Medical Device Daily Executive Editor

Faced with large debt and eroding confidence on the part of investors, Boston Scientific (Natick, Massachusetts) late Monday said it is considering the spin-off, via IPO, of a minority share of a group of endosurgical businesses manufacturing products for endoscopy, urology, gynecology and oncology. It said the IPO could raise up to $1 billion.

Late Monday, Boston Sci said its board gave it the go-ahead to explore selling of about 20% of the Endosurgery group — its main Endosurgery facility in Marlborough, Massachusetts — and establishing a separately traded public company. The new company would remain a majority-owned Boston Sci subsidiary.

(In reporting on the potential offering, The New York Times yesterday noted that the partial spin would be the biggest medical device sector since Nestle sold about 23% of eye care firm Alcon for $2.3 billion in 2002.)

The company would use the funds to help pay the $9 billion in debt it acquired with the purchase of Guidant last year. But that debt is just one of many difficulties for the company, ranging from a flattening of its sales of the Taxus drug-eluting stent and its defibrillator products, to an FDA warning letter that blocks approval of new products, to the continued filing of class action and product liability lawsuits, currently heading toward the one-thousand mark (Medical Device Daily, March 6, 2007).

The result has been significant paring of customer confidence and, worse, investor confidence, the company's share price having fallen about 37% since its 52-week high of $23.98.

Lexie Code, endosurgery department manager at Millennium Research Group (Waltham, Massachusetts), told Medical Device Daily, that the proposed spin is "exciting and creative," while adding a proviso: "I think it will be a very positive move as long as they can find the right partner with the right managers."

Code said she thought that consideration of this initiative was a response both to a longer-term analysis of the endosurgery division by Boston Sci and how to improve its operations, and also a response to the shorter-term issues related to the Guidant purchase.

Boston Sci, she said, had "definitely done a good job with [the endosurgery business] and it could be a star company on its own."

An "outside party," she said, "isn't going to be distracted in some cases."

Boston Sci said that its endosurgical offerings have produced "consistent revenue and earnings growth over the past eight years" with a compound annual growth rate in revenues of about 12% during that period. The group is expected to generate more than $1.4 billion in revenue in 2007.

But in a press statement, it acknowledged that the endosurgical businesses have been over-shadowed — specifically, "less visible to the investment community" — by the Guidant purchase last year and its "increased presence in the cardiovascular market."

It said that the benefits of operating the Endosurgical business as a private operation will have a variety of benefits including improved visibility and improved focus — as well as providing the $1 billion for debt repayment and providing funds for beefed-up salary offerings.

Lawrence Biegelsen, an analyst for Prudential Financial (New York), in a report said the move "signals that [Boston Sci management] acknowledges that the challenges in its core DES and CRM businesses are making it increasingly difficult for the company to achieve its debt repayment targets."

In a conference call late Monday, Jim Tobin, president/CEO of Boston Sci, emphasized the consistency of performance in the endosurgical sector but that these businesses were "not getting credit" for their track record because they are hidden in the larger corporate operations.

Tobin said that a minority-interest IPO for the business group "would highlight its success and stability and create a direct investment vehicle in these specialty device markets, while giving us greater financial flexibility."

The company said it would take from six to 12 months to evaluate the proposal and that, if approved for going forward, would be made in made late this year or early 2008.

If an IPO were to take place, the Endosurgery group would continue to be fully consolidated with Boston Sci for financial reporting purposes and would be headed by its current senior VP, Stephen Moreci.