Boston Scientific Corporation — FY 2009 Form 10-K
Reporting period: Year ended December 31, 2009. The filing also reports fourth-quarter results; this is an annual report, not a standalone Q4 filing. All amounts are U.S. dollars.
Business context
Boston Scientific develops and sells less-invasive medical devices across cardiac rhythm management (CRM), cardiovascular, neurovascular, endoscopy, urology and women’s health, and neuromodulation. International markets generated approximately 43% of 2009 sales. The company reported approximately $8.2 billion in annual sales.
Financial results and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $8.188 billion | $8.050 billion |
| Gross profit / margin | $5.612 billion / 68.5% | $5.581 billion / 69.3% |
| Operating income (loss) | $(894) million | $(1.505) billion |
| Net income (loss) | $(1.025) billion | $(2.036) billion |
| Diluted loss per share | $(0.68) | $(1.36) |
| Cash from operations | $835 million | $1.216 billion |
| Capital expenditures | $312 million | $362 million |
| Cash and cash equivalents | $864 million | $1.641 billion |
| Total debt | $5.918 billion | $6.745 billion |
| Working capital | $1.039 billion | $2.219 billion |
Sales rose 2% as reported. Excluding currency effects and sales from divested businesses, management reported 4% growth. Foreign exchange reduced 2009 sales by $92 million. Gross margin declined, principally from a shift in drug-eluting stent sales from higher-margin TAXUS products toward Abbott-supplied PROMUS products. Operating loss included substantial litigation, restructuring and impairment-related items; the 2009 net loss included $1.785 billion of specified items after tax, according to management.
Operating cash flow fell by $381 million, with litigation payments a major factor; the company cites $823 million of litigation-related payments in its cash-flow discussion. Net debt was $5.054 billion at year-end, compared with $5.104 billion in 2008. The company issued $2.0 billion of senior notes and prepaid its remaining $2.825 billion term loan during 2009. Its revolving-credit covenants were met at year-end. Working capital declined materially; current assets were $4.061 billion and current liabilities $3.022 billion.
Changes versus prior year and Q4
- CRM sales increased 5% to $2.562 billion; neuromodulation rose 17% to $285 million, endoscopy rose 7% to $1.006 billion, and urology/women’s health rose 6% to $456 million.
- Cardiovascular group sales declined 1% to $3.520 billion; neurovascular sales declined 3% to $348 million. Interventional cardiology sales excluding coronary stents fell 5% to $980 million.
- Coronary stent sales increased 2% to $1.879 billion, but U.S. drug-eluting-stent average selling prices fell approximately 8%. Abbott-supplied PROMUS products accounted for approximately 40% of drug-eluting-stent sales and had substantially lower margins than TAXUS.
- FY net loss improved from 2008, when the company recorded a $2.613 billion goodwill impairment charge. However, 2009 included $2.022 billion of litigation-related net charges, primarily associated with Johnson & Johnson matters and a U.S. Department of Justice agreement in principle.
- In Q4 2009, sales were $2.079 billion, gross profit $1.369 billion, operating loss $1.231 billion, net loss $1.075 billion, and diluted loss per share $0.71. The large quarterly loss reflected significant litigation-related charges.
Outlook, management commentary and material risks
- Restructuring: A 2010 plan announced after year-end is expected to eliminate 1,000–1,300 positions by the end of 2011, incur $180–$200 million of pre-tax charges, and reduce pre-tax operating expenses by approximately $200–$250 million when completed. Management expects the plant-network program to reduce annual manufacturing costs by $65–$80 million in 2012, in addition to $35–$40 million from the 2007 restructuring plan.
- Investment and spending: R&D expense was $1.035 billion, about 12.6% of sales. Planned 2010 capital expenditures were approximately $350–$400 million. The company cited launches of next-generation CRM, stent, neurovascular and other products, subject to approvals and execution.
- Debt and settlement obligations: A January 2010 settlement with Johnson & Johnson requires $1.725 billion plus interest. Boston Scientific paid $1.0 billion in February 2010, including $200 million drawn under its revolver, and must pay the balance by January 3, 2011. It also expected to refinance most 2011 debt maturities and its revolving facility by mid-2010; $1.750 billion of debt and the facility were due in 2011.
- Legal and regulatory exposure: The company recorded a $296 million charge for an agreement in principle with DOJ concerning Guidant product advisories; it expected payment in 2010 and entered a Corporate Integrity Agreement. The FDA had removed site restrictions after reinspections, but the corporate warning letter remained pending administrative procedures. Other patent, product-liability, securities and government matters remain.
- Business risks: Key exposures include competitive and pricing pressure, clinical-trial results and physician confidence, reimbursement and healthcare reform, product approvals and recalls, reliance on Abbott for certain U.S. and Japanese stent supply through mid-2012, supplier and sterilization continuity, foreign currency, and execution of restructuring. Two reporting units, U.S. CRM and EMEA, held approximately $7.4 billion of goodwill and were identified as having elevated impairment risk in future periods, although the 2009 annual test found no impairment.
- Other: No cash dividends were paid in 2009, 2008 or 2007, and none were then intended. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the $2.022 billion litigation charge and $2.316 billion year-end legal accrual with settlement payments, remaining obligations and other legal matters.
- Confirm completion and terms of the planned refinancing of 2011 maturities and the effect of settlement payments and the $745 million letter of credit on available liquidity.
- Track realized savings, cash restructuring costs and operational effects against management’s 2010 restructuring and plant-network estimates.
- Monitor CRM and stent sales, price trends, product launches and approvals, Abbott supply arrangements, and resulting gross-margin performance.
- Assess goodwill impairment sensitivity in U.S. CRM and EMEA and review developments in FDA, DOJ, product-liability and patent proceedings.