BSX

Business Context and Reporting Period

Company: Boston Scientific Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 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

Note: Total Debt calculated as Commercial Paper ($342M) + Bank Obligations ($9M) + Long-term Debt ($974M) as of June 30, 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 21% ($146M) for the quarter and 20% ($278M) for the six months compared to the prior year. Organic growth was approximately 15%, with the remainder driven by favorable foreign currency fluctuations ($40M for the quarter; $78M for six months).
• Profitability: Net income surged 356% for the quarter ($114M vs. $25M) and 97% for the six months ($211M vs. $107M). This improvement is largely due to the absence of significant special charges in 2003 compared to 2002, which included $70M in after-tax charges related to a global operations plan and acquisitions.
• Product Mix: Worldwide coronary stent sales increased over 100% for the quarter and 92% for the six months, driven by the Express2 stent in the U.S. and the TAXUS drug-eluting stent in international markets.
• Debt Levels: Net debt increased to $915 million from $658 million at year-end 2002, reflecting increased borrowings to fund acquisitions, strategic alliances, and stock repurchases.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• TAXUS Stent Launch: The Company submitted the final Pre-Market Approval (PMA) module to the FDA in June 2003, anticipating U.S. approval and launch as early as the fourth quarter of 2003. The product is already launched in Europe and Inter-Continental markets.
• Market Dynamics: The U.S. bare metal stent market faces share and price pressure due to a competitor's drug-eluting stent launch. Management expects operating profit to be adversely impacted until the TAXUS launch.
• Capital Allocation: The Company repurchased approximately 6 million shares ($244M) in the first half of 2003. Capital expenditures are expected to reach $100M in the second half of 2003 to support manufacturing for the TAXUS launch.
• Stock Split: A two-for-one stock split was approved by the Board, pending stockholder approval, with an expected payment date in early November 2003.

Risks and Contingencies

• Litigation: Significant ongoing patent litigation with Johnson & Johnson, Medtronic, Guidant, and Medinol. A $7M judgment was recorded in Q1 2003 related to an FTC suit. Total litigation reserves were $10M as of June 30, 2003.
• Regulatory & DOJ Investigation: The U.S. Department of Justice is investigating the 1998 recall of the NIR ON Ranger stent system; the Company and two senior officials are targets of the grand jury investigation.
• Contingent Consideration: The Company has potential future acquisition-related payments of up to $575 million contingent on performance milestones through 2013.
• Japan Market: Continued pressure on the Japan business due to competitive offerings and lack of acceptance of the NIR stent platform.

Investor Verification Checklist

• TAXUS FDA Approval: Verify the timing of the FDA decision on the Pre-Market Approval (PMA) application submitted in June 2003.
• DOJ Investigation Status: Monitor updates regarding the Department of Justice investigation into the 1998 stent recall and potential charges against senior officials.
• Patent Litigation Outcomes: Track the status of key patent disputes with Johnson & Johnson, Medtronic, and Guidant, particularly regarding preliminary injunctions and trial dates.
• Stock Split Execution: Confirm stockholder approval of the charter amendment required for the two-for-one stock split.
• Contingent Payments: Review future earnings reports for recognition of contingent acquisition payments (up to $575M potential) tied to revenue milestones.