hospital Supply Corp., it became clear to the ambitious Murphy that his career at this big, relatively anonymous company was limited. So Murphy formed Medical Development Corp. in 1957. One of the first products he developed was a "lumbar puncture tray," a disposable set of needles and tools used for spinal taps. Noticing that doctors performing this procedure often used dull and sometimes burred needles, making the test difficult and often painful, Murphy developed the concept of using a disposable kit, meaning that each patient would get a sterile, sharp needle. The doctor-engineer-entrepreneur developed several elaborations on this basic concept, patented them, and licensed the core concept to Mead John & Co. He used the $300,000 in royalties that accrued over the next couple of years to finance research and development at his own company. Ironically, the disposable procedural tray business would grow to $60 million per year by the early 1980s.
Realizing that his strengths lay more in research and development than operational management, in 1959 Murphy induced John Sterner to serve as president of his small, but growing, company, which had moved from its original garage headquarters to a house. Sterner, a physicist, introduced Murphy to venture capitalist General Georges F. Doriot, whose American Research and Development Corp. would invest nearly a quarter of a million dollars in the start-up business.
By 1960, Murphy had changed the business's name to the more distinctive Cordis ("of the heart"), a moniker that indicated the primary focus of the company's efforts. During the decade, Cordis became involved in the relatively new field of cardiac pacemaking, which utilizes a small, usually battery-operated electronic device known in the industry as a pacer to stimulate the heartbeat with electrical charges. By the early 1970s, Cordis ranked second only to Medtronic among America's pacemaker manufacturers. Cordis introduced its first remotely programmable pacemaker in 1973 and launched improved electrodes (which make the actual connection to the heart muscle) by mid-decade.
Despite infusions of more than $500,000 in cash in its first few years, Cordis had a rocky start. Under Murphy, the company was so devoted to research and development that it was not until 1980 that it achieved a positive net operating cash flow. Murphy and Sterner were forced to sell their stock to keep the firm afloat; by 1984, they held less than five percent between them.
Quality Control Crisis in the 1970s
Cordis found itself facing poor quality control, both within its own manufacturing operations and in components from an important supplier, in the mid-1970s. Flawed circuits from supplier CTS Corp. and an internal rejection rate that soared to 30 percent contributed to the U.S. Food and Drug Administration's (FDA) issue of a product advisory against Cordis in 1974. Cordis's share of the pacemaker market declined from 20 percent in 1975 to 13 percent in 1978. With sales and net worth plummeting, too, corporate executives were compelled to cut salaries by 20 percent across the board.
The supplier, CTS Corp., agreed to keep Cordis afloat via a $5 million injection of capital in exchange for control of nearly one-fourth of the pacemaker manufacturer's stock. For its part, Cordis promised to buy back the shares at a premium, which it was able to do in 1977. Hoping to reinvigorate the company after its near-death experience, Murphy and Sterner brought in a new president, Dr. Norman Weldon, in 1979. Characterized by Forbes as "a husky Indiana farm boy turned biochemist, economist, and businessman," the 40-something Weldon had served as CTS's president before moving to Cordis. For two years, Sterner, Murphy, and Weldon formed a management troika that focused on a costly restructuring of Cordis's manufacturing and marketing operations. Among other things, Weldon organized the company's first independent marketing department and boosted the sales force by 30 percent. The restructuring cost dearly. Cordis lost $8.3 million in 1981 and by that time had racked up $89 million in debt.
A Second Dilemma Mars the Early 1980s
Cordis's luck appeared to be changing in the early 1980s. Four years after a competitor launched the first lithium-powered implantable pacemaker, Cordis introduced its first lithium model in 1979. The Miami company's version featured an encapsulated battery that purported to be smaller, yet more efficient, than its predecessors. Just three years later, Cordis won FDA approval for an innovative "physiological" or "synchronous" pacemaker, which issued electric pulses only when needed by regulating two chambers of the heart instead of one. At the same time, several competitors--including Intermedics, which had supplanted Cordis as number two in pacemakers in 1979--were reeling from a kickback scandal.
Cordis took good advantage of the situation, increasing sales by more than 75 percent, from $117.7 million in 1984 to $207 million. It also recovered from a net loss of $8.2 million to more than $10 million in profits during the period. Furthermore, it regained the number-two rank among pacemaker manufacturers.
In the meantime, however, engineers at the company had discovered two potentially devastating problems with the lithium-powered pacer. First, they learned that their method of encapsulating the battery had a high potential for corrosion and, possibly, leakage. Though not legally obligated to do so at the time, Cordis modified the battery and notified both the doctors and the FDA about the possibility that the device could become corrupted. The close monitoring of the 8,500 patients who had already received the pacers revealed a second, more serious problem; a totally unforeseen chemical reaction was sapping the power of the batteries. The FDA ordered recalls of Cordis's pacemakers in 1983 and 1985 and prohibited the company from testing and selling new products for 18 months.
Cordis's sales were more than halved from 1984's $207 million down to just $80 million in 1986. The company sold the pacemaker division, which had at one time contributed more than half its annual revenues, in 1987 and reached a $5.7 million settlement with claimants two years later. CFO Robert Strauss succeeded Weldon as president and CEO upon the latter's resignation in 1987.
Under Strauss, Cordis fell back on a secondary business interest, diagnostic cardiac catheters, in the late 1980s. These fine-gauge tubes are used in angiography, the injection of special dyes into blood vessels and the heart chambers to conduct tests for impairment of this vital muscle. By 1990, Cordis had captured 40 percent of the global angiography market, and this business segment constituted 85 percent of the company's total revenues.
Rapid Growth Marks the Early 1990s
During the first half of the 1990s, Strauss guided what investment bankers Hambrecht & Quist characterized as a "metamorphosis" from a "troubled, unfocused, regulatory-hindered Cordis [to] a streamlined one." Moreover, Strauss's reorganization planned to transform it from a firm focused almost exclusively on development of new technology to one emphasizing customers' needs. Having eradicated the company's pacemaker obligations, Strauss focused on maintaining the company's leading share in angiography catheters and diversifying into the larger and more profitable therapeutic heart catheter market. Commonly known as angioplasty, this therapy uses specialized catheters to ream out blockages in the arteries around the heart, or, in the case of balloon angioplasty, to expand the artery to allow increased blood flow.
CEO Strauss hoped to increase Cordis's share of the therapeutic catheter market from two percent in 1991 to 15 percent by mid-decade, but he faced daunting competition from well-established giants in the medical business, including market-leading Eli Lilly & Co. and Pfizer Inc. He reorganized Cordis's staff into product-oriented teams focusing on balloon catheters, interventional catheters, steerable guidewires, and diagnostics, thereby encouraging the development of a comprehensive line. He used competitive pricing and dynamic marketing to make Cordis the industry's fastest growing competitor in the early 1990s. By 1994, the company had captured ten percent of total U.S. angioplasty sales--short of Strauss's ambitious goal, but an impressive expansion nonetheless.
Perhaps more important, the company made dramatic inroads into the global heart catheter business, achieving a third-ranking 17 percent of the worldwide angioplasty market by the middle of 1994. By that time, overseas sales constituted more than 50 percent of Cordis's total annual revenues. Strauss also reduced the company's debt from $31.6 million in 1990 to a mere $1.1 million by the end of 1993. Sales increased from $202.6 million in 1990 to more than $443 million in 1994, while net income multiplied from $20.1 million to $50.2 million.
Product Development Under Johnson & Johnson: Late 1990s and Beyond
Cordis's speedy growth attracted the attention of health care giant Johnson & Johnson, which initiated a highly unusual (for this industry, at least) hostile takeover of the Miami manufacturer in October 1995. Eager to create a total cardiac package of products, J&J offered $100 per share in cash for a company that was then trading at $81. Cordis initially resisted the assault, but in November it agreed to a stock swap valued at $1.8 billion. Cordis became a J&J company in February 1996. The merger combined J&J's cardiac stents--minuscule steel tubes that repair damaged arteries--with Cordis's balloon catheters, which were used to deliver the stents, forming a globally significant manufacturer of cardiac devices.
Under the leadership of its new parent, Cordis spent the remainder of the 1990s developing new products. In 1997, the company formed its Endovacular division to focus on vascular disease treatments. In an attempt to bolster J&J's share of the stent market, Cordis also began to manufacture several different stent's including the Palmaz-Schatz Crown Stent, the CrossFlex hybrid stent, and the S.M.A.R.T. stent.
Cordis also made several key acquisitions and formed strategic partnerships during this time period. In 1997, the firm teamed up with Cardiometrics Inc. in a co-distribution agreement involving Cardiometrics' testing products. Cordis also settled a patent dispute with Medtronic Inc. by forming a patent cross-license agreement for certain stents and stent delivery systems. In 1998, the firm acquired various assets of IsoStent Inc., including the BX Stent. The following year, AngioGuard Inc. was purchased, giving Cordis access to the firm's technology that was developed to protect the heart and brain during medical procedures.
The deals continued into the new millennium. In 2000, Cordis resolved another patent dispute, this time with Guidant Corp. Under the terms of the agreement, Cordis was able to provide its U.S. customers with rapid exchange catheters, which were used in interventional cardiology procedures, including angioplasty and stent placement. Cordis also acquired Atrionix Inc., a developer of catheter-based systems used in the treatment of atrial fibrillation--a disruption in the heart's normal sinus rhythm. In 2001, TERAMed Inc., a developer of catheter-based systems utilized to treat abdominal aortic aneurysms, was purchased.
The most significant moves for the company during the late 1990s and into the new millennium, however, were its attempts to reinvent itself in the stent market. In 1994, J&J had introduced the coronary stent and saw sales of the product increase rapidly to $500 million by 1996. Nevertheless, its prosperity was short-lived. By 1997, its 95 percent market share had fallen to just five percent and revenues had dropped to $200 million. Forbes commented on J&J's falter in a 2001 article, claiming that the company had "angered doctors with high prices, ignored demands for better technology, and wrongly assumed its patents would stall rivals. When competitors invaded in 1997, doctors were only too happy to switch."
Cordis, headed by Robert Croce, began to develop new stents and increased its sales force by 40 percent. Along with the less profitable Crown and CrossFlex stent released in the late 1990s, Cordis launched the Bx Velocity stent in 2000, which proved to be the success J&J needed to regain market share. In 2001, the Velocity Hepacoat stent was introduced. This stent was coated with a blood thinner that prevented blood clots from forming and quickly became responsible for nearly 20 percent of company stent sales.
Cordis then put plans in motion to launch a drug-coated stent that would prevent restenosis, a reclogging of the artery that occurred in 25 percent of patients that receive stents. By this time, stents were used in 80 percent of angioplasties performed in the U.S. and accounted for $1.4 billion in annual sales. J.P. Morgan Chase predicted that the release of the new stent could potentially increase U.S. market sales to $3 billion. Cordis, which received FDA approval for its SIRIUS study of the Sirolimus pharmaceutical-coated Bx Velocity Coronary stent, hoped to launch the breakthrough product in 2003, which would position it ahead of competitors by one year. Cordis chose the name SIRIUS--which means brightest star in the heavens--to symbolize the advantages of the new restenosis-preventing stent. The release of this new product had the potential to position both Cordis and J&J at the forefront of the stent market. Whether or not that potential would be realized, however, remained to be seen.
Principal Subsidiaries: Cordis Medizinische Apparate GmbH (Germany); Cordis Europa NV (Netherlands); Cordis S.A. (France); Cordis S.a.r.l. (Switzerland).
Principal Competitors: Boston Scientific Corp.; C.R. Bard Inc.; Guidant Corp.; Medtronic Inc.
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