01—Abstract
Summary
Summary of the 10-K filed March 27, 2002. Cited figures are marked; the original filing is the authoritative source.
Boston Scientific's 2001 results were weak on a reported basis.
Net sales were essentially flat at $2,673 milliona (vs. $2,664 million in 2000, up about 4% excluding roughly $92 million of currency headwinds), but the company posted a reported net loss of $54 million, or $0.13 per share, versus net income of $373 million in 2000. The loss was driven by $377 million of after-tax charges, chiefly $282 million of purchased in-process R&D from 2001 acquisitions, a provision for excess NIR stent inventory, costs of the global operations plan, and an intangible asset write-down. Excluding these charges, net income was $323 million, or $0.80 per share diluted, down from $1.03 in 2000 on an adjusted basis.
The core investment question is the coronary stent franchise. NIR stent sales fell to about 11%b of sales from 15% in 2000, with fourth-quarter NIR sales roughly half of first-quarter levels, and management expects further share erosion in 2002. Management is betting on the internally developed Express stent (launched in Europe in late 2001, U.S. launch expected in the second half of 2002) and the TAXUS paclitaxel-eluting stent (international launch planned for 2002, U.S. launch targeted for late 2003).
Research and development spending rose to $275 millionc, about 10% of sales, and will increase further in 2002. Gross margin, excluding special items, improved modestly to 69.8%. The balance sheet remains manageable, with total assets of $3.97 billion, stockholders' equity of $2.02 billion, and total debt of roughly $1.1 billion.
Operating cash flow fell to $490 milliond from $739 million. Risk factors are substantial: an open Johnson & Johnson patent verdict on the NIR stent that could imply up to about $324 million in damages plus interest, a $169 million arbitration award against Medtronic AVE under appeal, an ongoing dispute with supplier Medinol that could disrupt NIR supply, and a pending FTC matter. Investors should weigh the potential of the Express and TAXUS platforms against near-term stent erosion, litigation exposure, and the execution risk of integrating several 2001 acquisitions.
02—Key points
Key Highlights
- Net sales of $2.673 billion in 2001, nearly flat versus $2.664 billion in 2000; up about 4% excluding roughly $92 million of foreign currency drag
- Reported net loss of $54 million ($0.13 per share) versus net income of $373 million in 2000, driven by $377 million of after-tax special charges including $282 million of purchased in-process R&D
- Excluding special charges, 2001 net income was $323 million, or $0.80 per diluted share, versus $1.03 in 2000
- NIR coronary stent sales fell to about 11% of sales (from 15%), with Q4 2001 NIR sales down about 50% from Q1; management expects further share decline in 2002
- Express stent launched in Europe in Q4 2001 and reportedly increased share of those markets by more than 30% in the first three months; U.S. launch expected in 2H 2002; TAXUS drug-eluting stent U.S. launch targeted for late 2003
- Operating cash flow fell to $490 million from $739 million; total assets of $3.97 billion and stockholders' equity of $2.02 billion at year end
- Significant litigation exposure: a J&J jury verdict on the NIR stent (about $324 million plus interest, not accrued), an unresolved Medinol dispute threatening NIR supply, and a $169 million award against Medtronic AVE under appeal
03—Questions
Frequently Asked Questions
Why did Boston Scientific report a net loss in 2001 after earning $373 million in 2000?
The 2001 loss reflects $377 million of after-tax charges, most significantly $282 million of purchased in-process R&D tied to 2001 acquisitions (including Cardiac Pathways, Interventional Technologies, and RadioTherapeutics). The company also recorded an inventory provision for declining NIR stent demand, costs under its global operations plan, and a write-down of intangibles tied to discontinued technology platforms. Excluding these items, 2001 net income was $323 million, or $0.80 per diluted share.
How serious is the decline of the NIR stent, and what replaces it?
NIR's share of sales fell from about 15% in 2000 to about 11% in 2001, and management expects its global share to keep declining in 2002 as physician acceptance erodes. Replacement depends on the Express stent (international launch in late 2001, U.S. launch expected in 2H 2002) and the TAXUS paclitaxel-eluting stent (international launch planned for 2002, U.S. launch targeted for late 2003). Timing of FDA approvals is a key uncertainty.
What are the largest legal risks to the company?
The most significant is the December 2000 jury verdict in Johnson & Johnson's favor on the NIR stent, which could imply damages of about $324 million for past sales plus interest and additional damages for later sales; the company has not accrued a loss and expects to appeal. Other material matters include the Medinol dispute (Medinol purported to terminate the supply agreement in February 2002), a $169 million arbitration award against Medtronic AVE that is on appeal, and an FTC suit with a damages hearing scheduled for August 2002.
Is the balance sheet and liquidity position a concern?
Leverage appears manageable. Total debt is roughly $1.1 billion against $2.0 billion of equity, and the company reported covenant ratios of about 1.9x debt-to-EBITDA (limit 3.5x) and 10.4x EBITDA-to-interest (minimum 3.5x) at year end. However, operating cash flow declined to $490 million from $739 million, and the company expects about $400 million of contingent acquisition payments through 2006, along with a $1 billion revolving facility maturing in June 2002 that it intends to refinance.
04—Continue