Cardiovascular Device Update Executive Editor
"You should've bought it when you saw it."
That's the not really very catchy saying I recently happened to notice on the back wall of a flea market booth in a little town south of Atlanta.
But while not linguistically wonderful, the concept expressed is oh-so-true. Or am I the only one that has seen something pretty interesting (and I do shop in places other than flea markets), walked on by, considered some more, went back, and . . . oops, gone?
So we offer this as advice to those potential acquirers out there who have been listening to the many rumors that the shareholders of Boston Scientific (Natick, Massachusetts) might be very interested in an offer to buy the company — one of these, perhaps, Johnson & Johnson (New Brunswick, New Jersey), which could garner a sort of two-for-one deal, since Boston Scientific elbowed it aside last year to acquire Guidant (Indianapolis), and J&J could now essentially scoop up both at a much reduced (though not exactly flea-market-low) price. Or perhaps some big holding group might be interested?
But perhaps all the potential purchasers simply are waiting to see how low the company's share price will go in order to get that really big bargain.
Since acquiring Guidant, and then collecting a corporate-wide FDA letter blocking regulatory move-forward for the cardiovascular products that are this company's staple — and which it had hoped to beef up with the Guidant pipeline of implantable defibrillators — Boston Scientific's share price has been on the downward slope, and experiencing deterioration of its market capitalization as well.
The share price has tumbled from the $25 range in early 2006 to nearly half that today. And perhaps more critically, its market cap has fallen more than 20%, from $25 billion in 2004 to less than $20 billion today (and with its 2004 share price then in the $50 range).
More than one market negative
These declining numbers were largely fueled last year by the $9 billion dollar debt it took on when it acquired Guidant and the associated legal and regulatory problems. Then came problems in Boston Scientific's own flagship product, the Taxus drug-eluting stent. Touted as the "wonder device" of the 21st century, DES devices were hit by a series of critical studies which pushed back the entire sector.
Hence, over the past two months, Boston Scientific has been hopping about on the financial and "restructuring" dance floor attempting to figure out how to pay down its debt, reorganize its holdings — after a big buying spree in the few years prior to the Guidant acquisition — and regain the confidence of shareholders, analysts and its physician/patient consumer base.
Decisions, decisions
Following are some of the sentinel developments over the past few weeks, which have clearly forced Boston Scientific's executive team to decide whether they should keep on doing a disco (to the tune of "Stayin' Alive"), or bag all dance routines and sing a buy-out swan song.
- 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. - Towards the end of July, the company reported a plan "to explore" the sale of its fluid management business, formerly North American Medical Instruments Corp. (NAMIC), that produces a range of products both to manage fluid and to measure pressure during angiography and angioplasty procedures. That business posted sales of $767 million in 1Q07. 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 on a proposal that in March it said it was considering: to spin off part of a minority chunk of its endosurgery businesses via initial public offering. At that time it said it was considering the spin of "non-strategic assets" and was thinking about offering 25% of a group of its products for endoscopy, urology, gynecology and oncology via IPO in order to raise up to $1 billion.
But the company then said that after reviewing its options it had decided to keep full control of the endosurgical assets while continuing to explore ways of restructuring its businesses and investments. Jim Tobin, CEO of the company, said that "the exploration process has increased visibility to the historic strengths and future potential of the Endosurgery group." He billed Endosurgery as a market leader providing "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." - A bit 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. The company will pay $1 million and an additional earn-out of $360 million to separate from AB, the extricate itself. 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 services to sidestep the legal problems resulting from its 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 would be positive but that it added to the company's liquidity woes, short-term. - The company then reported that to reduce its debt and better target its core emphasis on interventional technologies, the company added its cardiac and vascular surgery units to the list of businesses in its product portfolio review. The Vascular Surgery business (San Carlos, California), whichdevelops 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."
Boston Scientific acquired the Cardiac Surgery business in April 2006 as part of the Guidant transaction, and it established the Vascular Surgery business (San Jose, California) with the acquisition of Meadox Medicals 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. - Somewhat later, the company reported that it 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 Rhyman Mangement 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 associated 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 Guidant 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." He added the pro forma wording that the agreement "underscores our commitment to being the industry leader in patient safety and in communicating with patients and doctors." - In early September, the bad news kept coming as the company received a warning letter from the FDA concerning safety violations, including failing to promptly report the deaths of five patients enrolled in clinical trials of a device used to treat abdominal aortic aneurysms (AAA). The two U.S. trials included an early stage trial that involved 43 patients and a mid-stage trial that did not involve the implantation of the device, called a stent graft.
The device was developed by TriVascular (Santa Rosa, California), a closely held company acquired by Boston Scientific in 2005. Two deaths occurred after Boston Scientific took over the company, according to the warning letter, issued Aug. 30.
The company failed to investigate the two deaths to determine whether they were caused by the stent grafts, according to the letter issued by CDRH. At least 25 patients were found to have cracks in the stent grafts placed in them during studies, and the events weren't reported within the required deadlines, Ulatowski said in the letter.
"Two of these deaths had not been evaluated to determine if there was a relationship between the deaths and the investigational device or to determine if they would be considered to be an [adverse event]," the letter said.And the agency said that the company failed to proerly notify trial participatns of the increased risk of stent fractures.
Boston Scientific has until late September to respond to the letter and provide documentation concerning the two U.S. trials related to the device.
So what will be the result?
Can Boston Scientific successfully restructure its multiple holdings that had been built up over a series of years, reestablish a clear technology and marketing focus and convince the markets that it can find its way of its current financial morass?