Business Context and Reporting Period
Company: Boston Scientific Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: A worldwide developer, manufacturer, and marketer of medical devices for less invasive procedures, operating in four geographic segments: United States, Europe, Japan, and Inter-Continental.
Key Financial Metrics
| Metric (in millions) | Q3 2002 | Q3 2001 | 9 Months 2002 | 9 Months 2001 |
|---|---|---|---|---|
| Net Sales | $722 | $670 | $2,105 | $1,996 |
| Gross Profit | $511 | $456 | $1,462 | $1,292 |
| Gross Margin % | 70.8% | 68.1% | 69.5% | 64.7% |
| Operating Income | $246 | $102 | $453 | $(8) |
| Net Income | $161 | $58 | $268 | $(119) |
| Diluted EPS | $0.39 | $0.14 | $0.65 | $(0.30) |
| Cash from Operations (9mo) | $540 | $328 | ||
| Cash & Equivalents (End Period) | $259 | |||
| Total Debt (Short + Long Term) | $1,107 (Current: $367, Long-term: $840) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8% in Q3 and 5% for the nine months ended September 30, 2002, compared to the prior year. Growth was driven by Endosurgery product lines and the Express2 coronary stent, partially offset by declines in NIR coronary stent sales, particularly in Japan.
- Profitability Surge: Net income improved significantly from a loss of $119 million in the first nine months of 2001 to a profit of $268 million in 2002. This turnaround is largely attributable to a $99 million net litigation settlement credit in 2002 and the absence of significant charges present in 2001 (including a $277 million purchased R&D charge and $34 million inventory provision).
- Margin Expansion: Gross margins improved to 70.8% in Q3 2002 from 68.1% in Q3 2001, driven by operational efficiencies from the global operations plan and favorable product mix shifts.
- Amortization Reduction: Amortization expense dropped to $19 million in Q3 2002 from $30 million in Q3 2001 due to the adoption of FASB Statement No. 142, which eliminated goodwill amortization.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Drug-Eluting Stents: Management expects significant market impact from drug-eluting stents. A competitor is expected to launch in the U.S. in early 2003, while Boston Scientific's TAXUS stent is targeted for a U.S. launch in late 2003. Until then, the company anticipates share and price pressure in the U.S. coronary stent market.
- Japan Market: Continued pressure is expected in Japan due to lack of physician acceptance of the NIR coronary stent platform.
- Acquisitions: The company completed acquisitions of Enteric Medical Technologies (EMT) and BEI Medical Systems in 2002 and expects to complete the acquisition of Smart Therapeutics in Q4 2002. Earn-out payments of approximately $150 million are expected in Q4 2002.
- Cost Savings: The global operations plan is estimated to achieve $220 million in pre-tax savings in 2002 and $250 million annually thereafter.
Risks and Contingencies
- Litigation: Significant ongoing patent litigation with Johnson & Johnson (Cordis) regarding the NIR stent, though a $175 million settlement with Medtronic was reached in Q3 2002. A new suit was filed by Guidant (ACS) in October 2002 alleging infringement of the Express stent.
- Regulatory & Clinical: Future growth depends on the success of the TAXUS clinical trials and regulatory approvals. Failure to complete trials or obtain approval could materially impact revenues.
- Self-Insurance: The company elected to become substantially self-insured for general and product liability claims in Q3 2002 due to insurance market conditions, exposing it to potential catastrophic losses.
- Foreign Exchange: Fluctuations in currency rates continue to impact reported sales and margins.
Investor Verification Checklist
- Litigation Settlements: Verify the timing and tax treatment of the $99 million net litigation settlement credit (primarily the $175 million Medtronic payment) and the status of the pending Johnson & Johnson and Guidant lawsuits.
- TAXUS Program: Monitor the progress of the TAXUS IV pivotal trial and the timeline for FDA PMA submission (expected Q2 2003) and subsequent commercial launch.
- Japan Performance: Assess the trajectory of NIR stent sales in Japan and the potential for further revenue erosion before the launch of new platforms.
- Acquisition Integration: Review the integration progress of EMT and BEI and the financial impact of the expected $150 million earn-out payments in Q4 2002.
- Debt Structure: Confirm the classification of short-term debt expected to remain outstanding beyond 12 months ($306 million) and the terms of the new $200 million asset-backed revolving credit facility.