10-QPeriod: Q3 FY2006

BOSTON SCIENTIFIC CORP Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 9, 2006For Securities:BSX

Summary

Boston Scientific Corporation (BSX) reported its third-quarter and nine-month results for the period ending September 30, 2006. The company's financial performance was significantly impacted by the recent acquisition of Guidant Corporation, which closed on April 21, 2006. This major acquisition led to a substantial increase in net sales, driven by the integration of Guidant's Cardiac Rhythm Management (CRM) and Cardiac Surgery divisions. However, the acquisition also resulted in a significant net loss for the nine-month period, largely due to substantial purchase accounting adjustments, including a large amount attributed to purchased research and development and the step-up in value of acquired inventory. The company also incurred considerable merger-related costs and integration expenses. Despite these charges, management highlighted sales growth in key segments and is focused on integrating Guidant, addressing FDA warning letters for both legacy BSX and acquired Guidant facilities, and navigating competitive market dynamics, particularly in the coronary stent and CRM sectors.

Key Highlights

  • 1Net sales increased by 34% to $2,026 million in Q3 2006 compared to Q3 2005, primarily due to the inclusion of Guidant's CRM and Cardiac Surgery divisions' sales.
  • 2The company reported a net loss of $3,854 million for the nine months ended September 30, 2006, a significant change from a net income of $294 million in the prior year, largely due to acquisition-related expenses and purchase accounting adjustments.
  • 3Gross profit margin decreased to 68.9% in Q3 2006 from 77.3% in Q3 2005, negatively impacted by acquisition costs, including $94 million for the step-up value of acquired Guidant inventory sold.
  • 4Selling, General, and Administrative (SG&A) expenses increased by 62% to $719 million in Q3 2006 compared to Q3 2005, driven by $235 million in expenditures associated with Guidant.
  • 5Research and Development (R&D) expenses increased by 50% to $272 million in Q3 2006 compared to Q3 2005, reflecting $99 million in expenditures associated with Guidant.
  • 6Amortization expense increased significantly to $153 million in Q3 2006 from $47 million in Q3 2005, largely due to $120 million in amortization of intangible assets acquired in the Guidant acquisition.
  • 7Outstanding debt increased substantially to $8,898 million at September 30, 2006, from $2,020 million at December 31, 2005, primarily to finance the cash portion of the Guidant acquisition.

Frequently Asked Questions

The primary driver of the substantial increase in net sales for the third quarter of 2006 (34% increase year-over-year) was the inclusion of revenue from the Cardiac Rhythm Management (CRM) and Cardiac Surgery divisions of Guidant Corporation, which Boston Scientific acquired on April 21, 2006.

The significant net loss of $3,854 million for the nine months ended September 30, 2006, was primarily due to substantial acquisition-related costs and purchase accounting adjustments following the Guidant acquisition. These included a large charge for purchased research and development ($4,117 million), a charge for the step-up in value of acquired Guidant inventory sold ($279 million), and other merger-related and integration costs.

The acquisition of Guidant, which involved a significant cash component, led to a substantial increase in Boston Scientific's outstanding borrowings. Total debt rose from $2,020 million at the end of 2005 to $8,898 million by September 30, 2006, primarily to finance the cash portion of the acquisition.

Boston Scientific faces several key challenges, including the complex integration of Guidant's operations, addressing FDA warning letters at both legacy and acquired facilities, navigating market uncertainties in drug-eluting stents due to late thrombosis concerns, regaining trust and market share in the CRM business following product recalls and field actions, and managing significant intellectual property litigation.