Medical Device Daily

Boston Scientific (Natick, Massachusetts) late last week reported that it will not go though with the considered spin-off of part of its Endosurgery business via an IPO, calling into question how quickly it plans to pay down on the roughly $9 billion in debt it took on with its $27.2 billion acquisition of Guidant (Indianapolis) last year.

Instead of a spin-off, the company said it will reduce costs through job cuts as well as sales of assets and pieces of its investment portfolio.

Faced with large debt and eroding confidence on the part of investors, the company said in March that it was considering the spin-off, via IPO, of a minority share (up to 25%) of a group of endosurgical businesses manufacturing products for endoscopy, urology, gynecology and oncology (Medical Device Daily , March 12, 2007). It said the IPO could raise up to $1 billion.

The company reported that it has completed its exploration of the IPO and has decided that the Endosurgery group will remain wholly owned by the company.

It also said it will make a number of announcements "in the coming weeks and months" that will advance its previously disclosed objectives of selling non-strategic assets, divesting elements of its investment portfolio, and reducing expenses and headcount to be more in line with the company's revenue base.

It said an expense and headcount restructuring plan is in development and will be communicated next quarter. The plan will be one of many critical actions, it said, designed to begin enhancing shareholder value. The company also reiterated its plans to be "more selective" in its business development activities.

"Our decision to retain the Endosurgery group is the first in a series of steps we plan to take to advance our strategy of restoring growth, increasing shareholder value and continuing to build a broad, diversified company," said Jim Tobin, Boston Scientific president/CEO in a company statement. "We believe we can create more shareholder value with the Endosurgery group remaining wholly owned by Boston Scientific, and we have concluded that an IPO would have reduced — rather than enhanced — Boston Scientific's shareholder value. The benefits of retaining the Endosurgery group clearly outweigh those offered by the sale of a minority interest."

The Endosurgery division has been a steady performer for Boston Scientific, in contrast to its major businesses in stents and defibrillators. Endosurgery's revenue grew 11% over the past year, to $367 million last quarter. It has operating-income margins of 23% to 25%, the company has said. Moody's Investors Service downgraded Boston Scientific to junk status late last month. Standard & Poor's downgraded Boston Scientific to its lowest investment-grade rating the same week, and said it regarded the Endosurgery sale as critical, but the company believes that keeping the unit intact is critical.

"The exploration process has increased visibility to the historic strengths and future potential of the Endosurgery group," said Tobin. "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. We believe these considerable contributions are best maintained by keeping Endosurgery as a strategic asset of Boston Scientific."

The company has repeatedly said in recent months it was planning cuts.

Late last month, the company said it might sell off its fluid management business, formerly North American Medical Instruments Corp. (NAMIC), which produces a range of products used to manage fluid and measure pressure during angiography and angioplasty procedures. A sale would be expected to include the business as well as the company's facilities in Glens Falls, New York and Tullamore, Ireland.

Also in July, The Boston Globe reported that the company is planning broad job cuts that could affect its Massachusetts employees.

The company employs 28,000 people worldwide, including 2,400 in Massachusetts, chiefly at its Natick headquarters, its Marlborough Endosurgery division, and a Quincy distribution center.

In July, the company reported a 2Q07 profit of $115 million, or 8 cents a share, slightly below consensus Wall Street estimates. That compares to a $4.3 billion loss last year, when the company declared a massive writeoff associated with the Guidant purchase.

But the underlying business is struggling, with worldwide sales of its flagship Taxus drug-coated stent falling more than 30% to $437 million from $647 million in the same quarter last year. In the U.S. the Taxus sales decline was even more pronounced at more than 40%. Sales of implantable defibrillators, which the company acquired by buying Guidant last year, were $377 million, down slightly from $383 million a year ago

The company's statement didn't specifically discuss the debt-rating issue, but it has previously said it is the company's "practice to maintain a sound financial position to support our long-term objectives."

In response to the report that it was canceling its IPO, both Fitch Ratings and Standard & Poor's (S&P) downgraded Boston Scientific's credit rating. Both credit rating services lowered the company's issuer default and senior unsecured notes ratings to 'BB+' from 'BBB-.' Companies with 'BB+' ratings are considered junk bonds.

Boston Scientific still plans to sell other assets and reduce its work force, but "debt reduction will proceed at a slower pace than previously anticipated," S&P said.

Tobin said the retention of the Endosurgery group should serve to strengthen the company's financial position going forward, particularly given Endosurgery's strong gross profit margins and robust operating cash flows.

If completed, the partial spin would have been the biggest in the medical device sector since Nestlé sold about 23% of eye care firm Alcon (Fort Worth, Texas) for $2.3 billion in 2002.