What drove the swing from a 2001 net loss to 2002 net income?

2001 included $377 million of after-tax charges, including in-process R&D from acquisitions, a NIR inventory write-down, restructuring costs and intangible write-downs. 2002 had lower special charges ($40 million after tax net), helped by Medtronic litigation settlement receipts and a tax refund. Sales growth, gross margin improvement and lower amortization (down to $72 million from $136 million, partly due to SFAS 142) also contributed.

When is the TAXUS drug-eluting stent expected to reach the U.S. market, and what are the main risks?

The company expects a U.S. launch in late 2003 and a Japan launch in early 2005, pending approvals. The FDA granted expedited review, and the final module, including TAXUS IV data, was planned for submission by mid-2003. Risks include delayed or limited approval, a competitor's DES reaching the U.S. market first in the first half of 2003, slower physician adoption, reimbursement changes, clinical result variability, patent litigation outcomes and inventory supply constraints.

How strong is the balance sheet and cash generation?

Net debt declined to $658 million, representing 19% of capital, versus 32% at year-end 2001. Operating cash flow was $736 million. Working capital was $285 million. Revolving credit facilities totaled about $1.6 billion, with a $1 billion facility expiring May 2003 that management intends to refinance. Debt covenant ratios were comfortable at about 1.1x total debt to EBITDA and 19.6x EBITDA to interest. Capex is planned at about $200 million for 2003.

What are the most material legal and regulatory risks disclosed?

The company faces multiple patent suits with Johnson and Johnson/Cordis over stents, including a suit over its Express2 stent and a preliminary injunction hearing set for June 2003 in a case involving Cordis's Cypher stent. It also faces Guidant suits over the Express stent, a long-running Medinol dispute, and a Cook patent case in Germany. The Justice Department grand jury investigation relating to NIR stent recall matters and the Medinol relationship identifies the company and two senior officials as targets, and an FTC judgment of about $7 million was entered in March 2003. Management says it believes it acted appropriately, but outcomes are uncertain.

Is international growth and exposure to Japan a concern?

International sales grew 8% to $1,163 million, but Japan sales fell 5% to $494 million at actual currency rates, with the decline driven by NIR stent weakness and competition. Management expects continued pressure in Japan, which carries high profitability relative to its revenue contribution. Currency exposure is hedged with nonspeculative derivatives, but unhedged exposure and economic instability in Japan or emerging markets remain risks to revenue, margins and receivable collection.

BSX 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 2003. Cited figures are marked; the original filing is the authoritative source.

Boston Scientific reported a strong 2002 rebound.

Net sales rose 9% to $2,919 million^a, with U.S. sales up 10% to $1,756 million and international sales up 8% to $1,163 million. Reported net income was $373 million, or $0.90 per diluted share, compared with a net loss of $54 million in 2001. Excluding after-tax special items, net income was $413 million, or $1.00 per diluted share, versus $323 million ($0.80) in 2001.

Gross margin improved to 70.2% (71.2% excluding special items), helped by the global operations plan, which delivered about $220 million^b of pre-tax savings in 2002. Cash from operations nearly tripled to... no, rose 50% to $736 million, and net debt fell to $658 million from $1,024 million. The central investment theme is the drug-eluting stent (DES) opportunity.

Coronary stent sales fell 8% to $318 million^c because of weak physician acceptance of the NIR stent, particularly in Japan. The company relaunched its Express2 bare-metal stent in the U.S. in September 2002, lifting its domestic coronary stent share above 20% in the fourth quarter. The TAXUS paclitaxel-eluting stent was filed with the FDA in modules, with the full PMA expected by mid-2003 and a U.S. launch targeted for late 2003.

Management expects research and development spending to stay near 12% of sales in 2003, including about $100 million^d for the TAXUS program. The filing also flags substantial risks: intense patent litigation with Johnson and Johnson/Cordis, Guidant and Medinol, a U.S. Department of Justice grand jury investigation in which the company and two senior officials are identified as targets, and the possibility of share and price pressure in U.S. coronary stents before TAXUS launches.

02—Key points

Key Highlights

Net sales grew 9% to $2,919 million; U.S. sales rose 10% to $1,756 million and international sales rose 8% to $1,163 million.
Reported diluted EPS of $0.90 (net income $373 million) swung from a 2001 loss of $0.13; excluding special items, EPS was $1.00 versus $0.80 in 2001.
Gross margin expanded to 70.2% of sales (71.2% excluding special items), aided by global operations plan savings of about $220 million in 2002.
Coronary stent sales fell 8% to $318 million due to NIR stent weakness, but Express2 gained more than 20% U.S. coronary stent share in Q4 2002.
TAXUS drug-eluting stent: FDA PMA modules submitted in 2003 with expedited review granted; U.S. launch targeted for late 2003 and Japan for early 2005.
Net debt cut to $658 million from $1,024 million; operating cash flow rose to $736 million from $490 million.
Significant legal exposure: multiple patent suits with Johnson and Johnson/Cordis, Guidant and Medinol, plus a DOJ grand jury investigation where the company and two officials are identified as targets.

03—Questions

Frequently Asked Questions

What drove the swing from a 2001 net loss to 2002 net income?
2001 included $377 million of after-tax charges, including in-process R&D from acquisitions, a NIR inventory write-down, restructuring costs and intangible write-downs. 2002 had lower special charges ($40 million after tax net), helped by Medtronic litigation settlement receipts and a tax refund. Sales growth, gross margin improvement and lower amortization (down to $72 million from $136 million, partly due to SFAS 142) also contributed.
When is the TAXUS drug-eluting stent expected to reach the U.S. market, and what are the main risks?
The company expects a U.S. launch in late 2003 and a Japan launch in early 2005, pending approvals. The FDA granted expedited review, and the final module, including TAXUS IV data, was planned for submission by mid-2003. Risks include delayed or limited approval, a competitor's DES reaching the U.S. market first in the first half of 2003, slower physician adoption, reimbursement changes, clinical result variability, patent litigation outcomes and inventory supply constraints.
How strong is the balance sheet and cash generation?
Net debt declined to $658 million, representing 19% of capital, versus 32% at year-end 2001. Operating cash flow was $736 million. Working capital was $285 million. Revolving credit facilities totaled about $1.6 billion, with a $1 billion facility expiring May 2003 that management intends to refinance. Debt covenant ratios were comfortable at about 1.1x total debt to EBITDA and 19.6x EBITDA to interest. Capex is planned at about $200 million for 2003.
What are the most material legal and regulatory risks disclosed?
The company faces multiple patent suits with Johnson and Johnson/Cordis over stents, including a suit over its Express2 stent and a preliminary injunction hearing set for June 2003 in a case involving Cordis's Cypher stent. It also faces Guidant suits over the Express stent, a long-running Medinol dispute, and a Cook patent case in Germany. The Justice Department grand jury investigation relating to NIR stent recall matters and the Medinol relationship identifies the company and two senior officials as targets, and an FTC judgment of about $7 million was entered in March 2003. Management says it believes it acted appropriately, but outcomes are uncertain.
Is international growth and exposure to Japan a concern?
International sales grew 8% to $1,163 million, but Japan sales fell 5% to $494 million at actual currency rates, with the decline driven by NIR stent weakness and competition. Management expects continued pressure in Japan, which carries high profitability relative to its revenue contribution. Currency exposure is hedged with nonspeculative derivatives, but unhedged exposure and economic instability in Japan or emerging markets remain risks to revenue, margins and receivable collection.

04—Continue

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