01—Abstract
Summary
Summary of the 10-K filed March 31, 1997. Cited figures are marked; the original filing is the authoritative source.
Boston Scientific's 1996 10-K shows a company that grew sharply through acquisitions but whose reported profitability was heavily affected by one-time charges.
Net sales rose 29.5% to $1.46 billiona from $1.13 billion, and vascular products (about 78% of sales) drove most of the growth. Net income rose to $167 million, or $0.92 per share, from $6 million in 1995. Excluding special charges tied to 1995 and 1996 acquisitions, management reports net income of $281 million, up 39%.
Gross margin improved to about 72.6% from 71.2%, and international sales grew to 39% of revenue, though foreign exchange was a drag. The balance sheet is more stretched than the income statement suggests. Cash and short-term investments fell to about $81 millionb from $161 million, commercial paper of $212.5 million was issued in 1996, and intangibles rose to $308 million from $138 million, largely from acquisitions.
Operating cash flow of $134 millionc covered only part of the roughly $200 million of planned 1997 capital expenditures, and integration of the 1995 and 1996 deals is not expected to finish until the end of 1997. Management also flagged risks around managed-care pricing pressure, the integration effort, and the pending Target Therapeutics merger, which is expected to close in the second quarter of 1997 as a pooling-of-interests transaction. Legal exposure is significant and active.
The company is in multiple patent disputes, including a Bard infringement suit filed in February 1997 and a broad European litigation campaign against Johnson & Johnson over the NIR stent. The company also faces a federal OIG investigation into reimbursement for devices that were not FDA-approved at the time of use. Management says none of these matters is expected to be material, but it acknowledges that adverse patent outcomes could be material.
02—Key points
Key Highlights
- Net sales grew 29.5% to $1,462 million in 1996, driven by vascular products (+28%) and non-vascular products (+34%).
- Reported net income was $167 million ($0.92/share), versus $6 million in 1995, which was depressed by $237 million of 1995 special charges. Excluding special charges, net income rose 39% to $281 million.
- Gross margin improved to about 72.6% from 71.2%, helped by cost containment and the shift to direct international sales, though FX and price pressure offset part of the gain.
- International sales reached 39% of total sales (up from 33% in 1995), but roughly $21 million of FX headwind hit 1996 international revenue.
- Liquidity tightened: cash and short-term investments dropped to about $81 million, commercial paper of $212.5 million was issued, and 1997 capex is planned at about $200 million.
- Intangible assets roughly doubled to $308 million, and the pending Target Therapeutics stock-for-stock merger (1.07 BSX shares per Target share) is expected to close in Q2 1997.
- Multiple patent and antitrust disputes are ongoing, including a broad European campaign against Johnson & Johnson over the NIR stent and a Bard suit filed in February 1997; an OIG investigation of off-label or unapproved device reimbursement also remains open.
03—Questions
Frequently Asked Questions
Why did reported net income rise so sharply in 1996?
1995 net income of $6 million was reduced by $237 million of special charges tied to the SCIMED, CVIS, Vesica, Meadox and Heart acquisitions. 1996 also included $128 million of special charges, including $96 million of purchased R&D, so the reported comparison is distorted. Excluding special charges, net income grew 39% to $281 million from $202 million, a more representative measure of underlying growth.
How is the company funding its growth and acquisitions?
Mostly with a mix of cash, borrowings, and stock. Acquisitions such as Symbiosis ($153 million) and Endotech/MinTec ($72 million) were paid in cash, which pushed cash and investments down to about $81 million. The company began a commercial paper program in 1996, with $212.5 million outstanding at year-end, backed by a $350 million revolving credit facility. Most of the earlier pooling-of-interests deals were stock-financed and did not consume cash.
What are the main risks to the investment case?
The main risks are integration execution, since management says failing to integrate effectively could hurt near-term results; continued pricing pressure from managed care and hospital consolidation, which could compress gross margins; intellectual property litigation, where an adverse ruling could be material; and regulatory risk from the FDA and the OIG investigation. Foreign currency movements and the company's reliance on multiple acquisitions to drive growth are also important considerations.
What does the pending Target Therapeutics acquisition mean for Boston Scientific?
The Target merger, announced January 20, 1997, would be a tax-free, stock-for-stock deal accounted for as a pooling-of-interests, with Target shareholders receiving 1.07 BSX shares per Target share. It would give Boston Scientific a leading position in neuro-endovascular therapy, including the Guglielmi Detachable Coil for cerebral aneurysms. The company expects to record additional special charges in 1997 if the deal closes, and closing is subject to Target shareholder approval.
Is the company's legal exposure a concern for investors?
It is an ongoing concern. The company is involved in several patent disputes, including a Bard infringement suit against SCIMED filed in February 1997, a multi-country European litigation campaign against Johnson & Johnson over the NIR stent, and long-running suits against Advanced Cardiovascular Systems. Management says the company has meritorious defenses and that current cases are not expected to be material, but it acknowledges that adverse patent outcomes could have a material adverse effect. Investors should monitor these cases, especially where the NIR stent is involved.
04—Continue