BB&T Executive Editor
One of the most interesting stories in med-tech during the summer of 2007 has centered on developments at Boston Scientific (Natick, Massachusetts): the fall-out from its purchase of Guidant, now its Cardiac Rhythm Management unit, its effort to deal with major debt it willingly assumed with that purchase and the subsequent flattened sales of one of its major products, the Taxus drug-eluting stent (DES).
Following is a review of sentinel developments and initiatives by the company over the past two months.
- In mid-July, the company agreed to pay $195 million to settle about 4,000 consolidated lawsuits that had targeted the purported and potential failures of Guidant's implantable rhythm management devices. The agreement, however, was considered to have no great financial impact since most paid by insurance and serving to avoid perhaps even a bigger payout at trial (that had been set for a July 30 start) and continuing negative publicity.
- Toward the end of July, the company reported a plan "to explore" the sale of its fluid management business, formerly North American Medical Instruments Corp., as a part of a broad restructuring of its assets. The business produces a range of products both to manage fluid and to measure pressure during angiography and angioplasty procedures. Any sale is expected to include the business as well as the company's facilities in Glen Falls, New York, and Tullamore, Ireland. At press time for this publication, the company had issued no reports concerning progress on this move.
About the same time as that report, Moody's and Standard & Poor's reduced the company's credit ratings based on flattened 2Q earnings, driven in part by lowered sales of the firm's Taxus stents.
- In early August, Boston Scientific abruptly reversed itself on a proposal that in March it said it was considering: spin-off of a minority chunk of its Endosurgery holdings via initial public offering. At that time it said it was considering the possibility of offering 25% of a group of its products for endoscopy, urology, gynecology and oncology via the IPO route in order to raise up to $1 billion.
But the company then said that it had reviewed its options and decided to keep full control of the endosurgical assets while continuing to explore ways of restructuring its businesses and investments. Jim Tobin, company CEO, said that "the exploration process has increased visibility to the historic strengths and future potential of the Endosurgery group." He added: "Endosurgery is a market leader that has delivered consistent double-digit growth and impressive performance year after year, and it is expected to generate more than $1.4 billion in revenue this year. It represents great value, and it provides important balance within our portfolio of businesses."
- Later in August, the company reported that it had ended its less-than-smooth relationship with Advanced Bionics (AB; Valencia, California), a maker of cochlear implants and pain management products, which it had acquired in 2004 for $740 million in cash, plus future milestone possibilities. Boston Scientific will pay $1 million and an additional earn-out of $360 million to separate from AB. The $1 billion will go to AB executives and others, and the agreement serves to avoid the earn-out milestone payments that it was scheduled to pay. Boston Scientific will retain AB's pain management business and its technologies.
The transaction provides a new schedule of fixed earn-out payments to former AB shareholders, consisting of $650 million payable upon closing, and $500 million payable in March 2009. AB's principals will acquire a controlling interest in the auditory and drug pump businesses for a payment of $150 million.
The deal also serves to sidestep the legal problems resulting from an attempt to oust Alfred Mann from AB. Mann was suing Boston Scientific, claiming it had plotted to violate agreements between them and was trying to force him out.
Analysts said that the long-term impact of the deal should be positive but that it adds to the company's liquidity woes, short-term.
- Still later in the month, the company reported that to reduce debt and better target its core emphasis on interventional technologies, it added its cardiac and vascular surgery units to the list of businesses in its product portfolio review. The Vascular Surgery business develops synthetic grafts and patches for repair of abdominal aortic aneurysms and peripheral vascular anatomy. The business had 2006 revenues of $86 million and has about 250 employees, primarily located at its manufacturing site in Wayne, New Jersey.
"We have now identified three non-strategic businesses to divest, and we are in discussions with potential buyers for all three," said Paul LaViolette, COO of Boston Scientific. "In addition, we continue to focus on the recovery of the drug-eluting stent and cardiac rhythm management markets. Together, these measures should combine to help us achieve our overall goals of restoring profitable growth, increasing shareholder value, and continuing to build and strengthen Boston Scientific."
The Cardiac Surgery business was acquired in April 2006 as part of the Guidant transaction, and Boston Scientific established the Vascular Surgery business (San Jose, California) with the acquisition of Meadox Medical in 1995.
Larry Biegelsen, med-tech analyst for Wachovia Capital Markets, wrote in a research note that if the company sells its Cardiac Surgery, Vascular Surgery, and Fluid Management businesses — which are expected to have $350 million-$400 million in sales in 2007 — the company could reap pretax proceeds of between $500 million and $600 million.
- The company then reported that it had amended its $2 billion revolving line of credit and $5 billion term loan agreement, further attempting to get out from under its debt. In connection with the amended agreement, the company prepaid $1 billion of its term loan, using $750 million from cash on hand and $250 million from a credit facility secured by U.S. receivables.
- Just prior to the September Labor Day holiday in the U.S., Boston Scientific reported that its Cardiac Rhythm Management unit — collectively, Guidant, Cardiac Pacemakers and Guidant Sales — had agreed to pay 16.75 million to settle government claims filed by the attorneys general of 35 states and the District of Columbia to settle investigations associatd with Guidant's Ventak Prizm 2DR Model 1861, Contak Renewal Model H135 and Contak Renewal 2 Model H155 devices.
The CRM unit also agreed to extend the supplemental warranty program for these devices an additional six months and reaffirmed a commitment to implement changes recommended by the independent panel commissioned by Gidant in 2005.
Those changes include the development of a patient safety officer position and a patient safety advisory board, and making "enhancements" to product performance communications.
Jay Nixon, attorney general for the State of Missouri, reported that Guidant will provide a warranty program to patients wanting their defibrillators replaced at no cost and will reimburse them as much as $2,500 for out-of-pocket expenses."
He also said that the company had not disclosed that it continued to sell the potentially faulty devices until 2005, two to three years after they hit the market; but the CRM unit was not required to admit liability.
In releasing the terms of the settlement, Tobin said that the company "has been working cooperatively with the state attorneys general and is pleased to have reached this amicable agreement."
Other legal claims are still pending against the company which could result in further payouts, though probably quite minimal. Other investigations include the possibility of criminal action against Guidant executives and the continuing scrutiny by U.S. legislators.