Boston Scientific (Natick, Massachusetts) has decided to end its rocky relationship with Advanced Bionics (AB; Valencia, California), a maker of cochlear implants and pain management products, which it acquired in 2004 (Medical Device Daily , June 2, 2004).

Boston Scientific originally acquired AB for $740 million in cash, plus the promise of future milestones that could have upped the deal value to nearly $3 billion, but it subsequently became entangled in protracted litigation with key members of AB's management, including medical device entrepreneur extraordinaire, Alfred Mann.

The company now will pay $1 million and an additional earn-out of $360 million to extricate itself from the deal. The $1 billion will go to AB executives and others, and will avoid the earn-out milestone payments that it was scheduled to pay them under terms of the 2004 deal.

With the agreement Advanced Bionics again will be an independent company, with businesses in cochlear implants and its development program in drug pumps.

Boston Scientific will be left with AB's pain-management business, including a spinal cord stimulator for chronic pain, and the Bion, a system in development to treat migraine headaches.

The transaction provides a new schedule of consolidated, fixed earn-out payments by Boston Scientific to former Advanced Bionics shareholders, consisting of $650 million payable upon closing — expected in January — 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 eliminates the legal overhang that ensued when Boston Scientific attempted to fire Mann, because apparently fed up with what it saw as declining quality control issues — in particular with two cochlear implant recalls and a warning letter from the FDA for AB. At the same time, Boston Scientific was dealing with other FDA issues of its own.

Mann sued in federal court last year, accusing the company of plotting to violate their agreement and trying to force him out.

In April, Alvin Hellerstein, the U.S. District Court judge for the Southern District of New York, granted Mann an injunction blocking Boston Scientific from ousting either him or Jeffrey Greiner, his co-CEO.

The judge ruled that terminating Mann and Grainger was in bad faith and contrary to the agreement in which Boston Scientific had allowed the men to continue running AB, reporting to a special executive board and giving them protections against dismissal.

Boston Scientific appealed that ruling and the parties have agreed to dismiss the pending litigation.

"We are excited about the immediate and long-term growth opportunities presented by neuromodulation as an integral part of the company," said Jim Tobin, president/CEO of Boston Scientific in a statement. "We hope to replicate the success of the pain management technologies across a wide spectrum of indications, expanding our microelectronic capabilities and strengthening our leadership in neuromodulation and cardiac rhythm management.

"The sale of the auditory business and drug pump program is consistent with our previously announced objective of selling assets we do not consider core to our long-term strategy."

Short-term the transaction could add to Boston Scientific's mounting liquidity woes, which have put its bonds in "junk" status. The $1 billion that the company is paying AB executives and investors in January 2008 and March 2009 in earn-out payments is about $550 million more than the projected earn-outs under terms of the original merger.

Longer-term, however, the deal is seen as having a potentially more positive impact on the company. With this new agreement, Boston Scientific said it is freed from future payouts that could have totaled more than $2 billion over the next six years.

Such cost efficiencies couldn't have come at a better time for Boston Scientific, which has struggled to shoulder the heavy debt of close to $9 billion it took on with its $27 billion-plus acquisition of device maker Guidant (Indianapolis). It has since had weaker sales in its coronary stent and defibrillator businesses, its two largest units.

Just last week, the company decided against selling a minority stake (up to 25%) in its Endosurgery business that could have generated close to $1 billion (MDD Aug. 6, 2007).

"The exploration process has increased visibility to the historic strengths and future potential of the Endosurgery group," Tobin said last week, explaining the decision not to sell the minority stake. "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."

The company said that, instead, it will cut costs via a restructuring program that it is expected to disclose next quarter.

AB also appears excited about the split. It had complained that Boston Scientific — cash-strapped by the Guidant deal — was squeezing budgets needed for R&D. This was seen as resulting in lower revenue and lower earn-out payments to its executives.

Greiner, currently head of the Neuromodulation Group at Boston Scientific and one of the principals purchasing the auditory and drug pump businesses, said, "We are very pleased that Advanced Bionics will continue serving the needs of the hearing impaired, as an independent company. Advanced Bionics has always been a pioneer in developing innovative cochlear implant technology to treat severely and profoundly deaf children and adults. We look forward to building on our proud record of achievement in hearing health, and to further developing the implantable drug pump technology."

AB estimated that Boston Scientific will keep roughly half the subsidiary's 1,000 employees, the rest remaining with the newly separate AB.

Larry Biegelsen, med-tech analyst for Wachovia Capital Markets, in a research report said that he views the amicable resolution of the dispute as a positive for Boston Scientific "because: 1) it removes the uncertainty surrounding the future of AB, an emerging med-tech business which is growing >20% per year; and 2) that [Boston Scientific] management is confident it can reach the required debt/EBITDA level of 3.5x by March 31, 2008, despite accelerated payments (~$300M in early 2008) to the principals of AB."

Biegelsen said the deal "looks like a wash." He noted the original agreement would have required Boston Scientific to pay earn-outs of up to $2 billion through 2013. In place of these earn-outs, the company is paying $650 million in 2008 and $500 million in 2009. He estimated the net present values of these two payment streams as "roughly equivalent."

The pain management business and emerging indications program will operate as Boston Scientific Neuromodulation under the leadership of Michael Onuscheck, currently head of the pain management business. The business will remain headquartered in Valencia. The auditory business and drug pump program will operate as Advanced Bionics under the leadership of Greiner, also headquartered in Valencia.