WWW.EXFILE.COM, INC. -- 888-775-4789 -- BOSTON SCIENTIFIC CORPORATION -- FORM 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2008
|
Commission
File No. 1-11083
|
BOSTON
SCIENTIFIC CORPORATION
(Exact
Name of Registrant As Specified in Its Charter)
DELAWARE
|
04-2695240
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
ONE
BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address
of Principal Executive Offices)
(508)
650-8000
(Registrant’s
Telephone Number)
____________________________________________________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
________________
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes:
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes: o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Shares
outstanding
as of April 30,
2008
|
|
|
Common
Stock, $.01 par value
|
1,496,257,958
|
TABLE
OF CONTENTS
|
|
Page
No. |
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations |
3 |
|
|
|
|
Condensed
Consolidated Balance Sheets |
4 |
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
47
|
|
|
|
Item
4.
|
Controls
and Procedures
|
48
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
49
|
|
|
|
Item
1.
|
Legal
Proceedings
|
49
|
|
|
|
Item
1A.
|
Risk
Factors
|
49
|
|
|
|
Item
6.
|
Exhibits
|
49
|
|
|
|
SIGNATURE
|
|
50
|
PART
I
FINANCIAL
INFORMATION
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
(in
millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,046 |
|
|
$ |
2,086 |
|
Cost
of products sold
|
|
|
580 |
|
|
|
568 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,466 |
|
|
|
1,518 |
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
661 |
|
|
|
735 |
|
Research
and development expenses
|
|
|
244 |
|
|
|
289 |
|
Royalty
expense
|
|
|
46 |
|
|
|
52 |
|
Amortization
expense
|
|
|
143 |
|
|
|
155 |
|
Purchased
research and development
|
|
|
13 |
|
|
|
5 |
|
Restructuring
charges
|
|
|
29 |
|
|
|
|
|
Gain
on divestitures
|
|
|
(250 |
) |
|
|
|
|
Total
operating expenses
|
|
|
886 |
|
|
|
1,236 |
|
Operating
income
|
|
|
580 |
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(131 |
) |
|
|
(141 |
) |
Other,
net
|
|
|
13 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
462 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
140 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
322 |
|
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
Net
income per common share — basic
|
|
$ |
0.22 |
|
|
$ |
0.08 |
|
Net
income per common share — assuming dilution
|
|
$ |
0.21 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,494.1 |
|
|
|
1,481.3 |
|
Assuming
dilution
|
|
|
1,500.1 |
|
|
|
1,497.8 |
|
See notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions, except share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,739 |
|
|
$ |
1,452 |
|
Trade
accounts receivable, net
|
|
|
1,496 |
|
|
|
1,502 |
|
Inventories
|
|
|
781 |
|
|
|
725 |
|
Deferred
income taxes
|
|
|
873 |
|
|
|
679 |
|
Assets
held for sale
|
|
|
|
|
|
|
1,099 |
|
Prepaid
expenses and other current assets
|
|
|
352 |
|
|
|
464 |
|
Total
current assets
|
|
|
5,241 |
|
|
|
5,921 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,736 |
|
|
|
1,735 |
|
Investments
|
|
|
321 |
|
|
|
317 |
|
Other
assets
|
|
|
143 |
|
|
|
157 |
|
Goodwill
and other intangible assets, net
|
|
|
22,905 |
|
|
|
23,067 |
|
|
|
$ |
30,346 |
|
|
$ |
31,197 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
debt obligations
|
|
$ |
257 |
|
|
$ |
256 |
|
Accounts
payable
|
|
|
222 |
|
|
|
139 |
|
Accrued
expenses
|
|
|
2,200 |
|
|
|
2,541 |
|
Taxes
payable
|
|
|
488 |
|
|
|
121 |
|
Liabilities
associated with assets held for sale
|
|
|
|
|
|
|
39 |
|
Other
current liabilities
|
|
|
226 |
|
|
|
154 |
|
Total
current liabilities
|
|
|
3,393 |
|
|
|
3,250 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
7,311 |
|
|
|
7,933 |
|
Deferred
income taxes
|
|
|
2,230 |
|
|
|
2,284 |
|
Other
long-term liabilities
|
|
|
2,021 |
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $ .01 par value - authorized 50,000,000 shares,
none issued and outstanding
|
|
Common
stock, $ .01 par value - authorized 2,000,000,000 shares
and issued 1,495,515,422 shares at March 31, 2008
and 1,491,234,911 shares at December 31, 2007
|
|
|
15 |
|
|
|
15 |
|
Additional
paid-in capital
|
|
|
15,830 |
|
|
|
15,766 |
|
Accumulated
deficit
|
|
|
(373 |
) |
|
|
(693 |
) |
Other
stockholders’ (deficit) equity
|
|
|
(81 |
) |
|
|
9 |
|
Total
stockholders’ equity
|
|
|
15,391 |
|
|
|
15,097 |
|
|
|
$ |
30,346 |
|
|
$ |
31,197 |
|
See notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
provided by (used for) operating activities
|
|
$ |
266 |
|
|
$ |
(59 |
) |
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(57 |
) |
|
|
(96 |
) |
Proceeds
from sales of publicly traded and privately held equity securities
and collections
of notes receivable
|
|
|
37 |
|
|
|
14 |
|
Payments
for acquisitions of businesses, net of cash acquired
|
|
|
|
|
|
|
(11 |
) |
Payments
relating to prior period acquisitions
|
|
|
(654 |
) |
|
|
(200 |
) |
Proceeds
from business divestitures
|
|
|
1,300 |
|
|
|
|
|
Payments
for investments in companies and acquisitions of certain
technologies
|
|
|
(6 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by (used for) investing activities
|
|
|
620 |
|
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term borrowings
|
|
|
(625 |
) |
|
|
|
|
Proceeds
from issuances of shares of common stock
|
|
|
26 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
Cash
(used for) provided by financing activities
|
|
|
(599 |
) |
|
|
31 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
287 |
|
|
|
(328 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
1,452 |
|
|
|
1,668 |
|
Cash
and cash equivalents at end of period
|
|
$ |
1,739 |
|
|
$ |
1,340 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Stock
and stock equivalents issued for acquisitions
|
|
$ |
|
|
|
$ |
90 |
|
See notes
to the unaudited condensed consolidated financial statements.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
A – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary
for fair presentation have been included. Operating results for the three
months ended March 31, 2008 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008. For further information,
refer to the consolidated financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the year ended December 31,
2007.
Certain
prior year amounts have been reclassified to conform to the current year
presentation. See Note N
- Segment Reporting for further details.
NOTE
B – FAIR VALUE MEASUREMENTS
We
adopted Financial Accounting Standards Board (FASB) Statement No. 157,
Fair Value
Measurements, as of January 1, 2008. Statement No. 157 defines fair
value, establishes a framework for measuring fair value in accordance with U.S.
GAAP, and expands disclosures about fair value measurements. Statement No. 157
does not require any new fair value measurements; rather, it applies to other
accounting pronouncements that require or permit fair value measurements. In
February 2008, the FASB released Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of Statement No. 157
for all nonfinancial assets and nonfinancial liabilities, except for those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. In accordance with Staff Position No. 157-2, we have not
applied the provisions of Statement No. 157 to the following nonfinancial assets
and nonfinancial liabilities:
·
|
Nonfinancial
assets and nonfinancial liabilities initially measured at fair value in a
business combination or other new basis event, but not measured at fair
value in subsequent reporting
periods;
|
·
|
Reporting
units and nonfinancial assets and nonfinancial liabilities measured at
fair value for our goodwill impairment test in accordance with FASB
Statement No. 142, Goodwill and Other Intangible
Assets;
|
·
|
Indefinite-lived
intangible assets measured at fair value for impairment assessment in
accordance with Statement No. 142;
|
·
|
Nonfinancial
long-lived assets or asset groups measured at fair value for impairment
assessment or disposal under FASB Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets;
and
|
·
|
Nonfinancial
liabilities associated with exit or disposal activities initially measured
at fair value under FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal
Activities.
|
We will
be required to apply the provisions of Statement No. 157 to these nonfinancial
assets and nonfinancial liabilities as of January 1, 2009 and are currently
evaluating the impact of the application of Statement No. 157 as it
pertains to these items. The application of Statement No. 157 for financial
assets and financial liabilities did not have a material impact on our financial
position, results of operations or cash flows.
On a
recurring basis, we measure certain financial assets and financial liabilities
at fair value, including our money market funds and U.S. Treasury securities,
available-for-sale investments, interest rate derivative instruments and foreign
currency derivative contracts. Statement No. 157 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. As
such, fair value is a
market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. We base fair value upon
quoted market prices, where available. Where quoted market prices or other
observable inputs are not available, we apply valuation techniques to estimate
fair value.
Statement
No. 157 establishes a three-level valuation hierarchy for disclosure of fair
value measurements. The categorization of financial assets and financial
liabilities within the valuation hierarchy is based upon the lowest level of
input that is significant to the measurement of fair value. The three levels of
the hierarchy are defined as follows:
·
|
Level
1 – Inputs to the valuation methodology are quoted market prices for
identical assets or liabilities.
|
·
|
Level
2 – Inputs to the valuation methodology are other observable inputs,
including quoted market prices for similar assets or liabilities and
market-corroborated inputs.
|
·
|
Level
3 – Inputs to the valuation methodology are unobservable inputs based on
management’s best estimate of inputs market participants would use in
pricing the asset or liability at the measurement date, including
assumptions about risk.
|
Our money
market funds and U.S. Treasury securities, as well as available-for-sale
investments carried at fair value are generally classified within Level 1
of the fair value hierarchy because they are valued using quoted market prices.
However, certain of our available-for-sale investments are subject to lock-up
agreements for a period of time. We use an option pricing model to determine the
liquidity discount associated with these lock-up restrictions as part of our
fair value measurement within the framework of Statement No.
157. Available-for-sale investments with such restrictions are
generally classified within Level 3 of the fair value
hierarchy.
Our cost
method investments are recorded at fair value only when impairment charges are
recorded for other-than-temporary declines in value and are determined using
fair value criteria within the framework of Statement No. 157. As the
inputs utilized for the impairment assessment are not based on observable market
data, these cost method investments are classified within Level 3 of the fair
value hierarchy on a non-recurring basis.
We
recognize all derivative financial instruments in our consolidated financial
statements at fair value in accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. We determine the fair
value of these instruments using the framework prescribed by Statement No. 157
by considering the estimated amount we would receive to terminate these
agreements at the reporting date and by taking into account current interest
rates, the creditworthiness of the counterparty for assets, and our
creditworthiness for liabilities. In certain instances, we may
utilize financial models to measure fair value. Generally, we use inputs that
include quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are
not active; other observable inputs for the asset or liability; and inputs
derived principally from, or corroborated by, observable market data by
correlation or other means. We have classified our derivative assets and
liabilities within Level 2 of the fair value hierarchy because these observable
inputs are available for substantially the full term of our derivative
instruments.
Fair
Value Measured on a Recurring Basis
Financial
assets and financial liabilities measured at fair value on a recurring basis
consist of the following as of March 31, 2008:
(in
millions)
|
|
Quoted
Market Prices for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds and U.S. Treasury securities |
|
$ |
912 |
|
|
|
|
|
|
|
|
|
$ |
912 |
|
Available-for-sale
investments
|
|
|
11 |
|
|
|
|
|
|
$ |
24 |
|
|
|
35 |
|
Currency
exchange contracts
|
|
|
|
|
|
$ |
12 |
|
|
|
|
|
|
|
12 |
|
|
|
$ |
923 |
|
|
$ |
12 |
|
|
$ |
24 |
|
|
$ |
959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
exchange contracts
|
|
|
|
|
|
$ |
233 |
|
|
|
|
|
|
$ |
233 |
|
Interest
rate swap contracts
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
$ |
|
|
|
$ |
274 |
|
|
$ |
|
|
|
$ |
274 |
|
For
assets measured at fair value using significant unobservable inputs (Level 3),
the following table summarizes the change in balances during the three months
ended March 31, 2008:
(in
millions)
|
|
Available-for-sale
investments with restrictions
|
|
Balance
at January 1, 2008
|
|
$ |
30 |
|
Net
transfers in (out) of Level 3
|
|
|
40 |
|
Net
(sales) purchases
|
|
|
(25 |
) |
Change
in unrealized gains/losses related to market prices
|
|
|
(17 |
) |
Change
in unrealized gains/losses related to liquidity discounts
|
|
|
(4 |
) |
Balance
at March 31, 2008
|
|
$ |
24 |
|
Unrealized
gains/losses are included in other comprehensive income in our accompanying
unaudited condensed consolidated balance sheets.
Fair
Value Measured on a Non-Recurring Basis
In the
first quarter of 2008, we recorded impairment charges on certain of our cost
method investments and adjusted the carrying amount of those investments to fair
value, as we deemed the decline in the value of those assets to be
other-than-temporary. These cost method investments fall within Level
3 of the fair value hierarchy, due to the use of significant unobservable inputs
to determine fair value, as the investments are in privately held entities
without quoted market prices. To determine the fair value of those
investments, we used all available financial information related to the
entities, including information based on recent third-party equity investments
in these entities. The following table summarizes changes to the
carrying amount of these investments during the three months ended March 31,
2008.
Balance
at January 1, 2008
|
|
$ |
24 |
|
Less:
other-than-temporary impairments
|
|
|
14 |
|
Balance
at March 31, 2008
|
|
$ |
10 |
|
Statement
No. 159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115, which allows an entity to elect to record financial assets
and financial liabilities at fair value upon their initial recognition on a
contract-by-contract basis. We adopted Statement No. 159 as of January 1, 2008
and did not elect the fair value option for our eligible financial assets and
financial liabilities.
NOTE
C – SUPPLEMENTAL BALANCE SHEET INFORMATION
The
following are the components of various balance sheet items at March 31, 2008
and December 31, 2007.
Inventories
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
504 |
|
|
$ |
454 |
|
Work-in-process
|
|
|
142 |
|
|
|
132 |
|
Raw
materials
|
|
|
135 |
|
|
|
139 |
|
|
|
$ |
781 |
|
|
$ |
725 |
|
Property, plant and
equipment, net
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
3,026 |
|
|
$ |
2,925 |
|
Less:
accumulated depreciation
|
|
|
1,290 |
|
|
|
1,190 |
|
|
|
$ |
1,736 |
|
|
$ |
1,735 |
|
Goodwill and other
intangible assets, net
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
15,094 |
|
|
$ |
15,103 |
|
Technology
- core
|
|
|
6,923 |
|
|
|
6,923 |
|
Other
intangible assets
|
|
|
2,464 |
|
|
|
2,481 |
|
|
|
|
24,481 |
|
|
|
24,507 |
|
Less:
accumulated amortization
|
|
|
1,576 |
|
|
|
1,440 |
|
|
|
$ |
22,905 |
|
|
$ |
23,067 |
|
Changes
in our product warranty obligations during the three months ended March 31, 2008
consisted of the following (in millions):
Balance
at December 31, 2007
|
|
$ |
66 |
|
Warranty
claims provision
|
|
|
20 |
|
Settlements
made
|
|
|
(20 |
) |
Balance
at March 31, 2008
|
|
$ |
66 |
|
NOTE
D – INVESTMENTS AND NOTES RECEIVABLE
During
2007, in connection with our strategic initiatives, we announced our decision to
monetize the majority of our investment portfolio in order to eliminate
investments determined to be non-strategic. In the first quarter of 2008, we
received gross proceeds of $37 million from the sale of investments and
collections of notes receivable, and recognized associated net gains of $15
million, recorded in other, net in our accompanying unaudited condensed
consolidated statements of operations. We intend to monetize the rest of our
non-strategic portfolio investments over the next few quarters.
We
regularly review our investments for impairment indicators. Based on this
review, we recorded net losses of $21 million in the first quarter of 2008 due
primarily to other-than-temporary impairments associated with certain of our
privately held investments, as well as adjustments related to investments
accounted for under the equity method of accounting.
Many of
our alliances involve equity investments in privately held equity securities or
investments where an observable quoted market value does not exist. Many of
these companies are in the developmental stage and have not yet commenced their
principal operations. Our exposure to losses related to our alliances is
generally limited to our equity investments and notes receivable associated with
these alliances.
NOTE
E – BORROWINGS AND CREDIT ARRANGEMENTS
We had
total debt of $7.568 billion at March 31, 2008 at an average interest rate of
6.02 percent, as compared to total debt of $8.189 billion at December 31,
2007 at an average interest rate of 6.36 percent. During the first quarter
of 2008, we prepaid $625 million of our term loan. These prepayments satisfied
the remaining $300 million of our term loan due in 2009 and $325 million of our
term loan due in 2010. As of March 31, 2008, the revised debt maturity
schedule for the term loan, as well as scheduled maturities of the other
significant components of our debt obligations, is as follows:
|
|
Payments
Due by Period
|
|
|
|
(in
millions)
|
|
2008
|
|
2009
|
|
2010
|
|
|
2011
|
|
2012
|
|
Thereafter
|
|
|
Total
|
|
Term
loan
|
|
|
|
|
|
$ |
1,375 |
|
|
$ |
2,000 |
|
|
|
|
|
|
$ |
3,375 |
|
Abbott
Laboratories loan
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
|
|
|
|
900 |
|
Senior
notes
|
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
$ |
2,200 |
|
|
|
3,050 |
|
Credit
and security facility
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
$ |
250 |
|
$
|
|
$ |
1,375 |
|
|
$ |
3,750 |
|
$
|
|
$ |
2,200 |
|
|
$ |
7,575 |
|
|
Note:
|
The
table above does not include capital leases, discounts associated
with our Abbott loan and senior notes, and non-cash gains related to
interest rate swaps used to hedge the fair value of certain of our senior
notes.
|
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants, including a ratio of total debt to EBITDA, as defined by
the amended agreement, of less than or equal to 4.5 to 1.0 through December 31,
2008. The maximum permitted ratio of total debt to EBITDA steps-down to 4.0 to
1.0 on March 31, 2009 and to 3.5 to 1.0 on September 30, 2009. The
agreement also requires that we maintain a ratio of EBITDA, as defined by the
amended agreement, to interest expense of greater than or equal to 3.0 to 1.0.
As of March 31, 2008, we were in compliance with the required covenants. Exiting
the quarter, our ratio of total debt to EBITDA was 2.9 to 1.0 and our ratio
of EBITDA to interest expense was 4.6 to 1.0. If at any time we are not
able to
maintain
these covenants, we could be required to seek to renegotiate the terms of our
credit facilities or seek waivers from compliance with these covenants, both of
which could result in additional borrowing costs.
Interest
Rate Swaps
We use
interest rate derivative instruments to manage our exposure to interest rate
movements and to reduce borrowing costs by converting floating-rate debt into
fixed-rate debt or fixed-rate debt into floating-rate debt. We designate these
derivative instruments either as fair value or cash flow hedges under Statement
No. 133. We record changes in the fair value of fair value hedges in other
income (expense), which is offset by changes in the fair value of the hedged
debt obligation to the extent the hedge is effective. Interest expense includes
interest payments made or received under interest rate derivative instruments.
We record the effective portion of any change in the fair value of cash flow
hedges as other comprehensive income, net of tax, until the hedged cash flow
occurs.
During
the first quarter of 2008, we entered floating-to-fixed interest rate swaps
indexed to three-month LIBOR to hedge variability in interest payments on $2.0
billion of our LIBOR-indexed floating-rate loans. These interest rate swap
agreements commence in June 2008 and mature in December 2009. We
designated these interest rate swaps as cash flow hedges under Statement No.
133 and record
fluctuations in the fair value of these derivative instruments as unrealized
gains or losses in other comprehensive income, net of tax, and reclassify the
gains or losses to interest expense during the hedged interest payment
period.
We
recorded a net unrealized loss of $26 million, net of tax, in accumulated other
comprehensive income at March 31, 2008 to recognize the fair value of all of our
outstanding interest rate derivative instruments, as compared to $11 million at
December 31, 2007. As of March 31, 2008, $26 million of unrealized
losses relating to our current and prior interest rate derivative instruments
may be reclassified to earnings during 2008, as compared to $3 million as of
December 31, 2007.
NOTE
F – ACQUISITIONS
Purchased
Research and Development
Our
policy is to record certain costs associated with strategic alliances as
purchased research and development. In accordance with this policy, we recorded
$13 million of purchased research and development in the first quarter of 2008
associated with entering a licensing and development arrangement with
Surgi-Vision, Inc. for magnetic resonance imaging (MRI)-safe technology, which
Surgi-Vision is developing. During the first quarter of 2007, we recorded $5
million of purchased research and development associated with payments made for
certain early-stage CRM technologies.
Acquisition-related
Payments
During
the first quarter of 2008, we made acquisition-related payments of $654 million,
consisting primarily of a $650 million fixed payment made to the principal
former shareholders of Advanced Bionics Corporation in connection with our 2007
amendment to the original merger agreement, which was accrued at December 31,
2007. Accrued at March 31, 2008 is $472 million ($465 million as of December 31,
2007), which represents the present value of a $500 million final fixed payment
to be made related to Advanced Bionics in March 2009. In addition to this
obligation, certain of our acquisitions involve the payment of contingent
consideration, which is generally contingent upon the acquired companies’
reaching certain performance milestones, including attaining specified revenue
levels, achieving product development targets or obtaining regulatory approvals.
Consequently, we cannot currently determine the total required payments;
however, we have developed an estimate of the maximum potential contingent
consideration for each of our acquisitions with an outstanding earn-out
obligation. The estimated maximum potential amount of future contingent
consideration (undiscounted) that we could be required to make associated with
these acquisitions, some of which may be payable in common stock, is
approximately $1.1 billion. The milestones associated with the contingent
consideration must be reached in
certain
future periods ranging from 2008 through 2022. The estimated cumulative
specified revenue level associated with these maximum future contingent payments
is approximately $3.4 billion.
In April
2008, we signed a definitive agreement to acquire 100 percent of the fully
diluted equity of CryoCor, Inc., under which we will pay a cash purchase price
of approximately $18 million, in addition to our previous investment. CryoCor is
developing products using cryogenic technology for use in treating atrial
fibrillation, the most common and difficult to treat cardiac arrhythmia
(abnormal heartbeat). We expect the acquisition to close during the second
quarter of 2008, subject to customary closing conditions. The acquisition is
intended to allow us to further pursue therapeutic solutions for atrial
fibrillation in order to advance our existing Cardiac Rhythm Management (CRM)
and Electrophysiology product lines.
NOTE
G – RESTRUCTURING ACTIVITIES
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which will result in the elimination of
approximately 2,300 positions worldwide. We are providing affected employees
with severance packages, outplacement services and other appropriate assistance
and support. As of March 31, 2008, we had completed more than half of the
anticipated head count reductions. The plan is intended to bring expenses in
line with revenues as part of our initiatives to enhance short- and long-term
shareholder value. Key activities under the plan include the restructuring of
several businesses and product franchises in order to better utilize resources,
strengthen competitive positions, and create a more simplified and efficient
business model; the elimination, suspension or reduction of spending on certain
research and development (R&D) projects; and the transfer of certain
production lines from one facility to another. We initiated these activities in
the fourth quarter of 2007 and expect to be substantially completed worldwide by
the end of 2008.
We expect
that the execution of this plan will result in total pre-tax costs of
approximately $425 million to $450 million. We expect that the plan
will result in total cash payments of approximately $375 million to $400
million. The following table provides a summary of our estimates of
total costs associated with the plan by major type of cost:
Type
of cost
|
Total
amount expected to be incurred
|
Termination
benefits
|
$250 million to $260 million
|
Retention
incentives
|
$60
million to $65 million
|
Asset
write-offs and accelerated depreciation
|
$50
million to $55 million
|
Other
*
|
$65
million to $70 million
|
* Other
costs consist primarily of consultant fees and costs to transfer product lines
from one facility to another.
In the
first quarter of 2008, we incurred total restructuring costs of $44 million. The
following presents these costs by major type and line item within our unaudited
condensed consolidated statements of operations:
|
|
Termination
|
|
|
Retention
|
|
|
Accelerated
|
|
|
|
|
|
(in
millions)
|
|
Benefits
|
|
|
Incentives
|
|
|
Depreciation
|
|
|
Other
|
|
|
Total
|
|
Cost
of goods sold
|
|
|
|
|
$ |
3 |
|
|
$ |
1 |
|
|
|
|
|
$ |
4 |
|
Selling,
general and administrative expenses
|
|
|
|
|
|
6 |
|
|
|
3 |
|
|
|
|
|
|
9 |
|
Research
and development expenses
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
2 |
|
Restructuring
charges
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
$ |
9 |
|
|
|
29 |
|
|
|
$ |
20 |
|
|
$ |
11 |
|
|
$ |
4 |
|
|
$ |
9 |
|
|
$ |
44 |
|
The
termination benefits recorded during the first quarter of 2008 represent amounts
incurred pursuant to our on-going benefit arrangements and amounts for
“one-time” involuntary termination benefits, and have been recorded in
accordance with FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. We expect to record the remaining
termination benefits in 2008 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. Retention incentives represent cash incentives, which are
being recorded over the future service period during which eligible employees
must remain employed with us in order to retain the payment. The
other restructuring costs are being recognized and measured at their fair value
in the period in which the liability is incurred, in accordance with Statement
No. 146.
We have
incurred cumulative restructuring costs of $249 million since we committed to
the plan in October 2007. The following presents these costs by major type (in
millions):
Termination
benefits
|
|
$ |
178 |
|
Retention
incentives
|
|
|
16 |
|
Intangible
asset write-offs
|
|
|
21 |
|
Fixed
asset write-offs
|
|
|
8 |
|
Accelerated
depreciation
|
|
|
7 |
|
Other
|
|
|
19 |
|
|
|
$ |
249 |
|
Charges
associated with restructuring activities are excluded from the determination of
segment income, as they do not reflect expected on-going future operating
expenses and are not considered by management when assessing operating
performance.
In the
first quarter of 2008, we made cash payments of approximately $83 million
associated with our restructuring initiatives, which related to termination
benefits paid and other restructuring charges. We have made
cumulative cash payments of $125 million since we committed to our restructuring
initiatives in October 2007. These payments were made using cash generated from
our operations. We expect to make the remaining cash payments
throughout the remainder of 2008 and into 2009 using cash generated from
operations.
The
following is a rollforward of the liability associated with our restructuring
initiatives since the inception of the plan in the fourth quarter of 2007, which
is reported as a component of accrued expenses included in our accompanying
unaudited condensed consolidated balance sheets.
(in
millions)
|
|
Termination
Benefits
|
|
|
Other
|
|
|
Total
|
|
Charges
|
|
$ |
158 |
|
|
$ |
10 |
|
|
$ |
168 |
|
Cash
payments
|
|
|
(23 |
) |
|
|
(8 |
) |
|
|
(31 |
) |
Balance
at December 31, 2007
|
|
|
135 |
|
|
|
2 |
|
|
|
137 |
|
Charges
|
|
|
20 |
|
|
|
9 |
|
|
|
29 |
|
Cash
payments
|
|
|
(74 |
) |
|
|
(9 |
) |
|
|
(83 |
) |
Balance
at March 31, 2008
|
|
$ |
81 |
|
|
$ |
2 |
|
|
$ |
83 |
|
NOTE
H – DIVESTITURES
During
the first quarter of 2008, we completed the sale of our Auditory, Cardiac
Surgery, Vascular Surgery, Fluid Management and Venous Access businesses,
as well as our former TriVascular entity. Each transaction is discussed below in
further detail.
Auditory
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump
development
program, acquired with Advanced Bionics in 2004, to entities affiliated with the
principal former shareholders of Advanced Bionics for an aggregate purchase
price of $150 million in cash. To adjust the carrying
value of the disposal group to its fair value, less costs to sell, we recorded a
loss of approximately $367 million in 2007, representing primarily a write-down
of goodwill. In addition, we recorded a tax benefit of $6 million in the first
quarter of 2008 in connection with the closing of the transaction. Under the
terms of the agreement, we retained a twelve percent interest in the limited
liability companies formed for purposes of operating the Auditory business and
drug pump development program. In accordance with Emerging Issues Task Force
(EITF) Issue No. 03-16, Accounting for Investments in
Limited Liability Companies, we are accounting for these investments
under the equity method of accounting.
Cardiac
Surgery and Vascular Surgery
In
January 2008, we completed the sale of our Cardiac Surgery and Vascular Surgery
businesses to the Getinge Group for net cash proceeds of approximately $705
million. To adjust the carrying value of the Cardiac Surgery and Vascular
Surgery disposal group to its fair value, less costs to sell, we recorded a loss
of approximately $193 million in 2007, representing primarily the write-down of
goodwill. In addition, we recorded a tax expense of $56 million in the first
quarter of 2008 in connection with the closing of the
transaction.
Fluid
Management and Venous Access
In
February 2008, we completed the sale of our Fluid Management and Venous Access
businesses to Avista Capital Partners for net cash proceeds of approximately
$415 million. We recorded a pre-tax gain of $234 million ($129 million
after-tax) during the first quarter of 2008 associated with this
transaction.
TriVascular
In March
2008, we sold our Endovascular Aortic Repair (EVAR) program obtained in
connection with our 2005 acquisition of TriVascular, Inc. for $30 million in
cash. We discontinued our EVAR program in 2006. In connection with the sale, we
recorded a pre-tax gain of $16 million ($35 million after-tax) in the first
quarter of 2008.
NOTE
I – COMPREHENSIVE INCOME
The
following table provides a summary of our comprehensive income:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
322 |
|
|
$ |
120 |
|
Currency
translation adjustment
|
|
|
10 |
|
|
|
(1 |
) |
Net
change in derivative financial instruments
|
|
|
(93 |
) |
|
|
(1 |
) |
Net
change in equity investments
|
|
|
(7 |
) |
|
|
(5 |
) |
Other
|
|
|
(2 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
230 |
|
|
$ |
113 |
|
NOTE
J – WEIGHTED-AVERAGE SHARES OUTSTANDING
The
following is a reconciliation of weighted-average shares outstanding for basic
and diluted earnings per share computations:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
Weighted
average shares outstanding - basic
|
|
|
1,494.1 |
|
|
|
1,481.3 |
|
Net
effect of common stock equivalents
|
|
|
6.0 |
|
|
|
16.5 |
|
Weighted
average shares outstanding - assuming dilution
|
|
|
1,500.1 |
|
|
|
1,497.8 |
|
Weighted-average
shares outstanding, assuming dilution, excludes the impact of 57 million stock
options for the first quarter of 2008 and 37 million for the first quarter of
2007 due to the exercise prices of these stock options being greater than the
average market price of our common stock during those periods.
We issued
approximately four million shares of our common stock in the first quarter of
2008 and three million shares of our common stock in the first quarter of 2007
following the exercise or vesting of the underlying stock options or deferred
stock units, or purchase under our employee stock purchase plan. In addition, in
the first quarter of 2007, we issued five million shares of our common stock in
connection with our acquisition of EndoTex Interventional Systems,
Inc.
NOTE
K – STOCK-BASED COMPENSATION
The
following presents the impact of stock-based compensation expense on our
unaudited condensed consolidated statements of operations:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
Cost
of products sold
|
|
$ |
6 |
|
|
$ |
4 |
|
Selling,
general and administrative expenses
|
|
|
28 |
|
|
|
23 |
|
Research
and development expenses
|
|
|
7 |
|
|
|
7 |
|
|
|
|
41 |
|
|
|
34 |
|
Less:
income tax benefit
|
|
|
12 |
|
|
|
10 |
|
|
|
$ |
29 |
|
|
$ |
24 |
|
On May 6,
2008, our shareholders approved an amendment and restatement of our 2003
Long-Term Incentive Plan (LTIP), increasing the number of shares of our common
stock available for issuance under the plan by 70 million shares. Together with
our 2000 LTIP, the plans provide for the issuance of up to 160 million shares
for various stock-based incentives.
NOTE
L – INCOME TAXES
Tax
Rate
The
following table provides a summary of our reported tax rate:
|
|
Three
Months Ended
March
31,
|
|
|
Percentage
Point
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
Reported
tax rate
|
|
|
30.3
|
% |
|
|
24.5
|
% |
|
|
5.8
|
% |
Impact
of certain charges*
|
|
|
(6.7 |
)
% |
|
|
(3.5 |
)
% |
|
|
(3.2 |
)
% |
*These charges are taxed at
different rates than our effective tax rate.
The
increase in our reported tax rate for the first quarter of 2008, as compared to
the same period in the prior year, related primarily to the impact of certain
charges that are taxed at different rates than our effective tax rate. In 2008,
these charges included restructuring costs, divestitures that occurred in the
quarter, and discrete items associated with the resolution of various tax
matters. In 2007, these charges included changes to the reserves
for
uncertain
tax positions relating to items originating in prior periods, purchased research
and development, and charges related to our 2006 acquisition
of Guidant Corporation. In addition, our effective tax rate for the
first quarter of 2008 increased by approximately three percentage points as
compared to the same period in the prior year, due primarily to the expiration
of the U.S. Research and Development (R&D) tax credit at December 31,
2007.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. At March 31, 2008, we had $1.104 billion of gross
unrecognized tax benefits, $437 million of which, if recognized, would affect
our effective tax rate in accordance with currently effective accounting
standards. At December 31, 2007, we had $1.180 billion of gross unrecognized tax
benefits, $415 million of which, if recognized, would affect our effective tax
rate in accordance with currently effective accounting
standards.
We had
$229 million accrued for interest and penalties at March 31, 2008 and $264
million at December 31, 2007. During the first quarter of 2008, we recognized a
reduction of income tax expense of $2 million resulting from the settlement of
previously recorded tax matters, net of current period accrued interest and
penalties. The total amount of interest and penalties recognized in the first
quarter of 2007 was an expense of $20 million.
We are
subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 2000 and substantially all material state, local, and foreign
income tax matters through 2001. During the first quarter of 2008, we resolved
certain matters previously under consideration at IRS Appeals, related primarily
to Guidant’s acquisition of Intermedics, Inc., and received several favorable
foreign court decisions and a favorable state audit settlement. As a
result of the resolution of these matters, we decreased our reserve for
uncertain tax positions, net of payments, by $49 million, inclusive of $24
million of interest and penalties, during the first quarter of
2008.
It is
reasonably possible that within the next 12 months we will resolve multiple
issues with taxing authorities, in which case we could record a reduction in our
balance of unrecognized tax benefits of up to approximately $140
million.
NOTE
M – COMMITMENTS AND CONTINGENCIES
The
medical device market in which we primarily participate
is largely technology driven. Physician customers, particularly in
interventional cardiology, have historically moved quickly to new products and
new technologies. As a result, intellectual property rights, particularly
patents and trade secrets, play a significant role in product development and
differentiation. However, intellectual property litigation to defend or create
market advantage is inherently complex and unpredictable. Furthermore, appellate
courts frequently overturn lower court patent decisions.
In
addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors are
parties in the same proceeding, or in a series of related proceedings, or
litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending
and potentially related and unrelated cases. In addition, although monetary and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes of other
cases in other geographies.
Several
third parties have asserted that our current and former stent systems infringe
patents owned or licensed by them. We have similarly asserted that stent systems
or other products sold by our competitors infringe patents owned or licensed by
us. Adverse outcomes in one or more of the proceedings against us could limit
our ability to sell certain stent products in certain jurisdictions, or reduce
our operating margin on the sale of these products and could have a material
adverse effect on our financial position, results of operations or
liquidity.
In the
normal course of business, product liability and securities claims are asserted
against us. Product liability
and
securities claims against us may be asserted in the future related to events not
known to management at the present time. We are substantially self-insured with
respect to general and product liability claims. We maintain insurance policies
providing limited coverage against securities claims. The absence of significant
third-party insurance coverage increases our potential exposure to unanticipated
claims or adverse decisions. Product liability claims, product recalls,
securities litigation and other litigation in the future, regardless of their
outcome, could have a material adverse effect on our financial position, results
of operations or liquidity.
We accrue
anticipated costs of settlement and damages and, under certain conditions, costs
of defense, based on historical experience or to the extent specific losses are
probable and estimable. Otherwise, we expense these costs as incurred. We record
losses for claims in excess of the limits of purchased insurance in earnings at
the time and to the extent they are probable and estimable. If the estimate of a
probable loss is a range and no amount within the range is more likely, we
accrue the minimum amount of the range.
Our
accrual for legal matters that are probable and estimable was $991 million
at March 31, 2008 and $994 million at December 31, 2007, and includes
estimated costs of settlement, damages and defense. The amounts accrued relate
primarily to Guidant litigation and claims recorded as part of the Guidant
purchase price, and to on-going patent litigation involving our Interventional
Cardiology business. We continue to assess certain litigation and claims to
determine the amounts that management believes will be paid as a result of
such claims and litigation and, therefore, additional losses may be accrued in
the future, which could adversely impact our operating results, cash flows and
our ability to comply with our debt covenants.
In
management’s opinion, we are not currently involved in any legal proceedings
other than those specifically identified below, which, individually or in the
aggregate, could have a material effect on our financial condition, operations
and/or cash flows. Unless included in our legal accrual or otherwise indicated
below, a range of loss associated with any individual material legal proceeding
can not be estimated.
Except as
disclosed below, there have been no material developments with regards to any
matters of litigation or other proceedings disclosed in our 2007 Annual Report
on Form 10-K.
Litigation
with Johnson & Johnson
On
October 22, 1997, Cordis Corporation, a subsidiary of Johnson &
Johnson, filed a suit for patent infringement against us and Boston Scientific
Scimed, Inc. (f/k/a SCIMED Life Systems, Inc.), our wholly owned
subsidiary, alleging that the importation and use of the NIR® stent infringes
two patents owned by Cordis. On April 13, 1998, Cordis filed another suit
for patent infringement against Boston Scientific Scimed and us, alleging that
our NIR® stent infringes two additional patents owned by Cordis. The suits were
filed in the U.S. District Court for the District of Delaware seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. A trial on both actions was held in late 2000. A jury found that
the NIR® stent does not infringe three Cordis patents, but does infringe one
claim of one Cordis patent and awarded damages of approximately
$324 million to Cordis. On March 28, 2002, the Court set aside the
damage award, but upheld the remainder of the verdict, and held that two of the
four patents had been obtained through inequitable conduct in the U.S. Patent
and Trademark Office. On May 27, 2005, Cordis filed an appeal on those two
patents and an appeal hearing was held on May 3, 2006. The United States
Court of Appeals for the Federal Circuit remanded the case back to the
trial court for further briefing and fact-finding by the Court. On
May 16, 2002, the Court also set aside the verdict of infringement,
requiring a new trial. On March 24, 2005, in a second trial, a jury found
that a single claim of the Cordis patent was valid and infringed. The jury
determined liability only; any monetary damages will be determined at a later
trial. On March 27, 2006, the judge entered judgment in favor of Cordis, and on
April 26, 2006, we filed an appeal. A hearing on the appeal was held on October
3, 2007, and a decision was rendered on January 7, 2008 upholding the lower
court’s finding of infringement and reversing the finding of invalidity of a
second claim. On February 4, 2008, we requested the Court of Appeals rehear
the appeal and reverse the lower court’s finding of infringement and/or remand
the case to the District Court for a new trial. On April 9, 2008, the Court of
Appeals denied our motion to rehear the appeal and remanded the case to the
District Court.
On
April 2, 1997, Ethicon and other Johnson & Johnson subsidiaries
filed a cross-border proceeding in The Netherlands alleging that the NIR® stent
infringes a European patent licensed to Ethicon. In this action, the
Johnson & Johnson entities requested relief, including provisional
relief (a preliminary injunction). In October 1997, Johnson &
Johnson’s request for provisional cross-border relief on the patent was denied
by the Dutch Court, on the ground that it is “very likely” that the NIR® stent
will be found not to infringe the patent. Johnson & Johnson’s appeal of
this decision was denied. In January 1999, Johnson & Johnson
amended the claims of the patent and changed the action from a cross-border case
to a Dutch national action. On June 23, 1999, the Dutch Court affirmed that
there were no remaining infringement claims with respect to the patent. In late
1999, Johnson & Johnson appealed this decision. On March 11, 2004,
the Court of Appeals nullified the Dutch Court’s June 23, 1999 decision and
the proceedings have been returned to the Dutch Court. In accordance with its
1999 decision, the Dutch Court asked the Dutch Patent Office for technical
advice on the validity of the amended patent. On August 31, 2005, the Dutch
Patent Office issued its technical advice that the amended patent was valid but
left certain legal issues for the Dutch Court to resolve. A hearing was held on
April 25, 2008 and a decision is expected on June 25, 2008.
On
August 22, 1997, Johnson & Johnson filed a suit for patent
infringement against us alleging that the sale of the NIR® stent infringes
certain Canadian patents owned by Johnson & Johnson. Suit was filed in
the federal court of Canada seeking a declaration of infringement, monetary
damages and injunctive relief. On December 2, 2004, the Court dismissed the
case, finding all patents to be invalid. On December 6, 2004,
Johnson & Johnson appealed the Court’s decision, and in May 2006, the
Court reinstated the patents. In August 2006, we appealed the Court’s decision
to the Supreme Court. On January 18, 2007, the Supreme Court denied our request
to review this matter. A trial began on January 21, 2008 and concluded on
February 29, 2008. On April 30, 2008, the Court found that the NIR stent did not
infringe one patent of Johnson & Johnson and that the other Johnson &
Johnson patent was invalid.
On
February 14, 2002, we, and certain of our subsidiaries, filed suit for
patent infringement against Johnson & Johnson and Cordis alleging that
certain balloon catheters and stent delivery systems sold by Johnson &
Johnson and Cordis infringe five U.S. patents owned by us. The complaint was
filed in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. On October 15, 2002, Cordis filed a
counterclaim alleging that certain balloon catheters and stent delivery systems
sold by us infringe three U.S. patents owned by Cordis and seeking monetary and
injunctive relief. On December 6, 2002, we filed an amended complaint
alleging that two additional patents owned by us are infringed by the Cordis’
products. A bench trial on interfering patent issues was held December 5,
2005 and on September 19, 2006, the Court found there to be no interference.
Trial began on October 9, 2007 and, on October 31, 2007, the jury found that we
infringe a patent of Cordis. The jury also found four of our patents invalid and
infringed by Cordis. No damages were determined because the judge found that
Cordis failed to submit evidence sufficient to enable a jury to make a damage
assessment. We filed a motion to overturn the jury verdict. A hearing on
post-trial motions was held on February 15, 2008, and on February 19, 2008, the
Court denied all post-trial motions. We intend to appeal the decision. The Court
also ordered the parties to attempt to negotiate a reasonable royalty rate for
future sales of the products found to infringe or file further papers with the
Court regarding continued infringement. A hearing on prospective relief is
scheduled for July 18, 2008.
On
March 26, 2002, we and our wholly owned subsidiary, Target
Therapeutics, Inc., filed suit for patent infringement against
Cordis alleging that certain detachable coil delivery systems infringe three
U.S. patents, owned by or exclusively licensed to Target. The complaint was
filed in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. In 2004, the Court granted summary judgment in
our favor finding infringement of one of the patents. On November 14,
2005, the Court denied Cordis’ summary judgment motions with respect to the
validity of the patent. Cordis filed a motion for reconsideration and a hearing
was held on October 26, 2006. The Court ruled on Cordis’ motion for
reconsideration by modifying its claim construction order. On February 7, 2007,
Cordis filed a motion for summary judgment of non-infringement with respect to
this patent. On July 27, 2007, the Court denied Cordis’ motion. The Court
also modified its claim construction and vacated its earlier summary judgment
order finding infringement by the Cordis device. Summary judgment motions
with respect to this patent were renewed by both parties and on March 21, 2008,
the Court reinstated the order finding infringement. Also, on January 18,
2008, the Court granted our
motion
for summary judgment that Cordis infringes a second patent in the
suit. Based on this order, we have filed a motion for summary
judgment of infringement of the third patent in the suit, as well as a request
to add infringement of certain additional claims of the second patent. A hearing
on this motion is scheduled for May 9, 2008. On January 25, 2008, the Court also
ruled that two of the patents, including one on which summary judgment of
infringement had been granted, are not invalid based on prior public or
commercial use. On March 21, 2008, the Court granted in part and denied in part
our motion for summary judgment of no inequitable conduct.
On
August 5, 2004, we (through our subsidiary Schneider Europe GmbH) filed
suit in the District Court of Brussels, Belgium against the Belgian subsidiaries
of Johnson & Johnson, Cordis and Janssen Pharmaceutica alleging that
Cordis’ Bx Velocity stent, Bx Sonic stent, Cypher stent, Cypher Select stent,
Aqua T3™ balloon and U-Pass balloon infringe one of our European patents and
seeking injunctive and monetary relief. A hearing was held on September 20 and
21, 2007 and a decision was rendered on December 6, 2007, scheduling a new
hearing for May 29, 2008 to consider new evidence. In December 2005, the
Johnson & Johnson subsidiaries filed a nullity action in France. On
January 25, 2008, we filed a counterclaim infringement action in France, and a
hearing is scheduled for April 6, 2009. In January 2006, the same
Johnson & Johnson subsidiaries filed nullity actions in Italy and
Germany. On October 23, 2007, the German Federal Patent Court found the patent
valid. We have filed a counterclaim infringement action in Italy and an
infringement action in Germany. A hearing is scheduled on the German
infringement action for July 15, 2008.
On May 4,
2006, we filed suit against Conor Medsystems Ireland Ltd. alleging that its
Costar® paclitaxel-eluting coronary stent system infringes one of our balloon
catheter patents. The suit was filed in Ireland seeking monetary and injunctive
relief. On May 24, 2006, Conor responded, denying the allegations and
filed a counterclaim against us alleging that the patent is not valid and is
unenforceable. On January 14, 2008, the case was dismissed pursuant to a
settlement agreement between the parties.
On May
25, 2007, Boston Scientific Scimed and we filed suit against Johnson &
Johnson and Cordis in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity of a U.S. patent owned by them and
of non-infringement of the patent by our PROMUS™ coronary stent system. On
February 21, 2008, Cordis answered the complaint, denying the allegations, and
filed a counterclaim for infringement seeking an injunction and a declaratory
judgment of validity. A trial is scheduled to begin on August 3,
2009.
On June
1, 2007, Boston Scientific Scimed and we filed a suit against Johnson &
Johnson and Cordis in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity of a U.S. patent owned by them and
of non-infringement of the patent by our PROMUS coronary stent system. On
February 21, 2008, Cordis answered the complaint, denying the allegations, and
filed a counterclaim for infringement seeking an injunction and a declaratory
judgment of validity. A trial is scheduled to begin on August 3,
2009.
On June
22, 2007, Boston Scientific Scimed and we filed a suit against Johnson &
Johnson and Cordis in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity of a U.S. patent owned by them and
of non-infringement of the patent by our PROMUS coronary stent
system. On February 21, 2008, Cordis answered the complaint, denying
the allegations, and filed a counterclaim for infringement seeking an injunction
and a declaratory judgment of validity. A trial is scheduled to
begin on August 3, 2009.
On
November 27, 2007, Boston Scientific Scimed and we filed suit against Johnson
& Johnson and Cordis in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity of a U.S. patent owned by them and
of non-infringement of the patent by our PROMUS coronary stent system. On
February 21, 2008, Cordis answered the complaint, denying the allegations, and
filed a counterclaim for infringement seeking an injunction and a declaratory
judgment of validity. A trial is scheduled to begin on August 3,
2009.
On
January 15, 2008, Johnson & Johnson Inc. filed a suit for patent
infringement against us alleging that the sale of the Express, Express 2 and
TAXUS EXPRESS 2 stent delivery systems infringe two Canadian patents owned by
Johnson & Johnson. Suit was filed in The Federal Court of Canada
seeking a declaration of infringement, monetary damages and injunctive
relief. We filed a motion to dismiss the complaint.
On
January 28, 2008, Wyeth and Cordis Corporation filed suit against Boston
Scientific Scimed and us, alleging that our PROMUS coronary stent system, upon
launch in the United States, will infringe three U.S. patents owned by Wyeth and
licensed to Cordis. The suit was filed in the United States District Court
for the District of New Jersey seeking monetary and injunctive relief. We have
not yet been served with the complaint. On February 1, 2008, Wyeth and Cordis
Corporation filed an amended complaint against Abbott Laboratories, adding us
and Boston Scientific Scimed as additional defendants to the complaint. The suit
alleges that our PROMUS coronary stent system, upon launch in the United States,
will infringe the same three U.S. patents owned by Wyeth and licensed to
Cordis. The suit was filed in the United States District Court for the
District of New Jersey seeking monetary and injunctive relief. On
March 17, 2008, we filed a motion to dismiss for lack of subject matter
jurisdiction.
Litigation
with Medinol Ltd.
On
February 20, 2006, Medinol submitted a request for arbitration against us,
and our wholly owned subsidiaries Boston Scientific Ltd. and Boston
Scientific Scimed, Inc., under the Arbitration Rules of the World
Intellectual Property Organization pursuant to a settlement agreement between
Medinol and us dated September 21, 2005. The request for arbitration
alleges that the Company’s Liberté coronary stent system infringes two U.S.
patents and one European patent owned by Medinol. Medinol is seeking to have the
patents declared valid and enforceable and a reasonable royalty. The September
2005 settlement agreement provides, among other things, that Medinol may only
seek reasonable royalties and is specifically precluded from seeking injunctive
relief. As a result, we do not expect the outcome of this proceeding to have a
material impact on the continued sale of the Liberté® stent system
internationally or in the United States, the continued sale of the TAXUS®
Liberté® stent system internationally or the launch of the TAXUS® Liberté® stent
system in the United States. We plan to defend against Medinol’s claims
vigorously. The arbitration hearing was held on September 17 through September
21, 2007. On May 2, 2008, the World Intellectual Property Organization panel
that held that the Liberté and TAXUS Liberté stent systems do not infringe the
Medinol patents.
Other
Patent Litigation
On
September 12, 2002, ev3 Inc. filed suit against The Regents of the
University of California and our wholly owned subsidiary, Boston Scientific
International, B.V., in the District Court of The Hague, The Netherlands,
seeking a declaration that ev3’s EDC II and VDS embolic coil products do not
infringe three patents licensed to us from The Regents. On October 22,
2003, the Court ruled that the ev3 products infringe the three patents. On
December 18, 2003, ev3 appealed the Court’s ruling. A hearing on the appeal
has not yet been scheduled. A damages hearing originally scheduled for June 15,
2007 has been postponed and not yet rescheduled. On October 30, 2007, we reached
an agreement in principle with ev3 to resolve this matter. On March 27, 2008,
the parties signed a definitive settlement agreement and the case has been
formally dismissed.
On
December 16, 2003, The Regents of the University of
California filed suit against Micro Therapeutics, Inc., a subsidiary
of ev3, and Dendron GmbH alleging that Micro Therapeutics’ Sapphire detachable
coil delivery systems infringe twelve patents licensed to us and owned by The
Regents. The complaint was filed in the U.S. District Court for the Northern
District of California seeking monetary and injunctive relief. On
January 8, 2004, Micro Therapeutics and Dendron filed a third-party
complaint to include Target Therapeutics and us as third-party defendants
seeking a declaratory judgment of invalidity and noninfringement with respect to
the patents and antitrust violations. On February 17, 2004, we, as a
third-party defendant, filed a motion to dismiss us from the case. On
July 9, 2004, the Court granted our motion in part and dismissed Target and
us from the claims relating only to patent infringement, while denying dismissal
of an antitrust claim. On April 7, 2006, the Court denied Micro Therapeutics’
motion seeking unenforceability of The Regents’ patent and denied The Regents’
cross-motion for summary judgment of enforceability. A summary judgment hearing
was held on July 31, 2007 relating to the antitrust claim, and on August 22,
2007, the Court granted summary judgment in our favor and dismissed us from the
case. On October 30, 2007, we reached an agreement in principle with ev3 to
resolve this matter. On March 27, 2008, the parties signed a definitive
settlement agreement and on April 4, 2008, a Stipulation of Dismissal was filed
with the Court and the case was formally dismissed.
On
March 29, 2005, we and Boston Scientific Scimed, filed suit against ev3 for
patent infringement, alleging that ev3’s SpideRX® embolic protection device
infringes four U.S. patents owned by us. The complaint was filed in the U.S.
District Court for the District of Minnesota seeking monetary and injunctive
relief. On May 9, 2005, ev3 answered the complaint, denying the
allegations, and filed a counterclaim seeking a declaratory judgment of
invalidity and unenforceability, and noninfringement of our patents in the suit.
On October 28, 2005, ev3 filed its first amended answer and counterclaim
alleging that certain of our embolic protection devices infringe a patent owned
by ev3. On June 20, 2006, we filed an amended complaint adding a claim of trade
secret misappropriation and claiming infringement of two additional U.S. patents
owned by us. On June 30, 2006, ev3 filed an amended answer and counterclaim
alleging infringement of two additional U.S. patents owned by ev3. A trial has
not yet been scheduled. On October 30, 2007, we reached an agreement in
principle with ev3 to resolve this matter. On March 27, 2008, the parties
signed a definitive settlement agreement and the case has been formally
dismissed.
On
September 27, 2004, Target Therapeutics and we filed suit for patent
infringement against Micrus Corporation alleging that certain detachable embolic
coil devices infringe two U.S. patents exclusively licensed to Target
Therapeutics. The complaint was filed in the U.S. District Court for the
Northern District of California seeking monetary and injunctive relief. On
November 16, 2004, Micrus answered and filed counterclaims seeking a
declaration of invalidity, unenforceability and noninfringement and included
allegations of infringement against us relating to three U.S. patents owned by
Micrus, and antitrust and state law violations. On January 10, 2005, we
filed a motion to dismiss certain of Micrus’ counterclaims, and on
February 23, 2005, the Court granted a request to stay the proceedings
pending a reexamination of our patents by the U.S. Patent and Trademark Office.
On February 23, 2006, the stay was lifted. Subsequently, Micrus provided a
covenant not to sue us with respect to one of the Micrus patents. On March 21,
2008, the Court rendered its claim construction ruling regarding the various
patents at issue. A trial date has not yet been set.
On
April 4, 2005, Angiotech and we filed suit against Sahajanand Medical
Technologies Pvt. Ltd. in The Hague, The Netherlands seeking a declaration
that Sahajanand’s drug-eluting stent products infringe patents owned by
Angiotech and licensed to us. On May 3, 2006, the Court found that the asserted
claims were infringed and valid, and provided for injunctive and monetary
relief. On July 13, 2006, Sahajanand appealed the Court’s decision. A hearing on
the appeal was held on March 13, 2008, and a decision is expected by May 29,
2008.
On
May 19, 2005, G. David Jang, M.D. filed suit against us alleging breach of
contract relating to certain patent rights covering stent technology. The suit
was filed in the U.S. District Court, Central District of California seeking
monetary damages and rescission of the contract. On June 24, 2005, we
answered, denying the allegations, and filed a counterclaim. After a Markman
ruling relating to the Jang patent rights, Dr. Jang stipulated to the dismissal
of certain claims alleged in the complaint with a right to appeal. In February
2007, the parties agreed to settle the other claims of the case. On May 23,
2007, Jang filed an appeal with respect to the remaining patent claims. Oral
arguments were heard on April 8, 2008 and a decision is expected in three to six
months.
On April
19, 2007, SciCo Tec GmbH, filed suit against us and our subsidiary, Boston
Scientific Medizintechnik GmbH, alleging certain of our balloon catheters
infringe a German patent owned by SciCo Tec GmbH. The suit was filed
in Mannheim, Germany. We answered the complaint, denying the
allegations and filed a nullity action against SciCo Tec relating to one of its
German patents. A hearing on the merits in the infringement action
was held on February 12, 2008 and on April 1, 2008, the Court appointed a
technical expert.
On
December 16, 2005, Bruce N. Saffran, M.D., Ph.D. filed suit against us
alleging that our TAXUS® Express coronary stent system infringes a patent owned
by Dr. Saffran. The suit was filed in the U.S. District Court for the
Eastern District of Texas and seeks monetary and injunctive relief. On
February 8, 2006, we filed an answer, denying the allegations of the
complaint. Trial began on February 5, 2008. On February 11, 2008, the jury found
that our TAXUS® Express and TAXUS® Liberte® stent products infringe Dr.
Saffran’s patent and that the patent is valid. No injunction was
requested, but the jury awarded damages of $431 million. The District Court
awarded Dr. Saffran $69 million in pre-judgment interest and entered judgment in
his favor. We believe the jury verdict is unsupported by both the evidence and
the law. We have filed post-trial motions before the District Court
to
reverse
the jury verdict and, if unsuccessful, will appeal to the U.S. Court of Appeals
for the Federal Circuit. On February 21, 2008, Dr. Saffran filed a new complaint
alleging willful infringement of the continued sale of the TAXUS stent products.
We will vigorously defend against its allegations.
On
December 11, 2007, Wall Cardiovascular Technologies LLC filed suit against us
alleging that our TAXUS Express coronary stent system infringes a patent owned
by them. The complaint also alleges that Cordis Corporation’s
drug-eluting stent system infringes the patent. The suit was filed in the
Eastern District Court of Texas and seeks monetary and injunctive relief. We
answered the original complaint denying the allegations. On February
18, 2008, Wall Cardiovascular Technologies filed a request, which has been
granted by the Court, to amend its complaint to add Medtronic, Inc. to the suit
with respect to Medtronic’s drug-eluting stent system.
Other
Proceedings
On
September 23, 2005, Srinivasan Shankar, on behalf of himself and all others
similarly situated, filed a purported securities class action suit in the U.S.
District Court for the District of Massachusetts on behalf of those who
purchased or otherwise acquired our securities during the period March 31,
2003 through August 23, 2005, alleging that we and certain of our officers
violated certain sections of the Securities Exchange Act of 1934. On
September 28, 2005, October 27, 2005, November 2, 2005 and
November 3, 2005, Jack Yopp, Robert L. Garber, Betty C. Meyer and John
Ryan, respectively, on behalf of themselves and all others similarly situated,
filed additional purported securities class action suits in the same Court on
behalf of the same purported class. On February 15, 2006, the Court
ordered that the five class actions be consolidated and appointed the
Mississippi Public Employee Retirement System Group as lead plaintiff. A
consolidated amended complaint was filed on April 17, 2006. The consolidated
amended complaint alleges that we made material misstatements and omissions by
failing to disclose the supposed merit of the Medinol litigation and DOJ
investigation relating to the 1998 NIR ON® Ranger with Sox stent recall,
problems with the TAXUS® drug-eluting coronary stent systems that led to product
recalls, and our ability to satisfy FDA regulations concerning medical device
quality. The consolidated amended complaint seeks unspecified damages, interest,
and attorneys’ fees. The defendants filed a motion to dismiss the consolidated
amended complaint on June 8, 2006, which was granted by the Court on March 30,
2007. The Mississippi Public Employee Retirement System Group appealed the
Court’s decision. On April 16, 2008, the First Circuit reversed the dismissal of
only plaintiff’s TAXUS stent recall related claims and remanded the matter for
further proceedings.
On
January 19, 2006, George Larson, on behalf of himself and all others
similarly situated, filed a purported class action complaint in the U.S.
District Court for the District of Massachusetts on behalf of participants and
beneficiaries of our 401(k) Retirement Savings Plan (401(k) Plan) and GESOP
(together the Plans) alleging that we and certain of our officers and employees
violated certain provisions under the Employee Retirement Income Security Act of
1974, as amended (ERISA) and Department of Labor Regulations. On
January 26, 2006, February 8, 2006, February 14, 2006,
February 23, 2006 and March 3, 2006, Robert Hochstadt, Jeff Klunke, Kirk
Harvey, Michael Lowe and Douglas Fletcher, respectively, on behalf of themselves
and others similarly situated, filed purported class action complaints in the
same Court on behalf of the participants and beneficiaries in our Plans alleging
similar misconduct and seeking similar relief as in the Larson lawsuit. On April
3, 2006, the Court issued an order consolidating the actions and appointing
Jeffrey Klunke and Michael Lowe as interim lead plaintiffs. On August 23, 2006,
plaintiffs filed a consolidated complaint that purports to bring a class action
on behalf of all participants and beneficiaries of our 401(k) Plan during the
period May 7, 2004 through January 26, 2006 alleging that we, our 401(k)
Administrative and Investment Committee (the Committee), members of the
Committee, and certain directors violated certain provisions of ERISA. The
complaint alleges, among other things, that the defendants breached their
fiduciary duties to the 401(k) Plan’s participants. The complaint seeks
equitable and monetary relief. Defendants filed a motion to dismiss on October
10, 2006, which was denied by the Court on August 27, 2007. On March 7,
2008, plaintiffs filed a motion for class certification. A trial has not yet
been scheduled.
On
June 12, 2003, Guidant announced that its subsidiary, EndoVascular
Technologies, Inc. (EVT), had entered into a plea agreement with the U.S.
Department of Justice relating to a previously disclosed investigation regarding
the ANCURE ENDOGRAFT System for the treatment of abdominal aortic aneurysms. At
the time of
the EVT
plea, Guidant had outstanding fourteen suits alleging product liability related
causes of action relating to the ANCURE System. Subsequent to the EVT plea,
Guidant was notified of additional claims and served with additional complaints.
From time to time, Guidant has settled certain of the individual claims and
suits for amounts that were not material to Guidant. Currently, Guidant has
approximately 14 suits outstanding, and more suits may be filed. The complaints
seek damages, including punitive damages. The complaints are in various stages
of discovery, with the earliest trial date set for the summer of 2008.
Additionally, Guidant has been notified of over 135 unfiled claims that are
pending. The cases generally allege the plaintiffs suffered injuries, and in
certain cases died, as a result of purported defects in the device or the
accompanying warnings and labeling.
Although
insurance may reduce Guidant’s exposure with respect to ANCURE System claims,
one of Guidant’s carriers, Allianz Insurance Company (Allianz), filed suit in
the Circuit Court, State of Illinois, County of DuPage, seeking to rescind or
otherwise deny coverage and alleging fraud. Additional carriers have
intervened in the case and Guidant affiliates, including EVT, are also named as
defendants. Guidant and its affiliates also initiated suit against certain
of their insurers, including Allianz, in the Superior Court, State of
Indiana, County of Marion, in order to preserve Guidant’s rights to coverage. A
trial has not yet been scheduled in either case. On March 23, 2007, the
Court in the Indiana lawsuit granted Guidant and its affiliates’ motion for
partial summary judgment regarding Allianz’s duty to defend, finding that
Allianz breached its duty to defend 41 ANCURE lawsuits. On April 19,
2007, Allianz filed a notice of appeal of that ruling. The Indiana appeal was
heard on March 25, 2008, and on April 17, 2008, the Court of Appeals reversed
the partial summary judgment ruling finding instead that Allianz did not have a
duty to defend. Guidant may seek review from the Indiana Supreme
Court. On July 11, 2007, the Illinois court entered a final partial summary
judgment ruling in favor of Allianz. Guidant appealed the Court’s ruling on
August 9, 2007. Both lawsuits are currently partially stayed in the trial courts
pending the outcome of the respective appeals.
Shareholder
derivative suits relating to the ANCURE System are currently pending in the
Southern District of Indiana and in the Superior Court of the State of Indiana,
County of Marion. The suits, purportedly filed on behalf of Guidant, initially
alleged that Guidant’s directors breached their fiduciary duties by taking
improper steps or failing to take steps to prevent the ANCURE and EVT related
matters described above. The complaints seek damages and other equitable relief.
The state court derivative suits have been stayed in favor of the federal
derivative action. On March 9, 2007, the Superior Court granted the parties’
joint motion to dismiss the complaint with prejudice for lack of standing in one
of the pending state derivative actions. The lead plaintiff in the federal
derivative case filed an amended complaint in December 2005, adding allegations
regarding defibrillator and pacemaker products and Guidant’s proposed merger
with Johnson & Johnson. On March 17, 2006, the lead plaintiff filed a
second amended complaint in the federal derivative case. On May 1, 2006, the
defendants moved to dismiss the federal derivative case. On March 27, 2008, the
District Court granted the motion to dismiss and entered judgment in favor of
all defendants.
Approximately
75 product liability class action lawsuits and more than 2,200 individual
lawsuits involving approximately 5,500 individual plaintiffs are pending in
various state and federal jurisdictions against Guidant alleging personal
injuries associated with defibrillators or pacemakers involved in the 2005 and
2006 product communications. The majority of the cases in the United States
are pending in federal court but approximately 250 cases are currently pending
in state courts. On November 7, 2005, the Judicial Panel on Multi-District
Litigation established MDL-1708 (MDL) in the United States District Court for
the District of Minnesota and appointed a single judge to preside over all the
cases in the MDL. In April 2006, the personal injury plaintiffs and certain
third-party payors served a Master Complaint in the MDL asserting claims for
class action certification, alleging claims of strict liability, negligence,
fraud, breach of warranty and other common law and/or statutory claims and
seeking punitive damages. The majority of claimants allege no physical injury,
but are suing for medical monitoring and anxiety. On July 12, 2007,
we reached an agreement to settle certain claims associated with the 2005 and
2006 product communications, which was amended on November 19, 2007. Under the
terms of the amended agreement, subject to certain conditions, we will pay a
total of up to $240 million covering 8,550 patient claims, including all of the
claims that have been consolidated in the MDL as well as other filed and unfiled
claims throughout the United States. On June 13, 2006, the Minnesota Supreme
Court appointed a single judge to preside over all
Minnesota
state court lawsuits involving cases arising from the product communications.
The plaintiffs in those cases are eligible to participate in the settlement, and
activities in all Minnesota State court cases are currently stayed pending
individual plaintiff’s decisions whether to participate in the
settlement.
We are
aware of twelve lawsuits pending internationally. Five of those suits are
pending in Canada and are all putative class actions. A hearing on
whether the first of these putative class actions should be certified as a class
was held in mid-January 2008 and on April 10, 2008, the Court certified a class
of all persons in whom defibrillators were implanted in Canada and a class of
family members with derivative claims. Guidant intends to appeal the
Court’s class-certification decision.
On
November 3, 2005, a securities class action complaint was filed on behalf
of purchasers of Guidant stock between December 1, 2004 and October 18, 2005 in
the U.S. District Court for the Southern District of Indiana, against Guidant
and several of its officers and directors. The complaint alleges that the
defendants concealed adverse information about Guidant’s defibrillators and
pacemakers and sold stock in violation of federal securities laws. The complaint
seeks a declaration that the lawsuit can be maintained as a class action,
monetary damages, and injunctive relief. Several additional, related securities
class actions were filed in November 2005 and January 2006. The Court issued an
order consolidating the complaints and appointed the Iron Workers of Western
Pennsylvania Pension Plan and David Fannon as lead plaintiffs. Lead plaintiffs
filed a consolidated amended complaint. In August 2006, the defendants moved to
dismiss the complaint. On February 27, 2008, the District Court granted the
motion to dismiss and entered final judgment in favor of all defendants. On
March 13, 2008, the plaintiffs filed a motion seeking to amend the final
judgment to permit the filing of a further amended complaint. On March 28, 2008,
defendants opposed the motion. The motion remains pending.
On July
17, 2006, Carla Woods and Jeffrey Goldberg, as Trustees of the Bionics Trust and
Stockholders’ Representative, filed a lawsuit against us in the U.S. District
Court for the Southern District of New York. The complaint alleges that we
breached the Agreement and Plan of Merger among us, Advanced Bionics
Corporation, the Bionics Trust, Alfred E. Mann, Jeffrey H. Greiner, and David
MacCallum, collectively in their capacity as Stockholders’ Representative, and
others dated May 28, 2004 (the Merger Agreement) or, alternatively, the covenant
of good faith and fair dealing. The complaint seeks injunctive and other relief.
On February 20, 2007, the district court entered a preliminary injunction
prohibiting us from taking certain actions until we complete specific actions
described in the Merger Agreement. We appealed the preliminary injunction order
on March 16, 2007. On April 17, 2007, the District Court issued a permanent
injunction. On May 7, 2007, we appealed the permanent injunction
order. A hearing on the appeal was held on July 13, 2007. On August 24, 2007,
the U.S. Court of Appeals for the Second Circuit affirmed the order of the
District Court in part and vacated the order in part. In connection with an
amendment to the Merger Agreement and the execution of related agreements in
August 2007, the parties agreed to a resolution to this litigation contingent
upon the closing of the Amendment and related agreements. On January 3, 2008,
the closing contemplated by the amendment and related agreements occurred and on
January 9, 2008, the District Court entered a joint stipulation vacating the
injunction and dismissed the case with prejudice.
On
February 26, 2008, fifteen pharmaceutical and medical device manufacturers,
including Boston Scientific, received a letter from Senator Charles E. Grassley,
ranking member of the United States Senate Committee on Finance regarding their
plans to enhance the transparency of financial relationships with physicians and
medical organizations. On March 7, 2008, we responded to the
Senator.
FDA
Warning Letters
On
December 23, 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and
record-keeping procedures in its CRM facility in St. Paul, Minnesota. In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
On
January 26, 2006, legacy Boston Scientific received a corporate warning
letter from the FDA, notifying us of serious regulatory problems at three
facilities and advising us that our corrective action plan relating to
three site-specific warning letters issued to us in 2005 was inadequate. As
stated in this FDA warning letter, the FDA may
not
grant our requests for exportation certificates to foreign governments or
approve pre-market approval applications for class III devices to
which the quality control or current good manufacturing practices deficiencies
described in the letter are reasonably related until the deficiencies have been
corrected. In February 2008, the FDA commenced its reinspection of certain of
our facilities.
In August
2007, we received a warning letter from the FDA regarding the conduct of
clinical investigations associated with our abdominal aortic aneurysm (AAA)
stent-graft program acquired from TriVascular, Inc. We have implemented a
comprehensive plan of corrective actions regarding the conduct of our clinical
trials and are finalizing commitments made to the FDA as part of our response.
We terminated the TriVascular AAA development program in 2006 and do not believe
the recent warning letter will have an impact on the timing of the resolution of
our corporate warning letter.
NOTE
N – SEGMENT REPORTING
In the
first quarter of 2008, we reorganized our international structure in order to
allow for better utilization of infrastructure and resources. Accordingly, we
have revised our reportable segments to reflect the way we currently manage and
view our business. We now have three reportable operating segments based on
geographic regions: the United States; EMEA, consisting of Europe, the Middle
East and Africa; and Inter-Continental. We combined our Middle East and Africa
operations, previously included in our Inter-Continental segment, with Europe to
form a new EMEA region and merged our former Asia Pacific region into our
Inter-Continental segment. Each of our reportable segments generates revenues
from the sale of medical devices. The reportable segments represent an aggregate
of all operating divisions within each segment. We measure and evaluate our
reportable segments based on segment income. We exclude from segment income
certain corporate and manufacturing-related expenses, as our corporate and
manufacturing functions do not meet the definition of a segment, as defined by
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. In addition, certain transactions or
adjustments that our Chief Operating Decision Maker considers to be
non-recurring and/or non-operational, such as amounts related to acquisitions,
divestitures, and restructuring activities, as well as amortization
expense, are excluded from segment income. Although we exclude these
amounts from segment income, they are included in reported consolidated net
income and are included in the reconciliation below.
We manage
our international operating segments on a constant currency basis. Sales
generated from reportable segments and divested businesses, as well operating
results of reportable segments and expenses from manufacturing operations, are
based on internally derived standard currency exchange rates, which may differ
from year to year and do not include intersegment profits. We have restated the
segment information for 2007 net sales and operating results based on our
standard currency exchange rates used for 2008 in order to remove the impact of
currency fluctuations. In addition, we have reclassified previously reported
2007 segment results to be consistent with the 2008 presentation. Because of the
interdependence of the reportable segments, the operating profit as presented
may not be representative of the geographic distribution that would occur if the
segments were not interdependent. A reconciliation of the totals reported for
the reportable segments to the applicable line items in our unaudited condensed
consolidated statements of operations is as follows:
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,117 |
|
|
$ |
1,169 |
|
EMEA
|
|
|
457 |
|
|
|
474 |
|
Inter-Continental
|
|
|
367 |
|
|
|
332 |
|
Net
sales allocated to reportable segments
|
|
$ |
1,941 |
|
|
$ |
1,975 |
|
|
|
|
|
|
|
|
|
|
Sales
generated from divested businesses
|
|
|
31 |
|
|
$ |
136 |
|
Currency
exchange
|
|
|
74 |
|
|
|
(25 |
) |
|
|
$ |
2,046 |
|
|
$ |
2,086 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
280 |
|
|
$ |
318 |
|
EMEA
|
|
|
217 |
|
|
|
261 |
|
Inter-Continental
|
|
|
202 |
|
|
|
166 |
|
Operating
income allocated to reportable segments
|
|
$ |
699 |
|
|
$ |
745 |
|
|
|
|
|
|
|
|
|
|
Manufacturing
operations
|
|
|
(101 |
) |
|
|
(154 |
) |
Corporate
expenses and currency exchange
|
|
|
(68 |
) |
|
|
(137 |
) |
Acquisition-,
divestiture-, and restructuring-related credits (charges)
|
|
|
193 |
|
|
|
(17 |
) |
Amortization
expense
|
|
|
(143 |
) |
|
|
(155 |
) |
|
|
|
580 |
|
|
|
282 |
|
Other
expense
|
|
|
(118 |
) |
|
|
(123 |
) |
|
|
$ |
462 |
|
|
$ |
159 |
|
NOTE
O – NEW ACCOUNTING PRONOUNCEMENTS
Statement
No. 141(R)
In
December 2007, the FASB issued Statement No. 141(R), Business Combinations, a
replacement for Statement No. 141. Statement No. 141(R) retains the fundamental
requirements of Statement No. 141, but requires the recognition of all assets
acquired and liabilities assumed in a business combination at their fair values
as of the acquisition date. It also requires the recognition of assets acquired
and liabilities assumed arising from contractual contingencies at their
acquisition date fair values. Additionally, Statement No. 141(R) supersedes FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, which
required research and development assets acquired in a business combination that
had no alternative future use to be measured at their fair values and expensed
at the acquisition date. Statement No. 141(R) now requires that purchased
research and development be recognized as an intangible asset. We are required
to adopt Statement No. 141(R) prospectively for any acquisitions on or after
January 1, 2009 and are currently evaluating the impact that Statement No.
141(R) will have on our consolidated financial statements.
Statement
No. 161
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which amends Statement No. 133 by
requiring expanded disclosures about an entity’s derivative instruments and
hedging activities. Statement No. 161 requires increased qualitative,
quantitative, and credit-risk disclosures, including (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement No. 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. We are
required to adopt Statement No. 161 for our first quarter ending March 31,
2009.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Boston
Scientific Corporation is a worldwide developer, manufacturer and marketer of
medical devices that are used in a broad range of interventional medical
specialties. Our mission is to improve the quality of patient care and the
productivity of healthcare delivery through the development and advocacy of
less-invasive medical devices and procedures. We accomplish this mission through
the continuing refinement of existing products and procedures and the
investigation and development of new technologies that can reduce risk, trauma,
cost, procedure time and the need for aftercare. Our approach to innovation
combines internally developed products and technologies with those we obtain
externally through our acquisitions and alliances. The growth and success of our
organization is dependent upon the shared values of our people. Our quality
policy, applicable to all employees, is “I improve the quality of patient care
and all things Boston Scientific.” This personal commitment connects our people
with the vision and mission of Boston Scientific.
Financial
Summary
Our net
sales for the first quarter of 2008 were $2.046 billion, as compared to $2.086
billion for the first quarter of 2007, a decrease of $40 million or two percent.
The decrease was attributable primarily to the divestiture of certain of our
businesses in the first quarter of 2008, which contributed additional net sales
of approximately $100 million in the first quarter of 2007, as well as a $40
million decline in sales of our drug-eluting stent systems as a result of
changes in market conditions. These decreases were partially offset by the
favorable impact of currency exchange rates, which contributed $99 million to
our year-over-year sales growth. Our reported net income for the first quarter
of 2008 was $322 million, or $0.21 per diluted share, as compared to net income
of $120 million, or $0.08 per diluted share, for the first quarter of
2007.
Our
reported results for the first quarter of 2008 included acquisition-,
divestiture-, and restructuring-related net credits (after-tax) of $74 million,
or $0.05 per share, consisting of gains of $114 million associated with the
divestiture of certain of our businesses; partially offset by $32 million of
restructuring costs, primarily head count related; and charges of $8 million for
purchased research and development. Our reported results for the first quarter
of 2007 included acquisition-related charges (after-tax) of $20 million, or
$0.01 per share, consisting primarily of integration costs related to our 2006
acquisition of Guidant Corporation.
Outlook
Coronary
Stent Business
Coronary
stent revenue represented approximately 24 percent of our consolidated net sales
during the first quarter of 2008, as compared to 25 percent in the first quarter
of 2007. We estimate that the worldwide coronary stent market will
approximate $4.8 billion in 2008, as compared to approximately $5.0 billion
in 2007, and estimate that drug-eluting stents will represent approximately
80 percent of the dollar value of worldwide coronary stent market sales in
2008, as they did in 2007. Market size is driven primarily by the number of
percutaneous coronary intervention (PCI) procedures performed; the number of
devices used per procedure; average drug-eluting stent selling prices; and the
drug-eluting stent penetration rate (a measure of the mix between bare-metal and
drug-eluting stents used across procedures). Uncertainty regarding the safety
and efficacy of drug-eluting stents, as well as the specific increased perceived
risk of late stent thrombosis1 following the use of drug-eluting stents, has
contributed to a decline in the worldwide drug-eluting stent market size as
compared to prior years. However, data addressing this risk and supporting the
safety of drug-eluting stent systems appear to have had a stabilizing effect on
the size of the drug-eluting stent market, as cardiologists regain confidence in
this technology.
1
|
Late stent thrombosis is the
formation of a clot, or thrombus, within the stented area one year or more
after implantation of the
stent.
|
The
following are the components of our first quarter worldwide coronary stent
system sales:
(in
millions)
|
|
Three
Months Ended
March
31, 2008
|
|
|
Three
Months Ended
March
31, 2007
|
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
Drug-eluting
|
|
$ |
218 |
|
|
$ |
210 |
|
|
$ |
428 |
|
|
$ |
293 |
|
|
$ |
175 |
|
|
$ |
468 |
|
Bare-metal
|
|
|
26 |
|
|
|
36 |
|
|
|
62 |
|
|
|
24 |
|
|
|
35 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
244 |
|
|
$ |
246 |
|
|
$ |
490 |
|
|
$ |
317 |
|
|
$ |
210 |
|
|
$ |
527 |
|
During
the first quarter of 2008, U.S. sales of our drug-eluting stent systems declined
$75 million, or 26 percent, as compared to the first quarter of 2007, due to
declines in market size and our share of the market. Decreases in drug-eluting
stent penetration rates, as well as decreases in PCI procedural volume,
contributed to an overall reduction in the U.S. drug-eluting stent market size.
For the first quarter of 2008, drug-eluting stent penetration rates were an
estimated 63 percent, as compared to approximately 69 percent for the first
quarter of 2007. Penetration rates decreased throughout 2007, but appear to have
stabilized with penetration rates between 62 and 63 percent for the last three
consecutive quarters. We estimate that the number of PCI procedures performed in
the U.S. in the first quarter of 2008 decreased five percent, as compared to the
first quarter of 2007, but have slightly increased from levels experienced in
the second half of 2007. In addition, until recently, our TAXUS®
paclitaxel-eluting coronary stent system was one of only two drug-eluting stent
products available in the U.S. market. In February, however, an additional
competitor entered this market, putting increased pressure on our U.S.
drug-eluting stent system sales and negatively impacting our market share.
Despite the additional competition in this market, we remained the market leader
throughout the first quarter of 2008. However, we expect that our share of the
U.S. drug-eluting stent market, as well as unit prices, will continue to be
impacted as additional competitors enter the U.S. drug-eluting stent market,
including Abbott Laboratories’ anticipated launch of its XIENCE™ V
everolimus-eluting coronary stent system in mid- 2008. Simultaneous with
Abbott’s U.S. launch of XIENCE V, we plan to launch our PROMUS™
everolimus-eluting coronary stent system, a private-labeled XIENCE V stent
system supplied to us by Abbott.
During
the first quarter of 2008, our international drug-eluting stent system net sales
increased $35 million, or 20 percent, as compared to the first quarter of 2007,
due primarily to the May 2007 launch of our TAXUS® Express2Ô
drug-eluting coronary stent system in Japan, as well as the favorable impact of
currency exchange rates. These increases were partially offset by a decline in
the size of the drug-eluting stent market in our Europe/Middle East/Africa
(EMEA) region, as compared to the same period in the prior year, as a result of
decreases in drug-eluting stent penetration rates. Further, a decrease in our
share of the drug-eluting stent market in this region, due to recent competitive
launches, negatively impacted our year-over-year sales growth.
Historically,
the worldwide coronary stent market has been dynamic and highly competitive with
significant market share volatility. In addition, in the ordinary course of our
business, we conduct and participate in numerous clinical trials with a variety
of study designs, patient populations and trial end points. Unfavorable or
inconsistent clinical data from existing or future clinical trials conducted by
us, by our competitors or by third parties, or the market’s perception of this
clinical data, may adversely impact our position in and share of the
drug-eluting stent market and may contribute to increased volatility in the
market. In addition, the FDA has informed stent manufacturers of new
requirements for clinical trial data for pre-market approval (PMA) applications
and post-market surveillance studies for drug-eluting stent products, which
could affect our new product launch schedules and increase the cost of product
approval and compliance.
We
believe that we can maintain our leadership position within the worldwide
drug-eluting stent market for a variety of reasons, including:
·
|
the
broad and consistent long-term results of our TAXUS® clinical trials,
including up to five years of clinical follow
up;
|
·
|
the
performance benefits of our current and future
technology;
|
·
|
the
strength of our pipeline of drug-eluting stent products, including
opportunities to expand indications for use through FDA review of existing
and additional randomized trial data in extended use
subsets;
|
·
|
our
overall position in the worldwide interventional medicine market and our
experienced interventional cardiology sales
force;
|
·
|
our
sales, clinical, marketing and manufacturing capabilities;
and
|
·
|
our
two drug-eluting stent platform strategy, including our TAXUS®
paclitaxel-eluting and PROMUS™ everolimus-eluting coronary stent
systems.
|
However,
a further decline in revenues from our drug-eluting stent systems could continue
to have a significant adverse impact on our operating results and operating cash
flows. The most significant variables that may impact the size of the
drug-eluting stent market and our position within this market
include:
·
|
the
entry and timing of additional competitors into the market, including the
recent approval of a competitive product in the U.S. and Abbott’s
anticipated launch of the XIENCE™ V drug-eluting coronary stent system in
mid-2008;
|
·
|
physician
and patient confidence in our technology and attitudes toward drug-eluting
stents, including expected abatement of prior concerns regarding the risk
of late stent thrombosis;
|
·
|
drug-eluting
stent penetration rates, the overall number of PCI procedures performed,
average number of stents used per procedure, and average selling prices of
drug-eluting stent systems;
|
·
|
variations
in clinical results or perceived product performance of our or our
competitors’ products;
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
·
|
the
outcomes of intellectual property
litigation;
|
·
|
our
ability to launch next-generation products and technology features,
including our TAXUS® Liberté® paclitaxel-eluting
and PROMUS™ stent
systems, in the U.S. market;
|
·
|
our
ability to retain key members of our sales force and other key personnel;
and
|
·
|
changes
in FDA clinical trial data and post-market surveillance requirements and
the associated impact on new product launch schedules and the cost of
product approvals and compliance.
|
Cardiac
Rhythm Management Products
Cardiac
rhythm management (CRM) product revenue represented approximately 28 percent of
our consolidated net sales for the first quarter of 2008, as compared to
approximately 26 percent for the first quarter of 2007. We estimate that the
worldwide CRM market will approximate $10.8 billion in 2008, as compared to
approximately $10.1 billion in 2007, and estimate that U.S. implantable
cardioverter defibrillator (ICD) system sales will represent approximately 40
percent of the worldwide CRM market in 2008, as they did in 2007.
The
following are the components of our first quarter worldwide CRM
sales:
(in
millions)
|
|
Three
Months Ended
March
31, 2008
|
|
|
Three
Months Ended
March
31, 2007
|
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
ICD
systems
|
|
$ |
274 |
|
|
$ |
137 |
|
|
$ |
411 |
|
|
$ |
273 |
|
|
$ |
125 |
|
|
$ |
398 |
|
Pacemaker
systems
|
|
|
82 |
|
|
|
72 |
|
|
|
154 |
|
|
|
76 |
|
|
|
65 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
356 |
|
|
$ |
209 |
|
|
$ |
565 |
|
|
$ |
349 |
|
|
$ |
190 |
|
|
$ |
539 |
|
Our U.S.
sales of ICD systems for the first quarter of 2008 were consistent with the
first quarter of 2007, with both the market size and our share of the market
remaining relatively unchanged. Our international ICD system sales increased $12
million, or 10 percent, in the first quarter of 2008, as compared to the first
quarter of 2007, due primarily to the favorable impact of currency exchange
rates. We also experienced growth in pacemaker system sales in both the U.S. and
international markets due primarily to an increase in market size. However, a
field action initiated in 2007 by one of our competitors may have an adverse
impact on the overall size of the CRM market. In addition, our net sales and
market share in Japan were negatively impacted by a decision made in 2007 by our
CRM distributor in that country to no longer distribute our CRM products. As a
result, we are currently moving to a direct sales model in Japan and, until we
fully implement this model, our net sales and market share in Japan may continue
to be negatively impacted.
Worldwide
CRM market growth rates over the past two years, including the U.S. ICD market,
have been below those experienced in prior years, resulting primarily from
previous industry field actions and from a lack of new indications for use.
While we expect that growth rates in the worldwide CRM market will improve over
time, there can be no assurance that these markets will return to their
historical growth rates or that we will be able to increase net sales in a
timely manner, if at all. The most significant variables that may impact the
size of the CRM market and our position within that market include:
·
|
our
ability to launch next-generation products and technology features in a
timely manner;
|
·
|
our
ability to increase the trust and confidence of the implanting physician
community, the referring physician community and prospective patients in
our technology;
|
·
|
future
product field actions or new physician advisories by us or our
competitors;
|
·
|
successful
conclusion and positive outcomes of on-going clinical trials that may
provide opportunities to expand indications for
use;
|
·
|
variations
in clinical results, reliability or product performance of our and our
competitors’ products;
|
·
|
delayed
or limited regulatory approvals and unfavorable reimbursement
policies;
|
·
|
our
ability to retain key members of our sales force and other key
personnel;
|
·
|
new
competitive launches;
|
·
|
average
selling prices and the overall number of procedures performed;
and
|
·
|
the
outcome of legal proceedings related to our CRM
business.
|
In April
2007, following FDA reinspections of our CRM facilities, we resolved the warning
letter issued to Guidant in December 2005 and all associated restrictions
were removed. Following the resolution of the warning letter, we received
numerous FDA approvals and have since launched several products using Guidant
technology. We anticipate introducing ten new CRM products throughout
2008.
Regulatory
Compliance
In
January 2006, legacy Boston Scientific received a corporate warning letter from
the FDA notifying us of serious regulatory problems at three of our
facilities and advising us that our corporate-wide corrective action plan
relating to three site-specific warning letters issued to us in 2005 was
inadequate. We believe we have identified solutions to the quality system issues
cited by the FDA and continue to make progress in transitioning our organization
to implement those solutions. We engaged a third party to audit our enhanced
quality systems in order to assess our corporate-wide compliance prior to
reinspection by the FDA. We completed substantially all of these third-party
audits during 2007 and, in February 2008, the FDA commenced its reinspection of
certain of our facilities. We believe that these reinspections represent a
critical step toward the resolution of the corporate warning
letter.
There can
be no assurances regarding the length of time or cost it will take us to resolve
our quality issues to our satisfaction and to the satisfaction of the FDA.
If our remedial actions are not satisfactory to the FDA, we may need to devote
additional financial and human resources to our efforts, and the FDA may take
further regulatory actions. Our inability to resolve these quality issues in a
timely manner may further delay product launch schedules, including the
anticipated U.S. launch of our next-generation TAXUS® Liberté® drug-eluting
stent system, which may weaken our competitive position in the market. We have
received an approvable letter for our TAXUS Liberté stent system from the FDA,
indicating that the agency may approve the device upon the resolution of the
restrictions imposed by the corporate warning letter.
In
addition, enhanced reporting requirements and modifications to our quality
systems may result in incremental medical device and vigilance reporting, which
could adversely impact physician perception of our products.
Strategic
Initiatives
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including the restructuring of several of our businesses and
product franchises; the sale of five non-strategic businesses; significant
expense and head count reductions; and the monetization of the majority of our
investment portfolio. Our goal is to better align expenses with revenues, while
preserving our ability to make needed investments in quality, research and
development (R&D), capital and our people that are essential to our
long-term success. We expect these initiatives to help provide better focus on
our core businesses and priorities, which will strengthen Boston Scientific for
the future and position us for increased, sustainable and profitable sales
growth. Our plan is to reduce R&D and selling, general and administrative
(SG&A) expenses by $475 million to $525 million against a $4.1 billion
baseline, which represented our estimated annual R&D and SG&A expenses
at the time we committed to these initiatives in 2007. This range represents the
annualized run rate amount of reductions we expect to achieve as we exit 2008,
as the implementation of these initiatives will take place throughout the year;
however, we expect to realize the majority of these savings in 2008. In
addition, we expect to reduce our R&D and SG&A expenses by an additional
$25 million to $50 million in 2009.
Restructuring
In
October 2007, our Board of Directors approved an expense and head count
reduction plan, which we expect will result in the elimination of approximately
2,300 positions worldwide. We are providing affected employees with severance
packages, outplacement services and other appropriate assistance and support.
The plan is intended to bring expenses in line with revenues as a part of our
initiatives to enhance short- and long-term shareholder value. We initiated
activities under the plan in the fourth quarter of 2007 and expect to complete
substantially all of these activities worldwide by the end of
2008. As of March 31, 2008, we had completed more than half of the
anticipated head count reductions. The plan also provides for the restructuring
of several businesses and product franchises in order to leverage resources,
strengthen competitive positions, and create a more simplified and efficient
business model. We recorded $44 million of restructuring-related costs in the
first quarter of 2008, and expect to record an additional $175 million to $200
million throughout the remainder of 2008 and into 2009. We are recording these
costs primarily as restructuring charges, with a portion recorded through
other
lines within our unaudited condensed consolidated statements of
operations. Refer to Quarterly
Results and
Note G – Restructuring
Activities to our unaudited condensed consolidated financial statements
included in Item 1 of this Quarterly Report for more information on these
costs.
Divestitures
During
2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous
Access and Fluid Management businesses were no longer strategic to our on-going
operations. Therefore, we initiated the process of selling these businesses in
2007, and completed their sale in 2008, as discussed below. We received net
proceeds of approximately $1.3 billion from these divestitures and our former
TriVascular entity (see below) and estimate future tax payments of approximately
$350 million associated with these transactions. We eliminated an additional
2,000 positions in connection with these divestitures.
In
January 2008, we completed the sale of a controlling interest in our Auditory
business and drug pump development program to entities affiliated with the
principal former shareholders of Advanced Bionics Corporation for an aggregate
payment of $150 million. In connection with the
sale, we recorded a loss of $367 million (pre-tax) in 2007, attributable
primarily to the write-down of goodwill. In addition, we recorded a tax benefit
of $6 million in the first quarter of 2008 in connection with the closing of the
transaction. Also in January 2008, we completed the sale of our Cardiac Surgery
and Vascular Surgery businesses for net cash proceeds of approximately $705
million. In connection with the sale, we recorded a pre-tax loss of $193 million
in 2007, attributable primarily to the write-down of goodwill. In addition, we
recorded a tax expense of $56 million in the first quarter of 2008 in connection
with the closing of the transaction. In February 2008, we completed the sale of
our Fluid Management and Venous Access businesses for net cash proceeds of
approximately $415 million. We recorded a pre-tax gain of $234
million ($129 million after-tax) during the first quarter of 2008 associated
with this transaction.
In
addition to these business divestitures, in March 2008, we sold our Endovascular
Aortic Repair (EVAR) program obtained in connection with our 2005 acquisition of
TriVascular, Inc. for $30 million in cash. We discontinued our EVAR program in
2006. In connection with the sale, we recorded a pre-tax gain of $16 million
($35 million after-tax) in the first quarter of 2008.
Monetization
of Investments
During
the second quarter of 2007, we announced our intent to monetize the majority of
our investment portfolio in order to eliminate investments determined to be
non-strategic. We have since monetized several of our investments in, and notes
receivable from, certain publicly traded and privately held entities, and intend
to monetize the rest of our non-strategic portfolio investments over the next
few quarters. We received gross proceeds of $37 million in the first quarter of
2008 from the sale of investments and collections of notes receivable. During
the first quarter of 2008, we recognized a net pre-tax loss of $6 million
associated with our investment portfolio. We believe that the fair value of our
individual investments and notes receivable equals or exceeds their carrying
values as of March 31, 2008; however, we could recognize losses as we monetize
these investments depending on the market conditions for these investments at
the time of sale and the net proceeds we ultimately receive. Refer to our Other, net discussion and
Note D – Investments and Notes
Receivable to our unaudited condensed consolidated financial statements
included in Item 1 of this Quarterly Report for more information on our
investment portfolio and activity.
Quarterly
Results
Net
Sales
In the
first quarter of 2008, we reorganized our international structure in order to
allow for better utilization of infrastructure and resources. Accordingly, we
have revised our reportable segments to reflect the way we currently manage and
view our business. We now have three reportable operating segments based on
geographic regions: the United States; EMEA, consisting of Europe, the Middle
East and Africa; and Inter-Continental. We
combined
our Middle East and Africa operations, previously included in our
Inter-Continental segment, with Europe to form a new EMEA region and merged our
former Asia Pacific region into our Inter-Continental segment. The following
table provides our first quarter net sales by region and the relative change on
an as reported and constant currency basis. We have reclassified previously
reported 2007 results to be consistent with the 2008 presentation.
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three
Months Ended
March
31,
|
|
|
As
Reported
Currency
|
|
|
Constant
Currency
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
Basis
|
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,117 |
|
|
$ |
1,169 |
|
|
|
(4%) |
|
|
|
(4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
507 |
|
|
|
469 |
|
|
|
8% |
|
|
|
(4%) |
|
Inter-Continental
|
|
|
390 |
|
|
|
313 |
|
|
|
25% |
|
|
|
11% |
|
International
|
|
|
897 |
|
|
|
782 |
|
|
|
15% |
|
|
|
2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested
Businesses
|
|
|
32 |
|
|
|
135 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$ |
2,046 |
|
|
$ |
2,086 |
|
|
|
(2%) |
|
|
|
(7%) |
|
The
following table provides our first quarter worldwide net sales by division and
the relative change on an as reported and constant currency basis. In addition
to the sale of certain of our businesses in the first quarter of 2008, we began
integrating our Electrophysiology business with our CRM business in order to
better serve the needs of electrophysiologists by creating a more efficient
organization.
Further, we integrated our remaining Oncology franchises into other
business units. We have reclassified previously reported 2007 results to be
consistent with the 2008 presentation.
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three
Months Ended
March
31,
|
|
|
As
Reported
Currency
|
|
|
Constant
Currency
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
Basis
|
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interventional
Cardiology
|
|
$ |
756 |
|
|
$ |
777 |
|
|
|
(3%) |
|
|
|
(8%) |
|
Peripheral
Interventions
|
|
|
155 |
|
|
|
146 |
|
|
|
6% |
|
|
|
0% |
|
Cardiovascular
|
|
|
911 |
|
|
|
923 |
|
|
|
(1%) |
|
|
|
(6%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurovascular
|
|
|
92 |
|
|
|
90 |
|
|
|
2% |
|
|
|
(6%) |
|
Peripheral
Embolization
|
|
|
22 |
|
|
|
22 |
|
|
|
3% |
|
|
|
(4%) |
|
Neurovascular
|
|
|
114 |
|
|
|
112 |
|
|
|
2% |
|
|
|
(6%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac
Rhythm Management
|
|
|
565 |
|
|
|
539 |
|
|
|
5% |
|
|
|
0% |
|
Electrophysiology
|
|
|
38 |
|
|
|
36 |
|
|
|
5% |
|
|
|
2% |
|
Cardiac
Rhythm Management
|
|
|
603 |
|
|
|
575 |
|
|
|
5% |
|
|
|
0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
|
|
229 |
|
|
|
206 |
|
|
|
11% |
|
|
|
5% |
|
Urology
|
|
|
100 |
|
|
|
95 |
|
|
|
5% |
|
|
|
2% |
|
Endosurgery
|
|
|
329 |
|
|
|
301 |
|
|
|
9% |
|
|
|
4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuromodulation
|
|
|
57 |
|
|
|
40 |
|
|
|
40% |
|
|
|
40% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested
Businesses
|
|
|
32 |
|
|
|
135 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$ |
2,046 |
|
|
$ |
2,086 |
|
|
|
(2%) |
|
|
|
(7%) |
|
We manage
our international operating regions and divisions on a constant currency basis,
and we manage market risk from currency exchange rate changes at the corporate
level. To calculate revenue growth rates that exclude the impact of currency
exchange, we convert actual current-period net sales from local currency to U.S.
dollars using constant currency exchange rates. The regional constant currency
growth rates in the table above can be recalculated from our net sales by
reportable segment as presented in Note N – Segment Reporting to
our
unaudited
condensed consolidated financial statements included in Item 1 of this Quarterly
Report. Growth rates are based on actual, non-rounded amounts and may not
recalculate precisely.
U.S.
Net Sales
During
the first quarter of 2008, our U.S. net sales decreased by $52 million, or four
percent, as compared to the first quarter of 2007. The decrease related
primarily to the decline in U.S. net sales of our drug-eluting coronary stent
systems by $75 million for the first quarter of 2008, as compared to the same
period in the prior year, principally as a result of decreases in the size of
the U.S. drug-eluting stent market and our share of the market. See the Outlook section for a more
detailed discussion of the drug-eluting stent market and our position within
that market. This decrease was partially offset by sales growth of $15 million
from our Neuromodulation division, driven by an increase in the size of the
market for our Precision® Spinal Cord Stimulation system, as well as a $7
million increase in sales of our CRM products, primarily as a result of an
increase in pacemaker system sales.
International
Net Sales
During
the first quarter of 2008, our international net sales increased by
$115 million, or 15 percent, as compared to the first quarter of 2007. The
increase was attributable largely to the favorable impact of currency exchange
rates, which contributed $99 million to our year-over-year sales growth. In
addition, our net sales in our Inter-Continental region increased, primarily as
a result of the May 2007 launch of our TAXUS® Express™ coronary stent
system in Japan. This increase was partially offset by declines in sales of our
drug-eluting stent systems in our EMEA region. See the Outlook section for a more
detailed discussion of the international drug-eluting stent market and our
position within that market.
Gross
Profit
For the
first quarter of 2008, our gross profit was $1.466 billion, as compared to
$1.518 billion for the same period in the prior year. As a percentage of net
sales, our gross profit decreased to 71.7 percent, as compared to 72.8 percent
for the first quarter of 2007. The following is a reconciliation of our gross
profit and a description of the drivers of the change from period to
period:
Gross
profit - three months ended March 31, 2007
|
|
|
72.8
|
% |
Shifts
in product sales mix
|
|
|
(1.2 |
)
% |
Reduced
Project Horizon spending
|
|
|
1.0
|
% |
Currency
exchange and hedging
|
|
|
(0.5 |
)
% |
All
other
|
|
|
(0.4 |
)
% |
Gross
profit - three months ended March 31, 2008
|
|
|
71.7
|
% |
The
primary factor contributing to a shift in product sales mix toward lower margin
products was a decrease in sales of our higher margin TAXUS® drug-eluting
stent system during the first quarter of 2008. In addition, our gross profit
percentage was negatively impacted by the settlement of foreign currency hedge
contracts on anticipated intercompany and third party transactions as a result
of the weakened U.S. dollar. These declines in our gross profit rate were
partially offset by the inclusion in the first quarter of 2007 of $21 million of
spending associated with Project Horizon, our corporate-wide initiative to
improve and harmonize our overall quality processes and systems, which ended as
a formal program as of December 31, 2007.
Operating
Expenses
In 2007,
we announced several new initiatives designed to enhance short- and long-term
shareholder value, including the restructuring of several of our businesses and
product franchises; the sale of five non-strategic businesses; significant
expense and head count reductions; and the monetization of the majority of our
investment portfolio. Refer to the Outlook section for more on
our cost improvement initiatives, including the anticipated cost reductions and
expenses associated with these initiatives.
The
following table provides a summary of certain of our operating
expenses:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(in
millions)
|
|
|
$
|
|
|
%
of Net
Sales
|
|
|
$
|
|
|
%
of Net
Sales
|
|
Selling,
general and administrative expenses
|
|
|
661 |
|
|
|
32.3 |
|
|
|
735 |
|
|
|
35.2 |
|
Research
and development expenses
|
|
|
244 |
|
|
|
11.9 |
|
|
|
289 |
|
|
|
13.9 |
|
Royalty
expense
|
|
|
46 |
|
|
|
2.2 |
|
|
|
52 |
|
|
|
2.5 |
|
Amortization
expense
|
|
|
143 |
|
|
|
7.0 |
|
|
|
155 |
|
|
|
7.4 |
|
Selling,
General and Administrative (SG&A) Expenses
During
the first quarter of 2008, our SG&A expenses decreased $74 million, or ten
percent, as compared to the first quarter of 2007. As a percentage of net sales,
our SG&A expenses decreased to 32.3 percent of net sales, as compared to
35.2 percent for the same period in the prior year. The decrease in our SG&A
expenses was due primarily to $72 million of reduced expenses attributable to
lower head count associated with our business divestitures and our expense and
head count reduction plan.
Research
and Development (R&D) Expenses
Royalty
Expense
For the
first quarter of 2008, our royalty expense decreased by $6 million, or 12
percent, as compared to the first quarter of 2007, due primarily to lower sales
of our TAXUS stent system. Royalty expense attributable to sales of our
TAXUS® stent
system decreased $5 million, as compared to the same period in the prior year.
As a percentage of our net sales, royalty expense decreased slightly to 2.2
percent for the first quarter of 2008 from 2.5 percent for the same period in
the prior year.
Amortization
Expense
Amortization
expense for the first quarter of 2008 decreased $12 million, or eight percent,
as compared to the first quarter of 2007, due to the disposal of $552 million of
amortizable intangible assets in connection with our first quarter 2008 business
divestitures. As a percentage of our net sales, amortization expense decreased
slightly to 7.0 percent for the first quarter of 2008, as compared to 7.4
percent for the same period in the prior year.
Purchased Research and
Development
Our
policy is to record certain costs associated with strategic alliances as
purchased research and development. In accordance with this policy, we recorded
$13 million of purchased research and development in the first quarter of 2008
associated with entering a licensing and development arrangement with
Surgi-Vision, Inc. for magnetic resonance imaging (MRI)-safe technology, which
Surgi-Vision is developing. During the first quarter of 2007, we recorded $5
million of purchased research and development associated with payments made for
certain early-stage CRM technologies.
Restructuring
Charges
In
October 2007, our Board of Directors approved, and we committed to, an expense
and head count reduction plan, which will result in the elimination of
approximately 2,300 positions worldwide. We are providing affected employees
with severance packages, outplacement services and other appropriate assistance
and support. As of March 31, 2008, we had completed more than half of
the anticipated head count reductions. The plan is intended to bring
expenses in line with revenues as part of our initiatives to enhance short-
and long-term shareholder value. Key activities under the plan include the
restructuring of several businesses and product franchises in order to leverage
resources, strengthen competitive positions, and create a more simplified and
efficient business model; the elimination, suspension or reduction of spending
on certain R&D projects; and the transfer of certain production lines from
one facility to another. We initiated these activities in the fourth quarter of
2007 and expect to be complete substantially all of these activities worldwide
by the end of 2008.
We expect
that the execution of this plan will result in total pre-tax expenses of
approximately $425 million to $450 million. We expect the plan to
result in cash payments of approximately $375 million to $400
million. The following table provides a summary of our estimates of
total costs associated with the plan by major type of cost:
Type
of cost
|
Total
amount expected to be incurred
|
Termination
benefits
|
$250 million to $260 million
|
Retention
incentives
|
$60
million to $65 million
|
Asset
write-offs and accelerated depreciation
|
$50
million to $55 million
|
Other
*
|
$65
million to $70 million
|
|
*
|
Other
costs consist primarily of consultant fees and costs to transfer product
linesfrom
one facility to another.
|
In the
first quarter of 2008, we recorded $29 million of restructuring
charges. In addition, we recorded $15 million of expenses within
other lines of our unaudited condensed consolidated statements of operations
related to our restructuring initiatives. The following presents these costs by
major type and line item within our unaudited condensed consolidated statements
of operations:
(in
millions)
|
|
Termination
Benefits
|
|
|
Retention
Incentives
|
|
|
Accelerated
Depreciation
|
|
|
Other
|
|
|
Total
|
|
Cost
of goods sold
|
|
|
|
|
$ |
3 |
|
|
$ |
1 |
|
|
|
|
|
$ |
4 |
|
Selling,
general and administrative expenses
|
|
|
|
|
|
6 |
|
|
|
3 |
|
|
|
|
|
|
9 |
|
Research
and development expenses
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
2 |
|
Restructuring
charges
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
$ |
9 |
|
|
|
29 |
|
|
|
$ |
20 |
|
|
$ |
11 |
|
|
$ |
4 |
|
|
$ |
9 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
termination benefits recorded during the first quarter of 2008 represent amounts
incurred pursuant to our on-going benefit arrangements and amounts for
“one-time” involuntary termination benefits and have been recorded
in accordance with FASB Statement No. 112, Employer’s Accounting for
Postemployment Benefits and FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. We expect to record the remaining
termination benefits in 2008 when we identify with more specificity the job
classifications, functions and locations of the remaining head count to be
eliminated. Retention incentives represent cash incentives, which are being
recorded over the future service period during which eligible employees must
remain employed with us in order to retain payment. The other
restructuring costs are being recognized and measured at their fair value in the
period in which the liability is incurred in accordance with Statement No.
146.
We have
incurred cumulative restructuring costs of $249 million since we committed to
the plan in October 2007. The following presents these costs by major type (in
millions):
Termination
benefits
|
|
$ |
178 |
|
Retention
incentives
|
|
|
16 |
|
Intangible
asset write-offs
|
|
|
21 |
|
Fixed
asset write-offs
|
|
|
8 |
|
Accelerated
depreciation
|
|
|
7 |
|
Other
|
|
|
19 |
|
|
|
$ |
249 |
|
In the
first quarter of 2008, we made cash payments of approximately $83 million
associated with our restructuring initiatives, which related to termination
benefits paid and other restructuring charges. We have made
cumulative cash payments of $125 million since we committed to our restructuring
initiatives in October 2007. These payments were made using cash generated from
our operations. We expect to make the remaining cash payments
throughout the remainder of 2008 and into 2009 using cash generated from
operations.
As a
result of our restructuring initiatives, we expect to reduce R&D and
SG&A expenses by $475 million to $525 million against a $4.1 billion
baseline, which represented our estimated annual R&D and SG&A expenses
at the time we committed to these initiatives in 2007. This range represents the
annualized run rate amount of reductions we expect to achieve as we exit 2008,
as the implementation of these initiatives will take place throughout the year;
however, we expect to realize the majority of these savings in 2008. In
addition, we expect to reduce our R&D and SG&A expenses by an additional
$25 million to $50 million in 2009.
Gain
on Divestitures
During
the first quarter of 2008, we recorded a $250 million pre-tax gain in connection
with the sale of our Fluid Management and Venous Access businesses and our
former TriVascular entity. Refer to the Strategic Initiatives section
and Note E – Divestitures
to our unaudited condensed consolidated financial statements included in
Item 1 of this Quarterly Report for more information on these
transactions.
Interest
Expense
Interest
expense for the first quarter of 2008 was $131 million, as compared to $141
million for the first quarter of 2007, a decrease of $10 million, or seven
percent. This decrease related primarily to a decrease in our average debt
levels due to debt prepayments of $750 million in the third quarter of 2007 and
$625 million in the first quarter of 2008.
Other,
net
Our
other, net reflected income of $13 million for the first quarter of 2008, as
compared to $18 million for the first quarter of 2007. Other, net included
interest income of $17 million for the first quarter of 2008 and $22 million for
the first quarter of 2007. In addition, other, net included expense of $6
million for the first quarter of 2008 associated with net losses attributable to
our investment portfolio. Refer to Note D – Investments and Notes
Receivable to our unaudited condensed consolidated financial statements
included in Item 1 of this Quarterly Report for more information regarding our
investments activity. Further, our other, net for the first quarter of 2007
included expense of $8 million representing a decrease in fair value of the
sharing of proceeds feature of the Abbott Laboratories stock purchase discussed
in further detail in our 2007 Annual Report on Form 10-K.
Tax
Rate
The
following table provides a summary of our reported tax rate:
|
|
Three
Months Ended
March
31,
|
|
|
Percentage
Point
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
Reported
tax rate
|
|
|
30.3
|
% |
|
|
24.5
|
% |
|
|
5.8
|
% |
Impact
of certain charges*
|
|
|
(6.7 |
)
% |
|
|
(3.5 |
)
% |
|
|
(3.2 |
)
% |
|
*
|
These
charges are taxed at different rates than our effective tax
rate.
|
The
increase in our reported tax rate for the first quarter of 2008, as compared to
the same period in the prior year, related primarily to the impact of certain
charges that are taxed at different rates than our effective tax rate. In 2008,
these charges included restructuring costs, divestitures that occurred in the
quarter, and discrete items associated with the resolution of various tax
matters. In 2007, these charges included changes to the reserves for
uncertain tax positions relating to items originating in prior periods,
purchased research and development and charges related to the Guidant
acquisition. In addition, our effective tax rate for the first
quarter of 2008 increased by approximately three percentage points as compared
to the same period in the prior year due primarily to the expiration of the U.S.
Research and Development (R&D) tax credit at December 31, 2007.
We are
subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 2000 and substantially all material state, local, and foreign
income tax matters through 2001. During the first quarter of 2008, we resolved
certain matters previously under consideration at IRS Appeals, related primarily
to Guidant’s acquisition of Intermedics, Inc., and received several favorable
foreign court decisions and a favorable state audit settlement. As a
result of the resolution of these matters, we decreased our reserve for
uncertain tax positions, net of payments, by $49 million, inclusive of $24
million of interest and penalties, during the first quarter of
2008.
Critical
Accounting Policies
Our
financial results are affected by the selection and application of accounting
policies and methods. As of January 1, 2008, we adopted FASB Statement
No. 157, Fair Value
Measurements and FASB
Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 116,. Refer to Note B – Fair Value Measurements
to our unaudited condensed consolidated financial statements included in
Item 1 of this Quarterly Report for a discussion of our adoption of these
standards.
There
were no other material changes in the quarter ended March 31, 2008 to the
application of critical accounting policies as described in our Annual Report on
Form 10-K for the year ended December 31, 2007.
Liquidity
and Capital Resources
The
following provides a summary of key performance indicators that we use to assess
our liquidity and operating performance.
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
Short-term
debt
|
|
$ |
257 |
|
|
$ |
256 |
|
Long-term
debt
|
|
|
7,311 |
|
|
|
7,933 |
|
Total
debt
|
|
|
7,568 |
|
|
|
8,189 |
|
Less:
cash and cash equivalents
|
|
|
1,739 |
|
|
|
1,452 |
|
Net
debt
|
|
$ |
5,829 |
|
|
$ |
6,737 |
|
|
|
|
|
|
|
|
|
|
2
|
Management
uses net debt to monitor and evaluate cash and debt levels and believes it
is a measure that provides valuable information regarding our net
financial position and interest rate exposure. Users of our financial
statements should consider this non-GAAP financial information in addition
to, not as a substitute for, nor as superior to, financial information
prepared in accordance with
GAAP.
|
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
322 |
|
|
$ |
120 |
|
Interest
income
|
|
|
(17 |
) |
|
|
(22 |
) |
Interest
expense
|
|
|
131 |
|
|
|
141 |
|
Income
tax expense
|
|
|
140 |
|
|
|
39 |
|
Depreciation
and amortization
|
|
|
223 |
|
|
|
224 |
|
EBITDA
|
|
$ |
799 |
|
|
$ |
502 |
|
Cash
Flow
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
Cash
provided by (used for) operating activities
|
|
$ |
266 |
|
|
$ |
(59 |
) |
Cash
provided by (used for) investing activities
|
|
|
620 |
|
|
|
(300 |
) |
Cash
(used for) provided by financing activities
|
|
|
(599 |
) |
|
|
31 |
|
Operating
Activities
Cash
generated by our operating activities continues to be a major source of funds
for servicing our outstanding debt obligations and investing in our growth. The
increase in our operating cash flow for the first quarter of 2008, as compared
to the first quarter of 2007, is attributable primarily to a tax payment of
approximately $400 million paid in the first quarter of 2007, related
principally to Guidant’s sale of its vascular intervention and endovascular
solutions businesses to Abbott. This increase was partially offset by cash
payments of $83 million in the first quarter of 2008 associated with our
restructuring initiatives.
Investing
Activities
The
increase in cash provided by investing activities for the first quarter of 2008,
as compared to the first quarter of 2007, is attributable primarily to proceeds
of approximately $1.3 billion related to the divestment of certain of our
businesses in the first quarter of 2008. These cash inflows were partially
offset by acquisition-related payments of $654 million, consisting primarily of
a $650 million fixed payment made to the principal former shareholders of
Advanced Bionics in connection with our 2007 amended merger agreement, which we
accrued at December 31, 2007. Our investing activities during the first quarter
of 2007 included $200 million of contingent
3
|
Management uses EBITDA to assess
operating performance and believes that it may assist users of our
financial statements in analyzing the underlying trends in our business
over time. In addition, management considers adjusted EBITDA as a
component of the financial covenants included in our credit agreements.
Users of our financial statements should consider this non-GAAP financial
information in addition to, not as a substitute for, nor as superior to,
financial information prepared in accordance with GAAP. Our EBITDA
included acquisition-, divestiture- and restructuring-related net credits
(pre-tax) of $193 million for the first quarter of 2008 and charges
(pre-tax) of $25 million for the first quarter of 2007. See Financial
Summary for a
description of these
charges/credits.
|
payments
related to Advanced Bionics. See Note F - Acquisitions to our
unaudited condensed consolidated financial statements included in Item 1 of this
Quarterly Report for the estimated maximum potential amount of future contingent
consideration we could be required to pay associated with our other
acquisitions.
We made
capital expenditures of $57 million in the first quarter of 2008, as
compared to $96 million during the first quarter of 2007. The decrease was
primarily a result of Company-wide efforts to reduce spending as part of our
expense and head count reduction plan. We expect to incur capital expenditures
of $450 million for the full year 2008, including capital expenditures to
further upgrade our quality systems and information systems infrastructure, to
enhance our manufacturing capabilities in order to support a second drug-eluting
stent platform, and to support continuous growth in our business
units.
In
addition, we received cash proceeds of $37 million during the first quarter of
2008 and $14 million during the first quarter of 2007 from sales of equity
investments in and collections of notes receivable from certain of our
non-strategic portfolio companies.
Financing
Activities
Our cash
flows from financing activities reflect issuances and repayments of debt and
proceeds from stock issuances related to our equity incentive
programs.
Debt
We had
total debt of $7.568 billion at March 31, 2008 at an average interest rate of
6.02 percent, as compared to total debt of $8.189 billion at December 31,
2007 at an average interest rate of 6.36 percent. The carrying amount of
our debt at March 31, 2008 reflects a discount of $32 million associated with
our $900 million loan from Abbott Laboratories, as well as $17 million of
unamortized losses related to interest rate swaps used to hedge the fair value
of certain of our senior notes.
During
the first quarter of 2008, we prepaid $625 million of our term loan. These
prepayments satisfied the remaining $300 million of our term loan due in 2009
and $325 million of our term loan due in 2010. As of March 31, 2008, the revised
debt maturity schedule for the term loan, as well as scheduled maturities
of the other significant components of our debt obligations, is as
follows:
|
|
Payments
Due by Period
|
|
|
|
|
(in
millions)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
Term
loan
|
|
|
|
|
|
|
|
|
$ |
1,375 |
|
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
$ |
3,375 |
|
Abbott
Laboratories loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
900 |
|
Senior
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
|
|
|
$ |
2,200 |
|
|
|
3,050 |
|
Credit
and security facility
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
$ |
250 |
|
|
$ |
|
|
|
$ |
1,375 |
|
|
$ |
3,750 |
|
|
$ |
|
|
|
$ |
2,200 |
|
|
$ |
7,575 |
|
|
Note:
|
The
table above does not include capital leases, discounts associated
with our Abbott loan and senior notes, and non-cash gains related to
interest rate swaps used to hedge the fair value of certain of our senior
notes.
|
Our term
loan and revolving credit facility agreement requires that we maintain certain
financial covenants, including a ratio of total debt to EBITDA, as defined by
the amended agreement, of less than or equal to 4.5 to 1.0 through December 31,
2008. The maximum permitted ratio of total debt to EBITDA steps-down to 4.0 to
1.0 on March 31, 2009 and to 3.5 to 1.0 on September 30, 2009. The agreement
also requires that we maintain a ratio of EBITDA, as defined by the amended
agreement, to interest expense of greater than or equal to 3.0 to 1.0. As of
March 31, 2008, we were in compliance with the required covenants. Exiting the
quarter, our ratio of total debt to EBITDA was 2.9 to 1.0 and our ratio
of EBITDA to interest expense was 4.6 to 1.0. If at any time we are not
able to maintain these covenants, we could be required to seek to renegotiate
the terms of our credit facilities or seek waivers from compliance with these
covenants, both of which could result in additional borrowing
costs.
Equity
During
the first quarter of 2008, we received $26 million in proceeds from stock
issuances related to our stock option and employee stock purchase plans, as
compared to $31 million for the same period in the prior year. Proceeds from the
exercise of employee stock options and employee stock purchases vary from period
to period based upon, among other factors, fluctuations in the exercise and
stock purchase patterns of employees.
Contractual
Obligations and Commitments
Certain
of our acquisitions involve the payment of contingent consideration. See Note F – Acquisitions to our
unaudited condensed consolidated financial statements included in Item 1 of this
Quarterly Report for the estimated potential amount of future contingent
consideration we could be required to pay associated with our prior
acquisitions.
There
have been no material changes to our contractual obligations and commitments as
reported in our 2007 Annual Report on Form 10-K.
Legal
Matters
The
medical device market in which we primarily participate is largely technology
driven. Physician customers, particularly in interventional cardiology, have
historically moved quickly to new products and new technologies. As a result,
intellectual property rights, particularly patents and trade secrets, play a
significant role in product development and differentiation. However,
intellectual property litigation to defend or create market advantage is
inherently complex and unpredictable. Furthermore, appellate courts frequently
overturn lower court patent decisions.
In
addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors are
parties in the same proceeding, or in a series of related proceedings, or
litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending
and potentially related and unrelated cases. In addition, although monetary and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes of other
cases in other geographies.
Several
third parties have asserted that our current and former stent systems infringe
patents owned or licensed by them. We have similarly asserted that stent systems
or other products sold by our competitors infringe patents owned or licensed by
us. Adverse outcomes in one or more of these proceedings could limit our ability
to sell certain stent products in certain jurisdictions, or reduce our operating
margin on the sale of these products and could have a material adverse effect on
our financial position, results of operations or liquidity.
In the
normal course of business, product liability and securities claims are asserted
against us. Product liability and securities claims may be asserted against us
in the future related to events not known to management at the present time. We
are substantially self-insured with respect to general and product liability
claims, and maintain insurance policies providing limited coverage against
securities claims. The absence of significant third-party insurance coverage
increases our potential exposure to unanticipated claims or adverse decisions.
Product liability claims, product recalls, securities litigation, and other
litigation in the future, regardless of their outcome, could have a material
adverse effect on our financial position, results of operations or
liquidity.
We record
losses for claims in excess of purchased insurance in earnings at the time and
to the extent they are probable and estimable. In accordance with FASB Statement
No. 5, Accounting for
Contingencies, we accrue anticipated costs of settlement, damages, losses
for product liability claims and, under certain conditions, costs of defense,
based on historical experience or to the extent specific losses are probable and
estimable. Otherwise, we expense these costs as incurred. If the estimate of a
probable loss is a range and no amount within the range is more likely, we
accrue the minimum amount of the range. Refer
to Note M - Commitments and
Contingencies to our unaudited condensed consolidated financial
statements included in Item 1 of this Quarterly Report for material
developments with regard to any matters of litigation disclosed in our 2007
Annual Report on Form 10-K or instituted since December 31, 2007.
Recent
Accounting Pronouncements
Statement
No. 141(R)
In
December 2007, the FASB issued Statement No. 141(R), Business Combinations, a
replacement for Statement No. 141. Statement No. 141(R) retains the fundamental
requirements of Statement No. 141, but requires the recognition of all assets
acquired and liabilities assumed in a business combination at their fair values
as of the acquisition date. It also requires the recognition of assets acquired
and liabilities assumed arising from contractual contingencies at their
acquisition date fair values. Additionally, Statement No. 141(R) supersedes FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, which
required research and development assets acquired in a business combination that
had no alternative future use to be measured at their fair values and expensed
at the acquisition date. Statement No. 141(R) now requires that purchased
research and development be recognized as an intangible asset. We are required
to adopt Statement No. 141(R) prospectively for any acquisitions on or after
January 1, 2009 and are currently evaluating the impact that Statement No.
141(R) will have on our consolidated financial statements.
Statement
No. 161
In March 2008, the FASB issued
Statement No.
161,
Disclosures
about Derivative Instruments and Hedging Activities, which amends
Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, by requiring expanded
disclosures about an entity’s derivative instruments and hedging activities.
Statement No. 161 requires increased qualitative, quantitative, and credit-risk
disclosures, including (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under
Statement No. 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. We are required to adopt
Statement No. 161 for our first quarter ending March 31, 2009.
Cautionary
Statement Regarding Forward Looking Statements
Certain
statements that we may make from time to time, including statements contained