10-QPeriod: Q2 FY2006

BOSTON SCIENTIFIC CORP Quarterly Report for Q2 Ended Jun 30, 2006

Filed August 9, 2006For Securities:BSX

Summary

Boston Scientific Corporation reported its quarterly results for the period ending June 30, 2006, which were significantly impacted by the recent acquisition of Guidant Corporation. Net sales saw a substantial increase due to the consolidation of Guidant's operations, but the company reported a net loss of $4.26 billion for the quarter. This loss was largely driven by significant purchase accounting adjustments and merger-related costs, particularly a substantial charge for purchased research and development related to the Guidant acquisition. The acquisition of Guidant marks a strategic shift for Boston Scientific, significantly expanding its presence in the cardiac rhythm management (CRM) market. Despite the large reported loss, the company's core operations showed growth in various segments, though offset by increased operating expenses and a notable decline in gross profit margin, largely due to inventory step-up costs from the acquisition. Investors should closely monitor the integration of Guidant, the resolution of FDA warning letters affecting both legacy Boston Scientific and Guidant, and the company's ability to manage its increased debt burden.

Key Highlights

  • 1The acquisition of Guidant Corporation was completed on April 21, 2006, for approximately $28.4 billion, significantly impacting the company's financial statements and strategic positioning.
  • 2Net sales increased by 30% to $2.11 billion for the three months ended June 30, 2006, compared to $1.62 billion in the prior year, primarily due to the inclusion of Guidant's results.
  • 3The company reported a significant net loss of $4.26 billion ($3.21 per share) for the quarter, a sharp contrast to a net income of $205 million ($0.24 per share) in the prior year, largely driven by acquisition-related charges.
  • 4Significant 'purchase accounting adjustments' totaling $4.42 billion, primarily related to purchased R&D and inventory step-up from the Guidant acquisition, were recorded in the quarter.
  • 5Gross profit margin decreased significantly to 67.9% from 77.9% year-over-year, largely due to inventory write-ups from the Guidant acquisition and recall costs.
  • 6Selling, general, and administrative expenses increased by 55% to $728 million, reflecting increased costs associated with Guidant integration and expansion.
  • 7Total assets grew substantially to $30.61 billion from $8.20 billion, primarily due to the assets acquired in the Guidant transaction, with intangible assets and goodwill making up a significant portion.
  • 8Long-term debt increased substantially to $8.89 billion from $1.86 billion, primarily to finance the cash portion of the Guidant acquisition.

Frequently Asked Questions

The primary driver of the net loss of $4.26 billion was the acquisition of Guidant Corporation. This included substantial purchase accounting adjustments, such as $4.17 billion for purchased research and development, and merger-related costs, including inventory step-up and fair value adjustments from the Abbott transaction.

The acquisition of Guidant significantly increased Boston Scientific's total assets to $30.61 billion, with a large portion attributed to intangible assets and goodwill. Consequently, the company's total debt also rose substantially, with long-term debt increasing to $8.89 billion, primarily to finance the cash portion of the acquisition. This has led to a significant increase in net debt.

Both Boston Scientific and Guidant received FDA warning letters concerning manufacturing quality systems and record-keeping procedures. These letters could impact the FDA's approval of pre-market applications for Class III devices and the issuance of exportation certificates until the deficiencies are corrected. The company is actively working to address these issues, but there is no assurance regarding the timeline or cost of resolution, and further regulatory actions are possible.

The gross profit margin declined significantly to 67.9% from 77.9% year-over-year. This was primarily due to purchase accounting adjustments, specifically an $185 million step-up in the value of acquired Guidant inventory that was sold during the quarter. Additionally, recall costs and expenses related to quality initiatives also impacted the margin.