BSX

Business Context and Reporting Period

Company: Boston Scientific Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
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

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 20% year-over-year ($132 million increase). On a constant currency basis, sales grew 14%. Growth was driven by the Express2 coronary stent, Endosurgery, and coronary angioplasty balloon lines.
• Profitability: Gross margin improved to 72.0% from 69.3%, attributed to cost reductions from the global operations strategy and a shift to higher-margin products.
• Special Charges: Q1 2003 results included $20 million in after-tax charges ($0.05 per share), consisting of $13 million for purchased in-process R&D (InFlow acquisition) and a $7 million litigation charge related to the FTC.
• Debt and Liquidity: Commercial paper borrowings surged from $88 million to $421 million to fund acquisitions and share repurchases. Net debt increased to $957 million (26% of capital) from $658 million (19% of capital).
• Share Repurchases: The company repurchased approximately 4.5 million shares for $189 million during the quarter.

Guidance, Outlook, and Risks

Outlook and Management Commentary

• Drug-Eluting Stents: Management views the drug-eluting stent market as a major opportunity, estimating the global market could reach $5 billion by 2005. The company received CE Mark approval for its TAXUS stent and initiated a limited launch in Europe, with a U.S. launch expected in late 2003.
• Japan Market: The company anticipates launching the Express2 stent in Japan in Q3 or Q4 2003 to counter competitive pressure and declining sales of the NIR stent platform.
• Capital Expenditures: Expected to be approximately $150 million for the remainder of 2003.
• Tax Rate: Management estimates an effective tax rate of approximately 27% for the remainder of 2003, excluding special charges.

Risks and Contingencies

• Litigation: Significant ongoing patent litigation with Johnson & Johnson (Cordis), Medtronic, and Guidant. A $7 million judgment was entered against the company by the FTC in Q1 2003. Potential exposure for litigation-related costs is estimated between $13 million and $18 million.
• Regulatory and Reimbursement: Uncertainty regarding reimbursement rates for drug-eluting stents in international markets and the timing of FDA approvals for the TAXUS system.
• Contingent Consideration: The company has an accrual of $60 million for acquisition-related obligations, with a maximum potential future contingent consideration of approximately $600 million tied to performance milestones through 2013.
• DOJ Investigation: The company and two senior officials are targets of a federal grand jury investigation regarding the NIR ON Ranger stent delivery system; the statute of limitations for certain charges may expire in 2003.

Investor Verification Checklist

• Verify the timeline and regulatory approval status for the U.S. launch of the TAXUS drug-eluting stent.
• Monitor the outcome of the FTC litigation and the status of the U.S. Department of Justice investigation.
• Track the progress of patent infringement lawsuits involving Johnson & Johnson, Medtronic, and Guidant, specifically regarding the Express2 and Cypher stents.
• Assess the impact of the $600 million potential contingent consideration on future earnings if acquisition milestones are met.
• Review the company's ability to refinance the $1 billion credit facility expiring in May 2003.