10. Boston Scientific
$7.8 Billion
KEY EXECUTIVES:
J. Raymond Elliott, President & CEO
Jeffrey D. Capello, Exec. VP & CFO
Sam Leno, Exec. VP & COO
Joseph M. Fitzgerald, Sr. VP & President, Endovascular
J. Michael Onuscheck, Sr. VP & President, Neuromodulation
William H. Kucheman, Exec. VP & President, Cardiology, Rhythm and Vascular
John B. Pedersen, Sr. VP & President, Urology andWomen’s Health
Brian R. Burns, Exec. VP, Global Quality & Regulatory Affairs
Kenneth J. Pucel, Exec. VP, Global Operations & Technology
NO. OF EMPLOYEES: 25,000
GLOBAL HEADQUARTERS: Natick, Mass.
POWER. That was Boston Scientific Inc.’s strategic plan for fiscal 2010. POWER isn’t capitalized just to emphasize the importance of the company’s growth strategy (and how badly it’s needed); it’s an acronym: prepare, optimize, win, expand and realign. In fact, throughout financial and promotional material for the year, you’ll find multiple references to the firm’s “strength” and discussions of how it is “powered for growth.”
During Boston Scientific’s investor meeting in November, its first in many years, the company played songs such as Van Halen’s “Right Now” and Jesus Jones’ “Right Here, Right Now” over the loudspeakers. Without a doubt, the company has been making aggressive—execs might call them POWERful—predictions about future bottom line growth and new product pipelines. At JP Morgan’s annual healthcare conference in January this year, Boston Scientific titled its presentation “Our Pipeline is no BS(X)”—a playful twist on the company’s stock ticker symbol.
Based on the company’s fiscal 2010 earnings (year ended Dec. 31), Boston Scientific’s predictions of power must still be a few years in the making.
CEO Ray Elliott, who succeeded Jim Tobin in 2009, had been trying to infuse the company with some of the energy that characterized his time as CEO of Zimmer Holdings Inc. However, that energy was short-lived. Elliott announced plans this May that he would retire by the end of 2011. Analysts and industry insiders had been banking on Elliott to turn the company around based on his performance at Zimmer, and they were hoping he would see his new course for the company through. His departure has created even more uncertainty.
Sales for 2010 dropped 5 percent to $7.8 billion from $8.2 billion in 2009. The firm’s bread and butter, sales from its cardiac rhythm management ($2.1 billion) and cardiovascular businesses ($3.3 billion), dropped 10 and 8 percent, respectively. Electrophysiology sales ($147 million) also fell—marginally by 1.3 percent. The company, however, posted top line growth in endoscopy ($1.1 billion, up 7.3 percent), urology and women’s health ($481 million, up 5.5 percent), and neuromodulation ($304 million, up 6.7 percent). The downside is that those businesses combined account for a little less than a quarter of annual revenue. The company took a net loss of approximately $1.1 billion, which was 3.9 percent more than fiscal 2009.
Despite these numbers, company management has said it can generate 11 to 12 percent compound annual earnings growth over the next four years, achieved through a combination of cost cuts, acquisitions, and modest top line growth of two to four percent a year.
The response from the analyst community early this year following the analyst meeting and end-of-year results was lukewarm.
“We question how Boston [Scientific] can acquire growth assets and invest to maintain leadership positions with a depressed balance sheet vs. peers and a stated objective to maintain absolute levels of [research and development] spend,” David Lewis, an analyst with Morgan Stanley, wrote in a research note. “Competition for attractive growth assets is likely to be intense, and competitors continue to invest heavily in internal development programs.”
Matthew Dodds, an analyst with Citigroup wrote: “BSX talked up the opportunity in several cardiovascular, neuromodulation and general surgery markets, but we believe it is sorely lacking in near-term products that can move the needle vs. the competition … BSX has made some effort to build out its pipeline with the recent deals for Asthmatx and Sadra (outlined below), but both deals will take a while to have an impact and the internal programs had little to highlight in the way of clinical [trials].”
Rick Wise, an analyst with Leerink Swann, was more upbeat.
“We had always assumed that turning around and rebuilding BSX would take time. But a challenging pricing and procedure environment—which does not seem to be easing in BSX’s core cardiology markets (drug-eluting stents and cardiac rhythm management)—does not help,” Wise wrote following the release of fiscal 2010 results. “To us, BSX seems to be taking the right actions: realigning the portfolio, taking out cost, redirecting investment toward faster-growing markets and technologies, and looking for more efficient ways to address its sluggish markets. And by 2012-2013, we strongly suspect that many of these actions should begin to pay dividends for BSX, gradually re-accelerating the company’s top-line growth and improving profitability.”
Indeed, Boston Scientific has suffered a string of setbacks in recent years involving two of its best-selling cardiac products: drug-eluting stents and defibrillators.
Last year, Boston Scientific struck the largest legal settlement in its 30-year history, agreeing to pay more than $1.7 billion to rival Johnson & Johnson to resolve three patent disputes in which the companies had accused each other of intellectual property theft in developing stents. That deal followed a 2009 settlement in which Boston Scientific agreed to pay $716 million to resolve 14 other patent suits brought by Johnson & Johnson. In a lawsuit filed against Boston Scientific in January, the U.S. Department of Justice alleged that the company’s Guidant subsidiary knowingly sold defective defibrillators and hid potentially dangerous defects from patients. That complaint was lodged two weeks after a Minnesota judge accepted a Guidant guilty plea on charges of concealing defibrillator problems. Boston Scientific, which acquired Guidant for $28.4 billion in 2006, agreed to pay $240 million the following year to settle more than 8,000 private suits charging that Guidant hid defibrillator problems.
The company began the year in a reorganization mode. In February, management announced the layoffs of roughly 1,300 employees, in addition to a series of management changes as part of a restructuring plan to cut costs. Management said the “restructuring initiatives” were designed to improve the company’s effectiveness and efficiency. Gross expenses were expected to be reduced by $200 million to $250 million (5 to 7 percent) during the following two years.
“The actions … will provide the organizational structure and leadership needed to execute our strategic plan and fulfill the enormous promise of this company,” said Elliott. “They are aimed at driving innovation, accelerating profitable growth and increasing both accountability and shareholder value. Above all else, they will help us better serve our customers and their patients.”
Under the shuffle, Hank Kucheman was promoted to executive vice president and president of the new Cardiology, Rhythm and Vascular Group. The Cardiovascular Group and Cardiac Rhythm Management Group were combined. Kucheman previously served as president of the Cardiovascular Group.
Also as part of the restructuring, the company’s international headquarters were eliminated. The presidents of Japan, Europe and the newly formed Emerging Markets Group now report directly to the CEO. The Emerging Markets Group, composed primarily of India, China, Brazil, Russia, Eastern Europe and parts of the Middle East, Asia and Latin America, will pursue selective offshore manufacturing, research, a variety of support services and individual country growth vehicles, according to the company.
The Endoscopy division and new Urology and Women’s Health division each will report to the CEO, and the Endosurgery Group structure, which currently oversees the Endoscopy and Urology/Gynecology divisions, will no longer exist. The newly named Urology and Women’s Health division, led by new Senior Vice President and Executive Committee member John Pedersen, plans to increase investment in its franchise in order to more aggressively pursue the substantial opportunities for device-related solutions for unmet women’s health needs, the company said. The Endoscopy division, led by new Senior Vice President Michael Phalen, would begin pursuing incremental growth through devices for endoluminal surgery, obesity/diabetes solutions and pulmonary asthma.
For a month, between March and April 2010, Boston Scientific suspended sales of defibrillator implants after failing to keep regulators in the loop about changes it had made in manufacturing the devices. Company officials said the defibrillators were safe but that Boston Scientific failed to meet a requirement to submit documents to the U.S. Food and Drug Administration (FDA) with notification of production process changes. In April, the FDA cleared two manufacturing changes to the Cognis and Teligen implants, which treat irregular heartbeats by delivering electric shocks to the heart. Medical device companies are required to inform the FDA immediately regarding significant changes to the design and/or manufacture of life-sustaining devices. Cognis and Teligen account for nearly all of
Boston Scientific’s implantable defibrillator revenue in the United States.
“Boston Scientific’s reputation has been damaged, but not destroyed, by the recall,” Derrick Sung, a New York, N.Y.-based analyst at Sanford C. Bernstein & Co., said in an e-mail to investors at the time. “It appears that it will remain a viable competitor in the market.” Competitors in the defibrillator markets—Medtronic Inc. and St. Jude Medical Inc.—reported increases in sales due to the recall.
In August of 2010, the company cleared up yet some more unfinished business with the FDA. After more than four years, the agency announced that issues cited in a 2006 warning letter had been resolved. The announcement finally cleared the cloud of perceived misgivings from the agency that has hovered over the company longer than expected. The January 2006 warning letter cited “serious deficiencies” at several Boston Scientific facilities throughout the country, including the Maple Grove, Minn., headquarters of its drug-coated stent business. One of the deficiencies cited by the FDA was a failure to promptly and properly report product issues, according to published reports. The letter followed three site-specific warnings in 2005 that Boston Scientific failed to adequately address.
Though they typically are used to force companies to comply with FDA regulations, corporate-wide letters such as the one received by Boston Scientific are relatively rare. When it issued the letter, the FDA gave the company an ultimatum: Fix the regulatory issues or the agency would block approval of all Class III products (which usually are the most novel and highest-risk devices the FDA evaluates).
The FDA made good on its threat, too. For two years, the Class III product approval ban remained in place, delaying the release of Boston Scientific’s much-anticipated Taxus Liberté medicated heart stent. By the time Taxus was approved, the domestic market for stents had become more crowded and competitive. In late 2008, the company showed improved quality systems during an inspection of its facilities, prompting the FDA to note that Boston Scientific was in “substantial compliance” with the agency’s regulations. Since that time, the warning letter had not been an issue, though it still cast a dark cloud of doubt over the company until the letter was officially resolved.
Part of the company’s 2010 restructuring efforts included key acquisitions as well as divestitures.
In October, the company said goodbye to its neurovascular business, selling it to Kalamazoo, Mich.-based Stryker for $1.5 billion in cash. Boston Scientific used about half of the $1.2 billion in after-tax proceeds of the sale for acquisitions and the remainder for retiring debt. Stryker has agreed to pay Boston Scientific $1.4 billion for the business at the closing of the deal and the remaining $100 million after the closing based on certain milestones, including the commercial launch of the business’s new Target detachable coils for treating hemorrhagic stroke. Boston Scientific’s neurovascular business, which employs 1,150 people, is based in Fremont, Calif., and had revenue of $348 million in 2009. The company first acquired the business in 1997 through its purchase of Target Therapeutics Inc. in a deal valued at $1.1 billion. The business is a leading provider of medical technologies such as detachable coils, stents, and guidewires used in the treatment of neurovascular diseases.
In October, in an effort to reshape its portfolio, Boston Scientific purchased Asthmatx Inc. for up to $443.5 million. Asthmatx designs, manufactures and markets the Alair Bronchial Thermoplasty System, a catheter-based asthma treatment system that uses heat to reduce excess smooth muscle in bronchial airways to limit constriction. The treatment, approved by the FDA in April 2010, is performed during three outpatient visits. Under terms of the deal, Boston Scientific paid $193.5 million in cash up front for Sunnyvale, Calif.-based Asthmatx and will spend an additional $250 million through 2019 if certain revenue-based milestones are achieved.
In November, the company purchased Los Gatos, Calif.-based Sadra Medical Inc.
Boston Scientific already owned 14 percent of Sadra, and paid $193 million upfront to acquire the rest of the company. The deal also called for another $193 million if Sadra hits regulatory and sales goals through 2016. By taking over Sadra, which was founded in 2003, Boston Scientific made a play in one of the few areas of cardiology still considered a growth market. Sadra develops technology for percutaneous aortic valve repair, in which interventional cardiologists seek to thread a catheter through the femoral artery of the leg, and up into the chest to repair the heart’s aortic valve without cracking open the chest and doing surgery. The technology is attractive because it’s a new market, in which elderly peoplegenerally considered too frail for heart surgery can become candidates for a minimally invasive valve repair procedure. As many as 3 million people in the United States have narrowing of their aortic valves, according to Sadra’s website. One of Boston Scientific’s rivals, Medtronic, made a move in this sector in February 2009 when it paid $700 million upfront, plus milestones to acquire Irvine, Calif.-based CoreValve Inc. Elliott called Sadra’s technology a “natural fit” with Boston Scientific’s product mix.
The year, of course, wasn’t all struggle and gloom and doom. Boston Scientific released an impressive number of new products throughout fiscal 2010.
Boston Scientific launched its Taxus Element Paclitaxel-Eluting Coronary Stent System in the European Union and other CE Mark countries. The Taxus Element Stent System is the company’s drug eluting stent technology and incorporates a platinum chromium alloy with stent design and an advanced catheter delivery system. The company also received the approval for the specific indication for the treatment of diabetic patients.
Here at home, the FDA gave the company the nod for a number of devices. The agency granted approval for two spinal cord stimulation (SCS) lead splitters for use with its Precision Plus Spinal Cord Stimulator System, a rechargeable SCS device for the management of chronic pain of the trunk, back and/or limbs. The FDA also cleared the Acuity Break-Away Lead Delivery System for use with cardiac resynchronization therapy defibrillators (CRT-Ds) and cardiac resynchronization therapy pacemakers, both of which treat heart failure. The FDA also allowed an expanded indication for Boston Scientific’s CRT-Ds, including the Cognis device. According to the company, this decision makes Boston Scientific’s CRT-Ds the only devices approved for patients in all New York Heart Association classes of heart failure. The FDA also approved the Express LD Iliac pre-mounted stent system for use in iliac arteries. The Express LD Iliac Stent is the low-profile, premounted, balloon-expandable stent approved by the FDA for use in treating iliac artery disease. Atherosclerotic iliac disease occurs when plaque builds within the arteries that supply blood to the legs, which can lead to poor blood flow, leg pain and other complications. The disease can be treated with medication, surgery or angioplasty. The Express LD Iliac Stent already received CE Mark approval and currently is approved for iliac use in a number of international markets.
Boston Scientific also received clearance to market a new balloon-style catheter in the United States and European Union. The NC Quantum Apex PTCA Dilation Balloon Catheter is intended for use in coronary angioplasty and stent procedures, which are designed to open arteries that have been blocked by atherosclerosis. The condition can cause strokes or heart attacks. Also in 2010, the company rolled out the U.S. and European launches of its fourth-generation Neuroform EZ stent system used for the advanced treatment of wide-necked aneurysms. The Neuroform EZ adjunctive stent system expanded the product portfolio of the company’s Neurovascular division, which includes a line of catheters used in thrombolysis and stent delivery technology through over-the-wire and open catheter systems.