Medical Device Daily

Boston Scientific (Natick, Massachusetts) reported that it has signed an agreement to sell its fluid management and venous access businesses for $425 million in cash to private equity firm Avista Capital Partners.

The transaction is expected to close in 1Q08, subject to regulatory approvals and customary conditions.

Boston Scientific previously reported its intent to sell these businesses as part of its plan to divest non-strategic assets. And with these sell-offs, the company has divested all five non-strategic units it had previously planned to divest, and it is "well under way" with its cost cutting and head count reduction plan, CEO Jim Tobin said in a statement.

In addition to these two spin-offs, Boston Scientific also recently reported agreements to sell its cardiac surgery, vascular surgery and auditory businesses, billing these as non-strategic to its core focus.

In August, the company reported plans to sell the cardiac and vascular surgery units. Earlier that month, it reported the sale of the auditory assets of Advanced Bionics (Valencia, California), though retaining the pain management assets of that company, after a protracted legal struggle with that company's management.

Collectively, these businesses represent about $550 million in 2007 sales for Boston Scientific.

As part of its restructuring, the company in October said that it would eliminate about 2,300 positions worldwide, or about 13% of an 18,000-person, non-manufacturing workforce baseline, by June 30 of next year. In addition, the company said it expects another 2,000 employees to leave the company in connection with the aforementioned divestitures.

Avista said the combined fluid management and venous access businesses will operate as an independent company under a new name when the deal closes. Revenue for the two divisions is expected to be about $170 million in 2007.

Ron Sparks, an Avista healthcare industry advisor, will become CEO and chairman of the new company. Dave McClellan, president of Boston Scientific's oncology business, will become the new company's president.

The fluid management franchise, formerly named North American Medical Instruments Corp., produces a range of products used to manage fluid and measure pressure during angiography and angioplasty procedures. The fluid management franchise employs about 750 people in its Glens Falls, New York, manufacturing facility.

The venous access franchise, whose products are also manufactured in Glens Falls, offers a portfolio of implantable devices designed to provide access to the blood stream for patients requiring intravenous antibiotics, nutrition, chemotherapy and blood sampling. It is part of Boston Scientific's oncology business, and employs about 150 people in locations around the U.S.

Boston Scientific has struggled with its finances since its $27.2 billion acquisition of Guidant (Indianapolis) last year. As a result of that transaction, the company is carrying more than $8 billion in debt, a financial issue compounded by downturns in product sales.

In 2Q07, Boston Scientifc's defibrillator sales were down 20% from two years before, when a series of recalls hurt the company's reputation. Sales of stents — especially the once lucrative drug-eluting type — have been hurt by medical studies indicating increases in thrombosis, often fatal, and were down 27% from a year ago.

Finally, the company in August pulled back on its decision to sell a minority stake (up to 25%) in its endosurgery business that could have generated close to $1 billion. That prompted several creditors to lower the company's debt ratings to junk-bond levels.

Tobin said the divestitures, coupled with the headcount reduction "should help us further our overall goals of restoring profitable growth, increasing shareholder value and continuing to strengthen Boston Scientific for the future."

According to analyst Rick Wise at Bear Stearns, the divestiture of the five non-core businesses could generate around $1.3 billion in net proceeds that should cover the company debt payments. He issued a research note saying that the company has no obligation in 2008 and that the 2009 debt has largely been prepaid ($300,000 remaining).

Wise said he believes the $1.3 billion in proceeds will help the company "cover its $1.7 billion and $3.5 billion mandatory payments in 2Q10 & 2Q11."

Bear Stearns assumes that the company will have ample cash to cover the $1.7 billion payment in 2Q10, and will come close to break-even in 2Q11. The $3.5 billion payment consists of a $2 billion term loan maturity (April 2011), a $900 million Abbott Laboratories (Abbott Park, Illinois) loan maturity (April 2011), and a $600 million maturity of senior notes (June 2011).

"By our estimates Boston Scientific will have about $3.2 billion in cash exiting 1Q11 and should generate about $500 million after investing activities," Wise said. "This would leave BSX with roughly $200 million in cash and equivalents entering 3Q11."

He added that, "directionally," the company "appears to be moving in the right direction with increased focus on its core cardiac rhythm and drug-eluting stent businesses."